Slow Or Fast, UK Interest Rates Are Only Going Up

It could be too late to build inflation protection into your ETF portfolio but you can still rebalance your fixed income in anticipation of policy changes

Jose Garcia-Zarate 21 February, 2011 | 12:06PM

If you think there is no worse predicament for a central bank than a severe loss of credibility, then spare a thought for the Bank of England. With UK inflation, as measured by CPI, running at double its medium-term price stability target of 2.0%, and expected to rise even further to around 5.0% in coming months, UK financial market commentators are having a field day questioning the ability of the rate-setting Monetary Policy Committee.

Regular readers of our ETF commentary may not have been excessively surprised by this high inflation landscape in the UK. Some six months ago, in our article Inflation: Dangers Filtering Through UK Economy, we voiced the case for a healthy dose of inflation protection for UK-centric investment portfolios. The rather punchy inflationary dynamics of late have of course been exacerbated by the rise in commodity prices. But at the heart of the UK inflationary problem has always been the weak sterling policy pursued by the BoE since the onset of the financial crisis.

The whole point of hedging is to do so at a reasonable cost before the event one is hedging against shows its ugly face. We are the first to admit that our warning to seek inflation protection six months ago was something of a last call to passengers to get on the train. And so, this leaves us to ponder whether seeking UK inflation insurance now may not only prove a bit futile, but also a cost-ineffective business.

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About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is a senior ETF analyst with Morningstar Europe.

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