Stronger growth and low rates support UK markets

UK markets are being supported by a favourable combination of accelerating economic growth, weakening inflation and very low interest rates. Granted, the MPC has brought forward to the third quarter of 2015 the point at which it expects the jobless rate to fall to the 7% threshold that underpins its interest rate guidance. But the Governor has emphasised that the outlook for low inflation could mean that rates remain on hold even when the unemployment threshold has been reached. What’s more, a robust revival in productivity and further strong growth in the workforce could lead to a slower fall in unemployment than the MPC’s expects. Meanwhile, those who assume that UK interest rates will inevitably rise when they increase in the US overlook the many previous occasions when they have differed. Accordingly, we expect UK asset prices to continue to be propped up by strong growth and very loose monetary policy for the foreseeable future.