Articles

As with millions of other bank account holders, I have recently received correspondence from my bank warning over the prospect of negative interest rates. In effect, banks wish to charge me for holding cash on deposit. At a time when inflation has risen to 2.1% in the UK (higher than expected in May) and 5% in the US, the timing of this bank correspondence might appear rather strange.

Global equity and bond markets are priced on the expectation that this rising inflation is transitory as opposed to persistent as a result of factors such as the base effect from 12 months ago and increased oil and other commodity prices. Amid the rebound in the economy, labour shortages and wage rises are being widely reported in the economy with 881,000 recorded vacancies in May. Meanwhile, the UK government’s furlough scheme has been extended until the end of September. This scheme in itself is creating labour shortages as employees remain on company payrolls thereby supressing what otherwise would be a higher unemployment rate. With a continuing output gap, the outlook for inflation won’t be known for another 6 months as the economy recovers in the post pandemic, vaccinated world.

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