As an Arsenal fan I approached this summer’s transfer window full of excitement and optimism. After years of selling our best players and failing to replace them with similar levels of quality, the fans were assured by club chief executive Ivan Gazides that this time would be different. This year we would be spending big.
It was music to the ears of fans who had become used to hearing manager Arsene Wenger trying to convince us that the unknown teenage African-French winger he had just signed on a free transfer will be the next Thierry Henry.
This year however we were told that, thanks to paying off debt on the new stadium and some lucrative sponsorship deals, we had £70m to splash on whoever we wanted – even big wage players such as Wayne Rooney were apparently no longer out of reach.
All this talk of “financial firepower” took place back at the beginning of June and now, over two months later, we still haven’t bought a single player.
So, watching my hopes and expectations gradually come to naught this summer, I feel for pension funds who were eagerly hoping for a rise in interest rates in the near future. Their hopes have now been dashed by new Bank of England Governor Mark Carney, who this week said investors were expecting rates to rise sooner than is realistically likely.
In its quarterly inflation report, the Bank unveiled plans to tie interest rates to unemployment, adding it would not raise the base rate of interest before the unemployment rate falls to 7% – something it does not see happening before the third quarter of 2016 – but added its new ‘forward guidance’ to the market is not unconditional.
“The path of market interest rates implies faster withdrawal of monetary stimulus than appears likely given current output,” he said, highlighting the differences between investors’ expectations and the Bank’s own.
The big question for pension schemes and other investors is whether forward guidance dilutes the Bank of England’s focus on managing inflation. If the market perceives that the MPC will fail in its mission to both manage inflation and boost economic growth, we could see an increase in inflation expectations, driving down real yields once again. For the time being, the slack in the UK economy should cancel out any major inflationary pressures, allowing for favourable monetary policy into the foreseeable future.
Much like Wenger’s well-used mantra that the Arsenal squad is strong enough to challenge for silverware without big- name signings (eight years without a trophy and counting), it seems investors must make do with what they’ve got for a few years to come.
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