Equities, bonds and commercial property expected to shrug off higher interest rates

Commenting on the outlook for interest rates and inflation, Quentin Fitzsimmons, Head of Government Bonds at Threadneedle Investments, said:

"The markets were surprised by the timing of the latest interest rate increase. There had been little change in the pattern of economic data since the MPC's 9 - 0 vote to keep interest rates on hold in December. Furthermore, the statement that accompanied the January hike seemed to add little insight to the MPC's thought process.

Of course the MPC has advance warning of some economic data and it's plausible that an indication that inflation would move up to its highest level since the Bank was granted independence might have galvanised the move.

Governor King and his team might fear that a sharp rise in inflation could become entrenched in the public's mind and this would threaten the hard won credibility of the UK's monetary framework if realised. King will not gamble with this. Indeed we acknowledge that he may yet persuade the Committee to raise interest rates again in the spring. However, this could be a tricky decision as further rate hikes will pile on the pain for households already burdened by high levels of debt, council tax, utility prices and tuition fee increases.

Looking on the bright side corporate profitability is robust and we believe that this should help equities shrug off any drag from higher interest rates. Meanwhile UK bond markets are offering higher yields than seen for sometime.

And unlike residential property which has a closer correlation to interest rates, commercial property returns are dependant on a much wider range of factors, so we are not anticipating any major impact there either.

Not a bad environment for the investor especially if, as we believe, inflation is already close to a peak!"