Carney reignites yield hunt

The Bank of England has joined in the forward guidance game, an event already practised by the US Federal Reserve and the European Central Bank.

This apparent commitment to an additional period of low interest rates means that the search for yield by income-seeking investors is set to continue for a long time yet.

Mr Carney has come under fire for his press conference yesterday, in which he seemed to signal that that the Bank of England would leave interest rates unchanged for another few years, or until unemployment in the UK falls to 7%. Some would argue that he is penalising those who live on income from interest-bearing assets, but this may be unfair.

Penalties of low interest rates

Certainly there are some who have suffered from record-low interest rates in the past few years. Savers have seen the income from their bank accounts drop, and the search for one that pays anything above the most minimal level has lead people to jump from bank to bank like a hyperactive frog.

But, ultimately, what can Mr Carney do? He could respond to those that say his policies (and those of his predecessor, Sir Mervyn King) are stoking bubbles in some financial assets by raising interest rates, but this would raise the very real danger that the nascent (and still very weak) recovery by the UK economy would be choked off. It is hard not to imagine the consequences of a premature move; interest rates go up, so mortgage repayments rise and homeowners who have hitherto kept their heads above water see their houses repossessed. Meanwhile, businesses see loan repayments increase and are forced to divert more cash away from investment activities.  Economic growth falters and government borrowing costs rise, even as Westminster acquires more to keep the economy afloat.

This may be a nightmare scenario, but no-one in Threadneedle Street wants to emulate the Federal Reserve of the 1930s and choke off the recovery before it is secure. Thus, the solution for savers and those looking for income lies in a place that many have shunned in the past few years; the stock market.

Turning to the stock market

Some might think that I am bound to say this, but given the number of sensible companies with secure and visible businesses, it is hard to argue that a dividend-focused approach is foolhardy. Just look at the insurance companies reporting today. Aviva, Standard Life and Schroders all have dividend yields far in excess of the bank base rate, with the first two offering a whopping 4.85% and 3.87% respectively.

This is not to say caution should be thrown to the wind when hunting for dividend payers. Clearly a common sense approach is needed, but, in my opinion, Mr Carney has merely given the hunt for yield a new lease of life. Given the positive effects on the economy of investing in the stock market, that is perhaps no bad thing.

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