Recent global events, amongst them falling oil price, weakness in China, tumbling Stock markets, coupled with continued benign UK inflation, wage data, and the impending EU referendum has seen a shift in the MPC’s reading of the economic landscape….writes Sukhvinder Gill
The Bank of England (BoE) has kept the Base Rate at 0.5% for almost 8 years now (a post war record period of time), and it look set to remain here for the rest of the year. Many of us will remember the Base Rate being well over 10% in the 1980s and early 1990s.
The Base Rate is important because Banks use it a reference point to determine mortgage and savings rates.
The Monetary Policy Committee (MPC), meets monthly to review economic data and analysis before deciding the next rate move. Recent global events, amongst them falling oil price, weakness in China, tumbling Stock markets, coupled with continued benign UK inflation, wage data, and the impending EU referendum has seen a shift in the MPC’s reading of the economic landscape.
The financial markets had been predicting interest rates to go up in 2016. Opinions have changed, and since the start of this year Short Sterling Futures contracts, which traders use to “bet” on interest rate levels, have rallied significantly. This means that the market now see rates being on hold until 2017.
In fact the markets have been wrong on interest rates more than once during the financial crisis. They had predicted that rates would rise in 2015 also.
Across the pond, the US raised rates in Dec 2015, after 7 years of near zero rates. The UK economy is generally considered to be closely “coupled” with that of the US, so obviously their policy makers are seeing the global situation differently to ours.
Which brings me to make the point that the setting of interest rates is not an exact science despite the enormous amount of economic data crunching and analysis by very clever people that goes into it. Economic headwinds are constantly changing and policy makers cannot hope to accurately predict where the “next economic shock” is coming from.
As of today, the MPC and the financial markets see rates being on hold for several months, but as I said, as of today.
(Sukhvinder has worked as a Global Business Head and Trader in Capital markets for over 20 years)