Super Thursday: Rate hike top of the agenda

Markets are waiting with baited breath for today’s meeting of the Bank of England’s Monetary Policy Committee (MPC), dubbed ‘Super Thursday’.

Although an actual increase in interest rates is unlikely, the change in monetary policy is what will be at the crux of discussions. The meeting of the MPC in June was overshadowed by what was looking like the imminent exit of Greece from the Eurozone and the economic ramifications from such an event.

The Greece situation, while far from being totally resolved, is less of a pressing concern. Increases in interest rates, widely expected in the US already, are heavily data dependant. With sterling appreciating and low commodity prices, this can lower inflation, meaning that now is not the right time for a hike.

David Stubbs global market strategist, JP Morgan Asset Management, says ahead of the meeting: “We continue to believe that the US Fed will go first. We still think the Fed is now looking for reasons not to raise rates, rather than the other way round.”

Speaking to Graham McDevitt, global strategist, of Macquarie Investment Managers, he told Funds Europe that while the economic data coming out of the US is good, it’s GDP growth is not exactly spectacular but the Fed has to raise rates to stay ahead of the curve as what the markets don’t want are sudden rate hikes or multiple ones. 

Time will of course tell but the fact that inflation in the UK is close to zero, compounded by a strong pound means a rate hike now is highly unlikely. One thing to bear in mind: around a third of market participants have never experienced a hike in interest rates, for some this is uncharted waters.

Update: Only one member of the MPC voted in favour of a rate increase now. The minutes from today’s meeting states:

“For most members, the outlook for inflation described in the August Inflation Report meant that it was not necessary to change the policy stance at this meeting. In light of the reduction in oil prices and appreciation of sterling over the past three months, it appeared that the increase in inflation over the following year would be more gradual than had previously been supposed.”

©2015 funds europe



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