Thursday, 17 December 2015

Interest rate rise

The US Federal Reserve raises interest rates by 0.25 percentage points [the first increase since 2006] in a move likely to have global repercussions.

The world has experienced the deepest recession since the 1930s. In an attempt to boost the flagging economy, the Federal Reserve, European Central and the Bank of England cut rates aggressively, their rationale being that the cheaper money is the more likely people are to borrow thereby stimulating growth, because after all the interest rate is simply the price of money.

It seems a very small move but the ramifications could be enormous.

First question will the UK follow suit, hardly, inflation in the UK today is about 0.1% and the Bank of England wants inflation to be steady at 2%. It will be a long time before that happens. However, the UK will not want to move against the US rate it would rather reflect a similar change, so perhaps the Bank of England Monetary Policy Committee will have a difficult decision to make.

But what about the smart money?

Because of this rate rise America will now look more attractive for the smart money to move into and away from emerging markets that have had very cheap money for the last seven years.

A rate hike by the US Federal Reserve could cause fresh turbulence, especially in emerging markets, as investors take the opportunity to switch money back to the safer haven of the US. The much less successful eurozone, while out of crisis mode for now, is presently pondering ways to combat the threat of deflation.

All eyes will be on the BoE Monetary Policy Committee and the result of their next meeting which is next year on Thursday 14th January 2016?.

No comments:

Post a Comment