Not immediately—but perhaps sooner than you'd thinkby George Magnus / September 12, 2016 / Leave a comment
No one is going to get too excited about the Bank of England’s expected announcement on Thursday that policy rates will remain unchanged. The Bank’s Governor, Mark Carney, has certainly not ruled out the possibility of another reduction from the current level of 0.25 per cent, but the data to hand concerning the economy this summer has been almost as good as the summer itself. The Bank will hold its fire, pending more concrete evidence of the post-referendum economy, and confirmation of what precisely the new government’s fiscal strategy will be. Yet, for all of these deliberations, we might well ask if something is finally beginning to change regarding the outlook for interest rates, if not immediately here in the UK, then elsewhere.
The Brexit referendum clearly hasn’t fulfilled fears that it would precipitate a global crisis—in truth its impact was always going to be much longer-term, and more imperceptibly corrosive—and the global economy is, despite some problems, surprisingly healthy.
Last week the US stock market ended the week on a very sour note, the Standard & Poor’s index dropping by 2.4 per cent amid concerns that US interest rates might rise shortly, perhaps as early as the next Federal Reserve meeting (20th-21st September). The catalyst had been the statement by President of the Federal Reserve Bank of Boston Eric Rosengren, who said there was a “reasonable case” for a second hike at that meeting.
His view is not shared by all his colleagues. Lael Brainard, a dove, is one of three Governors who are scheduled to speak on Monday, and financial markets will pay attention to any signals of policy intention this month. It has proven difficult for the Fed to raise interest rates, last summer and autumn, and again in the first half of this year. “Stuff” keeps happening, whether it’s concerns about China, Brexit, or developments at home. Most recently, the August purchasing manager reports for manufacturing and non-manufacturing were both disappointing, dropping by about 3 and 4 points, respectively. The manufacturing index dropped to 49.4 (a reading below 50 suggests contraction), while the non-manufacturing index was the lowest for six years. Further, the August employment figures were seen as firm, but…