When will interest rates go up?
After Tuesday's inflation data in the UK came out strong, the markets shifted their focus back to when interest rates will go up in the UK. There has been whispers that a rate hike may happen between September and November, however personally I am sceptical about this view. Though inflation is finally above minus figures, there are still so many issues over the world that are actually driving current problems in the market such as oil prices, gold prices and the problems in Greece.
So when will interest rates in the UK really go up? The market predicts the first rise in the UK Bank Rate around August 2016. This was a shift from the position last month when a rise in March or April (2016) was priced in. With inflation and employment back up slightly, the pressure is off for an imminent rate hike. Though there was a rise in inflation, it was a small one, which merely reflected the slightly earlier conclusion of summer discounted clothing this year compared to last (With lower inflation, the public generally has more money to spend on luxury items). So for this reason, it deems this inflation reading inaccurate to determine whether a rate rise in 2015 is feasible or not, the outlook still seems too weak. The Bank of England has started to question how long interest rates can remain at current record-low levels, but in our view, is unlikely to hike rates before CPI inflation returns to at least 1%, which may not happen before the second quarter of 2016.
Even after the first rise, the market is pricing in only very slow increases, far slower than seen in previous cycles of rising rates, and Capital Economics expects a rate of 1% by the end of next year and 1.5% by the end of 2017.
We also have a similar situation in the U.S, where the Fed has stated that they are looking for their first rate hike in 2015, however with current economic situations around the world this doesn't seem so wise. With the current problems in China, we have seen many currencies weaken- including the Dollar. The EURUSD exchange rate has been above 1.10 which has been great for import/export, and a rate hike in the U.S could drop that exchange rate to parity. With China and Japan currently depressing the value of their currencies, importers are more likely to buy from there as opposed to Europe and the USA, so for this reason I believe interest rates in the U.S may stay on hold for a little while longer.
prem.raja@currencies4you.com