Bank of England - interest rates

Monetary policy was in focus in the UK on Thursday with the Bank of England leaving interest rates on hold.  The vote came in at 8 to 1 with MPC member Ian McCafferty voting for a quarter point rise for the third month in a row.  UK interest rates have remained unchanged for over six years.

The Bank of England noted that the cost pressure in the UK labour market isn’t creating significant inflationary pressure. The Central Bank therefore expects that inflation will stay below 1% until spring 2015. In the currency markets the pound saw weakness after the Bank of England rate decision. The MPC minutes appeared to show more guarded comments from Mark Carney and suggest a shift towards the Federal Reserve’s stance.

The move by the Bank of England was also pretty predictable, particularly given they have shown a repeated inclination to take the lead from the Fed. They also of course are an active participant in the global currency wars and will also be conscious of the impact that a strong pound will be having. I expect interest rates in the UK will remain where they are until next year, and they will probably only go after the Fed. This should be positive for the FTSE (which rose 0.61% to 6374 on Thursday) and key sectors such as the housebuilders which we have exposure to. Having held the line at 6000 pretty well I expect the FTSE to also have a strong fourth quarter.

I think overall the message from most key central banks is that accommodative polices are going to remain the name of the game; this is not just in the US and Europe. We have seen this across Asia as well with India and China cutting rates, and the RBA in Australia surely poised to do the same.

I therefore think the doves will remain in the ascendency with anxiety over currency strength a particular source of tears. This will put the pressure cooker on inflation longer term but will be positive for stock markets over the next 12 months in my view.   

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