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Case for interest rate rise is some way from being made

By Jeremy Stewart

Published 22/09/2015

The Bank of England and the US Federal Reserve is in no hurry to increase interest rates
The Bank of England and the US Federal Reserve is in no hurry to increase interest rates

The US Federal Reserve kept interest rates on hold last week, citing increasing concerns about global growth and tighter financial conditions as risks to US growth. This has exerted downward pressure on inflation

The Federal Reserve (the Fed) seems to be predominantly worried about China. Indeed, Janet Yellen, its chairperson, talked about a more 'abrupt' decline in growth and the spill over effects on other emerging market economies. Domestic economic developments were, in contrast, described as strong and job growth as 'impressive' with employment deemed to be at or close to the non-inflationary rate.

For equity investors, the Fed's decision was somewhat of a non-event. This is hardly surprising, given that most markets did not anticipate a change. The S&P 500 finished the week down by a mere 0.15%. This marginal change was also reflected by similar performance on mainland Europe and in London. Ironically, only the Shanghai Composite Index recorded an increase, although it was a very modest rise.

For what it is worth, current market pricing is factoring in only a 50% probability of a rate increase before the end of 2015 and is consistent with less than two increases next year.

In the UK, the Bank of England's focus has shifted back to inflation in the wake of lower oil prices and stronger sterling. The visit last week of the Bank of England's chief economist, Andy Haldane, to Portadown Chamber of Commerce, provided an interesting insight to the Bank's current thinking.

It seems that, like the Fed, the Bank is not in a hurry to raise rates. In Portadown, Andy Haldane was clear in his view that 'the case for raising UK interest rates in the current environment is some way from being made'. Indeed while acknowledging solid UK domestic demand and on track economic recovery, he also outlined some the key downside risks, including early indicators of a possible slowdown in growth. He concluded that, were some of the downside risks to materialise, there could be a need to loosen rather than tighten monetary policy. Given this position, the Bank's caution on raising rates too quickly is understandable.

What the Bank of England's visit to Portadown also illustrated was that 'the markets' do not just represent some theoretical investment area. Too often investors forget that the markets represent real businesses providing a real economic contribution to society.

In an interview with local radio, it was good to hear that Andy Haldane confirmed he would be taking back a strong message to the Bank of England on the need to take account of the impact of Sterling strength on businesses. This is especially true for local businesses, so close to a Euro area. Currency strength has had a major impact on many Northern Ireland businesses. Issues like this and other factors such as corporation tax rates need to be addressed to help build a buoyant local economy, attract investors and create sustainable employment.

Me'.anwhile we are 'talking about talks'.

Jeremy Stewart is head of wealth management and private banking at Danske Bank

Belfast Telegraph

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