INTEREST RATES CLEARED FOR TAKE-OFF? The Governor of the Bank of England, Mark Carney, chose the unusual setting of Lincoln Cathedral to make his most clear-cut announcement to date concerning the likely timing of the UK’s first rise in official interest rates since they were lowered to 0.5% in March 2009. In his speech given on 16th July, he said that rates could rise as early as the turn of the year. Confirming remarks he has previously made, he underlined that rates will rise slowly from 0.5% eventually reaching around 2.5%. He said that the ‘equilibrium’ rate of interest, the rate required to keep the economy on track and inflation under control, will be perhaps half the historical average of 4.5%. Rises to be in gentle steps The Governor has maintained when rates rise, they will do so in gentle increments, typically smaller than the half of a percentage point that was commonly used before the recession in 2008. He added that it would take time for any increase in interest rates to feed through into the economy, and that the peak impact is likely to be around 18-24 months after the Bank’s Monetary Policy Committee makes its move. Factors in the decision There are many factors that will no doubt play a part in the nine-strong committee’s decision. The general state of the economy, inflation, employment figures, the strength of sterling and, of course, external factors such as the continuing Greek debt crisis and the recent fall of the Chinese stock markets will all need to be taken into consideration. What is clear is that if market growth remains buoyant, we have less need of very low interest rates to underpin the economy. Some economists have taken these announcements to mean that the UK will see interest rates rise to around 1.25% by the end of 2016, possibly reaching 2% by the end of 2017.
MARKETS (JULY) (DATA SUPPLIED BY THE OUTSOURCED MARKETING DEPARTMENT) Global stock markets found a few reasons to be cheerful during July, even as efforts to sort the Greek debt crisis continued and a big correction to Chinese share prices followed a mid-June peak. The latter unsettled the emerging markets sector as a whole. At home, FTSE100 member/owner Pearson agreed to sell the FT Group to Japan’s Nikkei. Aided by other prospective deals and better UK growth data, the blue-chip index ended July 2.69% higher at 6,696.28. The FTSE250 mid-cap index closed just 0.83% up at 17,677.4, with the junior AIM drifting 0.6% lower to 751.16. In New York, the Dow Jones index saw gyrations that left it a net 0.4% higher at 17,689.86. The Nasdaq, joined during the month by online payment operator PayPal, closed July 2.84% up at 5,128.28. European bourses continued to watch the Greek situation, but prospects of a new bailout deal helped to more than reverse June’s 4.1% fall and, at 3,600.69, the Eurostoxx50 ended July up 5.15%. The Tokyo stock market, whose Nikkei index pushed past 20,000 in April during a five-month bull run, made gains during July despite the volatility in China, improving 1.73% to 20,585.24. On foreign exchange markets, the long- suffering euro drifted lower again. By end-July it stood at $1.10 against the dollar, down 0.9%, and €1.42 against sterling, down 0.6%. Sterling lost about a cent versus the dollar, at $1.56.
The Chinese slowdown and other issues weakened commodities. Gold, down 6.43% at $1,095.73 an ounce, was not immune, some 3 analysts questioning its safe-haven status as key interest rates long nailed to the floor, looked 2 set for gradual release. Oil prices slumped 1 again, with Brent crude down 17.9% at $52.21 a barrel. Download full report here