Wider Market Outlook 18 February 2015

18th February 2015

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Could interest rates still rise in 2015?

Last week was most certainly a time when the press wanted to create a headline and seem to overlook certain facts and figures.

This was reflected in the acknowledgement by the Bank of England that CPI inflation is likely to turn negative within the next couple of months. It was also highlighted that the Monetary Policy Committee could manage deflation either through a return to a quantitative easing programme or a further cut in the base rate. Previously it was generally accepted that a further cut in base rate was highly unlikely but with events in Sweden (where base rate has been cut to below zero) and a banking sector that now looks relatively healthier, it seems that more people consider a further rate cut could be an option.

The point that some of the press seems to have missed is that whilst the Bank of England are clearly not ruling anything out, Mark Carney, the Governor of the Bank of England, does not view a short period of negative inflation as being the same as deflation, which he views as being a persistent fall in prices. What Mark Carney pointed out was that the prevailing circumstances were as a result of a ‘large adjustment in a few specific components of CPI’.

The message from Mark Carney that many seem to have overlooked was that he thought it was still most likely that the next change in monetary policy to be made would be an increase in interest rates.

The other part of the inflation report that has been overlooked is that GDP forecasting of 2.9%, which is as a result of a rise in income growth, is a step up from previous forecasts of 2.6%. In the event that inflation did pick up rapidly towards the latter part of the year the question arises whether this will lead to a change in monetary policy, i.e. a rate rise.

Based on the inflation growth it is hard to see how pressure not to increase rates could be averted – the problem is it appears to have become accepted that rates will remain at very low levels and consequently appears to be all that is being spoken about.

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