As widely anticipated we finally have lift off on interest rates from a major player. After a false move a few months ago, the Fed have unanimously voted to increase their main interest rate by 0.25% from near zero levels to 0.25% – 0.5%.
While you may think that actually this is not the biggest move in the world in an actual cost sense, the ramifications of this will no doubt be felt around the globe and puts down a marker for others to follow.
No-one will be watching this move any closer than our very own Bank of England Governor Mark Carney, who will now be expected to follow suit over the coming months. Whilst Carney has been adamant that any changes here will be very much based on our own needs and economy, despite his protestations, where the US leads the UK usually follows.
It seems a hike here could come mid-way through 2016, however, there is of course much to think about before all of this happens.
Coreco’s Rob Gill commented, “Numerous Central Banks have attempted to hike rates following the financial crises, only to be forced to cut again as their currencies appreciated and growth stalled. Now however that the US have achieved “lift off”, as still the world’s largest economy and number 1 reserve currency, this should make it easier for other countries to raise rates and maintain them, including the UK. Historically the Bank of England have raised base rate an average of 8 months after the US Fed have done likewise.”
The MPC will want to bide it’s time and see what this change brings, although with pretty much everyone expecting this move there should be no real adverse market reaction initially.
If inflation does not return as expected, if issues continue in China and elsewhere, or there are other unforeseen events, we could see the scenario that the Fed most dreads; a dawning realisation that they acted too early and need to reverse the hike like other countries have done in the past.
It is this issue of credibility which takes on an important role in all this. The Fed talked itself into a corner around a December rate hike to the point where they had to act or risk no one ever believing what they said again, something that Governor Carney is all too aware of!
Whilst there is much discussion around the relative merits of making a move now or not, there is much to be said for trying to be ahead of the curve and moving gradually rather than leaving things too late and having to play catch up with quicker paced rises.
It can also be seen as a “tester”. How will everyone react to an actual rise when they have been used to historically low rates with no movement for 7 years? What is key is what Janet Yellens’ statement that accompanied the decision mentioned around where they see rates will be in the medium term.
The most interesting comment was that the US could see around 4 rate rises in 2016 as they expect rates to be at 2% in 2 years’ time. Many people will find this hard to believe as things stand now.
For those of us here in the UK we can expect to see debate on whether the UK should follow reach fever-pitch proportions in the coming weeks, especially if there are no adverse reactions to this move.
Coreco’s Andrew Montlake commented, “Whilst many people in the UK may struggle to see what all the fuss is about this is a significant move for a number of reasons. Whether it is as a prelude to usher in a new era or just as a simple warning shot or testing the water, things have changed.
“This brings forward the expectation that interest rates in the UK will rise sooner rather than later, as where the US leads the UK inevitably seems to follow and there is now a good possibility of the Bank of England following suit in the summer. In the meantime such speculation will effect mortgage product pricing going forward and the reality will finally begin to sink in to borrowers that the current status quo will not stay like this forever. For those that are able to, locking into a low fixed rate now may well prove to be a wise decision.”
Of course we have heard all this before and there will be many stifling a yawn and muttering nothing to see here, but make no mistake this is a significant move for a wide variety of reasons. Whether it is as a prelude to usher in a new era or just as a simple warning shot or testing the water, things have changed. For now at least.
Over to you Mr Carney…