The market since the start of May 2015 had been predicting the first Bank of England rate rise for July 2016, while the US interest rates were forecast to rise this March. Neither of those has and will happen and due to unforeseen market conditions, the rate delay in the US and UK has continued.
UK Interest Rates
Speculation that the Bank of England will not raise interest rates this year has grown after a slightly dovish Quarterly inflation report and another poor CPI reading. Inflation is still expected to return towards the BoE’s 2% target by 2017 as the effect of depreciating energy and oil prices fall out of the equation. The MPC recent vote showed another unanimous 9-0 to keep rates on hold at 0.5%, with both hawkish members of the committee (Ian McCafferty and Martin Weale) reverting back to a dovish stance.
As usual market forecasts are surrounded by high levels of scepticism, including uncertainty surrounding the oil outlook, Eurozone and UK data. However, it still looks very likely that the Bank of England’s main benchmark rate will remain at record lows of 0.5% this December.
US Interest Rates
Federal Reserve Chairwoman Janet Yellen and her colleagues are adamant that interest rates will rise in the world’s largest economy this year. Strong labour data and a recent return to growth in retail sales may not be enough for a Fed rate hike this month but the bullish data will certainly act as a catalyst further down the line. We are now only left with four possible opportunities for the Fed to raise their main benchmark rate this year; July, September, October and December.
Analysing market instruments we can see the probability of a rate rise in the coming two months looks unlikely. The latter two meetings October and December are market favourites at the moment with a 47% chance of a rate rise in October and a 66% rise in December.
Economists’ until this announcement will continue to analyse US data heavily, specifically labour and tertiary sector data as cited by the Fed. Any hints from the US central bank that could confirm or alter their expectations of the timing of a rate hike would inject high levels of volatility into the market and of course Fed officials still have plenty of time to do that.
An interest rate decisions from both central banks remain extremely data dependant and therefore extremely uncertain. Central bank commentary will continue to keep markets entertained and oil will be closely monitored. However, it’s safe to say that the Fed will raise interest rates this year and the Bank of England next year, providing the economic data goes to plan.