Interest Rates to Rise Next Spring

Mike Franklin, Chief Investment Strategist at Beaufort Securities says, “Given the significance of the timing of an interest rate rise after the prolonged period of no increase, it is unsurprising that much speculation surrounds any hints from the Bank of England’s Monetary Policy Committee or from any individual members of the Committee about when the next move would come.

The Bank of England has now decided to move from the level of unemployment as a sole threshold for reviewing interest rates to a much wider range of criteria. This is probably more realistic but complicates the situation for ‘rate twitchers’.”

Mike continues, “The perception of the timing of a rate change is a particularly important component of equity market sentiment. The current hot spot for estimates is spring 2015 and, more specifically, May 2015.

Of course, a lot can change in the world economy before then and the ramifications for the UK economy could be significant. Consequently, even the Central Bankers here and elsewhere, including the Federal Reserve, cannot know for certain when in the future they will decide to move rates.

It is axiomatic that, given the sacrifices that have been made already to nurture economic recovery around the world to a sustainable level – that is, without the need for long term Central Bank intervention – Central Bankers will not wish to jeopardise the recovery by raising rates too soon.

However, that does not mean that they will get their timing right and that is part of the risk facing equity and bond markets as well as the many companies attempting to formulate their plans for future investment.”

Mike concluded, “In a nutshell, if economies recover much more quickly to a level where they are deemed to be able to cope with a rise in interest rates, then interest rates will probably rise sooner. If Central Banks are right on this, then any rise in itself should not be a problem.

With question marks over the rate of growth in the Chinese economy and Latin America, some moderation of global growth in 2015 looks possible, in which case, interest rates would be unlikely to rise before the second half of 2015.”