Credence Independent Advisors: Why interest rates won’t rise anytime soon?

Credence Independent Advisors:
Why interest rates won’t rise anytime
soon?
Economists expect Bank of England’s quarterly health check of the UK
economy to rubber stamp expectations that interest rates will remain low
for longer.
Interest rates will remain on hold beyond next year’s general election; the Bank of
England is expected to signal this week, in an environment of lower inflation, weak
wage growth and increasing eurozone headwinds.
Economists expect the Bank’s latest Inflation Report to highlight a risk that price rises,
as measured by the consumer prices index (CPI) could fall below 1pc at the beginning
of 2015, from September’s five-year low of 1.2pc.
According to the Centre for Economics and Business Research (CEBR), the recent
decline in oil prices to $83 a barrel from $115 in June will push CPI inflation down to
0.5pc by next June. Douglas McWilliams, chief executive of the CEBR, said if prices fell
to $60 a barrel, headline inflation could turn negative.
If inflation dips below 1pc, Mark Carney, the Governor of the Bank of England, will
have to write an open letter to the Chancellor explaining the fall and how policymakers
will ensure that inflation returns to the Bank’s 2pc target.

Alan Clarke, a strategist at Scotiabank, said it was very likely this could happen before
the end of this year. “Last December, we had a 6.5pc increase in gas and electricity
prices, that’s not being repeated this year, so that will push inflation down by 0.3
percentage points.
Coupled with that you’ve got Sainsbury’s recent decision to cut 1,200 prices and mild
autumn weather pushing down on clothing prices. All in all, if they forecast sub-1pc
inflation they’re conceding that Carney’s going to have to write a letter and the market
will push back the first hike even more than it already has done.”
In June, Mr. Carney said the decision surrounding the timing of the first rate increase
“could happen sooner than markets expect”, prompting traders to price in a November
rate hike. However, an oil glut, the slowdown in the eurozone and falling inflation
means markets now expect the Bank to raise rates in August 2015, well after May’s
election.
Andrew Haldane, the Bank of England’s chief economist, said in a speech last month
that a “gloomier” global outlook and lower inflation suggested that policymakers could
afford to keep interest rates lower for longer.
Official data show pay growth still catching up with price rises
The Deputy Governor, Sir Jon Cunliffe, said in a separate speech that with interest
rates already at a record low of 0.5pc, dealing with an inflation spike would be “more
manageable” than raising rates too early and having to change course.
However, Martin Weale, an external rate setter who has voted to tighten monetary
policy for the past three months, has argued that the Bank should “look through” the
current drop in inflation because it is driven by forces that are beyond the Bank’s
control, as the Monetary Policy Committee did in 2008, when price rises spiked to
5.2pc.
Simon Wells, chief UK economist at HSBC and a former Bank economist, said pay
growth would remain in focus for the nine rate-setters. “The first quarter of 2015 is an
important time for pay settlements, and if pay surveys continue to suggest starting

salaries for new recruits and vacancies are rising and we start to see wages pick up, that
would be the signal for me that this economy can withstand a rate rise”.
The Confederation of Business Industry expects the UK economy to expand this year at
the fastest pace since before the financial crisis. Britain’s biggest business lobby group
expects growth of 3pc in 2014, which would match the expansion in 2006. Growth is
then expected to slow to 2.5pc in 2015.
The forecasts were unchanged from its September forecasts, despite renewed fears of a
triple dip recession in the eurozone. “The recovery is on firm ground and is becoming
more ingrained,” said John Cridland, the CBI’s director general.
Credence Independent Advisors are always on the lookout for top quality
professionals that want a long term career in financial services. Whether from
Investment banking, Wealth Management or financial planning background if you
would like to be with a firm with a compelling client and advisor proposition. Provide
more information about clients with a financial educational framework at Credence
Independent Advisors Blog and Credence Independent Advisors News.