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No Interest-Rate Hike for the UK say Leading Economic Analysts

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February 10, 2016 By: , No Comments

Has the UK interest-rate flat lined?

The world economy is writhing. A tidal wave of negative economic data is coalescing to create conditions that are not conducive to economic growth. Weakness in China is leading the charge, with a GDP growth rate in December 2015 of 6.8%, and a 2015 GDP growth rate of 6.9%. That this is the weakest economic performance for the Chinese economy in over 25 years is worrying. Chinese bourses in the Shanghai Composite index and the Shenzhen Composite index have plummeted since July/August 2015, having shed trillions of dollars in value. As a case in point, the Shanghai Composite index has lost 21.92% in 2016 alone and is now trading at 2,763.49. The smaller Shenzhen composite index has lost 24.18% for 2016 and is currently trading at 1,750.703.
These numbers are part and parcel of a much broader trend that is sweeping the global economy. If we look towards commodities, the picture is none too rosy. The price of crude oil has hit multi-year lows and is now routinely trading below $30 per barrel. That key support level has been breached multiple times in 2016, and analysts are afraid to call the bottom in Brent crude oil and WTI crude oil. There is simply no definitive way to gauge how low prices can go at this point in time. West Texas Intermediate crude oil prices recently settled at their lowest price in more than 2 weeks on Monday. Brent crude oil is currently trading at $30.64 per barrel on the Ice Futures Europe. There have been several attempts by OPEC to host meetings between member countries to cut production. The latest such initiative took place between Venezuela and Saudi Arabia, but no consensus was reached on reducing output. With OPEC and non-OPEC countries failing to come to any sort of agreement on production quotas, we are staring down the barrel of excess production capacity, increasing inventory levels and slack global demand. Such anxiety does not bode well for UK policymakers when it comes to interest-rate increases. According to the EIU (Economist Intelligence Unit), a rate hike in the UK is unlikely until 2020.

Good news or bad news for UK consumers?

Interest-rate realities impact upon UK consumers in different ways. If you are a borrower and you are repaying your mortgage, your credit card, your tuition, or other credit obligations you will naturally be heartened by the fact that interest rates will not be rising. Low interest rates mean that your credit obligations – your interest repayments – will remain at current levels. However savers will be none too impressed with persistently low interest rates in the United Kingdom. Since there is very little to be gained on 0.50% interest rates, inaction by the Bank of England will not encourage saving in the UK economy. For the most part, analysts in the UK are expecting the 0.50% interest rate to remain in effect until the end of 2016 possibly even 2017. These concerns were echoed by the governor of the Bank of England – Mark Carney. The global economic weakness that is weighing heavily on European and US financial stocks and major averages around the world cannot be discounted any longer. Policymakers have to think long and hard about raising rates, for fear that emerging market economies, commodities markets and the global economic balance will be thrown off kilter. For the hawks however, Carney offered some hope: interest rates would likely rise within the next 2 years.

UK Trade Deficit Swells

Among others, the United Kingdom is facing economic difficulty as a result of global currency weakness and UK currency strength. This is much the same problem as US multinational conglomerates are facing when they report their quarterly earnings and a large component of that comes from emerging market economies. Global markets are particularly vulnerable right now, and this is evidenced by multiple indexes such as the volatility index (VIX). The VIX is currently trading at 26.54 (+2.0%). While this is nowhere near the 1-year high of over 40, it is on the ascendancy and it reflects investor concerns and anxiety in the global markets. During the course of 2015, the United Kingdom’s trade gap increased by £1.9 billion to close at an all-time high of £125 billion. This data was released by the Office for National Statistics (ONS). The difference between UK exports and UK imports was reported at £34.7 billion during the course of 2015. In the next two weeks, the Office for National Statistics will make public its second estimate for Q4 economic growth. Leading UK analysts are expecting slow progress in reducing the UK trade deficit in the short-term.

There are also concerns in the UK economy that sticky wages will prevent inflationary targets from being reached. With oil prices as low as they are, it is difficult for the Bank of England to achieve its inflation target range of 2%. There is tremendous anxiety about the United Kingdom’s economic recovery, and dovish sentiment at the Bank of England is not helping. For all the reasons listed above, it is disingenuous to expect the BoE to hike interest rates at this juncture. A stronger currency will certainly be hurtful to the trade deficit and to the profitability of UK companies operating overseas. There are also concerns that the US economy is heading towards a recession in 2016, perhaps in 2017, and rate hikes by the Bank of England would certainly not be beneficial to the broader economic picture.

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