JCAP market overview of interest rates March/April 2015


UK Rates

The minutes from the Bank of England’s most recent policy meeting released on the 22nd of April showed that the Monetary Policy Committee voted unanimously to keep rates on hold and its quantitative-easing program unchanged.

The minutes showed all nine members were in favour of leaving the key interest rate at 0.5% and making no changes to the £375 billion asset-purchase program.
According to the minutes, two members saw the decision as “finely balanced”, while all members agreed that the next rate move is likely be an increase.boe_rates_1668342c

The UK’s Consumer Price Index for February stayed flat at 0% for the second month running in despite forecasts that lower oil and food prices would push the rate negative. Economists predict that there is still room for the CPI to go negative in the next few months with expectation that it will start to increase again in Q3 2015.

The Bank of England considers that any deflation in the UK economy is likely to be brief and limited, and will actually provide stimulus to the economy through boosting consumers’ purchasing power. The Bank said it expected inflation back near its 2 per cent target by 2017 and above target in 3 years.
Bank of England Governor Mark Carney calmed speculation that interest rates could be reduced from the current 0.5% during a panel discussion at a Bundesbank conference in Frankfurt on the 27th of March stating, “We’re still in a position where our message is… that the next move in interest rates is going to be up.”

The result of the general election are also expected to have an impact on the current position on rates with some analysis expecting that a no clear majority outcome could push rate increases further away.
The timing of a first UK base rate rise, as indicated by the futures prices is currently for a 0.25% increase in spring 2016 followed by a second rise in late 2016.

US rates

At the March Federal Reserve Open Market Committee meeting expectations for increases to US key rates were less aggressive than the previous meeting. Predictions have now moved to suggest that the first rise will occur in September instead of June with a further hike in December.
The expectations were re-enforced by the latest US non-farm payrolls (jobs growth) for March which showed only 126,000 new jobs being created and a revision downwards of January and February’s numbers. This has led to a sharp fall in the non-farm payrolls 3 months moving average and the 12 months moving average to level out.

The proportion of economists predicting the Fed will wait until September to raise rates rose to 70 percent in an April 3-9 survey from 32 percent last month.
Euro dollar interest rate futures are predicting rates just above 1 percent by the end of 2016 and still under 2 percent 12 months later.

Euro Rates

In the Eurozone rates were, as expected, left unchanged at the last ECB meeting on the 15th of April. The benchmark interest rate was left unchanged at 0.05% with the interest rates on the marginal lending facility and the deposit facility left on hold at 0.3% and -0.2% respectively. ECB president Mario Draghi confirmed at the press conference following the announcement that recently launched Quantitative Easing programme is helping the Eurozone’s recovery. He also stressed that the QE programme needs to be completed in order to get inflation back to the target rate of 2%.
Expectations are for rates to stay at the current levels while the bond buying programme is in operation.

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