Where now for UK interest rates?

Interest rate decisions remain important wither you are a mortgage holder, saver or FX trader so what should we expect from the Bank of England in 2016 and why?

London
Source: Bloomberg

Since the tail end of 2015, the currency markets have had to absorb an aggressive shift in institutional thinking as far as the road map for interest rate changes for central banks.

When the Federal Reserve finally pulled the trigger on its first interest rate rise in December, the market consensus was that we would see a further four interest rate rises over the course of the year. Although the BoE did not have the luxury of an economy that was as far down the road of recovery as its US counterparts, it too was looking at when it might be able to start the process of rate normalisation.

Two months later and traders' conversations do not revolve around four rate rises for the Fed in 2016, but on whether or not it will suffer the ignominy of having to cut rates. This climb down from the US has also seen the chances of the BoE raising rates in 2016 reduced to almost nothing.

The task of deciphering what the BoE is thinking from its 'Super Thursday' interest rate and inflation report meetings has become increasingly difficult. Much like almost all central banks, it has found itself increasingly unable to impose any sense of direction on inflation. The aspirational target of 2% is as far away from being met now as it was a year ago, and with no sign of that gap being reduced any time soon.

The importance of oil prices to inflation has been clearly highlighted over the last eight months and at the heart of this is Saudi Arabia pulling the OPEC strings.

All of these issues however are likely to take a back seat to the biggest issue hanging over the BoE, the uncertainty in the run up to the UK’s Brexit vote, and subsequently the consequences should the UK decide to leave the European Union.

The decision as to whether the UK remains a member of the EU or leaves is in the hands of the public, a body of people who probably are not aware of what the full range of benefits and restrictions of EU membership are. The consequences of this decision will be felt across the country by both importers and exporters but arguably nowhere more directly than in the City.

The fact that the services sector is the most important part of the UK’s GDP and a large percentage of the service sector is derived from the city is probably not known or understood by the public.

We have recently heard from the CEO of HSBC who has stated that should the UK vote to leave then it is anticipated the company would have to shift 1,000 jobs from the UK into France. These comments warning of the consequences of a departure from the EU have been echoed by the CEO of RBS but it is probably not banking sector CEOs who need to start raising public awareness.

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