Bank of England at forefront of global rates dilemma

Kalerkantho Online   

3 February, 2018 09:28 AM

Bank of England at forefront of global rates dilemma

Photo: Getty images

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The Bank of England will find itself facing a question next week that is set to trouble many other central banks this year - does an unexpectedly strong global economy mean it should press ahead with raising interest rates?

For the BoE - and its Indian, Australian and New Zealand counterparts - the answer over the next few days is likely to be no, as domestic uncertainties for now outweigh the inflationary pressure of a powerful global upswing, according to Reuters report.

But the odds of moves further away from the emergency level stimulus of the financial crisis are shortening. In government bond markets, yields on 10-year U.S., German and British debt have leapt by more than 30 basis points since the start of the year and two-year U.S. yields are their highest since 2008.

BoE Governor Mark Carney takes centre stage on Thursday, when he will set out the central bank’s thinking on Britain’s prospects, barely a year before the country is due to leave the European Union.

No economist thinks a BoE rate hike is coming next week, according to Reuters polls. But markets see a 50 percent chance that there will be another move in May, a relatively quick follow-up to the BoE rate hike in November, the first for a decade.

UBS’s chief economist, Arend Kapteyn, recently changed his mind to predict a May rate rise due to recent strength in the global economy - assuming that Prime Minister Theresa May can get a temporary Brexit deal before then.

“We think the data lines up for a brief window where they can hike,” he said.

Much later and there is a risk that the domestic economy may sour, as businesses hold off on investment and hiring in the months running up to Britain’s departure from the EU.

Politics is also likely to exert its sway over the Reserve Bank of India’s thinking next week, after an expansionary budget on Thursday which boosted rural spending and predicted that India would become the world’s fastest-growing major economy.

A decision to jack up farmers’ production subsidies was especially likely to intensify the RBI’s worries about above-target inflation, economists said.

Going the other way is Brazil, which is likely to cut rates on Wednesday as the country slowly pulls out of more than two years of economic malaise.