Rates unchanged despite growth uncertainties

Despite concerns expressed by the Bank of England and the Federal Reserve about the underlying strength of their own and the broader global economy, both committees voted to keep interest rates unchanged. The Bank of England was almost unanimous, as only one member dissented by voting for a 25 basis point cut, compared to 3 at the last meeting.   Why so hawkish? Surely, concerns about a general weakening in the economic outlook would justify easing monetary policy. Mr Trump certainly thinks so; Presidents are supposed to remain silent when it comes to influencing monetary policy, but when will this one ever remain silent on any topic?

Taking each statement individually, the Federal Reserve continues to express the view that the underlying economy has continued to expand at a solid pace, whatever that means. Unemployment has stabilised. However, inflation is still “somewhat elevated”. Economic uncertainty has increased. In a nutshell, they, like the rest of the world, are unsure about the current strength of the US economy, but whilst inflation remains above their 2%  target, they are not minded to ease monetary policy further.

The Bank of England is in an even trickier position; inflation expectations are that UK prices this year could rise again close to 4% as fuel bills continue to rise. According to data released yesterday, wages are rising at almost 6% annually, while the economic outlook remains murky. Wages increasing at such a pace will add its own inflationary pressures while hindering profitability.

There is probably no doubt that both committees would love to cut rates in this uncertain world but dare not risk it. At some point, if the economic outlook weakens further, they may take the risk point, hoping a weaker outlook will naturally bring prices down.

Stocks had a small bounce on Wednesday and Thursday, as market investors were probably already discounting these statements, and no one expected any cuts. There was also some slightly better US housing data than forecast, which may have helped investor sentiment a little.

Trading volumes on Thursday were some of the lowest this year despite the recent correction in US stocks in the past month. US stocks are cheaper than they have been for a while, but they are still not cheap. Particularly when you consider one can pick up over 4% by sticking the money into government securities, the risk-reward remains uncertain for piling into US companies. Which accounts for part of the reason European and UK stocks have seen something of a return to favour. Back to who is winning the least ugly competition.