Friday 29 January 2016

The Fed awakens our interest

And so it came to pass that in the mild mid-winter, the US Federal Reserve did increase its interest rate as expected last month. It follows neatly that January, in taking its name from the god of new beginnings and transitions in Roman mythology, the developed economies are coming out of an old and in to a new phase but in what direction this will take interest rates this side of the pond remains to be seen - probably at some point later this year, according to Mark Carney’s latest pronouncement.

In the arc of history, the near-decade since the Federal Reserve last raised interest rates in 2006 is not so long a time. But the rate rise has certainly signalled a new phase, if only psychologically, according to financial commentators.

Some commentators see this new phase as a return to the old ways in which central banks’ main power was to use their interest rates as a controlled response to conventional domestic economic pressures such as inflation.  

Others point to the fact that the ‘norms’ of convention no longer apply when it comes to domestic interest rates in the post-2008 global economy where the European Central Bank (ECB) maintains negative interest rates and in economies which are smaller and much more open to that of the US.

What there does seem to be broad agreement on, however, is that more importance is attached to what the Fed rise signifies and what it might trigger than the numerical impact of the rise (to 0.5 per cent from 0.25 per cent).  That being the slow and controlled rise of rates away from a low interest rate ‘experiment’ by developed economies at some point in the coming 18 months.

Only time will tell on that matter. However, what just the anticipation and the Fed’s rise did trigger in the UK was consideration of the Bank of England’s position under the governorship of Mark Carney.  There was much scrutiny of the Bank’s hint in July last year that it might raise interest rates by 2015’s end when it failed to follow-through, chiefly because the inflation target of 2 per cent had not been reached.

It is a different kind of Bank of England under a different governor now than the one which accompanied us into the global financial crisis of 2007/2008.  

With abolition of the Financial Services Authority in 2013, the Bank assumed more regulatory powers which remain focused on, and exercised by, the robustness of our banking system.

As the Fed was raising its rate, the Bank of England was concerned about the indebtedness of the buy-to-let residential property sector. While reminding UK lenders of its powers to act on any kind of lending it considered too risky, it clearly signalled no immediate rise in interest rates in the first part of this year.

Next year, 2017, will mark 20 years since the newly elected Labour government of that May day cut the apron strings and gave the Bank of England its independence from political control by any government of any day. On that same day, Chancellor Brown raised the base rate by a quarter of a point to 6.25 per cent. 

We have all come very far in 20 years and it’s been a turbo-charged journey in the past eight. 

Whether the Fed’s rate rise marks a return to the old days of central banks using interest rates to control key elements of their economies or it heralds the start of a ‘new new’ remains to be seen.  However, as we start this new phase, may the Fed and all central banks be with you and your business interests in 2016 and beyond.


Will Mooney MRICS
Partner

Commercial, Cambridge

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