Will the UK be hik­ing rates at the same time as the Fed?

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

In­vestors have had years and years now to pre­pare for a Fed­eral Re­serve in­ter­est rate hike cy­cle in the United States. There re­mains much de­bate on the mag­ni­tude of how much tight­en­ing will be seen, how fast that tight­en­ing will ac­tu­ally take short-term in­ter­est rates up once it starts, and ul­ti­mately how high the in­ter­est rates will re­ally go.

That be­ing said, there is about to be a very large dis­crep­ancy in the world of how cen­tral banks are treat­ing their economies. The United States may be fol­lowed by the United King­dom in an in­ter­est rate hike cy­cle, while the Euro­pean Cen­tral Bank, the Bank of China, the Bank of Ja­pan and many cen­tral banks in South Amer­ica and other growth mar­kets are still fig­ur­ing out how to ease rates or to keep pur­su­ing their own quan­ti­ta­tive eas­ing mea­sures.

How­ever, can the global econ­omy han­dle ris­ing in­ter­est rates in the United States and in the United King­dom at the same time the rest of the economies are still in an eas­ing mode? Un­for­tu­nately no one will re­ally know un­til they see it oc­cur. China is try­ing to sta­bilise its own stock mar­ket econ­omy right now.

Europe is still try­ing to get it­self some mag­i­cal growth. Brazil and other mar­kets in South Amer­ica are just not liv­ing up to their growth po­ten­tial.

The CME trades Fed Funds Fu­tures, and the so-called 100% chance of an in­ter­est rate hike to just 0.25% is not un­til Novem­ber of 2015. That fig­ure had been Septem­ber and Oc­to­ber in re­cent months, but the global sit­u­a­tion re­mains weak de­spite a likely res­o­lu­tion of Greece and Iran.

There is not cur­rently a 100% chance be­ing priced in for a 0.50% Fed Funds rate un­til April of 2016. The cur­rent 100% chances of higher in­ter­est rates be­yond the 0.50% is as fol­lows: 0.75% in Septem­ber 2016, 1.00% in Jan­uary 2017, 1.25% in May 2017, and 1.50% in Oc­to­ber 2017.

Fed Funds Fu­tures can of course change, and rapidly. Still, this is real world money that trades around the pre­dic­tion of when in­ter­est rates will re­ally rise.

So, what hap­pens if the United King­dom is grad­u­ally rais­ing in­ter­est rates at more or less the same time as the United States?

On the United King­dom, Credit Suisse’s strat­egy team said: “We are cur­rently

and

its fore­cast­ing that the tight­en­ing cy­cle starts in Fe­bru­ary and that the ini­tial path of tight­en­ing is gen­tle. The mar­ket seems to share that view. But we think the risks are that once tight­en­ing starts, it could pro­ceed faster than the mar­ket ex­pects. And the data such tight­en­ing is de­pen­dent upon could be strong. Our anal­y­sis sug­gests that nei­ther ris­ing rates nor a stronger pound could pre­cip­i­tate a UK slow­down in 2016. So, in the ab­sence of an ex­ter­nal eco­nomic shock, a data-de­pen­dent MPC could com­fort­ably raise rates once a quar­ter.”

As a re­minder, the Euro­pean Cen­tral Bank has com­mit­ted to its own as­set buy­ing un­der ‘quan­ti­ta­tive eas­ing’ un­til at least Septem­ber 2016. Ja­pan re­mains ad­dicted to quan­ti­ta­tive eas­ing, while China is try­ing to do what­ever it can think of on any given day to keep its mar­kets and econ­omy higher.

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