Rate-lifting in the US. And why it matters for the UK презентация

Seggins & Marcus Wright
RBS Economics (@RBS_Economics)
September 2015

first rate rise happening this year

But too much focus on this misses a bigger point. US rates could stay lower for longer.

‘Lower for longer’ doesn’t necessarily mean interest rates cannot go up. It can also mean central banks trying to raise rates a little, before seeing them forced back down soon after.

Source: Bloomberg. *Blank entries are months in which there is no FOMC meeting

Macrobond, Mankiw (2001), Wu & Xia (2014). Mankiw rule estimated using period 1990-2008.

About 2.5%

won’t have risen beyond 0.5% by mid-2018

And even if the Fed follows the central expectation, rate rises will be very gradual. Over-focussing on the first rise misses the bigger picture.

are stable

Above average underemployment

Earnings growth is not surging

Source: Macrobond, Bloomberg

Chinese export price inflation explains a lot of what’s going on at the moment
Cheap goods from China were a key factor in the pre-crisis world of low inflation, low interest rates and increased risk-taking. They still are.
China’s slowdown has so far led to a drop in oil and raw materials prices and a world trade recession. Both mean less inflation for us.

in Europe and Japan

Central banks are keeping rates down by buying up government bonds (Quantitative Easing or QE). While QE may have come to an end in the US and the UK, the European Central Bank will be carrying on until Autumn 2016. The Bank of Japan’s programme is open-ended.

central banks that raised rates after 2008, all have either lowered or begun to lower them again

pod

Source: Macrobond

This is not surprising considering: 1) how much UK trade and finance goes to the US and back 2) the US’ position at the centre of the world financial system.

does, many of our interest rates could be affected anyway. For example, UK government bond yields track US yields closely.

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