MPC meeting signals low interest rates to stay
Bargain-hunters came out of the woodwork on Wednesday after the BoE signalled interest rates will remain low for some time
The Bank said that if UK interest rates were nudged higher in line with market expectations, the inflation rate would stand at 1.4% in two years’ time—below the 2% target and therefore forcing an explanation from Governor Mervyn King to the UK government. But should rates remain at 0.5% and the Bank take advantage of its full £175 billion quantitative easing target, inflation is likely to come in around its target rate in two years’ time, King said.
The suggestion that interest rates could remain near current levels helped attract buyers to the stock market in afternoon deals as those investors who had feared the Bank could hike rates too early returned to the market, comforted by the knowledge that King wasn’t about to pour cold water on recent index rallies.
“As soon as the inflation report was announced we saw the investors who had been staying away over the last few days return to the fore,” Joshua Raymond, market strategist at City Index commented. “They began cherry picking equities that had been recently sold off. Lloyds is a great example of this as it has fallen 15% over the last three trading days but it now tops today’s risers.”
The debate over whether it is inflation, deflation or stagnation that will set the stage following the introduction and expansion of quantitative easing is one that has reared its head repeatedly over the past few months. But today’s report from the Monetary Policy Committee allayed the fears of those concerned about rising prices in the medium term.
“The reality of a deep recession and sluggish recovery has dawned upon the MPC,” Charles Davis, economist at the Centre for Economics and Business Research said, adding that the Committee now recognises that “insipid growth and downward pressure on prices is the greater concern.”
This implies three things, Davis said. Firstly, more quantitative easing is on the cards—CEBR roughly estimates an additional £50 billion; secondly, the Bank is not expecting to roll back its QE programme any time soon; and thirdly, interest rates will remain lower for longer than expected.
In light of this report from the MPC, investors largely ignored a higher UK unemployment rate and focus instead switched to the Fed’s own meeting minutes. The Federal Open Market Committee is this evening expected to confirm suspicions that the US’s own quantitative easing programme will not be expanded due to recent improvements in economic data. US trade statistics, to be released just before the conclusion of the FOMC meeting, are forecast to show a combination of declining imports and increasing exports reduced the nation’s trade deficit to around $25 billion in June.
The FOMC announcement “may put a leash on today's gains somewhat,” Raymond predicted earlier today. In late Wednesday deals, the FTSE 100 index was 1.0% higher, up 48.7 points at 4,720.0, while the FTSE 250 index took on 24.4 points or 0.3% to 8,327.0.
