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Round Up – US & UK Interest Rate Prospects

James Boston
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Ahead of next weeks US Federal Open Markets Committee (FOMC) meeting, the word is that the Fed is congratulating itself on the success of it’s tapering program and plans to announce a further cut to bond buyback activities of up to $10bn. Despite the recent sharp fall in unemployment and the relative buoyancy of the US economy it remains unlikely that the Federal Reserve will raise interest rates or even alter the careful wording of its closely watched message regarding their commitment to an ultra loose monetary situation. This meeting will be the last for Ben Bernanke as Chairman before he hands the reins over to Janet Yellen and it widely expected that Yellen will continue on a similar course to Bernanke by holding rates at near zero until such a time as unemployment drops below 6.5% (currently 6.7%) and inflation begins to take hold, therefore in all probability there will not be any increase in US interest rates until at least Q1 of 2015.

The US is not the only economy welcoming the surprise news off rapidly falling unemployment. UK policy makers have been somewhat caught off guard by the unanticipated December drop in unemployment to 7.1%. The Bank of England’s Monetary Policy Committee (MPC) has previously announced that it will consider monetary tightening once unemployment falls below the key 7% level, a prospect that now seems inevitable in the coming months. Even though the MPC is now trying to back away from this commitment to raise rates it still looks likely that the UK will be the first major economy to reverse it’s low rates policy, possibly as soon as the second half of this year, keep an eye on the Bank of England’s Quarterly Inflation report on February 12 for clues to timeline. Markets have begun pricing in a UK rate rise sooner rather than later and the British Pound has gained almost 0.5% against the US Dollar so far today.

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