Interest rates: “But no one should get too excited about this being a sign of things to come.”

by | Aug 2, 2018

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Aberdeen Standard Investments Investment Strategist Luke Bartholomew: “This is no surprise. The economy has done just about enough for the Bank of England to justify a hike today. But no one should get too excited about this being a sign of things to come. It is almost unthinkable that the Bank of England will follow up with further rate rises in the next few months given the risks on the horizon.

“The most ominous of these risks is Brexit. The Bank is basing its assumptions on the UK having a smooth transition from the EU and that’s a pretty big assumption at the moment. The other big uncertainty is the UK’s chronically weak productivity, which will ultimately determine how fast the economy can grow without stoking inflation.

“The introduction of a neutral rate is a useful addition to the Bank’s forward guidance. Other central banks use similar tools to help guide investors’ thinking about how interest rates may change in the medium to long run. It should help reinforce the message that interest rates are only going to rise slowly and will probably settle at a lower level than what we would have considered to be normal in the past. The trick for the Bank is to keep reinforcing the message that the neutral rate is not a promise, but rather guidance.”

 

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