Pound plunges after Bank of England's dovish rates signal

IMF warns against increasing interest rates soon

3 September

The International Monetary Fund, the global lender of last resort, has waded in on the ongoing speculation over when the major central banks will finally increase interest rates from their current rock bottom levels, warning against any increase in the near future.

In what the Financial Times describes as an "agenda-setting note" ahead of a conference of central bankers in Ankara, Turkey this weekend, the fund's managing director Christine Lagarde, points out that growth rates in most advanced economies, including the US, eurozone and Japan, have already disappointed in the first half of this year.

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She highlights that lower oil prices have failed to drive increased demand and are dampening price pressure. According to The Guardian, Lagarde also warns that the potential for slowing Chinese growth means "risks are tilted to the downside currently", although she acknowledges that China has met forecasts for the first six months of the year.

Ultimately the IMF says "monetary policy must stay accommodative to prevent real interest rates from rising prematurely".

The Federal Reserve, which some say could raise rates as early as this month, has specifically been told there is "little evidence of meaningful wage and price pressures so far" to justify a hike. Lagarde said earlier this year it should hold rates, already at record lows for nine years, until next year. The European Central Bank and Bank of Japan are both advised they must prepare to inject more monetary stimulus to boost their economies.

Investors are now broadly betting against a rise in rates in the US, although strong jobs and productivity data published on Wednesday has again prompted speculation it may seek to act. In the UK the Bank of England has said it will seek to look beyond short-term trends. Last week, the bank's governor Mark Carney appeared to hint that it could act as early as next year after he dismissed concerns over the effects on the UK of China's stock market plunge.

Interest rate rise still looms as Carney holds firm

1 September

If you decided after the recent crash in China, which rippled across global equity and commodity markets, that there was no rush to prepare your portfolio for an interest rate rise in the near future, you may need to think again.

Despite an emerging investor consensus that suggests that a rates hike is not likely until early next year in the US (and much later in the UK), central bankers have given a strong indication that they remain unmoved and their timetable is largely unchanged.

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In a speech late last week at the end of a meeting of global central bank heads in Jackson Hole, Wyoming, Bank of England governor Mark Carney reprised comments made earlier in the summer that a rise would "come into sharper relief" at the end of the year. The Sunday Times says he noted the falls in China came on the back of a prolonged surge; that the UK economy's direct exposure to the country is "relatively modest"; and that there was no evidence of a "deflationary mindset" among UK consumers.His remarks came after Federal Reserve vice-chairman Stanley Fischer "left the door open" to raising rates this month, according to The Guardian, after he said there is "good reason to believe that inflation will move higher" as the forces holding it down "dissipate further" in spite of the market falls that have dragged key commodity prices lower.

The interventions also come after data last week showed that the US economy grew much faster than expected in the second quarter. New research also reveals that UK consumers are continuing to spend freely amid a rise in confidence.

BBC economics editor Robert Peston writes that Carney and Fischer are seeking to "dampen speculation" that the recent events in China have fundamentally altered the equation for an increase and that, while not certain, the timetable which many believe will see a move in the US this year (and in the UK in the opening months of next) remains unchanged.

But Peston also notes that "although influential", both "have only one vote each on the interest rate decision, and not all their colleagues will be as sanguine as them that it is sensible to keep open the option of early interest rate rises, in view of the weakening in the global economy".

Interest rates: Fed faces 'conundrum' after GDP data

28 August

In recent weeks, interest rates have become one of the defining characteristics of markets as diverse as equities, commodities and housing. The question of when central bankers will finally choose to begin tightening monetary policy after years of record lows – and the effects this will have – preoccupy traders and analysts alike.

Up until the revision to second quarter US GDP data was published on Thursday afternoon, the prevailing wisdom had been that a markets crash in China – amid fears the world's second largest economy is slowing faster than feared – would persuade the Federal Reserve to hold fire at its next meeting in September. The Fed is expected to be the first to move, but it could trigger a more hawkish stance from the likes of the Bank of England if it hikes rates without negative consequences.

And then the data were published, showing a huge uplift in expansion in the second quarter to 3.7 per cent. "The release offered a picture of broad strength in the US economy " and has left the Fed with a "policy conundrum", says the Financial Times. Should the Fed "go ahead and raise rates for the first time since 2006 on the back of what looks like an increasingly solid US recovery, or factor in the growing economic uncertainty abroad and hold fire"?

Most still seem to be saying no to a rate rise. US markets rose on Thursday in part, say analysts, because they reckon rates will stay lower for longer: traders are now only pricing in about a 24 per cent chance of a rate hike next month. Comment articles in both the Wall Street Journal and Washington Post argue rates should be held not because of the stockmarket turmoil, but because fundamental economic indicators – namely employment growth, wage growth and inflation – remain weaker than they might be.

But some are convinced the economic data is enough to warrant an early increase in September to test the water. Josh Rosner, managing partner at Graham Fisher, told TheStreet.com"economic data is the key, and growth, albeit low, gives [the Fed] the justification to take rates up in September and it won't want to risk missing the chance".

Interest rates: predictions that markets rout will delay lift-off

25 August

A Chinese stock market crash and corollary slump across commodity and global equity markets may seem remote for those who don't hold direct investments, but it could affect whether your mortgage rate stays lower for longer or hold down returns on your savings.

This is because it could delay a decision by central banks rate-setters on when to lift base interest rates. Bank of England governor Mark Carney had intimated this could become a real possibility by the end of the year, while the Federal Reserve in America was expected to act sooner and perhaps even at its meeting next month.

But according to The Times, after the 'Black Monday' crash in China and panic selling elsewhere, both the pound and the dollar were sold off around 1.5 per cent relative to rival currencies. That amounts to a bet by traders that interest rates will be held at record lows for longer.

The paper cites analyst predictions that US rates will now not be moved until next March, while in the UK the record low will be maintained until at least the second half of next year.

But according to the Sunday Times, many now believe depressed inflation that is being held back by falling commodity prices and especially a renewed decline in oil – benchmark Brent crude is trading hit a six-year low of close to $42 on Monday – is undermining the case for an increase.

Although rate-setters are at pains to point out they look through "temporary, commodity price-driven" movements in headline inflation, it would be "incredibly difficult" to justify a hike while they are being forced to explain "persistent undershoots" of the two per cent inflation target, says Andrew Goodwin of Oxford Economics.

But not everyone expects a rate rise to be held back. The BBC reports that the Confederation of British Industry has upgraded its growth forecast for the UK this year and next to 2.4 per cent and 2.5 per cent respectively following recent economic improvements. It says this will prompt a rate rise in the first quarter of next year, in line with consensus predictions in recent months.

Interest rates: should you move to a tracker savings account?

19 August

It is looking increasingly likely that the Bank of England may raise the base rate sooner rather than later and probably within the next 12 months. If it does savers are hoping it will mean there will finally be a rise in interest rates on bank accounts - in fact some banks are already starting to inch up their offers, according to the Daily Telegraph.

If there is a more appreciable rise, will you benefit? History has shown us that most banks only offer higher rates to new customers. Also, there is no guarantee that the full base rate rise will be reflected in savings accounts.

You don’t have to miss out. If you choose to put your money in a tracker account the interest rate you get follows movements in the base rate, much like a tracker mortgage does. This means that if the Bank of England does decide to raise rates you’ll immediately see the benefit.

Because you are guaranteed to benefit if the base rate rises tracker savers don’t pay as much as other fixed-term accounts, but they aren’t far behind. For example, Halifax has an online tracker bond with an 18-month term paying 1.43 per cent above the base rate on balances above £500 and 1.48 per cent above base rate on balances over £50,000. That means you would currently be getting a rate of 1.93 per cent or 1.98 per cent.

The best standard 18-month bond is from Charter Savings Bank and pays 2.15 per cent. But if rates rise to 0.75 per cent - meaning just one upwards move from the current 0.5 per cent - the Halifax bond would immediately start paying 2.18 per cent or 2.23 per cent.

Longer-term tracker accounts are less appealing. If you want to lock up a large sum of money then Investec Bank offers a two-year account that pays double the base rate plus 0.6 per cent, but you have to invest at least £25,000. So at present you would get 1.6 per cent rising to 2.1 per cent after the first base rate increase. Alternatively, Cambridge Building Society and Kent Reliance have two-year tracker accounts that pay one per cent above the base rate, giving a current rate of 1.5 per cent, rising to 1.75 per cent after the first hike.

Given that you could get a fixed-rate two year bond paying 2.38 per cent from Secure Trust bank, the base rate would have to jump to 1 per cent before the two-year tracker accounts beat the current best rates. Even the most hawkish commentators are not predicting that until 2017.

A tracker account could be a good option if you are looking for a short-term home for your money with limited access. You can lock your money away for 18 months knowing if rates rise you won’t be left behind. Equally, if you have a large amount of savings then you might want to consider putting some into a tracker account so you get an immediate benefit from any rate rise.

But to really get the most from your money you are better off finding the best rate available right now. Then if base rates do rise you can reassess your options.