Just in case you wondered which central bank is going to be first to raise rates towards a vaguely normal level, Mark Carney is making sure no one’s in any doubt that the UK is on course for a small hike soon.
Or, in typically cryptic and nuanced language, “sooner than markets currently expect”. Take what you will from that; the markets certainly saw it as a clear signal of intent and drove sterling towards a 19-month peak against the euro and back near a five-year high versus the dollar.
Markets had been primed for a rise in rates sometime in the spring of 2015, but Carney’s Mansion House comments suggest it could be before 2014 is out. As ever, he was keen to stress that any increase will be gradual and limited – “materially lower” than pre-crisis norms seems to be the idea.
Of course, the Bank of England is not actually the first central bank to raise rates – New Zealand did so this week for the third time this year, hiking its benchmark lending rate from three per cent to 3.25 per cent.
The effect was a surge in the kiwi as the carry traders piled in, desperate for any trace of yield in a low volatility market.
Meanwhile, over in Greater Germany, the ECB is only a about four years behind the curve. Draghi has finally taken some serious steps to tackle the onset of a deflationary cycle that seems worryingly hard to stave off. (Ian says Draghi’s steps are far from serious, other than to confirm the serious nature of the overall parlous state of the eurozone.)
The euro has fallen, but hardly by a lot – the problem for Draghi and co in weakening the single currency is dealing with the $4 trillion problem that is China’s efforts to diversify assets.
Steven Englander from Citigroup explained to Bloomberg: “One possible explanation relates yuan weakness to intervention by Chinese authorities. When this occurs, Chinese reserve holdings of dollars increase. In order to prevent the dollar share in reserves from rising, the authorities have to sell the dollar for other currencies, primarily the euro.”
Negative deposit rates probably won’t work either. “We have disagreed with the move to cut the deposit rate in the past, as we expect banks to simply pass on the costs to households and businesses, either by charging fees for savers, but more likely through higher interest rates on new borrowers – the opposite of what the ECB is trying to achieve,” says Schroders’ European economist Azad Zangana.
So while Carney looks to tighten, the ECB seems unable to do anything but slowly loosen policy without much effect on the eurozone economy.
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