Market Insight - June/July 2015
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The Only Way is Up! (…But Not Yet)
Economic recovery is still on the up, but rates are staying put.

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UK economic growth was stronger than the government thought in Q1 2015. It grew by 0.4 per cent bringing the annual rate up to a very respectable three per cent. And things look set to continue. Maintaining its rising trend over the last six months, consumer confidence reached its highest level for 15 years. Consumers hit the shops with credit cards but as real household incomes are up by 4.5 per cent over the year, that shouldn’t pose a problem. It looks like we are finally seeing the benefits of falling unemployment (at its lowest since 2008) and wages continuing to outpace inflation.

Rising credit shouldn’t be a problem with such low interest rates and, despite the apparent spat between Martin Weale and the Bank of England’s Chief Economist, Andy Haldane, both members of the Monetary Policy Committee, it seems more likely that rates will stay where they are than rise. Mr Weale is the arch hawk on the committee, wanting to swoop down on any sign that inflation may take hold. He feels that rising wages might be such a sign. In contrast Andy Haldane – one of the doves who do not want to threaten any recovery by raising rates too soon disagrees. His position is clear “Wage growth is causing some fluttering but not in this dovecote”.

Inflation is close to zero and there is still a great deal of catching up to do, even though the economic recovery is firmly underway. The Greek crisis is also likely to have an impact. First on the value of Sterling against the euro. The rise in Sterling will be great for holidaymakers, but not so good for exporters. In addition, with concerns that the issues in Greece could destabilise not just the euro currency but the economic recovery in the whole of the euro area, it would seem prudent not to throw anything else in that could threaten the UK’s recovery at the same time.

It looks like the dovecote suits most of the interest rate setters for now – only two out of the nine Monetary Policy Committee members seem to prefer the wild. That means rates should stay where they are for at least another six months. 

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