Jose Garcia Zarate: Will interest rates ever rise? This is one of the key questions that investors are asking themselves. For the all the talk that rate hikes in the U.S. and the U.K. are just around the corner, the central banks continue to find reasons not to pull the trigger. In the U.S. the Federal Reserve is worried about global trends, particularly in emerging markets. Meanwhile, here in the U.K., Governor Carney is now talking about rate hikes as a possibility rather than as a certainty. Elsewhere in the world monetary policy retains an ultra EC bias. China is cutting rates and the ECB pretty much announced recently that it's going to add further stimulus in December.
The fact is that downside risks to the overall economic outlook have increased in the past six months. And the while inflationary pressures are nowhere to be seen. Besides, the U.K. and the U.S. have already experienced a de facto tightening of conditions as exemplified in the strengthening of the dollar and sterling relative to other currencies. This in a way weakens the case for rate hikes in the U.S. and the U.K.
But does this mean that interest rates will not increase in these two countries? Not necessarily so. More likely what it means is that the peak of the tightening cycle could be much lower than previously anticipated. So, overall, it seems as though economic agents around the world will continue to enjoy very easy monetary policy settings for the foreseeable future.
