No Interest Rate Rise in 2015

MARKET REACTION: Minutes from the latest Monetary Policy Committee meeting reveal that all nine members unanimously voted to keep interest rates at 0.5%

Emma Wall 21 January, 2015 | 5:04PM
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Emma Wall: Hello and welcome to the Morningstar series, 'Market Reaction.' I'm Emma Wall and here with me today is Peter Hensman, Global Strategist for Newton.

Hello Peter.

Peter Hensman: Good morning.

Wall: So, we've heard this morning the latest minutes from the latest MPC meeting and all nine members voted to keep interest rates at 0.5%. In the past there has been a couple of members who actually wanted to push rates up but they seem to have sat back down and shut up. What's happened?

Hensman: Well, no doubt there is obviously a lot going on, but the key fact here has to be to do with the general pricing backdrop and particularly the drop in the oil price that we've seen that is making the bank reassess its expectations for inflation over their forecast horizon.

Wall: Of course, inflation has come down to less than 1% and Mark Carney has had to write to George Osborne to say it's much less than half target. Is this something we should expect to continue and indeed, inflation keeping interest rates down low, will the two things continue to be low?

Hensman: We think it is and I guess we take a slightly view of the backdrop from the consensus in the market and from the Bank of England. So, we do think this is a more permanent state of affairs that we've created here rather than something that's transitory.

Wall: Of course, low inflation is good for the consumer. Obviously, no one wants to pay any more than they have to for their goods. But of course, low interest rates are not so good for the consumer. So, how does that affect us all?

Hensman: Well, it is a bit of a challenge and the MPC rightly point out that low interest rates are good for those who have mortgages. It's good for borrowers because it keeps your borrowing costs down. But equally, it's a challenge for savers who are looking for income from their savings or those who are trying to save for retirement. The cost of the pension keeps on going up as bond yields and interest rates remain low. So, there are a lot of different effects going on here.

Wall: A lot of economic news I think many consumers aren't that bothered about. But interest rates are something that really do affect the people on the street. We've got a general election coming up this year. Will we expect to have any policy or any noise around those sort of issues, the economic issues that really affect people?

Hensman: Well, certainly, the general election is going to create a lot of noise. We're already seeing that in newspaper headlines and we can only expect that to increase as we head towards the May election day. That shouldn't impact on the MPC. The MPC is supposed to be independent of political interference and that's something that all political parties are likely to want to maintain. But the uncertainty over what the next government will look like, how stable will it be certainly seems likely to have a bearing on business investment.

Why invest your money in the first six months of this year until you have more certainty over what the next government is going to be, what their policies are likely to be and that certainly seems likely to continue to weigh down on interest rates and interest rate expectations through the quarter, certainly the first half of this year.

Wall: So, interest rates remain low and inflation remains low?

Hensman: That seems to be the case. Again to us, the idea behind policy is it's supposed to be dragging demand higher and very much looking at this from the viewpoint of people who are in debt who benefit from lower interest costs, but we see a whole series of other effects coming through; increasing costs for those, some areas increasing competition that we are seeing coming through as new supply emerges and those all seem to us to continue to point to persistent low pricing power and low rates.

Wall: Peter, thank you very much.

Hensman: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar