Global Economic Volatility Pressures Bank of England Not to Act
The last time the Bank of England decided to move on interest rates was after the global economic crisis of 2008/2009. That the interest-rate has flat-lined at 0.5% has not been lost on economists and policymakers in the United Kingdom. However, the Bank of England governor Mark Carney does not believe that now is the time to raise interest rates. The Fed last raised interest rates on December 16, 2015 when it increased them from 0.25% to 0.50%. At the time, there was general consensus that the Bank of England would act in lockstep with the Fed. However, the BOE weighed domestic conditions and global conditions and decided against hiking interest rates in the United Kingdom.
At the forefront of the concerns plaguing policymakers in the United Kingdom is China weakness. That the Chinese economy recorded a GDP of 6.8% in December 2015 and a GDP growth rate of 6.9% for the year in 2015 is indicative of the pervasive weakness in the world economy. Owing to China weakness, commodity prices have all but bottomed out and crude oil, iron ore, copper and molybdenum have suffered massive losses in the past year. Emerging markets have been particularly hard hit with pervasive currency weakness, notably the economies of South Africa, Turkey, Brazil, Venezuela, Russia and others. The Chinese stock markets are heavily overvalued, and domestic and foreign investors are having none of it. The performance of the Chinese stock market has been abysmal in 2016. The Shenzhen composite index has shed 24.18% in 2016 and the Shanghai Composite index has lost 21.92% this year.
Re-entry of Iran into oil markets complicates matters
But it’s not only Asian Stock Markets that are suffering; Middle Eastern stock markets like the one in Saudi Arabia are at multi-year lows. This is all as a result of pervasive weakness in commodity prices owing to oversupply, slack demand and the re-entry of Iran into the global oil trade. Many UK, Italian, American and Russian companies have already locked in agreements with Iran to buy crude oil in 2016. It is expected that Iran will increase the global supply by as much as 500,000 barrels per day, perhaps even 700,000 barrels per day by the end of the year. The Bank of England is fully aware that a strong GBP will act as a disincentive to trading with UK companies. As the pound strengthens relative to foreign currencies, the ability of foreign countries to trade with United Kingdom diminishes. It is already evident in the emerging market currency crisis.
Now is not the time to raise interest rates
The trade gap in the UK is now at £125 billion and it increased by £1.9 billion during 2015. Data provided by the Office for National Statistics has not inspired confidence in the global economy, or the UK economy. At this juncture, economic analysts and policymakers at government level are reluctant to push for interest-rate hikes for fear that it will have negative repercussions for the UK economy and the precariously balanced world economy.