Later today, the Bank of England will announce its interest rate decision. There seems little possibility that rates will be increased today. In fact, recent comments by the Governor of the Bank of England, Mr Mark Carney, have been dovish and market friendly.
Mr Carney has sighted the pessimistic growth global outlook, the collapse in commodity prices and less-than-encouraging wage and consumer inflation as reasons to put off increasing interest rates in 2016.
Far from being convinced of the inevitability of a rate increase happening once data begins to improve, some market commentators are now openly talking up the merits of the Bank of England reversing course and reducing the Official Bank Rate from its present level of 0.50%.
In today’s Super Thursday statements, the markets will be looking for a change in the mood of the Bank of England’s commentary. Will Mr Mark Carney now move to downgrading the previous projections for wages, employment and inflation? Furthermore, will we see a seismic shock as the markets have to deal with one or more members of the Monetary Policy Committee shifting their stance from hold to negative on interest rates?
The Bank of England does have some room to maneuver, as the current overnight rate, in relative terms, is high when compared to say, Eurozone, Japanese, and Swiss interest rates. Therefore, the Bank of England has some way to go before it even has to contemplate moving towards negative rates.
The question, however, is if cutting an already low level of interest rates had any real effect other than stoking the fire under the housing bubble. Japanese business has enjoyed low levels of interest cost for a considerable time without any noticeable change investment.
Fiscal measures could be reintroduced as was the case during the great recession of 2008. However, the massive stimulus programs that were initiated by the US Federal Reserve, Bank of Japan and Bank of England have not brought the expected results.
The central banks of the world are fast running out of tools which they can use to stimulate their economies. A race to the bottom in a currency war is not a real solution.
It would appear that the coming months will be pivotal for Mr Carney and his counterparts at the US Federal Reserve and European Central Bank. The time is ripe for better solutions rather than more of the same. The problem for the decision makers is that there are no obvious alternatives.