Home |  Blog  |  Press Room | 

April 2010 Commentary

Interest Rate Outlook 27th April 2010

City of London A number of data releases over the last week suggest that rates might start to increase sooner rather than later. Firstly, the inflation figures published on 20th April by the Office of National Statistics (ONS) show that the inflation rate measured by the Consumer Price Index (CPI) was 3.4% for the year to March, up from 3% in February. At the same time, annual Retail Price Inflation (RPI) was 4.4%, up from 3.7% in February.

Secondly, the minutes of the April Monetary Policy Committee (MPC) meeting, published on 21st April, highlight two main risks, which are inflation risk and financial market concerns over sovereign creditworthiness across a number of countries.

At the time of the April MPC meeting, the committee identified upside risks to inflation:

"Oil and some other commodity prices had risen substantially over the past two months, raising the near-term outlook for inflation. And, although measures of households' medium-term inflation expectations had remained reasonably stable, some measures of financial market participants' inflation expectations had been drifting up. Given that a period of above-target inflation was in prospect at a time when monetary policy was exceptionally accommodative, this was a source of concern to some members."

The committee identified spare capacity in the economy as being a restraining factor on inflation but there was a range of views among Committee members about how the balance of risks to inflation and activity had altered over the past few months.

The financial situation in Greece is driving concerns over sovereign credit worthiness, with contagion fears impacting Portugal, Spain and Ireland in particular, driving rates on debt from these countries up.

The final piece of information, published on Friday by the ONS, was the preliminary estimate for GDP growth for the first quarter of 2010. Gross Domestic Product (GDP) increased 0.2% in the first quarter of 2010, compared with an increase of 0.4% in the previous quarter. The decrease in the growth rate was due to weaker growth in services. This shows that the recovery continues to be fragile and may keep rates in check.

ONS: Inflation report and GDP Growth report Bank of England: MPC April minutes


Interest Rates from Down Under 12th April 2010

SydneyWhilst the Bank of England decided to keeps rates steady at 0.5%, the Reserve Bank of Australia increased rates to 4.25% last week. With inflation at 2.1% Australian savers are actually earning positive real rates of return, unlike savers in the UK. However, as a visitor to Australia, the weak pound is making Australia expensive. Last time I visited in December 2008, the Australian dollar was worth 48p but now at 61p this means that it is 27% more expensive, without allowing for inflation.

The Reserve Bank of Australia sets the target 'cash rate', which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations. Decisions to vary this interest rate are made by the Reserve Bank Board, and are explained in a media release which announces the decision at 2.30 pm after each Board meeting.

Rates in Australia hit a low of 3% a year ago in April 2009. The reserve board started to increase rates last October and over the last seven months they have increased by 1.25%. The Statement made by Glenn Stevens (Governor: Monetary Policy Decision) following the 6th April meeting explained the reason for increasing rates as follows:

"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. ....Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today's decision is a further step in that process."

Over the last ten years, official rates in Australia have averaged 5.27%, some 1.13% higher than average UK rates at 4.14%. Australian rates have only been lower than UK rates between March and July 2001. So whilst Australian rates are moving closer to their historic average levels, UK rates have some way to go to return to their historic average levels.

Source: Reserve Bank of Australia website http://www.rba.gov.au


Follow CashAdviser on Twitter

Blog Archives: 2011 January | February | March | April | May
2010 February | March | April | May | July | August | September
Home | AskCashAdviser | Blog | Contact Form | Movie | Press Room | Log In | Search