The Bank of England is unlikely to rates anytime soon because of a slowdown in China’s growth and it’s crazy stock market volatility, says Investec’s chief economist Philip Shaw.
UK interest rates have stayed at a record low of 0.5% since 2009.
Although two members of the BoE’s rate setting panel — the Monetary Policy Committee — came out in August to warn that interest rates will rise “pretty soon,” Investec believes that the knock-on effect from China makes it too risky for the central bank to hike rates.
“What you’re looking at is a domestic picture that is looking pretty good … particularly because of the service sector, and that growth momentum is gaining gradually,” said Philip Shaw, chief economist at Investec, on the BBC’s Today programme.
“However, there’s a less comfortable international background” he added, due to a potential slowdown in Chinese growth and stock market volatility.
The MPC will publish its latest decision on interest rates later today, alongside the minutes of meeting.
A low interest rate stimulates the economy because it reduces the cost of borrowing. In other words, it helps those in debt to make repayments and boosts the amount of money in people’s pockets. This was necessary when the economy was hit by the credit crisis on 2007/2008.
However, the UK economy has expanded since then and latest data from the Office for National Statistics shows that the UK economy was 2.6% larger in the second quarter (April to June) in 2015, compared to the same quarter a year ago. It also revised up its forecasts for the expansion of the British economy this year.
This has led to prominent BoE member Kristin Forbes warning that Britain needs to hike interest rates or risk killing the recovery. In July, BoE governor Mark Carney revealed that the BoE is looking to raise interest rates “at the turn of this year.”
However, China is in an incredibly turbulent period right now. Its stock market has fallen around 40% since hitting multi-year highs in mid-June and the government is burning through cash reserves to prop it up.
Meanwhile, China’s economy grew at its slowest rate of expansion in 24 years, by only by 7.4% in 2014. My colleague Ben Moshinsky pointed out last month that Britain’s fortunes have been linked to the global economy for centuries and 2015 is no different:
As Chinese growth weakens, the country’s manufacturing sector slows down and needs fewer raw materials. As demand for commodities falls, so does the price, hurting economies such as Australia that depend on exporting them. This leads back to less demand for China-made goods.
The UK economy, being outward looking for a lot of its goods, isn’t out of this loop.
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