21 of 24 economists polled by Reuters expect the Reserve Bank will cut the official cash rate by a quarter point to 2.5 percent with its monetary policy statement on Thursday. Brazil is experiencing its worst recession in decades and previous rate hikes have not prevented a rise in inflation, which in October reached a 12-year high of 9.93%. That could mean holding interest rates lower for even longer.
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What markets are looking for is any signal of how close the Bank is to raising interest rates.
In Britain, muted inflation and collapsing oil prices mean that there is little prospect of a hike in United Kingdom interest rates any time soon, economists say.
Nick Dixon, investment director at Edinburgh-based life and pensions group Aegon UK, said: “Although MPC members who voted to hold rates had one eye on the US Fed’s decision next week, the MPC’s forward guidance indicate that rates will remain low for “some time”.
The BoE’s Monetary Policy Committee (Mpercent) kept its key rate at 0.5 percent, where it has stood since March 2009, it said in minutes of the latest monthly gathering. These are all significant headwinds for the economy and to raise interest rates in the middle of it all could be quite risky. Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to absorb remaining spare capacity in a manner that returns inflation to the target in around two years and keeps it there in the absence of further shocks.
A Bank of England meeting this week offers some hope of a boost for sterling, if the bank’s minutes again signal a rate increase next year or one or more of the bank’s inflation hawks vote at the meeting to raise rates. The core consumer price index (CPI) was higher given it takes out the more volatile products such as energy at 1.1 percent which is what gives credibility to the Bank of England’s rhetoric about higher rates and that the negative effects pressuring the United Kingdom economy being labelled transitory. German bank Berenberg on Thursday pushed back its forecast for the first increase to May 2016, from February.
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“We think that there is the case for a baby step in the hawkish direction on the back of firmer domestic data, less bad external news and the likelihood that the Fed will hike imminently”, Scotiabank economist Alan Clarke said. Investors’ reactions are hard to predict because the “Fed has not changed its rate for nine years, and the question is how much of a buffer the European Central Bank is offering to neutralize higher USA rates”.
