Good morning

Was it something I said?

Only 3 days ago we wrote FIRST that the likelihood of a FED rate hike this year has diminished considerably after recent disappointing NFP (jobs) data and inflation from the US coupled with the increasing slowdown in China. This was then CONFIRMED by the FED yesterday in the FOMC minutes when the Pres. of the FOMC Yellen noted concerns around Chinese growth, static inflation and a downturn in job creation in the US were the reasons why they kept rates on hold in September and why rates are now likely to stay on hold through 2015. The news sent the USD lower vs the majors and gave EM currencies a boost, not to mention a rally on the stock markets globally.

At the same time the BoE published their interest rate decision (unchanged) and the minutes were published. As previously the vote was 8-1.  A former member of the BoE’s Monetary Policy Committee Andrew Sentance told the BBC that he thinks it’s important to start gradually hiking rates again otherwise it will damage economic growth. He has already said this a few times before and also wrongly predicted that back in August that “2-3 members of the MPC would vote for a rate hike. Only one person voted for a rise in rates. “We have independent central banks because they are meant to be courageous, they are meant to try and get ahead of the curve, they are meant to do things that politicians might find difficult and they don’t seem to be behaving that way at the moment. You have to start raising them (rates) before the red lights start flashing.” He added that now more than ever, the UK needs to start gradually raising rates because of the uncertainty caused by the FED holding rates at 0.00-0.25% adding ” it is not really very good for the economy.”  In August, prominent Bank of England member Kristin Forbes warned that the central bank must hike rates soon or face damaging the progress Britain has made over the last few years. “An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions. Therefore, interest rates will need to be increased well before inflation hits our 2% target. Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect. But with inflation starting from about zero today, there is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected.”

In my humble opinion, while I have much respect for both Sentance and Forbes, I disagree with them both. I think the world has entered a very precarious and dangerous period unlike the financial crisis of 2008-2014. China plays a pivotal role in global growth and prosperity and with China now showing increasing strains and little in the way of a comeback, CB’s need to be ultra careful not to pour fuel on the fire and ignite a capital shift out of China and into the UK or US (had they raised rates). Coupled with falls in inflation, jobs growth and commodity/energy/food prices, we are now facing a very different problem to the one that prevailed at the start of the Bear Stearns/Lehman Brothers/AIG/Merrill Lynch fiasco.

Getting back to the USD then, as I wrote earlier this week, it looks like the USD is increasingly likely come under pressure over the coming months as the threat of rates hike in the US and UK is pushed back. Good news then for EM currencies who until recently were obliterated. Respite and breathing space is always a good thing and let’s hope for more of the same.

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