Fears Of Impending Interest Rate Rises Quelled

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Fears of interest rates rising were put on hold when central bankers in the US and Britain decided against an increase in key meetings this week.

Although Federal Reserve chief Janet Yellen had signalled she was ready to ratchet up rates in the US on the back of positive economic data, she stayed her hand.

Likewise, Bank of England governor Mark Carney presided over a dovish monetary policy meeting this week that also left interest rates on hold.

The chance of a rate rise on the eve of Brexit was probably minimal anyway as a robust Stay campaigner Carney was unlikely to rock the economic boat so close to the June 23 referendum.

Another issue for Carney is inflation.

Stubbornly low inflation

The cost of living in the UK has remained stubbornly well below the Bank target of between 2% and 3% for at least 15 months.

During that time, the high has been just 0.5% after a flirtation with deflation. The current rate is 0.3%.

“Longer for lower is the mantra from most economists,” said Maike Currie, investment director at finance house Fidelity International.

She explained rebounding oil prices, an increasing cost of eating out and more expensive mobile phone services pushed the consumer price index up.

“Investors parking their money in gold or a tracker fund won’t cut it,” she said. “The markets are clearly worried about a Brexit and the FTSE 100 is below the 1999 peak and shows a lot of volatility.

“Good stock selection and reinvesting dividends is the only way to cope at the moment until the Brexit vote and the markets sort themselves out.”

New economic normal

Meanwhile, Yellen also had a Brexit on her mind when the Fed met.

Speaking since the meeting, she has announced the US interest rate may rise in July – however nothing is certain.

“It’s not impossible the rate might rise in July,” she said, still playing her cards close to her chest.

She also rolled out the phrase the ‘new normal’ which has also been quoted by Carney.

Both explain that some drags on the world economy such as a growing aging population, low growth and problems with funding pension promises will persist regardless of monetary policy.

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