Central Banks Mull Over Federal Rate Rise Announcement

Central Banks across the world will now be wondering what the effect of the much expected federal reserve interest rise will be, and what the implications are for their future monetary policies.

Many analysts believe the European Central Bank (ECB), will be secretly pleased about the Federal Reserve’s decision to increase rates for the first time in nine years, as this will keep downward pressures on the euro.

This resulting in the euro being more attractive for trading partners, even though it has not been a view that the ECB has publicly disclosed.

The recent decision by the ECB Governing Council at their latest policy meeting on December 3, to extend the EUR 60 billion per month asset purchasing Quantitative Easing (QE) programme to March 2017, analysts say was partly aimed at weakening the currency.

It is a theory that will have to be supported by demand in the global economy, over the past year there has been economic turbulence in China, now the European Union’s second largest trading partner after the United States.

The QE programme will keep yields low, and the low interest rate environment is likely to stay in the euro area for a while, in contrast the action of the Federal Reserve.

Also, the emerging economies will be hurt by the Federal Reserve Rate Rise, as their borrowing costs will increase, which could lead to a reduction in demand.

Since the rate rise was made public, the euro has slipped down to buying $1.08, but this morning the euro bounced back, climbing to £1.086, before sliding down again to $1.082.

The euro was trading at $1.09 when the rate rise declaration was made.

Standard and Poor Say that European Bond Markets ‘Need to Watch Step’

Standard and Poor have analysed what might happen to the European government bond markets, following the rate rise.

The ratings agency said that the European markets rallied when the news of the rate hike filtered through,.

This sent yields lower, in contrast to earlier in the year when European bonds were sold off in fear of a potential US Fed rate hike. Although yields in Europe are largely ending up higher with a few exceptions

They also concluded that the rate hike could also significantly change the ‘steady ground’ in Europe, and hurt what remains a sluggish economy in the euro area.

Bank of England Unlikely to Follow Federal Reserve

The Bank of England has often followed the decisions made by the Federal Reserve, but its improbable that this will happen on this occasion.

Mark Carney, the governor of the Bank of England, has strongly hinted that the UK will have a prolonged period of 0.5% interest rates. The rate which interest rates have now been pegged at for over six years.

The Confederation of British Industry (CBI) is far from convinced that the UK economy is ready for a rate rise, as the decision in the United States reflects the health of their jobs market.

The CBI say this is good news for the UK economy, as this should result in higher exports from the UK over the Atlantic, due to household incomes in the United States increasing.

Rain Newton-Smith, CBI Director of Economics, said: “The move was widely anticipated and the consequences for the UK are likely to be small.”

“Alongside the US, the UK has been one of the best performing advanced economies in recent years, but the Bank of England probably still has a way to go before rising inflationary pressures at home persuade it to follow and up interest rates.”

The UK recently announced that inflation was 0.1% for November, the first time in four months that the figure was positive.