A central bank in Europe raised interest rates yesterday. Not ours, unfortunately

Czech National Bank © Getty Images
The Czech central bank raised its benchmark interest rate by a whopping 400%.

A central bank in Europe raised interest rates yesterday: the Czech central bank hiked its benchmark interest rate by a whopping 400%. That’s a melodramatic way to say that it raised rates from 0.05% to 0.25%. Not so impressive when you write it like that.

It’s the first European central bank to raise interest rates this year. And so far, it’s the only one. Its compatriot in Britain, the Bank of England, was rather less bold. Indeed, it’s looking as though our interest rates here in the UK could be on hold for at least another year…

The Bank of England stays on hold

The Bank of England decided not to raise interest rates yesterday.

The Monetary Policy Committee (MPC) voted by six votes to two to keep “Bank rate” at 0.25%. Last time the vote was 5-3, but Kristen Forbes – one of the three dissenters – left after the last meeting, and her replacement, Sylviana Tenreyro, decided to vote with the majority.

In case you’re wondering, the MPC normally has nine members, but they’re running one short at the moment. The new deputy governor, Sir Dave Ramsden, starts next month. Clearly my application got lost in the post.

Tenreyro’s history at the central bank of Mauritius had suggested that she would be a “dove”, so the vote shouldn’t really have come as a surprise.

Yet the market had clearly started to get a bit over-excited about the idea that the Bank might at least nod towards the process of raising rates at some point soon. After all, as we discussed earlier this week, the Bank has been very vocal recently in its worries over the consumer debt boom.

But it’s clearly not worried enough to raise rates. And in fact, it thinks that the economy will continue to be weak enough to justify low rates for a while.

At least, that’s what the Bank’s latest inflation report implies. It reckons inflation will average 2.7% this year, 2.6% next, and 2.2% in 2019. Meanwhile, it revised down its expectations for GDP growth from 1.9% to 1.7% this year, and nudged them lower for next year.

This is all based on the assumption that there will be just two interest rate rises over the next three years, with the first one not happening until the third quarter of next year. In other words, it could be over a year before we see interest rates rise from their current “emergency emergency” levels of 0.25%.

Wow.

The MPC rather half-heartedly suggested that “monetary policy could need to be tightened by a somewhat greater extent” than the path markets currently expect. But that’s the absolute bare minimum that they could get away with.

The Bank also has no plans to prevent sterling from slipping back. “Monetary policy cannot prevent either the necessary real adjustment as the UK moves towards it new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment.

“Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.”

In short, don’t be looking for higher interest rates any time soon.

What does this mean for your money?

The pound, unsurprisingly, fell rather sharply on the news. In the back of their minds, traders were expecting something a little bit more aggressive. Instead, they got something closer to flat-out capitulation.

Of course, given that every other country in the world right now wants a weaker currency, this isn’t going to concern the Bank too much. Indeed, one of the few benefits that the Bank can see arising from Brexit is that UK manufacturers have “increased incentives… to expand or renew export capacity to take advantage of the lower pound”.

So the upshot is that low interest rates and a relatively weak currency are going to continue.

What does that mean for your money? On the shares side, it’s pretty good for anyone who’s invested in any overseas assets or those that make their money in dollars, for example.

The FTSE 100 was pretty cheery about the idea of an ongoing weak pound – that’s all those miners and other dollar earners for you. And if you own emerging markets (which have already done very well this year) then your holdings will only have gone up in value in sterling terms. So stick with the international diversification.

As far as the rest of your money goes – on mortgages and lending in general – the Bank appears to be trying to crack down on this stuff by the back door. So while rates may stay low for some time, if you’ve been looking to remortgage, I see no real reason to hang on for better rates.

As for savings – I hate to say it, but just don’t expect savings rates to improve any time soon. Getting an inflation-matching return on your cash deposits is not going to happen, unless you have the patience and administrative dexterity to do the current account merry-go-round (whereby you shift relatively small amounts of money from one 5% account to another).

Does that mean you should dump cash? Not at all. It’s useful to have and it’s dry powder ready to be invested. Again, this is the problem with the “reaching for return” environment (as Howard Marks of Oaktree Capital describes it). Don’t get forced to take part in the market because you feel you have no alternative. Only buy in if you feel there’s a genuine opportunity.

The alternative is to move to the Czech Republic of course. But the koruna just got a lot more expensive, so that’s maybe a bit extreme.

  • Hugh Jarsse

    The longer we have essentially 0% interest rates, the more debt will be taken out against this backdrop, and the more difficult it will become to raise interest rates to any meaningful degree because the overall sensitivity of outstanding debt to increasing interest rates becomes higher. Cue the next downturn where the only lever left to pull is the one marked ‘print’ – that’s when the real fun begins. The knuckle-draggers at the central bank are perfectly happy it seems to keep kicking the can down that ever-shortening road