Bank of England holds rates

May 15, 2018

Bank of England holds rates

The Bank of England (BOE) guided earlier in the year that they would be looking to raise interest rates to 0.75% in May. This led to the market at one stage pricing in this possibility to a nearly 100% likelihood. However, recent weakening economic data has led to the Bank quickly backtracking and opting to keep interest rates on hold. After giving such strong guidance for a rate rise, the BOE and its forward guidance policy has lost some credibility. Nevertheless, such a sharp deterioration in the data, and particularly in consumer activity, makes raising the cost of borrowing at this stage a potentially dangerous move. The BOE will now want to see a marked improvement in the fortunes of the UK economy before acting in the future.

US walks away from Iran nuclear deal

Donald Trump has taken the US out of the Iran nuclear deal negotiated in 2015, to the disappointment of key allies and world powers. While the remaining parties are attempting to keep the deal alive, the economic might of the US means that it is unlikely to succeed in the long term without Donald Trump’s blessing. The move is likely to be an opening negotiating tactic to bring more stringent controls into the deal; however, there is a significant risk that this backfires and results in the Iranians restarting nuclear weapons development. The immediate result of the US withdrawal has been the sharp increase in the oil price, as the potential reintroduction of sanctions may limit the supply of Iranian oil to world markets. The predictions for the impact of restrictions range from 200,000 bbl/day to 1.5m bbl/day and may take six months to be implemented. There will, therefore, continue to be a significant amount of ambiguity in the oil price for some time.

 FTSE 100 rally continues

The rally in the FTSE 100 since the end of March continued last week, taking the total gains from the recent low to over 12%, and nearing a new record high. The rally has been predominately driven by a weakening pound and higher commodity prices. Given the significant weighting in the index taken by overseas earners, as well as oil and mining companies the performance of the index can vary widely from the fortunes of the domestic economy. Furthermore, the investor concerns that drove the last selloff, namely higher US interest rates and inflation as well as a potential trade war between the US and China have faded somewhat, although this outlook may change rapidly.

Market Data

Index Open Close Change % Change
FTSE 100 7567 7724 157 2.07%
S&P 500 2663 2727 64 2.40%
Dax 12819 13001 182 1.42%
Cac 40 5516 5541 25 0.45%
Nikkei 225 22472 22758 286 1.27%
UK 10 Year Gilt Yield 1.4 1.44 0.04 2.86%