Carney & Co. Get Ready for Interest Rate Rises

It appears that the overwhelming consensus from the annual Jackson Hole Economic Policy Symposium, held in the US, is that the world’s central banks are ready and prepared for a US interest rate hike.

In public declarations, global policymakers made it clear that due to an initial monetary tightening and a yearlong rise of the USD, global financial markets are ready and there should not be any delay.

The Jackson Hole’s global central banking conference was fortuitous in its predetermined date. The governors of central banks gathered at the end of a tumultuous week in the world’s stock market, where concerns of  China’s slowed and weakened economy resulted in plunging shares and currencies.

At the conference, both the Governor of the Bank of England (BOE), Mark Carney and the Vice President of the European Central Bank (ECB), Vitor Constancio agreed that stronger growth will pull inflation higher in the US and Europe but that their regions will break away from the headwinds that are keeping inflation too low.

The Vice-Chairman of the US Federal Reserve, Stanley Fischer, said, “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further... With inflation low, we can probably remove accommodation at a gradual pace... Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening.”

ECB Vice President Constancio added, “The link between inflation and real activity appears to have strengthened in the euro area recently... Provided our policies are able to significantly reduce the output gap, we can rely on a material effect to help bring the inflation rate closer to target.”

BoE Governor, Mark Carney shared similar sentiments, “The prospect of sustained momentum in the economy and a gradual pickup in inflationary pressures will likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year. Recent events, including China’s slowdown, so far do not call for changing the Bank of England strategy for returning inflation to target.”

Carney went on to state, “The direct exposure of the UK economy to China is relatively modest. Developments in China are unlikely to change the process of rate increases.”

This announcement came despite the loss of £74bn by the UK’s FTSE 100 companies following China’s “Black Monday”, and some analysts speculated that this unexpected turn of events would force the BoE to keep the interest rate increase on hold.

To counter this opposing opinion, Carney made note of the “ongoing domestic strength”  of the UK market, as evident by the strong rebound of the FTSE falling last week’s tumble.

The Governor of BoE also added, “"In the UK, consumer confidence is at its highest level in over a decade and retail sales have been growing at well above past average rates. Firms’ investment intensions are robust. And inflation expectations remain consistent with our 2pc target."

Mark Carney strongly indicated that UK interest rates are scheduled to increase in early 2016. From September 2, the ECB governing council will convene in Frankfurt to discuss and set its monetary policy.