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The UK, International Business & Market Arenas

abstract bank notes from different countries
abstract bank notes from different countries

The USD

The US economy has had a lot going on this year and it looks as if the much talked about interest rate rise may go ahead. The reason this is so important is that it is a tool that effectively cools the rate of growth in the economy. So, you could say that if you are interested in raising central bank rates then you are trying to control the speed of growth – which is obviously a positive thing to say about the state of your economy.

Like the UK’s Bank of England, the US Federal Reserve (who make the decisions about monetary policy like this) is mandate driven. They have targets in order to satisfy that things are headed in the right direction and no changes are normally made outside of these targets. Unemployment must be at a certain rate and inflation too, among other things. So once all these aspects line up in a positive way, then a rate rise can be considered. The actual impact of a rate rise is far reaching, particularly where we are dealing with the world’s most influential economy. It means that the value of debt will increase for the American people and as the mortgage and credit repayments go up, the amount of money they have to spend goes down – and this will have an impact on global demand too. But, on the other hand, it does invite more investment. As interest rates rise, the interest paid rises (yield) and so investors will have a safe economy with a higher return then this time last year. In fact, this is a particularly exciting (for me) movement because it is the first since the global financial crisis. This is all assuming it goes ahead….at this stage around 80% of canvassed banks and financial institutions are expecting to see it happen.

So what are the potential outcomes?

The GBPUSD has been trading largely around the 1.5000-1.5200 levels for the last few weeks, with brief dips under the 1.5000 mark. Should the interest rate rise go ahead on Wednesday, we will likely see a move in favour of the USD but perhaps more muted that other changes in the interest rates, given these were very heavily scrutinised and discussed at length in the media so dramatic movements may not take place because of expectation. There will be considerable focus on what the future plans are for potentially raising rates further in to 2016 (most analysts are seeking 2-3 further increases) and if this conversation endorses further raises, that would bolster the USD even more.

The GBPUSD has been trading largely around the 1.5000-1.5200 levels for the last few weeks, with brief dips under the 1.5000 mark. Should the interest rate rise go ahead on Wednesday, we will likely see a move in favour of the USD but perhaps more muted that other changes in the interest rates, given these were very heavily scrutinised and discussed at length in the media so dramatic movements may not take place because of expectation. There will be considerable focus on what the future plans are for potentially raising rates further in to 2016 (most analysts are seeking 2-3 further increases) and if this conversation endorses further raises, that would bolster the USD even more.

The EUR

The Eurozone has had a tumultuous year with the action coming significantly from Greece and all the associated brinkmanship that went with the issues there. There were significant periods where we could have seen Greece exit the Eurozone completely. The single currency bloc has also faced significant and sustained inflation concerns as well. Desperate to stimulate the economy and growth in the region, the European Central Bank has been using a quantitative easing programme to encourage money to circulate around the economy. And still inflation has remained low – which is a bad thing in this case.

While it does mean that prices of goods and services are static (a positive in most consumer’s eyes), it means also that there is not enough demand for the prices to rise to meet and capitalise on it. It can be seen as an indicator of growth and it’s absence is impactful. The European Central Bank, still failing to see any real demand changes then opted to lower and, more recently, continue to lower their deposit rates.

They have now imposed and effective cost for banks to hold their money with the central bank, which is a way of persuading banks not to bother, and instead keep the money in circulation. Lately, the European Central Bank failed to live up to their hype with intimations and verbal commitments not delivered on. They had talked about making pretty significant changes to their monetary policy but really just made some minor tweaks. Some say that this can be seen as a signal that they are keen to play a long game and not shock and awe the markets.

The UK

The UK is playing a little catch up next to the US in terms of growth and being poised for an interest rate rise ourselves. At one stage this year, we could have considered ourselves to be the front runner for this but the economic recovery was a little wobbly during the middle of the year. Don’t be disheartened, though, the employment growth, debt reduction and overall growth figures can be considered relatively strong. Inflation should steadily return to the UK economy which is perhaps the last part of the puzzle before any confidence can be given to this growth trajectory hanging around for a while.

The issue of productivity was certainly hanging over our heads for a while, but it seems that measures have been taken to address this. Of course the housing market here is an ongoing and ever shifting feature. At the moment a lot of debt per household, largely in mortgages, still exists in abundance in the UK, and so any interest rate rises will need to be carefully engineered.

The possibility of reassessing the UK’s involvement with the European Union has been repeatedly mooted. There are a lot of cases for either side of the argument. One one hand, the benefits of belonging to the European Union has a lot of benefits in being able to trade more easily and more cheaply by transaction, but on the other hand the costs associated with belonging are very high as well – the overall costs are around 0.6% of our GDP. If we decide to move away from the EU the impact to SMEs here would be noted in higher input costs to businesses, the price of importing goods would be higher and this would be worn not only in direct importing costs but also other goods that have components from the EU as well. But, of course, the savings could be redirected in ways that may benefit the same businesses in the UK (we can dream).

The proposal to raise the interest rates is certainly on the minds of those running SME businesses, listed as the number one concern in a recent survey. Stand by for our detailed analysis of how this will affect businesses in real terms if it were to go ahead.