How difficult situation to lift interest rate? 13-Sep-2015

It has been a while since discussion was started about lifting the interest rate. Watching the market consensus, it seems that the rate hike is triggered by US or UK.

For a last few years, however, the market has moved against the rate rise. There have been multiple factors, listed below, preventing US, UK or others to lift their interest rate in the global economy.

1. Rate cutting in other nations
Particularly in the last year, but for a last few years, the policy rates have been cut remarkably in several nations, such as Australia, New Zealand, Canada, Sweden, Denmark, Switzerland, ...  Some of them has reached at negative rates. As a result of those rate cutting, USD and GBP has been stronger against currencies, particularly against AUD, NZD and CAD.
In the current market, US or UK rate hike will lead to their currency value gone up. It may be good for importer in those nations, but it would suffer the exporter as USD and GBP are already expensive than other currencies relatively.
There is certain level of concern about deflation risk as their currency values are already higher and rate hike lift the currency value further.

2. Price for oil and natural resources down sharply
WTI crude oil price currently stays around 44.6, and it was around 90 just a year ago. While media have mainly broadcasted that the crude oil price has been going down, other natural resources, such as Iron Ore, the price has gone down in parallel with the oil price. Chinese demand for the oil and natural resources have been shrink for a last few years due to their growth slowing down.
The lower price is not bad for consumers and importers, but it still brings deflation risk into the world. For the exporters such as Australia or Canada, weak demand for oil and natural resources suffer their economy.

Local 10  >>  Goldman Sachs: Oil could hit $20
Forget $40 a barrel oil. Prices could plummet to $20 as a massive supply glut persists until the end of next year.

That's the view of Goldman Sachs, which published an oil report Friday headlined "Lower for even longer."

The bank's commodities team slashed its forecast for average prices in 2016 to $45 per barrel from $57, but said the risks of a collapse to $20 were growing.

Under the risk at deflation, it is difficult decision whether rate hike or not. But at the same time, keeping loose monetary policy, there is eventually a room that inflation badly suffer the people's life.

Even in such situation, Bank of England is likely under pressure to lift their interest rate, as BOE announced the rate must rise relatively soon.

CITY A.M.  >>  Interest rates must rise "relatively soon" says Bank of England's Martin Weale
Interest rates will need to rise "relatively soon", Bank of England rate setter Martin Weale has said.
The hawkish member of the BoE's monetary policy committee (MPC) has said inflation is likely to rise above the central bank's two per cent inflation target "in two to three years' time", which needs to be reflected in policy now.

Weale is the second BoE official in as many days to point to a rate rise. Fellow member of the nine-strong MPC, Kristin Forbes, said on Friday rates will rise sooner rather than later, because the appreciation of sterling may be less of a drag on inflation and import prices than first thought.


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