Central banks warned to be alert at the prospect of rising interest rates

Speculation is rife

With speculation rife that the Bank of England (BoE) will raise interest rates this November, the BoE’s Donald Kohn has issued a warning to global central banks about the risk posed to financial firms by rises in interest rates and the reduction in bond-buying programmes, warning them to “anticipate financial stability risks” if rates rise as predicted.

Significantly, HSBC economist Liz Martins and colleagues have forecasted an interest rate rise in November and in May 2018, despite the monetary policy committee (MPC) voting last month to hold interest rates at 0.25 per cent.

HSBC issued a note stating: “We now expect a 25bp rise in that meeting, followed by another in May 2018, taking the bank rate to 0.75 per cent. Previously, we had expected no change in rates this year or next.

“This being the case, we do not see the November rise marking the start of a conventional tightening cycle. We do not think two rate rises will crash the UK economy.”

Nonetheless, experts continue to warn that it remains to be seen how markets will be affected if interest rates are indeed raised in November.

The simple rumour that interest rates may rise will affect the way in which the markets and economy behave, and the consequence of such small changes is likely to be felt across the economy.

This could create a great deal of uncertainty in the international economy that would potentially effect a wide range of businesses and industries, regardless of their size and field of operation. A good knowledge of banking and finance mechanisms within the staff, at any level, would help to face this widespread volatility giving businesses a great internal resource.  

All this being said, there is still a chance that the MPC will hold off its rate hike until February 2018. Some have detected a degree of elusiveness in BoE’s Governor Mark Carney speech in September, during which he said any potential adjustment of rates would be “in the coming months”. Whilst any proposed timescale suggests a more hawkish intent than has been seen on Threadneedle Street in recent months, the language still noncommittal.

The uncertainty continues but one thing is for sure: the MPC meeting in November is going to be very interesting viewing.