With the prospect of US interest rate rise looming ever closer and widely predicted to arrive in September, once that bump has been negotiated the spotlight will shift across the Atlantic towards Threadneedle Street.
However Flanders, JP Morgan Asset Management’s chief market strategist for UK and Europe, believes that while the Federal Reserve will be first to implement a rate rise, there is economic data emerging that could push the Bank of England into moving sooner than expected.
“We should not be assuming that the UK interest rate will keep going forever into the future,” she said. “A raise is not imminent, but it will be sooner than the market is forecasting, and there have been quite a lot of signals from the Bank of England to that effect.”
Flanders cited a relatively strong economic recovery combined with momentum in earnings growth and the labour market as key potential influences over the timing of a UK rate rise.
“A year ago we would have said that the UK interest rate rise would have been very close to the Fed raise, if not ahead of it,” she expanded. “Obviously because of what has happened to inflation and in Europe we have moved away from that view.
“But when you strip away what is going on at the moment, there are two central banks – the UK and US – ahead of the others in the developed world thinking about rate rises. Both are saying that they will be absolutely data dependent, and the data that they will be looking at the most is the labour market – what is going on with productivity, and what this labour force growth tells us.
“Those two sets of data are telling us slightly different things: if anything, there is greater strength in UK wages than those in the US, and possibly more acceleration.”
According to a Office for National Statistics report published in April, UK employment numbers grew by 424,000 year-on-year to 31.05m, alongside an average weekly earnings increase of 2.7% in the same time-frame.
However, while some may ask why – considering the aforementioned figures – the Bank of England does not just steal a march on its US counterpart, Flanders highlighted one decisive factor standing in the way.
“[The data] does not mean the UK will raise interest rates first because it has much more reason to be worried about the exchange rate going up in response to that kind of expectation,” she explained. “There will be much more economic impact if the pound goes up compared to the dollar going up.
“The one thing that is really different is the exchange rate implications for inflation. So a UK rise will come after the Fed, but not as far back as the market is expecting, which is currently the middle of next year.”
