What's going on?
The Bank of England (BoE) said on Thursday that it wouldn’t be raising UK interest rates this month, and grumpy investors can’t stand surprises.
What does this mean?
Investors went into this update expecting the BoE to announce that it would be raising interest rates, largely because that’s exactly what it hinted at last month. So it was a real rug-pull when the central bank announced that it’d be keeping rates at their historic lows – especially given its admission that it’s expecting inflation to hit 5% by April next year. Still, the BoE had a solid justification: there are signs that consumer spending might be slowing down due to product shortages and the removal of government support. A rate hike, then, might only risk denting economic growth even more.
Why should I care?
For markets: Ditch the pound?
The BoE did say a hike’s likely to arrive in the next few months, but its decision means it’s still cheaper to borrow money in the meantime. That should encourage people and businesses to take out loans and spend their cash, which could be why a major UK stock market index rose following the news. The British pound wasn’t quite so lucky: lower rates for longer make the currency less appealing to international savers and investors, which might be why it fell against the US dollar.
The bigger picture: The Fed stays predictable.
The US Federal Reserve (the Fed) announced on Wednesday that it isn’t hiking interest rates either – not until the country’s unemployment rate improves. But at least investors got something they were expecting: the Fed said it’d start tapering its $120 billion-a-month bond-buying program by $15 billion every month, which could mean the support is gone completely by the middle of next year.