The US central bank’s decision to increase interest rates for the first time in nearly a decade signals confidence in the economic outlook, says Michael Grady.
- The US Federal Reserve has increased interest rates for the first time in nearly a decade
- Financial markets have reacted calmly to the move, which was widely expected
- We anticipate the Bank of England could hike rates in the middle of 2016
- Gilts may weaken ahead of this. But UK equities should benefit from a strengthening UK economy
- A sharper-than-expected slowdown in emerging economies poses the main risk to our outlook
Global financial markets have responded positively to the increase in the range for the Federal Reserve’s benchmark interest rate to between 0.25% and 0.5%, from the previous range of 0%-0.25%.
Although the move had been widely anticipated by investors, the lifting of uncertainty prompted a rally in US, European and Asian equity markets. The hike signals policymakers have confidence in the outlook for the US economy following the long and steady recovery from the financial crisis. Janet Yellen, the Federal Reserve’s chair, said the process of raising interest rates is likely to proceed “gradually”.
The UK is facing a similar economic outlook – robust domestic demand growth, a tightening labour market and an expected increase in inflation. If this continues, the Bank of England is likely to raise interest rates around the middle of 2016. That could result in some weakening in gilts, particularly short-dated gilts, which are currently pricing in an exceptionally slow pace of hikes in the UK. However, UK equities should remain supported if we see continued strength in the US and UK economies along with a stabilisation in the euro area. The impact on the UK real estate market of the increase in US rates is likely to be limited, with domestic developments over the coming year of more relevance.
Risks remain however. Prominent among them is the danger of a faster slowdown in China and other emerging economies. That could dampen global economic growth and inflation, which would be more supportive of bonds and less positive for equities.
Unless stated otherwise, any sources of all information is Aviva Investors Global Services “Aviva Investors”) Limited as at 17 December 2015. Unless stated otherwise any views and opinions expressed are those of the author and should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
Important notice: DIFC
This document is intended for distribution only to Persons of a type specified in the DFSA’s Rules “Professional Clients” and must not, therefore, be delivered to, or relied on by, any other type of Person. This document is for the exclusive use of the persons to whom it is addressed and in connection with the subject matter contained therein. This communication is distributed in the DIFC by Aviva Investors Global Services Limited Regulated by the Dubai Financial Services Authority as a Representative Office with its address at Office 108, Al Fattan Currency House, DIFC, Dubai, UAE, and entered on the DFSA register under Firm Reference number F001481. The Dubai Financial Services Authority has no responsibility for reviewing or verifying this document. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it.
Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority and a member of the Investment Association. Telephone calls may be recorded for training and monitoring purposes.
Approved for Austria, Belgium, Denmark, DIFC, Finland, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, Switzerland and the UK.