We have always expected rates to remain low until the recovery is fully established and unlikely to be derailed by rate rises, which should be some way away; the 7 per cent unemployment marker is just one possible threshold.
The Bank of England governor appeared to confirm this view, but we expect markets to remain skittish as unemployment continues to drop.
Elsewhere, actual events have also been interesting and generally positive, with Ireland exiting the bailout scheme and important changes on the US political front in particular catching our eye.
Market reaction to news this week, however, has been generally muted, possibly reflecting the fact that significant headwinds remain; however, we think it is right to be cautiously optimistic regarding the future.
EU: Ireland exits bailout
Ireland has decided to exit the IMF/EU bailout scheme, the first of the rescued European countries to do so, and return to the bond markets for financing.
This has been a popular move in Ireland, with the country no longer bound by the painful austerity conditions imposed in return for emergency support.
Exit also means Ireland will bear full responsibility should any of its banks get into trouble again and any further weakness in the banking sector will have a direct impact on the nation’s credit rating, possibly restarting the credit crisis that forced a bailout in the first place.
Despite Ireland’s attempts to return to normality, the outlook for Europe as a whole remains poor.
Bank of America Merrill Lynch released its 2014 forecasts this week and predicts that only Ireland and Germany will experience significant levels of economic growth next year, at 1.9 and 1.6 per cent respectively.
The rest of Europe will continue with its “timid recovery”, with overall growth rates predicted to be just 0.8 per cent.
US: Budget deal reached
It was a week of encouraging news in the US where after several years of wrangling, the Volcker rule has finally been approved and will be implemented next year.
The Volcker rule addresses the issue of banks conducting proprietary trading which is hidden from the public eye. In recent years, banks have shown themselves to be very bad at investing; legislation restricting this activity will prevent the need for further bailouts and will lessen the risk to investors’ deposits.
In an illustration that political normality may finally be returning to Washington, the House of Representatives passed a new budget by a large majority this week. It still has to be passed by the Senate next week, but if that happens it will mean spending levels will be set for the next two years, preventing further government shutdowns.
However, the US debt ceiling has not been raised, leading to the prospect of further clashes in the future. Nevertheless, we remain hopeful that legislative normality may be returning, which can only be good for future stability.
China: Economy promising as third plenum concludes
China’s Third Plenum concluded this week with a raft of Chinese reforms that indicate an opening up of its economy.
The most interesting ones from our point of view concern the liberalisation of interest rates and the ability to convert the yuan freely into other currencies.
Unsurprisingly, the reforms are being introduced in a slow and controlled way by the authorities: the introduction of a free trade zone limited to the area of Shanghai only is a prime example of this.
It will probably be years before we are able to assess if this really is a turning point in the opening up of the economy, but the signs are encouraging.
Chinese exports grew faster than expected in November, bolstered by demand from the US and EU for goods shipments. Shipments were 12.7 per cent higher than a year earlier, way ahead of 7 per cent expectations.
This was combined with increasing domestic retail sales growth and industrial output growth only slowing slightly, subduing fears of Chinese economic growth dipping, and hopefully smoothing the shift to a domestic consumer-driven economy.
