China Crisis Fails To Sway Bank Of England

Economic crisis in China is not bad enough to deter the Bank of England considering interest rate rises early next year.

In the minutes of September’s meeting of the rate-setting monetary policy committee, the members voted 8-1 to keep the official interest rate at 0.5% for another month.

The committee felt that although China’s central bank devalued the renminbi by 2% and raised interest rates to counter a slowing economy, the resulting stock market panic around the world was more a knee-jerk by investors than a real disaster.

However, the Bank does feel any slowdown in China will badly impact the British economy but opinions that recovery will go into reverse are ‘premature’.

UK not immune

The Bank also considered recent economic data and a disappointing drop in manufacturing output would have more effect on growth than economic problems in China.

“The risks from what is happening in China are skewed to the downside,” said the report.

“China is the world’s second largest economy and the nation’s sizeable standing in the global marketplace means the UK will not be immune from what happens there.

“But global events are not sufficiently to materially alter the current outlook although we must continue to monitor the situation.”

Economists interpret the report as the Bank having confidence in the UK recovery and that although geopolitical events may trigger some slowdown or gains, the general consensus is UK interest rates will start to rise in 2016.

Opposing views

Michael Saunders, chief UK economist at Citi explained that monitoring was central bank language for having concerns, even though the Bank sees no reason to hike rates in the short term.

“We all know rates are going up because they have nowhere else to go,” he said. “The question is when and that’s something only the Bank can answer and they are not letting the cat out of the bag.”

The news encouraged the money markets where both the Pound and US dollar made gains.

Meanwhile, business leaders have opposing views of the Bank’s decisions.

The Institute of Directors feels interest rates should rise to stimulate the economy, but the British Chambers of Commerce agree the Bank should heed warnings from the International Monetary Federation and World Bank that raising rates too soon could damage the recovery.

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