16 September 2016

Will they, won't they?

A degree of volatility has returned to markets. Once again it has been central bank bosses that have been setting the tone.

A few remarks from one of the more hawkish members of the interest rate setting body on a Friday early in September saw shares tumble on Wall Street, with the UK following suit shortly after the weekend. One of the members of the Federal Reserve Bank’s Open Markets Committee had suggested rates must rise to prevent the economy overheating.

Following on, as it did, from a disappointing decision (for markets, at any rate) by the European Central Bank to keep its policy on hold, investors started to worry if the central bank community really knew what needed to be done. After all, the financial crisis kicked off eight years ago. Fortunately, calm wa s restored by some more dovish remarks from a Fed governor. Still, the worry remains that the current policy of low interest rates may not be the universal panacea that everyone hopes for. And we still don’t know when the Fed is likely to increase interest rates.

Recent inflation figures for the UK have added little to the mix for investors to digest. The Consumer Price Index was unchanged, while the Retail Price Index, which includes property costs, came in a little below expectations. The fear for investors is that we are stuck in a low inflation, low economic growth scenario that may persist for years. Even China is not expected to haul us out of this unexciting prospect.

But even this cloud may have a silver lining. The latest set of economic statistics suggest we do not face stagflation – a combination of no growth, but rising prices – something to be avoided at all costs. Moreover, deflation fears have receded, though they are still present elsewhere, with some economic commentators worried that China could export deflation if it allows its currency to depreciate too far.

Part of the problem facing economic managers lies with the demographic pressures the world is facing. We are living longer and falling birth rates are becoming an issue. In China this is even part of government policy, but an ageing population places pressure on nations, not least through health care provision. And the developing world, with its higher birth rates and younger population profile, is still not ready to pick up the baton. Perhaps we had better wait to see which way the Fed jumps.

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