Increasing debate spurred on by Mark Carney’s recent comments has highlighted how fragile perceptions of the strength of world economy are. As pointed out to me – last August – by a multi-asset portfolio manager at a large institutional house, “The hardest part of the business cycle to predict is the slowdown”. Ominous words… which appear to have more weight this side of Christmas than the rosy picture painted by the sharp rally of equities in Q4 2015.
This highlights an interesting subplot in the U.K. base rate conversation. After moving in lockstep following the credit crisis, the U.S. Fed, the Old Lady of Threadneedle Street, and the European Central Bank (ECB) began to diverge in 2011. The U.K. and U.S. kept rates on the floor while the ECB (in)famously introduced a rate increase in 2011, followed by another. This was then swiftly followed by impressive backpedalling through to now, where we appear to be on the brink of negative headline interest rates.
As Europe continued to be buffeted on tumultuous seas, it appeared that the U.S. and the U.K. economies managed to enter cruise mode. This came to a head at the end of last year as the U.S. Fed introduced their first rate rise since the financial crisis. At the time, optimistic markets were pricing in the Bank of England to follow suit shortly after but the words spoken by the fund manager to me last August have seemed increasingly clairvoyant.
As we continue to move in uncharted territory, it now seems as though our course for a rate move is threatening to look more like the negative rates installed in Europe, rather than the rate increase seen by the U.S. Despite years of looking otherwise, it appears our fortunes are more closely coupled to the Eurozone than the U.S. and, indeed, the Pond is significantly wider than the Channel.