The Bigger Picture: US Jobs, Growth, Interest Rates
The latest US employment data has just been published. It shows that 215,000 new jobs were created during July, which fell short of the consensus forecast of 223,000. Despite the shortfall, economists believe that US interest rates are likely to rise for the first time since 2006 when the Federal Reserve meets in September.
One reason that economists believe that US rates will rise is that there is now well-established wage growth. Wages rose 0.2 per cent in July bringing the annual increase to 2.1 per cent. Average hours worked rose from 34.5 to 34.6 and, although this sounds insignificant, hours worked are now at a 38-year high. In an economy the size of the US, this marginal increase can make a significant difference to the amount that consumers have to spend and have a positive impact on GDP growth.
The overall unemployment rate is now 5.3 per cent in the US, a seven-year low. Many believe that it could dip below 5 per cent in the coming months. As a result of these figures, the major equity markets fell as they anticipated that borrowing costs would rise and the dollar strengthened against the euro and the yen.
So, if US rates rise, what impact will this have on the UK? Many are predicting that UK interest rates will start rising from the end of the first quarter of 2016. However, the UK is more dependent on trade with Europe than it was in the past and problems still continue with Greece and the euro. The strength of sterling against the euro is a major problem for UK manufacturing businesses. It may well be that UK interest rates stay low for longer as a result. At the Bank of England’s Monetary Policy Committee meeting a few days ago, members voted 8 to 1 to keep rates at 0.5 per cent and the deputy governor of the Bank of England, Ben Broadbent, told the BBC that an increase in interest rates was still “some way away”.
I am frequently asked how higher interest rates would affect Money&Co. If interest rates moved from 0.5 per cent to 2 per cent, I think it would make very little difference.
Lenders are attracted to Money&Co. because they can get a much higher rate of interest on their money. The simple average of the rates achieved so far across our book of 19 loans is 8.9 per cent or 7.9 per cent after our 1 per cent lender fee. This is far in excess of anything that can be achieved by leaving your money on deposit and the same will be true if base rates rise to 2 per cent. As far as borrowers are concerned, the problems of accessing credit will be the same for small and medium-sized companies whatever the level of base rates. Thus, my strong belief is that a move in UK interest rates will not significantly affect Money&Co.
