Out of Nowhere

The big surprise last week…

Out of nowhere, the Bank of England stunned the European market by raising interest rates in the UK by one-quarter point. Interest rates in England are now at their highest level in six years.

What does the Bank know that analysts don’t?

While some analysts said the Bank of England was privy to inflation information that others were not, the fact is that interest rates in the UK have risen three times since August. Coincidently, the Bank of England bank rate of 5.25% now matches the U.S. Federal Reserve Discount Rate of 5.25%.

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Could an interest rate surprise on the wrong side happen in the U.S.?

Out of 50 analysts polled by Reuters before the rate hike in the UK, 49 said rates would not move up. So, you can see why the markets in the UK went into a tailspin after the new rate was set. While analysts here in North America are getting “cozy,” feeling the actions of the U.S. Federal Reserve are predictable, remember that the Fed has surprised us before.

It’s troublesome that bank governors who are members of the Federal Reserve Open Market Committee (the group that votes on interest rates movements) have been speaking across the U.S. stating that inflation is still a concern for the Fed.

An unexpected rate hike here would not only send the U.S. stock markets into a tailspin, but the greenback would also rally to new highs against the euro and the yen — this is something that I’m not sure the Fed wants. It’s in England’s best interest to have a strong pound; it’s not in our best interest to have a strong U.S. dollar. My prediction: Interest rates in the U.S. will remain unchanged at the next Fed meeting — delivering just what the market expects.