Yesterday UK£ Sterling fell against the US Dollar$ when the Bank of England announced that UK interest rates would not be rising from the historical low of 0.5%. The markets had assumed a rise in the near future, but this was clearly an error, thus sterling has come under pressure, depreciating against the US Dollar. UK and US Equity Markets surged.

Reading the Bank of England press release [http://www.bankofengland.co.uk/publications/Pages/news/2013/007.aspx], it’s clear in the wording:

“At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”

This is no different in the USA, Ben Bernanke the Chairman of the US Federal Reserve has made similar comments on low interest rates, and has stated that rates will remain low for the considerable future. His comments from a meeting in San Francisco explains why long term rates are slow low

[http://www.federalreserve.gov/newsevents/speech/bernanke20130301a.htm]

“I will begin my remarks by posing a question: Why are long-term interest rates so low in the United States and in other major industrial countries?  At first blush, the answer seems obvious: Central banks in those countries are pursuing accommodative monetary policies to boost growth and reduce slack in their economies. However, while central banks certainly play a key role in determining the behavior of long-term interest rates, theirs is only a proximate influence”

What happened on the equity markets ?

The UK’s FTSE-100 soared by over 190 points, a 3% gain, closing at 6421 adding nearly £50 Billion to corporate valuations as investors moved into equities, to get a decent return (juicy dividends) as cash on deposit yields next to nothing, and also clearly looking on the horizon the prospect of continued cheap money. By keeping rates low, it deters savers, in the hope they will spend in the wider economy and this consumption fuels some level of growth, but also reduces the cost of capital to businesses, in the hope they will invest and grow and fuel employment growth.