China's 'Black Monday': Stock market rout pushes back likely date for first UK rate rise

Shanghai's 'Black Monday' forces reassessment of how fast central banks will move

There was an 8.5% fall in the Shanghai Index (EPA)

British interest rates could stay at their current record lows until at least May next year following the China-inspired shock waves in global stock markets.

The stunning 8.5 per cent fall in the Shanghai index – labelled “Black Monday” by China’s state-backed Xinhua news agency – reverberated around the world in one of the most dramatic days for stock markets since the depths of the 2008 financial crisis.

But fears about the growth prospects for the world’s second-biggest economy, which have shaken share prices, have also pushed back expectations for the timing of the Bank of England’s first interest rate rise since 2007.

Just weeks ago its Governor, Mark Carney, said the decision on a rise would come into “sharper relief around the turn of the year”. Before the latest eruptions from China, financial markets forecast a 50 per cent likelihood of a rate rise in February, with a quarter-point rise fully priced by May.

Deutsche Bank’s chief UK economist, George Buckley, said those forecasts had now slipped back by three months, with the Bank more likely than not to act in May, but with a first rate rise not fully priced in until August.

Mr Buckley said: “The Bank needs to be careful about raising rates in this environment, given the relatively low inflationary climate as well as the market moves we are seeing.”

The US Federal Reserve – which until recently was seen as ready to move on rates as soon as next month – is now forecast to sit on its hands until January next year. The dwindling expectation of interest rate rises from both the Fed and Threadneedle Street has sent money flooding back into the euro, despite the European Central Bank’s ongoing €1.1trn quantitative easing efforts to lift the eurozone economy.

That flood of money lifted the euro to seven-month highs of $1.1714 against the dollar. Sterling lost as much as 3 cents against the single currency at one stage, falling to lows of €1.3477 and putting up the costs of European trips for UK holidaymakers.

Alex Lydall, senior sales trader at the currency trader Foenix Partners, said: “With the second-largest economy in the world struggling and having to reassess monetary policy, it begs the question as to whether Fed chairman Janet Yellen will raise rates this year, let alone in September or October.”

The Bank of England has said it will look through the low level of its consumer prices index (CPI) benchmark – currently just 0.1 per cent – as it judges when to raise rates.

But the global commodity rout, inspired by the fears over Chinese demand, is likely to push the CPI back to zero or into negative territory in the months ahead. Brent crude sank to $42.51 at one stage on Monday – a six-year low – as Iran’s oil minister also pledged to ramp up production and protect its market share despite a global supply glut.

Metals also faced a savage sell-off. China is the world’s biggest consumer of copper, which sank by 4 per cent to $4,855 a tonne, another 2009 low. Aluminium also hit six-year lows and zinc and lead five-year lows.

“The perception that the Chinese government can control what is going on in the economy has been shattered,” said Carsten Menke, a commodities analyst at Julius Baer.