The BoE convened yesterday and kept their monetary policy unchanged. However, the way the voting went was different with Ian McCafferty changing his stance and joining the rest of the MPC in voting for things to stay the same. This says something about how the Bank is not yet ready to follow their American counterparts. The governor of the Bank of England, Mark Carney, announced that there is no reason to increase rates for the meantime. The MPC decision was taken taking the current worsening of external market factors and high financial market volatility into account.
According to the Bank’s forecasts, economic growth in the UK will be moderate over the next few years, with the economy doing not too bad on the whole. Carney forecasts a gradual return of annual inflation to 2% by the end of 2017. Weak growth in salaries and a fall in the price of oil are the main things hindering inflation growth.
The forecasts made by the Bank are yet another argument to say that the UK is unlikely to hike its rates before 2017. The market doesn’t expect any tightening of monetary policy until 2018. Moreover, it’s not worth excluding any fall in the rates if the country’s economic growth weakens more than expected.
The pound reacted weakly to the decisions taken and is trading at 1.4528 against the dollar and 0.7704 against the euro today.
According to data out yesterday, initial unemployment benefit applications in the US the week ending 30th January were up 8,000 to 285,000, indicating the stable, yet slow, growth in job creation. The indicator has been below 300,000 for 48 weeks in a row, showing the improvement of the labour market situation.
The Cleveland Fed chief, Loretta Mester, stated today that market volatility and unfavourable economic conditions abroad is likely to resume. This statement goes in favour of any Fed interest rate rise beliefs. In particular, she pointed to positive labour market indicators, including that of employment creation and increases in real disposable income. In her opinion, this says a lot about how the US’ macroeconomic state is healthy. Whilst there is now news of otherwise, the US will continue to grow moderately, despite the problems in the energy sector and manufacturing industry. Mester noted that any interest rate changes will depend on economic changes.
The president of the Dallas Fed, Robert Steven Kaplan, stated yesterday that the weak US economic data and signs of financial constraints show how the Fed will have to be patient with its intentions to raise interest rates.
The euro/dollar is trading at around 1.1197 as we wait for the NFP to come out.
The RBA today dropped its inflation forecasts over the short-term. By mid-2016 it should be at 1.5% (in comparison with November 2015’s 2.0% forecast), but will remain in the 2%-3% target zone over the forecasted period. The GDP forecast made by the Bank for Australia was also dropped for 2017 from 3.5% to 3.0%. On the whole, the Aussies’ assessment of the situation is optimistic with the RBA forecasting a fall in unemployment levels.
The Reserve Bank reckons that there is sufficient breathing room for them to drop their interest rate further if required. The quarterly RBA statement on monetary policy hasn’t shown much anxiety about the current financial uncertainties across the globe.
The AUD reacted to the RBA news by weakening slightly to 0.7184.
Today it’s worth having a look at the US and Canadian labour market reports.