Attention has been focused this week on the possibility of interest rate cuts in the US and the eurozone, and a potential change of direction in the UK, with many analysts believing that the Bank of England may be forced to cut rates in the event of a no-deal Brexit.
The US Federal Reserve Open Market Committee (FOMC) met on Wednesday and, while it held rates steady on this oc-casion, the markets are betting that it will cut rates next month, with another cut likely towards the end of the year.
Fed Chairman Jerome Powell was at pains to point out, however, that this was far from a foregone conclusion and that events during the next month - most importantly the meeting between President Trump and Chinese Premier Xi Jinping at the G-20 summit next week in Japan - will be important in determining if and when a rate cut will take place.
Head of the European Central Bank Mario Draghi was more forthright, suggesting that “additional stimulus” would be re-quired unless eurozone inflation returned to its 2% target. Inflation in the bloc stood at just 1.2% in May. The ECB could cut rates or restart its multi-billion euro bond-buying programme to add liquidity to the eurozone and help boost spend-ing. Its other option, reportedly preferred by many ECB officials, is to cut interest rates to below zero - deposit rates are already at -0.4%, meaning banks have to pay to deposit money with the ECB. Cutting the rate further into negative terri-tory would make it even more expensive for banks to hold on to their reserves and would instead encourage them to lend. The idea, once again, is to boost spending and push up prices.
In the UK, annual inflation fell back to its target rate of 2% in May, according to the Office for National Statistics (ONS), down from the 2.1% annual rise reported in April. The fall was due to falling energy costs, which spiked in April, and competition in the car industry following a fall in sales over the past year. The news has taken pressure off the Bank of England to increase rates and cool price pressure in the economy; high employment, strong wage growth and above-target inflation had been leading many commentators to push for a rate rise to bring inflation back down. However, on Thursday, the Bank of England voted unanimously to hold rates steady at 0.75% while simultaneously cutting its fore-cast for economic growth for the second quarter to zero from its previous forecast of 0.2%. With further downside risks caused by global trade tensions, a deteriorating outlook for global growth and rising chances of a disorderly Brexit, the data is more suggestive of a cut to UK rates than a hike. The chances of a no-deal Brexit in particular have caused mar-kets to raise the odds of a rate cut before the end of the year. The Bank has refused to explain why it has kept its for-ward guidance on rates the same, despite acknowledging that downside risks to growth have increased. As if to empha-sise the challenges facing the UK economy, retail sales data released on Thursday showed sales falling at an annualised rate of 0.5% in May, as unusually cool weather was blamed for keeping shoppers at home.
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