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US cuts interest rates: Fed prepared to be “more aggressive”, says Powell

US cuts interest rates: Fed prepared to be “more aggressive”, says Powell

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The US cut interest rates for only the second time since the financial crisis this week. The Federal Reserve cut its Fed Funds Rate by 0.25% to a range of 1.75% - 2%. Fed chair Jerome Powell called the cut a “mid-cycle adjustment” and said the bank was prepared to be "more aggressive" with cutting the cost of borrowing as and when US economic growth slowed enough to justify it.

Elsewhere, economic data this week was largely disappointing, suggesting more stimulus was necessary to keep the global economy growing. The growth rate in Chinese industrial production fell to a 17-year-low in August, bolstering the case for further state intervention in the world’s second-largest economy. Growth in industrial production – a broad measure of economic activity – slowed to an annual rate of 4.4% compared to 4.8% in July. In the same announcement, retail sales growth dropped to 7.5% from 7.6% in July, well below forecasts for 7.9% growth. Fixed asset investment, a good forward indicator of activity, fell to 5.5% from 5.6% in July.

Fresh talks between the US and China to try to hammer out a trade deal started in Washington on Thursday and were set to continue through Friday. There is speculation the two countries may reach an “interim” agreement to ease fears of fur-ther escalation.

In the UK, the Bank of England kept interest rates on hold at 0.75% this week and warned of the damage that a no-deal Brexit could do. Officials said leaving the EU without a deal would lead to weaker economic growth, higher inflation and a further drop in the value of the pound. However, the bank said it expected the UK to avoid falling into a recession in the third quarter, predicting a 0.3% expansion of the UK economy.

However, in a report this week, the OECD said that trade tensions were having a bigger impact on global growth than previously thought. It urged the international community to drop barriers to trade and boost growth with fiscal stimuli such as lower taxation and higher public spending. It downgraded its forecast for global growth from 3.2% to 2.9% for 2019 and from 3.4% to 3% for 2020 – the lowest levels since the financial crisis. It also predicted a recession in the UK next year, saying the economy would contract by 1% in 2020 in the event of a hard Brexit. Meanwhile, in August UK infla-tion fell to its lowest level since 2016, according to the Office for National Statistics (ONS). Consumer prices rose by 1.7% in the year to August, down from 2% in July, and falling below the Bank of England’s 2% target. The fall was caused by a decrease in the price of computer games and a weak recovery in the price of clothes following the summer sales. The ONS also released data on the UK housing market, which showed prices rising at their slowest rate since 2012. Average UK prices increased by 0.7% in the year to July, with growth suppressed by falls in prices in the north east of England (down by 2.9% over the year) and London, which saw price falls of 1.4%.

 

 


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In addition, we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset. The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.

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