BOE contemplates increasing interest rates

Thursday 20th August 2015 08:01 EDT

The European commission reports that Greece has reached a technical agreement with its creditors which now requires parliamentary approval.  The Greek government is now looking to put a Euro 85 billion (£60 billion) three year agreement through parliament this week.  The country needs to reach a deal by the 20th of Aug when it has to pay Euro 3 billion to the European Central Bank.  The parties involved in the deal agreement were the IMF, the ECB, and the European Stability Mechanism.

Greece’s bailout deal will next be reviewed in October. Greece’s Eurozone creditors insisted they will not be discussing bailout relief before this month, with no promises on how soon any easing of Greece’s debt burden might come. It is reported that Germany has serious doubts about the bailout deal and that the German government has little faith in what has been agreed in Athens. We also saw the Euro reach a two week high against the dollar due to China devaluing the Yuan.

Germany's gross domestic product grew 0.4 per cent from the previous quarter, falling short of economists' forecasts of a 0.5 per cent gain. Analysts believe the disappointing GDP figures that are due to a weaker euro exchange rate, lower oil prices and the European Central Bank's massive stimulus program, which has done little to lift the region onto a higher growth path. German chancellor Angela Merkel went live on national television to express confidence in the IMF's involvement in Greece's third bailout. In an attempt to assuage fears that the bailout for Greece will not have support from international creditors. 

Data released showed that the number of people claiming unemployment benefits in the U.K. had declined unexpectedly throughout July, while the country’s jobless rate held steady near a six-year low. The claimant count fell by a seasonally adjusted 4,900 last month, compared to expectations for a gain of 1,500 people. The report also showed that the rate of unemployment held steady at 5.6% in the three months to June which stood in line with forecasts.

The labour market is being closely monitored by the Bank of England as it contemplates when to start raising interest rates for the first time since the global financial crisis in 2008. Bank of England policymaker Kristin Forbes warned keeping interest rates low for too long risks undermining Britain's economic recovery ahead of Tuesdays inflation figure which is expected to show inflation at zero for June. "With such low inflation today, it is understandable to want to avoid pre-emptively ending this holiday. A solid recovery is finally here. Increasing interest rates prematurely could moderate companies’ willingness to invest and consumers’ willingness to spend. But unfortunately monetary policy works with lags," Forbes wrote in an article. 

Atlanta Fed President Dennis Lockhart said economic conditions in the United States have largely returned to normal and a Federal Reserve decision to raise interest rates should come soon. He said the U.S. economy had cleared several major hurdles that worried him earlier in the year stating that risks from abroad, whether a Greek exit from the euro zone or a meltdown in China have been reduced. Also job growth has left the U.S. economy just a shade from full employment.

U.S. retail sales rebounded in July as households boosted purchases of automobiles and a range of other goods, suggesting solid momentum in the economy early in the third quarter. Retail sales increased 0.6 percent last month, broadly in line with economists’ expectations. June's retail sales were revised up to show them unchanged instead of the previously reported 0.3 percent drop. The retail sales report added to July's fairly upbeat employment and small business confidence reports in suggesting the economy was growing at a steady clip at the start of the third quarter. GDP expanded at a 2.3 percent annual pace in the April-June quarter.

Given the steadily firming economy, many economists expect the Fed will raise its short-term lending rate in September for the first time in nearly a decade. Financial markets have shifted their rate hike expectations towards December following China's devaluation of its currency this week. On Friday US producer prices rose for a third straight month in July, but inflation pressures remain benign against the backdrop of lower oil prices and a strong dollar. A strong dollar and weaker oil prices are keeping a lid on inflation, which has some economists believing that the Federal Reserve will be hesitant to raise interest rates next month.

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