BoE keeps interest rate increase on hold

Tuesday 09th February 2016 11:13 EST

In the UK, Manufacturing Purchasing Managers Index (PMI) came out better that expected at the figure of 52.9, a three month high, increasing from the previous figure of 52.1 and beating the expected figure of 51.8 showing growth within the UK manufacturing sector. Mortgage Approvals for December showed an Increase from the previous figure of 70.424K to 70.837K beating the expected decreasing figure of 69.600K perhaps indicating potential growth within the housing market. The UK construction sector slowed in January to its weakest level for nine months.

The Construction Purchasing Managers Index (PMI) fell to 55 from 57.8. Economists had forecast for a reading of 57.5. The construction PMI release was in contrast to a stronger-than-expected start for the manufacturing sector published on Monday. Markit economist Tim Moore said "Taken together with the slowdown in new order growth, the latest survey suggests that construction companies are braced for a relatively subdued first quarter." Optimism among construction companies waned to its lowest level since December 2014, the survey showed. "Some firms highlighted concerns that underlying demand conditions had started to soften."

Britain's services sector was unscathed by growing worries about the global economy last month but firms are concerned about risks ahead including a referendum on European Union membership. The Services Purchasing Managers Index (PMI) edged up to 55.6 in January, a level it has surpassed only once since July last year. Economists in a Reuters poll had expected the index to slow to 55.3 after dipping slightly to 55.5 in December. Markit said the UK’s service sector is expected to expand by 0.6 percent in the first quarter of 2016, picking up a bit of speed from estimated growth of 0.5 percent in the last three months of last year. On the back of this data we saw GBP strength against both the EUR and USD.

The Bank of England kept interest rates and their asset purchase program on hold at 0.5% and £375bn respectively, but the voting moved to a unanimous 9-0-0 in favour of inertia, with Ian Mcafferty relinquishing his position as the MPC’s solitary hawk. In the press conference, BoE governor Mark Carney reiterated the likelihood that the next move in rates will be up. This was covered in the statement, but questioned over recent probabilities of a possible cut, addressed by Governor Carney in the press conference, affirmed this and was encouragement enough for a GBP rally in trade.

In the Eurozone, Manufacturing Purchasing Managers Index (PMI) released a figure of 52.3 matching the previous figure and expected figure for the Eurozone whereas countries such as Germany and Spain saw an increase with Germany increasing from the previous figure of 52.1 to 52.3 and Spain increasing from the previous figure of 52.5 to 55.4. As a collective the Eurozone Manufacturing PMI was positive at 52.3 however lower than December’s figure of 53.2, causing deflation fears to grow within the Eurozone as continuous growth is not being seen in this sector. 
Mario Draghi President of the ECB spoke mainly about the annual report of the ECB for 2014. Draghi discussed that the policies put in place by the ECB in 2014 they had expected inflation figures to reach 1.5% in 2016 and 1.8% in 2017. Although these expectations have not yet been met he then went on to say that the policies put in place in the summer of 2014 had been very effective and provided substantial support to the euro recovery area which ‘would have been in outright deflation’ without these measures being put in place.

The Eurozone unemployment rate dropped in December to its lowest rate in over four years despite worries about the global economy. Eurostat the EU's statistical agency, reported the jobless rate in the Eurozone fell to 10.4% from 10.5% in November. This means 16.75 million people are jobless, which is down 49,000 from November. Greece and Spain continue to have the highest jobless total at over 20%, with Czech Republic and Germany having the lowest rate, both at 4.5%. Jennifer McKeown, Capital Economics analyst, welcomed the improvement, but said “A slowing global economy could reverse any progress.” ECB President Mario Draghi has already indicated another stimulus package could be unveiled as soon as next month.

In the United States, Manufacturing Purchasing Managers Index (PMI) came out lower than the previous figure of 52.7 the initial figure for December. Showing growth at a slower rate within the manufacturing sector, however it has increased from the final PMI reading for December which was 51.2. This recent figure of 52.4 was still the second lowest since October 2013. The Services Purchasing Managers Index (PMI) for January came in at 53.2 compared to a projection of 53. The composite PMI fell from 54 in December to 53.2, the lowest level since October 2013. The ISM services report for the US is also showing a slowdown in growth last month. The index came in well below expectations at 53.5 in January, compared to 55.8 in December and forecasts of a reading of 55.1.
To compound USD weakness New York Fed president William Dudley said yesterday that the weakening of the economy means conditions have tightened since the Fed raised rates. If current concerns are still in place at the time of its March meeting the Fed would have to take that into consideration to decide if it will raise rates again. He also cited that any further strengthening of the USD could have serious consequences for the health of the US economy. On a slightly more positive note for the US economy the ADP employment change beat forecasts as US employment increased by 205,000 in January compared to forecasts of a 195,000 rise.

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