IMF cuts UK growth forecast

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 19th April 2016 19:19 EDT

The ‘Brexit’ issue dominated the headlines again this week. The IMF (The International Monetary Fund) warned that the UK exiting the EU would cause “severe regional and global damage” .They said the referendum had already created uncertainty for investors and a vote to exit would only heighten this. It also believes a UK exit from the EU would "disrupt and reduce mutual trade and financial flows" and restrict benefits from economic co-operation and integration, such as those resulting from economies of scale. 

The IMF also cut its UK growth forecast. It now expects 1.9% growth in the UK this year, compared with its January estimate of 2.2%. For next year, it expects 2.2% growth, unchanged from its earlier forecast.

Tuesday saw the Consumer Price Index figures released showed inflation hit 15-month high in March. Headline CPI showed an annual rise of 0.5% percent, above the expected 0.4% 

The Office for National Statistics said that rises in air fares and clothing prices were the main contributors to the inflation increase between February and March, and were partially offset by a fall in food prices and a smaller rise in petrol prices than a year ago. The rate remains relatively low in the historical context.

Despite these figures The Bank of England decided to hold rates at 0.5 percent once again, a record low for seven years. All nine members of the BoE's Monetary Policy Committee (MPC) voted to hold rates amid concerns over global growth and uncertainty ahead of the Brexit vote.

The bank has been in no hurry to raise rates, and, with uncertainty over the referendum on the U.K.'s membership of the European Union in June, many anticipate it will wait and watch for any impact from the decision on the UK economy.

However, the delay in raising rates has been a concern for those who warn that the UK economy may get used to a low-rate environment.

In the U.S. retail sales figures (MoM) unexpectedly fell in March as households cut back on purchases of automobiles and other items showing a stump in growth in the first quarter. Other data on Wednesday showed a surprise drop in producer prices last month as rising energy prices were offset by a decline in the cost of services.

The two reports suggested the Federal Reserve will probably not raise interest rates until later this year. The Commerce Department said retail sales declined 0.3 percent last month, confounding economists' expectations for a 0.1 percent gain. They were unchanged in February. Economic growth estimates for the first quarter are currently as low as a 0.2 percent annualized rate.

The Labour Department said on Thursday its Consumer Price Index gained 0.1 percent last month as a rebound in gasoline prices was partly offset by a drop in the cost of food, medical care and housing costs.

Yellen said she believed that "transitory" factors were behind the recent run-up in prices. The combination of benign inflation and weak economic growth in the first quarter suggest the Fed will not hike rates again before September, even as the labour market strengthens.

The disappointing inflation figure was offset by the jobless claims which unexpectedly fell to match lowest since 1973. The job rate is near an eight year low and persistent additions to headcounts indicate companies are looking beyond the recent softness in the economy.

The dollar ended Friday on the back foot as it broadly fell as a slide in oil prices and soft US consumer sentiment report which came out weaker than previous at 89.7 against a previous of 91.0.

The dollar index which tracks the greenbacks value against six currencies posted losses after two days of gains which has widely been attributed to anticipation of the oil producers meeting in Doha. The meeting which was led by top oil exports Saudi Arabia and Russia to discuss oil production and how to solve the oil price crisis has widely reported to be a failure; with Iran making a last minute decision not to attend and Saudi Arabia vowing not to halt or freeze production, unless other major producers did the same. The crisis has left the world with excess oil supply and thus dropping oil prices. All eyes are now on June’s meeting of the OPEC counties where the oil producers hand may be forced if crude prices begin another downward spiral.

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