Interest rate cut reversed

Thursday 09th November 2017 06:12 EST

The Bank of England raised interest rates for the first time in more than 10 years on this month, however the pound was sold off after the central bank said it expected only “very gradual” rate increases as Britain prepares to leave the European Union. The Bank’s nine rate-setters voted 7-2 to increase the Bank Rate to 0.50 percent from 0.25 percent, reversing an emergency cut made in August 2016 after the Brexit vote. They sighted the Brexit talks were likely to be the biggest factor for the next BoE move on rates being either up or down depending on how negotiations progress.
The two Monetary Policy Committee members who voted to keep rates steady, deputy governors Jon Cunliffe and Dave Ramsden, said wage growth was too weak to justify a rate rise now. The Bank said debt servicing costs paid by British households and companies would remain “historically very low” despite Thursday’s hike as a number of fixed rate loans roll off and refinancing would be at considerably lower rates. The Bank stuck with its forecasts that Britain’s economy would grow by 1.6 percent next year and by 1.7 percent in 2019.
 Later that week Governor of the Bank of England Mark Carney said that failure to secure a trade deal with the EU following Brexit will damage UK economic growth in the short term.
When questioned about the Brexit deal in an interview with a top British TV broadcaster Carney said "In the short term, without question, if we have materially less access (to the EU) than we have now, this economy is going to need to reorient and during that period of time it will weigh on growth."
Carney also added that the lack of progress in the ongoing negotiations is hindering the growth of British business investment which would otherwise flourish given the strength of the world economy and other factors.
Apart from the Bank of England’s decision to raise interest rates for the first time since July 2007.November also saw a cabinet reshuffle amongst top members of UK parliament with British Prime Minister Theresa May appointing North Yorkshire MP Julian Smith as her new chief whip. Smith who initially voted to remain in the EU, replaces Gavin Williamson who has since been promoted to defence secretary although he has never held ministerial office.
The euro fell after the Spanish government revealed that it is poised to stall Catalonia’s autonomy after leader Carles Puigdemont refused to abandon the push for independence.
The plans were backed by the Spanish Supreme Court which declared the October 1 vote invalid and said that it violated the constitution, which renders the country as indivisible. Although article 155 has never been invoked, there are now increasing concerns that the moves could trigger further unrest in the region after mass demonstrations in the run up to the ballot earlier this month.
The ECB prolonged its bond buying programme by nine months to September 2018, and left the door open to keep buying after that. It said it would begin paring its monthly purchases by half to 30 billion euros ($34.90 billion) starting in January. ECB chief Mario Draghi said “an ample degree of monetary stimulus remains necessary”, as inflation has yet to show signs of a sustained upward trend.
From January of next year The European Central Bank will reduce the amount of assets it buys every month to €30bn from the current level of €60bn. The program could finish by the end of next year.
Inflation is likely to be below the 2% ECB target for the next few years. The recovery in the eurozone is gaining momentum, so the ECB has opted to reduce some of its stimulus. The ECB kept the key interest rate for the countries that use the euro unchanged at 0%, and its deposit rate at -0.4%.
The Federal Reserve Bank of New York confirmed that William Dudley, among the most influential monetary policymakers throughout the financial crisis and its aftermath, expects to retire by mid-2018.
The US economy expanded at 3% during the three months to the end of September, which was stronger than expected. Analysts had been expecting a sharp slowdown after back-to-back hurricanes battered several states in the quarter. But consumer spending held steady, despite a drop in home building investment
Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage points to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013.
The Federal Reserve refrained from raising interest rates at its policy meeting and said the late-summer hurricanes likely will not have much longer-term impact on overall economic activity. There was little in the post-meeting statement Wednesday to indicate that the Fed would hold off on raising rates again soon.

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