Rational FX

Wednesday 02nd December 2015 08:09 EST

The Bank of England governor Mark Carney has said that UK interest rates are likely to remain low "for some time". UK rates have been held at 0.5% since March 2009. Most economists are not expecting the Bank to raise rates until mid-2016 at the earliest. Mr Carney said that "even with limited and gradual rate increases it still will be a relatively low interest rate environment". He remained vague on when a rate rise might be coming, and added: "The question in my mind is when the appropriate time for interests to increase and that is strongly consistent with the strength of the domestic economy." Mr Carney also said that he did not see any need for negative interest rates and that productivity was more likely to exceed than undershoot the Bank's latest forecasts, reducing the pressure on inflation.
Meanwhile, sterling fell after the Bank's chief economist Andy Haldane said he saw more downside risks to growth and inflation than had been indicated by the Bank's latest economic outlook. He reiterated his view that the Bank's next move might actually be a rate cut. "I see the balance of risks around UK GDP growth and inflation as skewed materially to the downside, more so than embodied in the November 2015 Inflation Report," he told the Treasury Committee. According to another poll, it is anticipated The Bank of England will hike interest rates in the second quarter of next year but the timing may rest on whether the U.S. Federal Reserve tightens policy in the world's largest economy come December.
George Osborne’s Autumn Statement stated that they expect the UK economy to grow by 2.5% in 2016 and 2.4% in 2017, revised up from 2.3% and 2.4% respectively. Unemployment is set to fall to 5.25 next year and stay there until 2017 when it is set to rise. He is also made a U-turn on controversial and unpopular tax credit cuts, but admitted the shortfall will be made up by an 11.6B raid on British businesses. Sterling fell back towards a seven-month low against the dollar, with upbeat UK forecasts and a spending review by the Chancellor not changing the view that interest rates will not rise any time soon. The pound had initially climbed after George Osborne's "Autumn Statement", in which he eased some spending cuts and dropped an unpopular plan to scrap some benefits for low-earners, as well as announcing a higher growth forecast of 2.5 percent for 2016.

In Europe, the Markit flash composite Purchasing Managers' Index (PMI), which tracks manufacturing and services activity and accounts for more than two-thirds of the economy, rose to 54.9 from 54.2 in October - far above the 50 mark that separates growth from contraction for the 31st month running. New export orders and employment rose to their highest readings in three months, suggesting demand from abroad remained strong despite broad concerns about the global economy. This has no doubt been fuelled by Euro weakness leading to German goods being cheaper for consumers outside of the Eurozone
German business confidence unexpectedly rose in a sign that Europe’s largest economy is robust enough to weather risks including a global slowdown and Volkswagen AG’s emissions scandal. The IFO institute’s business climate index climbed to 109 in November, the highest level since June 2014, from 108.2 in October. German companies are battling to cope with a slowing global economy, the home-grown scandal at its biggest carmaker, a refugee crisis, and now a threat to euro-area consumer confidence after the Paris attacks and lockdown of Brussels. Even so, record-low unemployment and interest rates are supporting domestic demand, and more stimulus may be ahead as the European Central Bank considers whether to ease monetary policy further.

According to economists polled by Reuters it is widely expected that the European Central Bank will ease policy on December 3rd in some way or another, stating the bank cannot pull back now after signalling its intentions so clearly over the past month. Speculation of further stimulus from the ECB has mounted ever since President Mario Draghi indicated in October that the Governing Council would act if needed to drive up inflation to its 2 percent target. The consensus from the poll is that the ECB will cut the deposit rate further to -0.30 percent from -0.20 percent now. Forecasters also expect the ECB to increase the amount of bonds it buys each month to 75 billion euros from the current 60 billion euros, or extend its quantitative easing programme beyond September 2016, or do both.

US economic growth for the third quarter has been revised up, helped by stronger investment and house building. GDP rose at an annual pace of 2.1%, not the 1.5% rate it reported last month. Even with the GDP revision, growth still slowed from an annual pace of 3.9% in the second quarter. However, in the second quarter of the year the economy was rebounding from the impact of the harsh winter weather experienced at the start of the year, which slowed the US economy to a crawl.
The better third quarter growth is still likely to fuel speculation that the US Federal Reserve is ready to raise interest rates next month. The upward revision by the Commerce Department puts the US economy on course to grow at least 2% in the second half. It comes in the wake of strong jobs growth in October. Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 3% rate, down from the 3.2% rate estimated last month.

U.S. consumer spending barely rose in October as households took advantage of rising incomes to boost savings to their highest level in nearly three years, rising just 0.1%, pointing to moderate economic growth in the fourth quarter. A slowdown in consumer spending has done little to change expectations that the Federal Reserve will raise interest rates next month as other data showed a surge in business spending plans in October and a drop in new applications for unemployment benefits last week.

In a noteworthy mention, the International Monetary Fund (IMF) has announced that it will include the Yuan, also known as the Renminbi, in its $280 billion basket of currency reserves, known officially as Special Drawing Rights, or SDR. Its inclusion in the basket marks a major diplomatic victory for Beijing's campaign to internationalise the currency.

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