A leading development over the past week has been the slowdown of inflation in the UK, the Euro Zone and the U.S., and how this supposedly points to central banks either staving off further interest rate hikes or opting not to begin a path towards monetary ‘normalisation’ in the near term.
Janet Yellen’s testimony to Congress last week was widely interpreted as her backtracking on further possible rate rises, despite stating very clearly that rates will continue to go up in conjunction with the expected ‘evolution of the economy‘. The consensus in the UK after the latest inflation figures is that there is next to no chance that the Bank of England will raise rates any time soon. Falling inflation in the Euro Zone has also prompted doubt about the timescale of the ECB beginning a path of ‘normalising‘ policy.
Given that the ‘normalisation‘ of monetary policy is a central directive, I would expect rates to rise in both the UK and the Euro Zone before too long. The Euro Zone will likely be the last to make the move. We will be able to glean more about the Bank of England’s plans over the next couple of weeks.
In the U.S., what has been clear is how amidst falling inflation, the Fed has continued to raise interest rates. Two months ago inflation was running at 2.2% with rates at 1%. Inflation is now 1.6% with rates now 1.25%. The Fed have long been saying they expect weak data to be ‘transitory‘ and for inflation to rise once more into the winter. The evidence so far is that the Fed have been quite prepared to raise rates as economic data declines.
The overall trend remains unchanged: the debate is not whether central banks will raise interest rates, but when.
- The UK’s inflation rate dropped unexpectedly to 2.6% in June, down from 2.9% in May, official figures have shown.
- It is the first fall in the rate since October 2016 and was largely down to lower petrol and diesel prices.
- Fuel prices fell for the fourth month in a row in June, according to the Office for National Statistics.
- Economists say the fall in inflation could ease pressure on the Bank of England to raise interest rates.
- Credit card offers that allow consumers to transfer balances interest free are being scaled back as banks and building societies tighten borrowing rules, a Bank of England survey showed.
- It found that lenders expected the length of interest-free periods on such transfers to decrease in the coming three months – for the first time since it began recording the data in 2015.
- They also expect to scale back mortgage availability, affecting borrowers with deposits of less than 25% and in particular home buyers who have saved up less than 10% of a property’s value.
- Free schools face a budget raid to help fund a £1.3 billion education bailout, after the Treasury refused to release any extra money.
- Ministers are using money for the Government’s flagship free school programme – some of which would have been used to set up new grammars – to increase the amount of cash for all schools.
- Justine Greening, the Education Secretary, said that the extra money was desperately needed to address the issue of school funding, which had been raised on the doorstep during the Tories’ election campaign.
- She said the £1.3 billion would all be made from “efficiencies and savings” in the Department for Education’s (DfE) budget – an admission that any bids to the Chancellor for extra cash had been unsuccessful.
- A monthly index of homebuilder confidence in the single-family market fell 2 points in July to 64 from a downwardly revised June reading. Economists had expected a reading of 68. Anything above 50 is considered positive, but this is the lowest reading on the National Association of Home Builders/Wells Fargo Housing Market Index since November — before the presidential election.
- “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said NAHB Chairman Granger MacDonald, a homebuilder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”
- Treasury Department officials called bond traders and their advisers on Friday to assure them that the Trump administration isn’t considering prioritizing U.S. debt payments if Congress fails to increase the nation’s borrowing authority later this year, according to two people familiar with the matter.
- The calls came after Bloomberg News published a story about worries among traders that Treasury Secretary Steven Mnuchin may have to employ a secret plan written by the Obama administration to make sure debt payments are made, potentially at the expense of salaries for government employees, payments to contractors and other obligations.
- College tuition hikes and the resulting increase in student debt burdens in recent years have caused a significant drop in homeownership among young Americans, according to new research by the Federal Reserve Bank of New York.
- The study is the first to quantify the impact of the recent and significant rise in college-related borrowing—student debt has doubled since 2009 to more than $1.4 trillion—on the decline in homeownership among Americans ages 28 to 30. The news has negative implications for local economies where debt loads have swelled and workers’ paychecks aren’t big enough to counter the impact. Homebuying typically leads to additional spending—on furniture, and gardening equipment, and repairs—so the drop is likely affecting the economy in other ways.
- As much as 35 percent of the decline in young American homeownership from 2007 to 2015 is due to higher student debt loads, the researchers estimate.
- Eurozone inflation fell in June, the European Commission today confirmed, easing pressure on the European Central Bank (ECB) to start tightening monetary policy at its next announcement on Thursday.
- Consumer prices rose just 1.3 per cent in June, down from 1.4 per cent in May.
- Meanwhile, core inflation, which strips out the effects of volatile energy and food costs, rose by 1.1 per cent, below its April high of 1.2 per cent.
- The stubborn refusal of inflationary pressure to pick up towards the ECB’s two per cent target, despite the continued fall in unemployment in the Eurozone, has made the central bank wary of raising tightening conditions either by stopping quantitative easing (QE) or raising its key interest rates.
- Flat consumer inflation and a surprise drop in June retail sales triggered new doubts that the Federal Reserve will be able to raise interest rates again this year.
- Fed Chair Janet Yellen raised the level of anxiety about inflation when she said told a congressional committee this week that the central bank was concerned about low inflation and would change its policy path if it persists. That was a slight departure from previous Fed comments that the softening inflation is “transitory,” and likely due to temporary events like a drop in wireless charges or lower drug prices.
- Retail sales unexpectedly dropped for a second month in June, signaling consumers are providing only modest support for the U.S. economy, Commerce Department data showed Friday.
- Purchases dropped 0.2% (forecast was 0.1% gain) after falling 0.1% the prior month (previously reported as 0.3% drop). Sales minus car dealers and gas stations fell 0.1% after no change a month earlier.
- The figures suggest households remain cautious about spending and may provide less of a boost for the second-quarter economy after a weak start to the year. Receipts weakened at department store, sporting goods outlets and restaurants.
- Sales within the so-called retail control group have weakened for three straight months, and the decline in June indicates a weak finish to the first half of the year.