BoE’s Cunliffe Opposes Interest Rate Hike
Sir John Cunliffe, the Deputy Governor of the Bank of England (BoE) is the latest member of the BoE’s Monetary Policy Committee (MPC) to take part in a war of comments regarding the need or not of raising interest rates. Cunliffe, who agrees with Governor Carney’s opinion, said that increasing interest rates would make the UK’s economy suffer more. In the meantime, Sir Oliver Letwin, a Senior Tory, suggested that taxes should be increased “in a careful way” to allow more money to be spent on public services. A published survey showed that half of Britons think that the government should raise taxes and increase spending.
In Portugal, some of the world’s most influential central bankers are going to share their views on global economic matters. BoE’s Governor Mark Carney and ECB’s president Mario Draghi along with Governor of the Bank of Japan, Haruhiko Kuroda, and Governor of the Bank of Canada, Stephen Poloz, will attend an ECB economic forum in Sintra. Draghi’s remarks over the monetary policy in the Eurozone yesterday caught the experts off-guard, which means that attention will be shifted to Portugal today.
Pound Sterling – UK Markets
Today, Sterling slumped against the Euro with the exchange rate set at €1.12. The British Pound continued, for a second day, to extend its gains against the US Dollar, trading at $1.28.
The rift at the BoE over the issue of raising interest rates widened even more today, after comments made by its Deputy Governor, Sir John Cunliffe. Cunliffe stayed in line with Governor Carney’s opinion that borrowing costs should not be raised right now. He said that raising interest rates, while wages are getting squeezed, would only make the situation worse. Until now, three members of the Monetary Policy Committee (MPC) are in favour of raising interest rates. The next MPC meeting is scheduled in August.
According to a survey by Nationwide, UK house prices rose by 1.1% in June, despite a slowdown in the London area. Real estate experts suggested that the rise is due to low interest rates and a lack of supply in the market. They view the increase in house prices as a bit unexpected, taking into consideration that the housing market had a weak start to the year. It should be noted that in May, mortgage approvals hit an eight-month low and inflation hit an almost four-year high.
US Dollar – US Markets
The US Dollar continued its drop against the Euro for a second day, trading at €0.87. Mario Draghi’s comments on the ECB’s monetary policy and the uncertainty around the American Healthcare Act bill resulted in the weakening of the US currency.
The US Dollar didn’t recover even when Janet Yellen reiterated the view that the Fed will continue to raise interest rates according to plan. Yellen, who is the Fed’s Chair, delivered a speech in London in which she said that there won’t be a new financial crisis in the next years, thanks to the reforms in the banking sector after the crash of 2008-2009. Yellen said that the Fed will reduce the number of bonds it bought during the financial crisis “gradually and predictably.”
The uncertainty around the “Trumpcare” bill, which aims to replace “Obamacare”, continues to bother investors and traders who are aware that Republicans are still divided on the subject. Republican leaders in the US Senate postponed yesterday a vote on the healthcare overhaul, after facing resistance from some of their own party members. President Donald Trump urged Republican leaders to convince the opposing members as soon as possible because, as he said, “Obamacare is melting down.”
Euro – European Markets
The Euro rallied against the US Dollar, reaching a ten-month high against the US currency with the exchange rate set at $1.13. The Euro’s rally was fuelled by Mario Draghi’s comments regarding the European Central Bank’s (ECB) monetary policy and the subsequent buying interest from traders.
Draghi’s speech in an ECB Forum in Portugal hinted that there is the possibility that the bank could soon unwind its aggressive stimulus programme. Deutsche Bank analysts said in a report that “Draghi’s speech seemed to mark a transition from the ‘whatever it takes’ period to ‘it will take less’ and a slow turning point in the direction of travel towards tighter policy.” An Amplifying Global FX Capital report said that the ECB’s president laid the groundwork for a tapering in monetary policy in the next months.
Vitor Constancio, who is the ECB’s Vice President, spoke to CNBC and warned over the slackening European economy. Constancio said that domestic factors of inflation, such as wages and cost developments, are not responding in the way the ECB expects them to. The ECB’s Vice President agreed with Mario Draghi that “if we want to bring inflation below, but close, to the 2% target, then we have to persist in the type of monetary policy we have been adopting.”
Other Currencies – Highlights
Sterling slumped against the Australian Dollar, trading at 1.68 AUD. The Aussie strengthened on the back of the surge in the iron ore price. China’s construction projects have increased the demand for such commodities with Australia being one of the top exporters. John Edwards, a former Reserve Bank of Australia (RBA) board member, told Bloomberg that the RBA could raise interest rates eight times in the next two years, if its forecasts prove correct.
The Pound gained small ground against the New Zealand Dollar with the exchange rate set at 1.76 NZD. The Reserve Bank of New Zealand (RBNZ) published its 2017-2020 Statement of Intent (SOI), which outlines its priorities. In its statement, the RBNZ says that “the outlook for New Zealand’s economic growth remains positive, albeit with considerable uncertainty, especially internationally.” The RBNZ reiterated that a key domestic risk is the performance of the housing market.