BoE Policy Unchanged

Daily Analysis - 15/01/2016

UK Central Bank Leaves Rates Stable As Expected

With inflation hovering near zero and growth decelerating, Bank of England policymakers have now left monetary policy unchanged for almost 7 years with Committee Members voting of 8 to 1 in favor of the current strategy. As the UK prepares for a referendum to exit the European Union, economists have postpone rate hike forecasts to the end of the current year and in some cases the beginning of 2017.

German GDP Jumps

German gross domestic product grew to 1.70% in 2015 compared to 2014’s 1.60% according to the Federal Statistical Office. The boost from domestic consumption has helped the country to grow at a time when the export economy is struggling, recording the best performance since 2011. Household spending rose 1.90% over the year compared with 2014’s 0.90% gain whereas government consumption also rose from last year’s 1.70% to 2.80%. Imports outstripped exports in the latest reading, printing at 5.70% and 5.40% respectively. Industrial production, excluding construction, accounts for more than 25% of total GDP, advancing by 2.20% in 2015 whereas construction itself reported a 0.20% rise. Employment was up by 0.80%, helping to increase domestic spending with record low unemployment and steadily rising wages aided by cheaper energy prices and record low interest rates implemented by European Central Bank.

South Africa Manufacturing Still in Contraction

The latest manufacturing purchasing managers’ index released from South Africa showed an improvement, rising from 43.3 in November to 45.5 for the month of December. Despite the gains, manufacturers, the figure remains in contractionary territory with analysts and economists not so optimistic on the future with demand softening and confidence absent. On the output front, mining has seen a substantial turnaround with November shrinking at a -0.80% pace compared to October’s revised value of -4.70%. The biggest drivers of the decline were falling iron ore prices which tumbled by -20.40% and other metallic minerals sliding by -35.00%. The one bright spot was gold production which managed to climb 2.20% year over year through the month of November, up from October’s revised contraction of -7.80%. However, with commodity prices still sinking and global demand weakening, the outlook for South Africa remains challenging.

BoE Meets Expectations

The Bank of England left interest rate policy unchanged at a record low 0.50% with Monetary Policy Committee members unmoved in their position on current policies, with an 8-1 vote for maintaining rates. The one dissenting vote is Ian McCafferty who has keep his views intact and remains firmly in the hawkish camp, calling for higher rates immediately. The main drivers of the latest decision were growing concerns about the pace of growth and inflation. With inflation on the cusp of deflation and growth slowing modestly in the last quarterly reading, policymakers are unsure when conditions will ease for the economy. The prevailing hope is that inflation will gradually start to rise after energy prices bottom out, paving the way for policy tightening. Economists now predict interest rates will be adjusted higher closer to the end of 2016 or near the beginning of 2017.

US Unemployment jumps

Americans filing for unemployment for the week ending January 9^th rose to 284,000, marking a 7,000 increase from last week’s 277,000 and exceeding expectations of 275,000. The Department of Labor stated that this is the 45^th straight week that unemployment is stayed below the critical 300,000 mark that is strongly correlated with a healthy labor economy. Most firings were attributed to layoffs in factories, transportation and warehousing. Analysts were unfazed by the figure, considering it a seasonal factor as employment adjusts following the holiday season and claiming it is relatively natural to see claims rising at the start of the new year. The 4-week jobless claims averages, considered by some to be less volatile, also rose modestly to 278,750 from prior reading of 275,750, the highest since July. Rising unemployment also reflects cost cutting measures by firms as global demand unravels.