Bankers may not want to get too comfy on the sun bed in August

We suggested on Wednesday that despite all the speculation to the contrary it may be sensible for the Bank of England to wait and see what the economic consequences might be of the out vote before acting to cut interest rates. On Thursday they appeared to agree with that view, as the members of the Monetary Policy Committee voted 8-1 to leave rates where they were for the month of July.

Speculation now moves to whether the Bank of England will cut in August, when the Governor is also due to give a press conference and a revised forecast of economic conditions. To our mind it still is questionable what a further 0.25pct cut in rates will do to the economy.  It is prudent also to see if the recent weakness in sterling has had a positive boost to the economy. Sterling continued to rally on the back of today’s announcement, trading just over $1.33. There was also a modest pickup in gilt yields, however yields on 10 year gilts at 0.79% remain close to record lows. 

We also suggested in the past weeks that the Federal Reserve may start to be put in a tricky place in regard to what their position is over interest rates, as the US economy continues to show signs of resilience. Brexit was given as the latest reason for the Fed to remain on hold at last month’s meeting. However, Federal Reserve member James Bullard earlier this week commented that now the markets have had time to digest the move, he feels that Brexit’s impact on the US economy will be “close to zero”.

Speculation as to what the Federal Reserve might do with interest rates is an ongoing topic. At the start of the year the Federal Reserve were forecasting to raise rates four times in 2016, the markets had forecast two. In the early months of 2016 the US economy was feared to be moving back into an economic recession, which even prompted some to speculate of a cut. As the year has worn on, and the US economy showed signs of stabilising, speculation increased that a second rise sometime in the year might take place. Then came the Brexit vote which muddied the waters again.

On Thursday the latest US producer prices came in above expectations for the month of June, this on the heels of a stronger than expected non-farm pay roll report last Friday. Later today we get the inflation data for the month of June as well as the latest retail sales data, Michigan consumer confidence, industrial production and capacity utilisation. The Citi economic surprise index continues to tick higher as economic data continues to come in above expectations.

Should this trend continue later today and inflation does continue to tick higher, the Federal Reserve may well look to once again re-adjust their thoughts on what they might do with interest rates in August. A move higher in August would take the markets by surprise and disturb bankers on the beach once again. 

Posted on July 14, 2016 .