“The Fed and the hike in interest rates…”

On Wednesday the Federal Reserve (FED) raised the target federal funds rate by three-quarters of a percentage point to a range of between 1.5% and 1.75%. This was the biggest increase by the US central Bank since 1994.  The FED’s commitment to controlling inflation has already impacted the credit conditions which are being felt in the US housing and stock markets, and is likely to slow down demand in the rest of the economy.  Powell stated, “Our objective really is to bring inflation down to 2% while the labour market remains strong… What’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not”, citing also the war in Ukraine and global supply concerns.  A survey released on Friday of the previous week showed consumer inflation expectations increased sharply in June, which according to Powell was “quite eye-catching,” and sufficient to motivate policymakers towards a larger 75-basis-point hike in order to address inflationary pressures faster whilst retaining trust that price increases will slow down.  In the light of the change in consumer inflation expectations, Powell stated that, “this is something we need to take seriously.”  “We’re absolutely determined to keep them anchored.”  Powell further added that in view of the unexpected jump in the monthly inflation report on Friday as well in expectations, “75 basis points seemed like the right thing to do at this meeting, and that’s what we did.”  He also said that rate hikes of that size were unlikely to “be common” and that for the next meeting an increase of either of half a percentage point or three-quarters of a point would be “most likely.”  Besides the tightening policy the FED has downgraded the FED’s economic outlook, with the economy now seen slowing to below-trend 1.7% rate of growth this year, unemployment rising to 3.7% by the end of this year and continuing to rise to 4.1% through 2024. 

Bank of England

The Bank of England (BOE) took a gradual path to raise interest rates however said that it was ready to act “forcefully” if needed to combat inflation that has now topped 11%.  The BOE increased the Bank Rate by another 25 basis points, warning that the UK economy would shrink in the April-June quarter.  The nine-strong Monetary Policy Committee voted 6-3 for the 25 basis-point increase in the Bank Rate to 1.25%, the same breakdown as in May with the minority voting for a 50 basis-point increase.  The benchmark is now at its highest since January 2009.  This was the fifth time that the BOE has raised interest rates since December and was also the first central bank to tighten monetary policy after the COVID-19 pandemic.  The BOE said, “The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures”.   “The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”  The Bank also noted that the market path for British interest rates has risen substantially since the meeting held in May, despite the fact that there was little news since then. 

ECB and its Promise of a New Instrument

On Wednesday the ECB has promised fresh support via a new scheme to avoid a market rout.  Government borrowing costs have increased in the 19-country currency bloc since the ECB announced its plans to increase interest rates to combat high inflation.  The sell-off was then accelerated by the decision of the ECB not to give details of its plans to limit the rise in borrowing costs.  In this light, the ECB plans a new support scheme of directing cash from debt maturing in its recently-ended €1.7 trillion pandemic support scheme towards indebted nations.  Following the extraordinary meeting, the ECB said, “The Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.”

US Producer Prices

US Producer prices increased firmly in May amid increased cost of energy products, indicating that inflation is likely to remain high for a while.  The producer price index for final demand increased by 0.8% last month after rising by 0.4% in April, said the Labour Department on Tuesday.  In the 12 months through May, the PPI increased by 10.8% after accelerating by 10.9% in April.  Excluding the volatile food, energy and trade services components, producer prices increased by 0.5% in May.  Meanwhile in April core PPI increased by 0.4%. In the 12 months through May, the core PPI increased by 6.8% after rising by the same margin in April. 

US Retail Sales

US retail sales unexpectedly dropped in May as motor vehicle purchases dropped on the back of shortages and record high oil prices that shifted spending from other goods.  This is the first decline in sales reported by the Commerce Departments that suggests that high inflation is starting to impact demand.  It followed in the wake of major retailers like Walmart and Target cutting their profit projections amid cost pressures.  Retail sales dropped 0.3% last month. Data for April was revised lower to show sales increasing 0.7% instead of 0.9% as previously reported.  Sales rose 8.1% on a year-on-year basis.  The decline in sales reflected a slow shift of spending from goods to services.  Annual consumer prices increased the most in nearly 40 ½ years in May.  As inflation erodes wage gains, consumers are using their savings or taking debt to keep up with their spending. 

UK Economy

The UK economy unexpectedly shrank in April, showed official figures increasing the fear of a sharp slowdown.  Gross domestic product contracted by 0.3% after dropping by 0.1% in March.  The Office for National Statistics (ONS) said, GDP would have expanded by 0.1% excluding the impact of a reduction in the government’s coronavirus vaccination programmes, said the Office for National Statistics.  The ONS further added that many firms said increases in the cost of production had affected their business. 

Oil

Oil prices climbed on Tuesday amid tight global supply that outweighed worries that fuel demand would be hit by a possible recession and fresh COVID-19 curbs in China.  Brent crude futures increased by 0.8% to $123.20 a barrel while US West Texas Intermediate (WTI) crude increased by 0.7% to $121.74 a barrel.  Concurrently, tight supply has been worsened by a drop in exports from Libya amid a political crisis that has impacted output and ports. World oil demand will increase by more than 2% to a record high of 101.6 million barrels per day in 2023, according to International Energy Agency, however, high oil prices and weakening economic forecasts impacted the future outlook.  The IEA said, “Economic fears persist as various international institutions have recently released downbeat outlooks”, forecasting that demand would increase by 2.2 million bpd, or 2.2% in 2023 compared to 2022.  It further said, similarly tightening central bank policy, the impact of a soaring US dollar and rising interest rates on the purchasing power of emerging economies mean the risks to our outlook are concentrated on the downside.” Meanwhile, Wednesday saw oil prices dropping more than $3 as markets were worried about a drop in demand following the rate hike by the FED of 75 bp.  Brent crude futures for August settled down by 2.2% at $118.51 a barrel while the US West Texas Intermediate crude dropped by 3.04% to $115.31 a barrel.  Oil prices on Thursday rose after the US announced new sanctions on Iran and as energy markets remained focused on supply concerns causing prices to soar.  Brent crude futures settled at $119.81 or 1.1% while West Texas Intermediate (WTI) crude futures rose by 2% at $117.58. 

Registered Employment – January 2022

A press release dated 13 June 2022 shows that administrative data provided by Jobsplus show that over a period of one year, the labour supply (excluding part-timers) in January 2022 increased by 3.9%, reaching 245,726.  This increase happened due to a year-on-year increase in the full-time registered employment (10,766) and a decrease in registered unemployment (1,558).  Comparing January 2022 to January 2021, the highest increase in employment was brought about by accommodation and food services activities and the construction sector with 1,517 and 1,304 persons respectively.  Registered full-time employment in the private sector increased by 10,010 persons to 193,130.  Meanwhile, public sector full-time employment increased by 756 persons to 51,479.  Registered part-time employment in January 2022 increased by 9.9% when compared to the same month in 2021. 

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