Kristin Forbes, a member of the Bank of England Monetary Policy Committee, signals she may vote for an interest rate hike on the back of recovering UK economy by downplaying potential fallout for UK from emerging markets slowdown…
An interest rate hike in the UK will come “sooner rather than later” and pessimism about the state of the global economy is overdone, according to a Bank of England policymaker.
Kristin Forbes, a member of the bank’s rate-setting monetary policy committee (MPC), was also upbeat about the domestic economy. She argued that the country had only limited exposure to emerging markets such as Russia and Brazil and that, despite signs of a slowdown in those markets, British businesses should not be deterred from building stronger links with them.
Forbes’s intervention, against the backdrop of a recovering UK economy, indicated that she is preparing to vote for rates to be raised from their current record low of 0.5%.
“Despite the doom and gloom sentiment, the news on the international economy has not caused me to adjust my prior expectations that the next move in UK interest rates will be up and that it will occur sooner rather than later,” she said in a speech on Friday.
Forbes conceded that if some of the potential risks to emerging markets play out – such as a sharper than expected slowdown – “then the UK economy is unlikely to be immune”. But she said the UK’s exposure “appears manageable”.
Kristin Forbes says despite increased risks the current “gloom and doom” on emerging markets is “overblown” http://t.co/SnyNwS3fZj
— Bank of England (@bankofengland) October 16, 2015
Her comments align her with fellow rate-setter Ian McCafferty, who has voted for higher rates at recent policy meetings, where the MPC has split 8-1 at recent gatherings in favour of holding rates steady. But the Bank’s chief economist, Andy Haldane, said last month that rates may have to be cut further given signs of a slowdown in the UK and risks to the global economy from China.
The newest member of the nine-person MPC, Jan Vlieghe, also left the door open to an interest rate cut this week when questioned by MPs. Highlighting low inflation, Vlieghe told parliament’s Treasury committee that there was an option to cut rates but that the next move was “more likely to be up than down”.
Forbes, a US economics professor, said that on emerging markets, “recent negative headlines merit a closer look”.
“After considering the actual data and differences across countries, the actual news for this group is much more balanced (albeit not all bright),” she said in her speech, entitled “growing your business in the global economy: Not all doom and gloom”.
She was speaking a week after the International Monetary Fund warned central bankers that the world economy risks another crash unless they continue to support growth with low interest rates.
Forbes referred to the IMF’s latest downgrade to global growth prospects but noted that the fund had left its China forecasts unchanged. The data from China “has not yet weakened by anything close to what the gloomy headlines imply”, she added.
More broadly, she felt the global outlook was also better than headlines suggested.
“Although the risks and uncertainties in the global economy have increased, the widespread pessimism is overstated,” Forbes said.
She told business leaders that they should not be deterred from trading with emerging markets by the recent negative news, which “should prove temporary”.
“UK companies – as a whole – have been slow to expand into emerging markets. This may provide some stability over the next few months if the heightened risks in some of these countries become reality. But when viewed over a longer perspective, this limited exposure to emerging markets has caused the UK to miss out on growth opportunities in the past,” Forbes said.
UK interest rates were slashed to shore up the economy during the global financial crisis and they have stayed at a record low for more than six years. With inflation below zero and headwinds from overseas, economists do not expect a rate hike until well into next year.
In the US, interest rates are also at a record low of near-zero. Policymakers had been signalling they could start hiking last month but then worries about China’s downturn prompted them to wait. Still, the Federal Reserve chair, Janet Yellen, recently said the current global weakness will not be “significant” enough to alter the central bank’s plans to raise rates by December.
Forbes was also optimistic that the UK could weather the turmoil and said its domestic-led expansion “shows all signs of continuing, even if at a more moderate pace than in the earlier stages of the recovery.””
Howard Archer, an economist at the consultancy IHS Global Insight, said Forbes’ remarks reinforced the picture of a wide range of views on the rate-setting committee.
“The current wide range of differing views within the MPC highlights just how uncertain the outlook for UK interest rates is – although it still seems to be very much a question of when will the Bank of England start to raise interest rates rather than will they,” he said.
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Why Australia should fear a US government default
By: All Things Forex
Published October 7, 2013, in Forex Outlook
In May, the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures run out on 17 October. If the USS America goes down, little HMAS Australia will find it tough not to get sucked into the vortex…
The current US government shutdown has little impact on Australia, but if the US hits the debt ceiling Australia will feel the consequences of a bitterly partisan US political system.
One of the more ironic aspects of the US government shutdown is that if it goes on for much longer, the government won’t be able to calculate its economic impact because it won’t be able to collect the data.
Last Friday was supposed to be the most recent release of US jobs figures, and yet those logging on to the BLS website would have seen this:
During the shutdown the BLS won’t be able to collect the data to calculate the employment figures. Similarly the Bureau of Economic Analysis is also shut down, which rather makes collating data for the GDP figures a tad tricky.
But for Australians the big issue is not so much the shutdown. Costly as it is to the American economy – wiping about 0.1% of GDP growth each week – it does not have a great direct impact outside its borders. After all there are not many Australians employed by the US government or about to go to a US national park this weekend. The real bitter pill for the rest of the world (and US) comes in a couple weeks when the US reaches its debt ceiling.
The debt ceiling is often lazily referred to as the US government’s credit card limit, but it is not about giving the US government the right to spend more, but the ability to borrow to pay off spending it has already undertaken.
The debt ceiling is currently at $US16.699tn, and was actually reached in May but the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures will run out on 17 October.
At that point the US will no longer be able to borrow money to pay its bills. In the short run that is OK, because the US government gets enough cash from tax revenue to cover its expenses. But on 1 November it gets a bill for US$67bn for social security, medicare and veterans benefits. By 15 November the US government will be short about US$108bn. And that means defaulting on its payments.
No one really knows what will happen if the debt ceiling is not raised. Views range from, it’ll be fine, to it’ll be Armageddon. The US Treasury for its part has put out a paper that paints a pretty scary picture.
After looking at what has occurred in 2011 when the US nearly reached the debt limit, it concluded that a debt default “could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth”.
It also noted that “many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression”.
And just in case you are a glass-half-full kind of person and you still have some optimism, the report ends on this less than upbeat note: “Considering the experience of countries around that world that have defaulted on their debt… [the] consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”
Cheery.
Thus far the markets have been rather sanguine. The US Treasury 10-year bond yields are lower now than they were a month ago – suggesting investors are not too spooked about the long-term US economy. There is also a sense that investors are a bit jaded – the debt ceiling fight is now becoming an annual event.
But in the past few days, investors have become very worried about holding US treasury bonds which mature in the next month.
The spread of the six-month to one-month treasury bonds fell off a cliff, to the point where investors are now demanding a higher return for buying a one-month US treasury bond than for a six-month.
Should the default actually occur you could expect those jaded investors would suddenly get very alert. A US government default would put the world economy into uncharted waters. Around 87 % of all foreign exchange transactions involve US dollars. If the US government can no longer guarantee it will pay its bills (even for a short time), that rather upsets the integrity of the entire system.
In 2011 when the debt ceiling was almost breached, the US’s credit rating was downgraded to AA. It hurt US confidence, put a big hand brake on economic growth, and the turmoil on financial markets reduced American household wealth by around US$2.4tn.
For Australia, in 2011 our dollar at the time soared to US$1.10 as the American currency lost value. With the value of our dollar already rising the last thing our manufacturing sector needs is for the dollar to be given a boost.
For the moment most expect congress to back down and raise the debt ceiling (or perhaps even suspend it for a few more months like they did last year).
But Australians should hope that the US gets its act in order soon. While it is nice to think that we are now bound to China, a look over the past 20 years shows that aside from extraordinary circumstances – such as the dotcom bubble and September 11 attack, and our mining boom in 2006 – Australia and the US’s GDP growth is quite closely linked.
Our economy is like a dinghy in the ocean of the international economy. If the US scuttles itself though political intransigence, without another mining boom, little HMAS Australia would find it tough not to get sucked into the vortex as USS America goes down.
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