US Fed, Bank of Eng­land in wai­t­and-see mode

Fo­cus on Don­ald Trump’s pol­icy state­ments

The Star Early Edition - - BUSINESS REPORT - Jonatha Cable

US PRES­I­DENT Don­ald Trump will again be the cen­tre of at­ten­tion in the com­ing week with any pol­icy state­ments, hav­ing helped put the Fed­eral Re­serve, Bank of Eng­land and other cen­tral banks in wai­t­and-see mode.

Trump, in­au­gu­rated as 45th pres­i­dent on Jan­uary 20, pushed Repub­li­can law­mak­ers on Thurs­day for swift ac­tion on a sweep­ing agenda, in­clud­ing his planned US-Mex­ico bor­der wall, tax cuts and re­peal­ing Oba­macare.

The White House also floated the idea of im­pos­ing a 20 per­cent tax on goods from Mex­ico to pay for the wall, send­ing the peso tum­bling and deep­en­ing a cri­sis be­tween the two neigh­bours.

“Mar­kets will be fo­cused on whether he (Trump) con­tin­ues to show a high de­gree of com­mit­ment to im­ple­ment­ing his pre-elec­tion prom­ises and whether he gets on to de­tail­ing his fis­cal plans,” said Vic­to­ria Clarke at In­vestec.

A rise in pro­tec­tion­ist trade poli­cies is the big­gest risk fac­ing the global econ­omy, ac­cord­ing to a poll of hun­dreds of econ­o­mists taken ear­lier this month. Trump has al­ready with­drawn from the Trans-Pa­cific Part­ner­ship and threat­ened to rene­go­ti­ate – or even scrap – the North At­lantic Free Trade Agree­ment with Mex­ico and Canada.

In con­trast, spec­u­la­tion Trump will en­act bold stim­u­lus and re­fla­tion­ary mea­sures has pushed up US 10-year Trea­sury yields, lit a fire un­der the dol­lar and sent the Dow Jones In­dus­trial Av­er­age above the 20 000 mark for the first time.

Last month the Fed added 25 ba­sis points to bor­row­ing costs, only its sec­ond hike since the Great Re­ces­sion and a year since the first one. At the time, pol­i­cy­mak­ers sig­nalled as many as three in­creases in 2017.

But no hike is ex­pected on Wed­nes­day and rates will re­main at 0.50 to 0.75 per­cent un­til the sec­ond quar­ter, when an­other 25-ba­sis-point rise is likely, a poll found.


Strong labour mar­ket data, due on Fri­day, would lend cre­dence to those ex­pec­ta­tions for a sec­ond quar­ter hike. A poll pre­dicts a pick-up in non-farm pay­rolls.

The Euro­pean Cen­tral Bank (ECB) has had an ul­tra-loose mon­e­tary pol­icy for years, with lit­tle chance of any change in the fore­see­able fu­ture, as it has so far failed to get in­fla­tion any­where near its close to 2 per­cent tar­get.

Euro zone in­fla­tion rose to 1.5 per­cent this month, flash data are ex­pected to show on Wed­nes­day, still a long way from tar­get. Ger­many’s is ex­pected to rise to 2 per­cent.

But ECB Pres­i­dent Mario Draghi has re­mained rel­a­tively com­fort­able about up­ward move­ments and re­laxed about Ger­man calls for tighter pol­icy as its in­fla­tion rate climbs.

“We ex­pect in­fla­tion re­leases due this week from sev­eral coun­tries to show prices are ac­cel­er­at­ing fur­ther. Oil is the main fac­tor be­hind rapidly ris­ing in­fla­tion; Brent crude was about 65 per­cent higher year-on-year in Jan­uary 2017,” said Achil­leas Chrysos­to­mou at Stan­dard Char­tered.

An in­crease in euro zone man­u­fac­tur­ing is also ex­pected to be con­firmed with the re­lease of pur­chas­ing man­ager in­dexes.

A slow­down in growth in Bri­tain’s dom­i­nant ser­vice in­dus­try and among its man­u­fac­tur­ers dur­ing Jan­uary, af­ter they fin­ished 2016 strongly, is ex­pected to be re­ported by Bri­tain’s pur­chas­ing man­agers’ in­dexes.

Bri­tain’s free-spend­ing con­sumers again con­founded warn­ings that June’s Brexit vote would cause an im­me­di­ate slow­down in the coun­try’s econ­omy, driv­ing ro­bust growth in the fi­nal three months of 2016, data showed on Thurs­day. Gross do­mes­tic prod­uct rose at a quar­terly pace of 0.6 per­cent in Oc­to­ber-De­cem­ber, keep­ing up the same above-av­er­age pace seen in the ini­tial three months af­ter the ref­er­en­dum de­ci­sion to leave the E U.

Cur­tail growth

But econ­o­mists have warned boom­ing in­fla­tion and un­cer­tainty around the terms of Bri­tain’s di­vorce from the EU could cur­tail growth rates this year. Prime Min­is­ter Theresa May has said she will trig­ger Ar­ti­cle 50, start­ing the twoyear count­down to leav­ing, by end-March.

“The Bank of Eng­land is ex­pected to leave rates on hold next week and is likely to re­tain its po­si­tion that a rate hike is just as likely as an in­ter­est rate cut,” said James Knight­ley at ING. A re­cent poll sug­gested the bank would leave its record-low in­ter­est rates and other stim­u­lus mea­sures un­changed at least un­til 2019. – Reuters

Euro zone in­fla­tion rose to 1.5 per­cent this month, flash data are ex­pected to show on Wed­nes­day.


The Euro­pean Cen­tral Bank in Frankfurt, Ger­many. ECB Pres­i­dent Mario Draghi has re­mained rel­a­tively com­fort­able about up­ward move­ments and re­laxed about Ger­man calls for tighter pol­icy.

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