The governor of the Bank of England, Andrew Bailey has raised concerns over economic growth as he warned again that interest rates will not be cut in the ‘foreseeable future’.
The bank boss said he was concerned over the UK economy’s potential to grow. It comes after the government’s forecaster cut its growth outlook for the UK, due to high inflation, interest rates, energy and food price increases which were exacerbated by the Covid pandemic and Russia’s invasion of Ukraine.
Inflation, which is the rate consumer prices rise at, has dropped sharply in recent months, falling to 4.6% in the year to October largely as a result of lower energy prices.
However, it is still more than double the Bank of England’s 2% target and Mr Bailey warned lowering inflation further would be ‘hard work’.
Interest rates are currently at 5.25%, a 15-year high, which has pushed up borrowing and mortgage costs.
The first transatlantic flight using 100% sustainable aviation fuel (SAF) is scheduled to take off on Tuesday, 28th November 2023.
UK Government funded project
The flight is operated by Virgin Atlantic and will fly from London’s Heathrow to New York’s JFK airport. The flight is part of a UK government-funded project to demonstrate the feasibility and benefits of using SAF as an alternative to conventional jet fuel. SAF can reduce carbon emissions by over 70% compared to fossil jet fuel.
The flight will also use biochar credits to offset any remaining emissions and achieve net zero.
Biochar is the lightweight black residue, made of carbon and ashes, remaining after the pyrolysis of biomass, and is a form of charcoal.
Support
The flight is supported by a consortium of companies, including Boeing, Rolls-Royce, BP, Imperial College London, University of Sheffield, Rocky Mountain Institute, and ICF. The transatlantic flight has received a permit to fly from the UK Civil Aviation Authority, after undergoing technical assessments and ground testing.
The flight will use a Boeing 787 Dreamliner powered by Rolls-Royce Trent 1000 engines. The SAF used will be made primarily from waste oils and fats, such as used cooking oil.
The flight is not the first transatlantic flight to use SAF, but it is the first to use 100% SAF. In 2019, Gulfstream flew a G600 aircraft from Georgia to the UK using a 30/70 blend of SAF and jet fuel.
The Virgin Atlantic flight will be the first to use pure SAF on a commercial airliner.
Update 29th November 2023 – History made
The first transatlantic flight by a large passenger aeroplane, fueled by ‘greener fuel’ was a success.Operated by Virgin Atlantic, it flew from London’s Heathrow to New York’s JFK airport.
Gold prices on Monday 27th November 2023 climbed to a more than six-month high as the U.S. dollar weakened.
Investors, it is reported, have placed their bets, suggesting the Federal Reserve is finished with interest rate hikes.
Gold was up around 0.52% at $2,012 per ounce in early afternoon trading (London time). It reached a high of $2,017.82 earlier in the day. Gold futures for December 2023 hit $2,018.90 according to analysts’ data.
The dollar index, a measure of the greenback against major currencies, was 0.13% lower as markets price in a more than 90% chance the Fed will hold rates at its next two meetings.
Analysts at Goldman Sachs reportedly said that the outlook for 2024 is that gold’s ‘shine is returning’.
The potential upside in gold prices will be closely tied to U.S. real rates and dollar moves.
The UK energy price cap is expected to rise by 5% in January 2024, which means that a typical household who pays by Direct Debit will face an annual bill of £1,931, up from £1,834 in the previous quarter.
This increase comes at a “difficult period” for struggling households, as many are already facing higher costs of living due to the pandemic, Brexit, and inflation.
Designed to protect customers
The energy price cap is designed to protect customers from unfair price hikes and ensure that they pay a fair price for their energy. However, it does not limit the total bill, which depends on how much energy is actually used.
Therefore, customers are advised to shop around for better deals and switch to cheaper tariffs if possible. This, however, is easier said than done.
It is also recommended that struggling customers contact suppliers if they have difficulty paying their bills and seek help from schemes, grants, and benefits.
The UK energy price cap is a limit on the maximum amount that energy suppliers can charge customers on standard or default tariffs for each unit of gas and electricity they use. It is set by Ofgem, the energy regulator, every three months based on the underlying costs of energy and inflation.
Some of the main takeaways from the chancellor’s autumn statement November 2023
National Insurance rate cut from 12% to 10% from 6 January, affecting 27 million people.
The 75% business rates discount for retail, hospitality and leisure firms in England extended for another year.
Class 2 National Insurance – paid by self-employed people earning more than £12,570 – abolished from April.
Class 4 National Insurance for self-employed – paid on profits between £12,570 and £50,270 – cut from 9% to 8% from April.
Full tax break permitting companies to deduct spending on new machinery and equipment from profits – now made permanent.
Funding of £4.5bn to attract investment to strategic manufacturing sectors, including aerospace, green energy, aerospace, life sciences and zero-emission vehicles.
Some £500m over the next two years to fund artificial intelligence (AI) innovation centres.
New premium planning services for England, with faster decision times for major business applications and fee refunds when these are not met.
Defence spending to remain at 2% of national income – a Nato commitment.
Overseas aid spending kept at 0.5% of national income, below the official 0.7% target.
Reaffirms previous commitments made last autumn to provide £14.1bn for the NHS and adult social care in England, as well as an extra £2bn for schools, in both 2023‑24 and 2024-25.
Fuel duty remains 52.95p per litre for petrol and diesel, after the chancellor announced a 5p per litre cut for 12 months in March 2023
State pension payments to increase by 8.5% from April, in line with average earnings.
Claimants in England and Wales deemed able to work who refuse to seek employment to lose access to their benefits and extras like free prescriptions.
UK autumn statement – art illustration of office worker preparing data
Further £1.3bn to help people who have been unemployed for over a year.
National Living Wage – to increase from £10.42 to £11.44 an hour from April.
Funding of £1.3bn over the next five years to help people with health conditions find jobs.
OBR Stats
Independent Office for Budget Responsibility (OBR) expects the economy to grow by 0.6% this year and 0.7% next year, rising to 1.4% in 2025; then 1.9% in 2026; 2% in 2027 and 1.7% in 2028.
Living standards not expected to return to pre-pandemic levels until 2027-28.
Underlying debt forecast to be 91.6% of GDP next year; 92.7% in 2024-25; 93.2% in 2026-27; before declining to 92.8% in 2028-29.(One to watch)
OBR forecasts that inflation – the rate prices are rising – will fall to 2.8% by the end of 2024, before reaching the Bank of England’s 2% target rate in 2025.(One to watch)
The OBR says higher inflation means real value of departmental budgets will be £19bn lower by 2027/28 compared with March 2023 forecasts.
Borrowing forecast to fall from 4.5% of GDP in 2023-24; to 3% in 2024-25; 2.7% in 2025-26; 2.3% in 2026-27; 1.6% in 2027-28 and 1.1% in 2028-29.(One to watch)
Federal Reserve members, in their most recent meeting, gave little indication of cutting interest rates anytime soon, particularly as inflation remains well above their goal of 2%, according to minutes released Tuesday 21st November 2023.
The detail of the meeting held 31st October – 1st November 2023, showed that Federal Open Market Committee (FOMC) members are still concerned that inflation could be stubborn or move higher, and that more may need to be done.
They indicated that policy would need to stay ‘restrictive’ at the very least, inflation is on a convincing move back to the central bank’s 2% goal.
It was reported Friday 17th November 2023 by the city-state’s central bank that Singapore will be piloting the live issuance and use of wholesale central bank digital currencies in 2024.
During the pilot, the Monetary Authority of Singapore, (MAS) will partner with local banks to pilot the use of wholesale CBDCs to facilitate domestic payments.
What is a CBDC?
A CBDC is a digital form of a country’s fiat currency, issued and regulated by the central bank or monetary authority of that country. CBDCs are different from cryptocurrencies, which are decentralized and not backed by any government.
Singapore is one of the countries that has been actively exploring the potential of CBDCs, both for wholesale and retail purposes. Wholesale CBDCs are meant for interbank transactions and cross-border payments, while retail CBDCs are meant for general public use and everyday payments.
CBDC MAS timeline
In November 2021, the Monetary Authority of Singapore (MAS) launched Project Orchid, a retail CBDC project that aims to build the infrastructure and test the use cases for a digital Singapore dollar. The project will explore the concept of purpose-bound digital Singapore dollars, which allow senders to specify how and where the money will be used.
In August 2021, MAS announced Project Dunbar, a wholesale CBDC project that involves the collaboration of the Reserve Bank of Australia, Bank Negara Malaysia, and South African Reserve Bank. The project will develop prototypes of shared platforms for cross-border transactions using multiple CBDC’s.
In June 2021, MAS published a monograph on the economic considerations of a retail CBDC in the Singapore context. The monograph concluded that there is no urgent case for a retail CBDC in Singapore, but MAS wants to be prepared in case the situation changes in the future.
In April 2021, MAS extended the regulatory sandbox for Project Ubin, a wholesale CBDC project that started in 2016. Project Ubin has successfully demonstrated the feasibility of using blockchain technology for clearing and settlement of payments and securities.
Singapore to pilot use of wholesale central bank digital currencies in 2024
In March 2021, MAS joined the Multiple CBDC (m-CBDC) Bridge initiative, a wholesale CBDC project that involves the Bank of Thailand, the Hong Kong Monetary Authority, and the Bank for International Settlements. The project will explore the use of distributed ledger technology to enable real-time cross-border transactions using multiple CBDC’s.
Process
Banks will issue tokenized bank liabilities in the form of claims in balance sheets. Retail customers can then use the tokenized bank liabilities in transactions with merchants, who will then credit these bank liabilities with their respective banks. Tokenization refers to the process of issuing a digital form of an asset on a blockchain.
The CBDC will then be automatically transferred to the merchant as a form of payment during the transaction.
Many central banks are testing and exploring their own digital currencies, includung the UK and U.S.
European Central Bank President Christine Lagarde on Friday 17th November 2023 reportedly said that Europe is now at a critical juncture, with deglobalization, demographics and decarbonization looming on the horizon.
Fragmentation
‘There are increasing signs that the global economy is fragmenting into competing blocs’, she said at the European Banking Congress, according to a transcript.
Focusing on Europe, she said that a continuous decline in the population of working age looks set to start as early as 2025, alongside climate disasters that are increasing every year.
Her answer to these shocks was that massive investment would be needed in a short space of time, requiring what she called a ‘generational effort‘.
Barriers
‘As new trade barriers appear, we will need to reassess supply chains and invest in new ones that are safer, more efficient and closer to home‘, Lagarde reportedly said.
‘As our societies age, we will need to deploy new technologies so that we can produce greater output with fewer workers. Digitalization will help. And as our climate warms, we will need to advance the green transition without any further delays‘.
Shoppers bought less food and fuel in October 2023 as they were hit by rising living costs and poor weather, according to ONS data.
The volume of products sold last month fell by 0.3% to the lowest level since February 2021 when large parts of the UK were in Covid lockdowns. Retail sales had been expected to grow in October 2023.
Demand for other goods was also lower, the ONS reported.
The CNBC/NRF Retail Monitor, which tracks card transactions, also reported a drop in consumer spending in October 2023, with retail sales, excluding autos and petrol/diesel, falling by 0.08%, and core retail, which also removes restaurants, declining by 0.03%.
The report suggested that the consumer took a spending break ahead of the holiday season, amid rising inflation, supply chain disruptions, and labour shortages.
Observing the data available at CME FedWatch the stock market does not seem to expect the Fed to start cutting rates aggressively anytime soon, this opinion is based on the current pricing data of the fed-funds futures market.
According to the CME FedWatch Tool, the probability of a rate cut in the next FOMC meeting on 13th December 2023 is very low. It is likely interest rates will be left unchanged.
The market seems to expect the Fed will hold the current rate of 5.25% until at least March 2024, but will then gradually lower it to 4.75% by December 2024.
The market seems to be more optimistic about the U.S. economic outlook and the Fed’s ability to control inflation. The mood on rates has been buoyed recently with inflation data coming in better than expected.
It is highly likely that the Fed will have to cut rates more aggressively in 2024 and 2025 to stimulate the economy and avoid a potential prolonged recession.
UK inflation fell to 4.6% in October 2023, down from 6.7% in September 2023.
This is the lowest rate of price increases since 2021 and the bigger than expected fall should provide some relief to UK households gripped by the cost-of-living crisis.
The main factors that contributed to the drop in inflation were largely due to lower energy prices, food and non-alcoholic drink prices, and airfares. Economists suggested that the main reason inflation fell from its peak of 11.1% in October 2022 was due to the fall in the energy price cap, which limits what suppliers can charge consumers per unit of energy.
However, the UK still has the highest inflation rate of any G7 country, and some economists warn that the Bank of England (BoE) may need to raise interest rates to prevent inflation from rising again.
Target hit
The UK government will no doubt rejoice today as the end-of-year 5% has been achieved earlier than expected. But don’t party too early, the actual target is 2%. There is a limit to how much credit ministers can take for the fall as energy prices settle.
The FTSE100 was happy, it climbed some 100 points in morning trade.
U.S. Inflation was flat in October from the previous month, providing a positive sign that high prices are finally easing their tight grip on the U.S. economy. Is this also a green light for the Federal Reserve to stop raising interest rates.
The consumer price index (CPI) was flat in October 2023 from the previous month but up 3.2% from a year ago. Both were below analysts’ estimates, sparking a major stock market rally.
Excluding volatile food and energy prices, the core CPI rose 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual rate was the smallest increase since September 2021.
The flat reading on the headline CPI came as energy prices declined 2.5% for the month, offsetting a 0.3% increase in the food index.
Traders do not anticipate that the Fed will raise interest rates in December 2023, according to data from the CME Group.
Traders do not anticipate that the Fed will raise interest rates in December 2023, according to data from the CME Group.
U.S. Treasury yields fall
U.S. Treasury yields fell on Tuesday 14th November 2023 as key inflation data showed a surprisingly ‘soft’ change in prices last month.
The 10-year Treasury yield fell to about 4.45%. The 2-year Treasury yield fell more to under 4.9%.
Good data
Inflation stabilising, yields falling and equities up – are the stars aligning for a stock market rally leading into Christmas 2023?
Pay growth has outstripped inflation by the most since 2021, in a further sign that the pressure on living costs may be starting to ease.
Regular pay rose at an annual rate of 7.7% between July and September 2023, official figures show; higher than average inflation over the same three months.
But job vacancies fell for the 16th month in row, in a worrying sign that the jobs market is weakening. Between August and October 2023, the estimated number of vacancies in the UK fell to 957000, down 58000 – although the Office for National Statistics (ONS) said the total remains well above pre-pandemic levels.
Data Source: Office for National Statistics Data
UK pay outstrips inflation by highest amount for two years
The UK’s unemployment rate was largely unchanged between July to September 2023 at 4.2%, according to ONS data.
The U.K. economy flatlined in the third quarter, initial figures showed Friday 10th November 2023.
Gross domestic product (GDP) showed zero quarterly growth in the three months to the end of September 2023, following an increase of 0.2% in the previous quarter. In annual terms, the UK’s Q3 GDP was 0.6% higher than in the same period in 2022.
Services sector output dropped 0.1% on the quarter, but the decline was offset by a 0.1% increase in construction performance, while the production sector flatlined.
U.K. Chancellor of the Exchequer Jeremy Hunt said high inflation remains the ‘single greatest barrier to economic growth’ in the country, with the consumer price index remaining at 6.7% year-on-year in September 2023.
UK economy flatlines as inflation sticks at 6.7% year-on-year as at September 2023.
‘The best way to sustainably grow our economy right now is to stick to our plan and knock inflation on its head’, Hunt reportedly said.
It’s useful to know the government have a plan, even though they were very late to the inflation party! Guess they were sidetracked with all the other parties at No.10!
‘The Autumn Statement will focus on how we get the economy growing healthily again by unlocking investment, getting people back into work and reforming our public services so we can deliver the growth our country needs’.
Up until September 2023, the Bank of England (BoE) raised interest rates 14 consecutive times to try to influence the UK ‘product and service’ price climb.
Red flags
Interest rates are now at a 15-year high of 5.25%, and are expected to remain high for some time to come. Bank Governor Andrew Bailey reportedly said last week it was ‘much too early’ to be considering rate cuts.
Thank you Governor Baily – it so comforting and reassuring to know that the very people who missed the red inflation flags are still in charge of policy.
Transitory?
Remember, the BoE and others originally suggested inflation would be transitory – I suppose it is, if given years to move back down. What did you think was going to happen after all that borrowing and the country crawling back to work after the pandemic.
Nice job guys! Don’t forget to collect your paycheque on the way out!
Moody’s, a credit rating agency, lowered its ratings outlook on the United States to negative from stable.
This means that Moody’s sees a higher risk of a downgrade in the future, which could affect the borrowing costs and confidence of the U.S. government.
Moody’s actions
The main reasons for Moody’s action are the rising deficits and debt levels of the U.S., as well as the continued political polarization that hampers effective policymaking. Moody’s also cited the impact of the Covid-19 pandemic and the recent failures of some U.S. banks as factors that have worsened the environment for the U.S. government and the banking system in general.
Warning!
Moody’s warned that the U.S.’s deficits are likely to remain ‘very large’. It also warned that ‘continued political turmoil or polarization’ in Congress further increases the risk the U.S. will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability‘.
Moody’s still maintains a triple ‘A’ (AAA) credit rating on the U.S. government debt, which is the highest possible rating, but warns of the challenges and uncertainties that the U.S. faces in restoring its fiscal strength and stability.
The ‘AAA‘ rating is at risk.
U.S. government on brink of shutdown, again
The federal government is on the brink of another shutdown, with just a week left for the Republican-led House, Democratic-led Senate and Biden White House to reach a breakthrough on funding.
Fed Chair Jerome Powell reportedly said he and his colleagues remain steadfast in getting policy in line with their 2% inflation target, but ‘we are not confident that we have achieved such a stance’.
He stressed the Fed nevertheless can be cautious as the risks between doing too much and too little have come into closer balance.
Federal Reserve Chairman Jerome Powell reportedly said Thursday 9th November 2023 that he and his fellow policymakers are encouraged by the slowing pace of inflation but are unsure whether they’ve done enough to keep the momentum going.
Inflation battle
Speaking a little more than a week after the central bank voted to hold rates steady, Powell said in remarks aimed at the International Monetary Fund (IMF) gathering in Washington, D.C., that more work could be ahead in the battle against high prices.
The statement comes with inflation still well above the Fed’s long-standing goal but also considerably below its peak levels in the first half of 2022. After 11 U.S. rate hikes, we have witnessed the most aggressive policy tightening since the early 1980s, the FOMC have increased rates from pretty much zero to a range of 5.25%-5.5%.
Those increases have coincided with the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, to fall to an annual rate of 3.7%, from 5.3% in February 2022. The more widely followed consumer price index peaked above 9% in June of last year.
Progress
Powell referenced the progress the economy has made. Gross domestic product (GDP) accelerated at a ‘quite strong’ 4.9% annualised pace Q3 2023, though Powell also said the expectation is for growth to ‘moderate in coming quarters’. He described the economy as ‘just remarkable’ in 2023 in the face of a broad expectation that a recession was inevitable.
Nothing like a massive ‘self-pat’ on the back for a job well-done? Remember the Fed’s initial analysis? IT was for inflation to be ‘transitory’. They didn’t get that right either.
Futures pricing, according to the CME Group, suggested there’s less than a 10% chance that the FOMC will approve a final rate hike at its Dec. 12-13, 2023, meeting, even though committee members in September pencilled in an additional 0.25% rise before the end of 2023.
Impression drawing of Fed Chair. The Fed is ‘not confident’ according to Jerome Powell.
Traders anticipate the Fed will start cutting rates next year, probably around June 2024.
U.S. citizens now owe $1.08 trillion on their credit cards, according to a new report on household debtfrom the Federal Reserve Bank of New York.
U.S. Household Debt Rises to $17.29 Trillion Led by Mortgage, Credit Card, and Student Loan Balances
Total household debt rose by 1.3% to reach $17.29 trillion in the third quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit.
Mortgage balances increased to $12.14 trillion, credit card balances to $1.08 trillion, and student loan balances to $1.6 trillion.
Auto loan balances increased to $1.6 trillion, continuing the upward trajectory seen since 2011. Other balances, which include retail credit cards and other consumer loans, were effectively flat at $0.53 trillion. Delinquency transition rates increased for most debt types, except for student loans.
The market reaction to the U.S. jobs report comes down to a simple observation: bad news is good news, as long as it is not too bad.
Stocks rallied sharply after the Labour Department said nonfarm payrolls rose by 150,000 in October 2023, 20,000 fewer than expected but a difference caused mostly by the auto strikes, which appear to be over – a case of bad news is good news.
For the Federal Reserve, the relatively constrained job creation coupled with wage gains nearly in line with expectations adds up to a scenario in which the central bank doesn’t really have to do anything.
The Fed finally got what it’s been looking for – a meaningful slowdown in the labour market.
South Korea stocks surged on Monday, 6th November 2023 after the country imposed a ban on short selling, while most Asia-Pacific markets took the lead from a lighter than expected U.S. jobs report that helped reduce interest rate expectations.
Financial decision makers in South Korea said short selling will be banned until the end of June 2024. Short selling is when a trader sells borrowed shares to buy back at a lower price and pocket the difference.
There is some evidence that AI could create the next financial crisis, according to some experts and regulators.
AI scenarios
AI could increase the complexity and opacity of financial markets, making it harder to monitor and prevent systemic risks. For example, AI could enable new forms of market manipulation, fraud, or cyberattacks that could destabilize the financial system.
AI could create feedback loops or cascading effects that could amplify shocks and cause contagion across different sectors and regions. For example, AI could trigger flash crashes or sudden liquidity shortages that could spread rapidly and disrupt market functioning.
AI could create new sources of concentration and interdependence that could increase the vulnerability of the financial system. For example, AI could create a reliance on a few dominant data providers, platforms, or models that could fail or malfunction.
AI bots could take control of a stock trading platform or worse a stock exchange.
These are some of the possible scenarios that AI could create the next financial crisis. However, there are many potential benefits and opportunities that AI could bring to the financial sector, such as enhancing efficiency and innovation and even enhancing easier access and personal financial control for millions of investors and savers.
AI could lead to the next financial crash! It could also enhance personal financial control.
The Bank of England (BoE) announced its latest interest rate decision on Thursday, 2nd November 2023 to hold the bank rate at 5.25%.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) voted by a majority of 5-4 to maintain Bank Rate at 5.25%, the highest level in 15 years. However, four members preferred to increase the bank rate, to 5.5%.
The MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes by £100 billion over the next twelve months, to a total of £658 billion.
The BoE’s decision was influenced by the weak economic outlook, the high inflation rate, and the uncertainty surrounding the Covid-19 pandemic and the Brexit saga.
The BoE said that the UK economy was likely to contract by 0.5% in Q3 2023, and that underlying growth in the second half of 2023 was also likely to be weaker than expected. The BoE also warned that there was a 50% chance of a recession in the next year (50/50). I think even I could guess with odds at 50/50.
2% target inflation to be hit by Q2 2025
The BoE also said that inflation, which was 6.7% in September 2023, was expected to peak at around 7% in Q4 2023, before falling back to the 2% target by 2025 Q2. The BoE said that the inflation spike was largely driven by temporary factors, such as higher energy and food prices, and that it would not respond to it.
The Bank of England was behind the curve calling it transitory. Can we trust any future forecasts?
The BoE’s decision was in line with the market expectations, as most analysts and investors had predicted that the BoE would keep rates on hold.
The UK supercomputer project is a major initiative by the UK government to boost the country’s capabilities in artificial intelligence, weather forecasting, climate research and other highly important scientific research projects.
The project involves building and connecting two new supercomputers across the UK: Isambard-AI and Dawn.
Dawn will be a new supercomputer cluster at the University of Cambridge, delivered by a partnership with Dell and UK SME StackHPC. It will be powered by over 1,000 Intel chips that use water-cooling to reduce power consumption. It will target breakthroughs in fusion energy, healthcare and climate modelling.
The UK supercomputer project is part of a £300 million investment from the government to create a new national Artificial Intelligence Research Resource for the country. The project is expected to be completed by summer 2024.
The investment comes as the UK hosts an AI safety summit in Bletchley Park, home of World War II codebreakers.
These announcements are all part of the £1 billion supercomputer plan launched in May 2023.
The U.S. central bank has held its key interest rate at its current 22-year high as it seeks to stabilise price increases, which had recently reached near-record levels.
The Federal Reserve’s rate remains at 5.25%-5.5%.
The bank has been raising interest rates in an attempt to tame the economy and slow inflation, (the rate at which prices rise). Recent data showed the U.S. economy grew faster than expected.
Raising interest rates is a way for central banks tackle rising inflation. The idea is that by raising interest rates and making it more expensive to borrow, consumers will spend less and that would lead to slower price rises. In the U.S. however, the consumer is not slowing down. This may lead to higher rates, or higher for longer which in turn could push the U.S. into a recession.
The bank had faced criticism, with some suggesting that holding interest rates at higher levels could put the U.S. economy at risk of entering a recession.
House prices had the biggest monthly rise in October for more than a year, according to the Nationwide Building Society.
However, they were still down sharply on a year ago, the UK’s biggest building society noted. The rise in prices was most likely due to there not being enough properties to meet demand.
However, activity in the housing market is still extremely slow, as buyers struggle with higher mortgage rates.
Interest rates, which underpin mortgage pricing, have moderated recently but they are still well above the lows of 2021. The Bank of England has raised interest rates from lows of around 0.1% to 5.25% in its inflation battle.
According to the latest data from Eurostat, the statistical office of the European Union, the euro area annual inflation was 2.9% in October 2023, down from 4.3% in September 2023.
The main factor behind the decline in inflation was a sharp drop in energy prices, which fell by some 15% year-on-year in October 2023, compared to a 10.7% decrease in September.
The euro area economy also contracted by 0.1% in the third quarter of 2023, after growing by 0.6% in the second quarter, according to preliminary estimates from Eurostat. This puts the eurozone on the brink of recession, as high interest rates and weak demand weigh on the economic activity.
However, some analysts argue that the ECB’s monetary policy is too tight and risks choking off the recovery. They suggest that the ECB should adopt a more flexible approach and consider cutting rates or expanding its bond-buying programme if the economic outlook worsens.
Core inflation
Core inflation which excludes volatile food and energy prices dropped to 4.2% year-on-year in October 2023 from 4.5% in September 2023, according to European Union statistics agency Eurostat.
The agency also revealed Tuesday that the euro zone economy contracted by 0.1% in the third quarter, according to initial estimates, below consensus estimates for GDP to be unchanged from the previous quarter.
Predicition
The ECB expects the euro zone economy to grow by just 0.7% this year, by 1% in 2024 and 1.5% in 2025.
