Changing Monetary Policy
Financial markets showed a little uncertainty towards the end of June caused by speculation that leading central banks might be poised to end their ultra-loose monetary policy.
Following the US Federal Reserve’s (Fed’s) third interest rate increase in six months, investors reacted strongly to European Central Bank (ECB) President Mario Draghi’s view that deflationary forces are being replaced by reflationary influences in the eurozone.
The ECB upgraded its economic growth predictions for the euro area to 1.9% in 2017, and 1.8% in 2018. The eurozone’s labour market continued to strengthen during the first three months of 2017 and its economy expanded at a quarterly rate of 0.6%.
France’s new President Emmanuel Macron won a clear Parliamentary majority in June; the CAC 40 Index declined by 3.1%, while the Dax Index fell by 2.3%. As expected, the Fed increased its key interest rate by 0.25 percentage points during June. The central bank plans to begin paring back its balance sheet later this year.
The US economy posted a faster rate of expansion than originally calculated during the first quarter of 2017, growing at an annualised rate of 1.4% compared with an initial estimate of 1.2%. The financials sector was cheered by the Fed’s confirmation that the 34 largest US banks have sufficient capital to cope with a range of severe financial shocks.
The Dow Jones Industrial Average Index rose by 1.6% over June as a whole. In the UK, investors were surprised as the snap General Election resulted in a hung Parliament that intensified concerns over the UK’s Brexit prospects.
Uncertainties were compounded by an increasingly hawkish tone from the Bank of England; although base rate remained unchanged at the Monetary Policy Committee’s (MPC’s) June meeting, where three members of the MPC voted in favour of an increase.
Consumer price inflation rose to 2.9% during May, moving close to a four-year high; however, wage growth is not keeping pace with the rising cost of living as witnessed by the recent debate regarding public sector pay awards.
For now, all domestic attention appears to be focussed on the unravelling Brexit negotiations and the implications that this might have for the UK economy going forward. Not only does the UK need to focus on achieving a fair ‘divorce’ settlement but many employers in the financial sector are considering contingency plans involving potentially moving parts of their UK operations overseas.
Sabre Financial is the trading title of Sabre Financial Planning Ltd. Sabre Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
By Sabre Financial | Tuesday, August 01, 2017