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The only way is down for UK interest rates, say City economists

The UK economy is in contraction mode, but the Bank of England isn’t greatly worried. GDP fell by 0.2 per cent by the second quarter of the year as Brexit uncertainty and a global slowdown held growth back.

Policymakers at the BoE are reluctant to fiddle with interest rates as the Brexit date of 31 October looms. New Prime Minister Boris Johnson has made it abundantly clear that Britain could be crashing out of European Union without a deal.

Noises from the British economy last week will have comforted bosses at the Bank and cemented their “wait and see” position. Inflation was shown to have picked up to 2.1 per cent, wages grew at their fastest pace in 11 years, and July retail sales delivered a pleasant surprise.

It looks, then, like only the shock of a no-deal Brexit would cause Threadneedle Street to tamper with rates, which currently sit at 0.75 per cent. Yet the BoE has repeatedly said that in such an event rates could move “in either direction”.

City economists are not convinced by this argument from Mark Carney and co, however. Peter Dixon, economist at Commerzbank, says: “There would appear to be no good arguments in favour of a hike”.

The Bank’s logic is that a tumbling pound could push up the cost of imports and drive up prices. But Dixon says the effects would only be felt “over a six to 12 month horizon”.

Eventually, he says, the BoE will have “to weigh up” the risks to inflation versus the risks to growth. “But that will not be a calculation they have to make anytime soon”.

Oliver Blackbourn, portfolio manager on the multi-asset team at Janus Henderson, concurs. “In the higher-inflation, lower-growth environment expected,” he says, “the Bank of England will choose to primarily worry about the latter”.

He says lower availability of goods, services and workers for industry as well as consumers worrying about their incomes will weigh on economic growth. “This is likely to be the Bank’s main focus in its decision making.”

Turning the taps back on

Institute of Directors chief economist Tej Parikh says: “The precise shape of a no-deal Brexit and the scale of the government contingencies will play into the Bank’s final decision.”

Sajiv Vaid portfolio manager at Fidelity International takes a similar view, saying that in the event of a no deal, “the lesson to learn is that you cannot rule anything out”.

The shock could be so severe that policymakers might turn to the bazooka of stimulus bond-buying, or quantitative easing (QE), rather than the pistol of interest rate cuts. In even the relatively benign scenario modelled by the International Monetary Fund (IMF), Britain would enter a recession in 2020 and unemployment would rise by 1.5 percentage points.

Dixon says: “The BoE can always resume asset purchases. After all, the BoE balance sheet is only around 28 per cent of GDP – a full 10 percentage points lower than [European Central Bank] levels”

Government help

Craig Erlam, senior market analyst at foreign exchange firm Oanda, says a no-deal Brexit would force “at least one rate cut and perhaps additional quantitative easing”. He says the Bank will be hoping that “unlike in the aftermath of the crisis, the government also plays a role in providing an economic buffer”.

Vaid agrees. “I think this time will be different and expect fiscal policy to play its part,” he says. Blackbourn also says he thinks rates would be lowered, “likely alongside a large fiscal easing from the government”.

Almost all economists disbelieve the Bank when it says interest rates could move either way if a no-deal Brexit comes around. Blackbourn says: “Despite the inflation-targeting mandate, the Bank’s first reaction will be to support growth and later worry about inflation.”

By Harry Robertson

Source: City AM

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Unexpected inflation jump puts pressure on Bank of England

The Bank of England is set to come under pressure to control price growth after inflation in July came in at 2.1%, significantly above analyst expectations.

The figure, released by the Office for National Statistics (ONS) on Wednesday, follows bumper wage growth data earlier this week.

Analysts had predicted that the consumer price index, the measure of inflation used by the Bank of England and the government, would fall to 1.9%, or slightly below the Bank of England’s 2% target.

But the 2.1% growth in prices now suggests that record-low unemployment and high wage growth have now translated into higher consumer spending.

The ONS said on Tuesday that average weekly wages jumped by 3.7% in the year to June, the highest increase in more than a decade.

The Bank of England earlier this month forecast that inflation would fall below 1.6% in the final three months of the year, in part because of lower energy prices.

But the steep decline in the value of the pound in recent weeks has increased inflationary pressure in the UK, largely because it has raised the cost of imports.

The ONS said that higher prices for hotels, video games, and consoles combined with a decline in summer clothing discounts were responsible for the uptick in inflation.

Inflation in June had already hit the bank’s target.

Though markets expect the Bank of England to hold rates steady before the 31 October Brexit deadline, above-target inflation would normally prompt the bank to hike interest rates.

“The latest data will not change the position of the Bank of England, which is committed to keeping interest rates on hold at least until more clarity is provided on Brexit,” said Mike Jakeman, an economist at PwC, in a note on Wednesday.

The data, however, “could well be seen as supporting a hike,” said David Cheetham, chief market analyst at XTB.

Core inflation, which excludes energy, fuel, alcohol, and tobacco prices, also came in above expectations, climbing to a six-month high of 1.9%.

Another measure of inflation, the retail prices index, fell to 2.8%, from 2.9% in June.

That figure is used to determine the extent to which rail prices will be increased from January, meaning that commuters will face a £100 hike in season ticket costs.

Inflation has climbed since the June 2016 Brexit referendum, which prompted a 10% fall in the currency’s value.

The pound had its worst month since October 2016 in July, and earlier this month plunged below $1.21 (GBPUSD=X) for the first time since January 2017.

In normal times, surging inflation would see the bank tighten monetary policy, mostly by increasing its benchmark interest rate.

But the bank is expected to ease its policy stance — in part by lowering rates — in the event of a no-deal Brexit, because the economy will likely need a boost.

Under current guidance from the bank, which assumes that there will be an orderly exit from the European Union in October, the bank has said that it expects to gradually increase interest rates.

By Edmund Heaphy

Source: Yahoo Finance UK

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Bank of England: juggling weak growth, higher inflation and Brexit

The Bank of England (BoE) again left interest rates unchanged at 0.75%, despite the headwinds buffeting the UK economy. The Bank didn’t follow the Federal Reserve and European Central Bank in turning more dovish, though economic growth is expected to be weaker than previously forecast this year and next. The Bank appears to be caught between a weaker near-term growth outlook and expectations that inflation will rise above the 2% target over the next three years. As markets are clearly pricing in interest rate cuts, the Bank is forced to expect rising inflation over the forecast period, despite their own indications that they intend to raise interest rates.

Despite recent commentary from UK government ministers, the Bank of England continued with its assumption of a smooth Brexit transition. The Bank continues to find itself entangled in a web of planning for ‘no deal’ but being unable to use this as an assumption in its own forecasts. This is creating significant inconsistencies between its outlook and the market forecasts that feed into it. Some Monetary Policy Committee (MPC) members have recently provided their opinions on the outlook in the event of ‘no deal’ but the need to remain apolitical continues to prevent the wider committee making a decisive assumption. However, as Governor Carney commented, a no deal Brexit may require a range of different responses depending on the actual outcome and future relationships. A shift to a ‘no deal’ assumption remains potentially the most obvious catalyst for a shift in the Bank’s interest rate forecasts, though this itself comes with additional political risks in the assumptions made.

At some point, if global growth continues to slide and Brexit-related uncertainty remains an additional drag, the Bank might be forced to change its forecasts anyway. In the meantime, the fog of Brexit continues to pervade the decision-making of every UK institution and corporate. This is likely to weigh on sterling and gilt yields in the near term, though breakeven rates may continue to drift higher, in contrast to other major sovereign bond markets.

BY ANDREW SULLIVAN

Source: IFA Magazine

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Bank of England Holds Interest Rates, Warns of Possible Brexit Recession

The Bank of England has voted to hold interest rates at 0.75%, while issuing a grim forecast about the impact of Brexit on growth and the value of the pound.

As anticipated, the nine-member monetary policy committee (MPC) voted unanimously to hold interest rates at 0.75%. They were last revised up a year ago.

However, the Bank’s forecasts for growth were more pessimistic than expected.

With Brexit negotiations dragging on, the chance of a no-deal exit rising, and as the pound plunged, reaching a two-year low this week, the central bank predicted zero GDP growth in the second quarter—before the UK even departs the EU.

The bank’s quarterly inflation report, issued Thursday, also warned there was a one in three chance of a negative growth—a recession—by 2020.

The Bank cited “entrenched Brexit uncertainties” along with escalating international trade tensions and a global economic slowdown, as reasons for the dour forecasts.

“Since May, global trade tensions have intensified and global activity has remained soft. This has led to a substantial decline in advanced economies’ forward interest rates and a material loosening in financial conditions, including in the United Kingdom,” the Bank’s Monetary Policy Committee said.

“An increase in the perceived likelihood of a no-deal Brexit has further lowered UK interest rates and led to a marked depreciation of the sterling exchange rate.”

The recent spiral in the pound—the worst performance of any major currency in the month of July—has been linked to new Prime Minister Boris Johnson’s commitment to leave the EU, deal or no deal, in 100 days.

“These asset prices reflect market participants’ perceptions of the likelihood and consequences of a no-deal Brexit,” the Bank said.

A no-deal exit would send the pound crashing still further, with inflation rising and GDP growth slowing further, the Bank warned.

However, the Bank said it did believe a deal with Brussels, and a smooth Brexit transition, could still be reached—reflecting official government policy to continue pursuing a managed exit.

In that case, the bank said it would likely raise the bank rate over the next three years to combat inflation.

“Assuming a smooth Brexit and a recovery in global growth, a significant margin of excess demand was likely to build. Were that to occur, the MPC judged that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate,” the Bank said.

But while the government is still officially targeting an agreement with Brussels, there are suggestions it is expecting to leave without one. Johnson ally Michael Gove, in charge of no-deal preparations, said earlier in the week that the government was “operating on the assumption” of a no-deal exit on 31 October.

Source: Money Expert

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Unchanged interest rates amid Brexit uncertainty, predicts EY

Despite recent expectation that the Bank of England could either raise or even cut the UK interest rates, EY’s economic analysts have predicted the will likely remain the same.

As recently as June, the focus on UK monetary policy has been when the Bank of England is most likely to raise interest rates.

A turnaround in sentiment, however, has led some to believe the Bank of England could be just as likely to cut them.

According to EY’s ITEM (Independent Treasury Economic Model) Club, it would be a surprise for the Monetary Policy Committee (MPC) meeting to result in anything other than a unanimous 9-0 vote in favour of keeping UK interest rates at 0.75%.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “We expect the Bank of England to keep interest rates unchanged at 0.75% on Thursday following a unanimous 9-0 vote of the Monetary Policy Committee (MPC) at their August meeting. This would match the outcome of the MPC’s last meeting in mid-June.

“However, a fair amount has changed since the last MPC meeting in mid-June and this will lead to a lot of interest in the tone of the minutes of the August meeting as well as in the new growth and inflation forecasts contained in the simultaneously released Quarterly Inflation Report.”

The direction interest rates move hinges on Brexit developments. Should the UK leave the EU with a deal in place, the EY team expects that the current rate of 0.75% will remain the same well into 2020, and gradually rise in-line with a slowly growing economy.

The expectation is that the Bank of England will acknowledge the recent increased risk facing the UK economy due to uncertainty surrounding Brexit, but are unlikely to react by cutting interest rates unless there is a damaging ‘no-deal’ Brexit in October.

“Increased belief that the Bank of England’s next move will be to cut interest rates rather than increase them is the consequence of a number of factors,” said Archer. “These include the weakened performance of the UK economy in the second quarter, domestic political uncertainties, a slower and more uncertain global economic environment which is expected to see the Federal Reserve and ECB shortly cut interest rates, and Brexit uncertainty.”

“If the UK ultimately leaves the EU without a “deal”, the Bank of England has repeatedly held to the view that interest rates could move in either direction.”

The view mirrors Bank of England Governor Mark Carney’s comments saying that the prospect of a no-deal is slowing down economic growth, and that the BoE would likely be required to provide stimulus to the economy should a no-deal occur.

Speaking to MPs, Governor Cerny said: “It’s more likely we would provide some stimulus. We have said we would do what we could in the event of a no-deal scenario but there is no guarantee on that.”

“There is not a business investment boom going on in the country right now. I think we all know why that is not the case.”

The fear of further Brexit uncertainty is also reflected in economic predictions. The likelihood is that further delay in leaving the EU could also lead to a cut to interest rates, or at the very least a long delay before any hike.

Archer said: “If Brexit is delayed again – most likely until the end of March 2020 – we expect the Bank of England to hold off from hiking interest rates until further into next year as it gauges how the economy is performing after the UK’s exit from the EU.”

By Chris Jewers

Source: Accountancy Age

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Bank of England’s Haldane ‘very cautious’ about cutting rates

Bank of England chief economist Andy Haldane sought to push back against market bets that the central bank’s next move will be an interest rate cut, saying he would resist lowering borrowing costs unless there was a sharp downturn.

Haldane contrasted the BoE’s stance with that of the U.S. Federal Reserve and the European Central Bank – both of which are expected to loosen policy – and stressed again that even a disruptive no-deal Brexit would not bring an automatic rate cut.

He acknowledged that business investment was “strikingly subdued” as companies struggled with Brexit uncertainty.

“My personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn,” he said at an event for local businesses in Scunthorpe, northern England.

BoE Governor Mark Carney and others have also deflected the idea that the Monetary Policy Committee is thinking of cutting rates while a Brexit deal remains possible.

They say the pricing of rate futures has been distorted by the risk of Britain leaving the EU without a transition deal on Oct. 31, creating a tension between their forecasts and market assumptions.

“Monetary policymakers are often cast as one-club golfers. In the current conjuncture, the problem is more that the MPC does not know which of two quite different fairways it should be aiming at,” Haldane said in his speech.

“With the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong.”

Britain’s economy appears to have slowed sharply during the three months to June, reflecting a lull after businesses rushed to prepare for Britain’s original EU exit date of March 29.

Some economists think the country risks slipping into recession especially if there is a no-deal Brexit.

But Haldane highlighted robust consumer spending and the strong labour market and said Britain’s economy was running at full capacity.

Even after a no-deal Brexit – something incoming prime minister Boris Johnson has said is prepared to do if the EU refuses to renegotiate the withdrawal deal – the case for a rate cut would not be clear-cut, Haldane said.

Carney and other BoE policymakers have said the BoE is more likely to cut rates than raise them after a no-deal Brexit.

Carney sounded less positive about the economy than Haldane when he said this month that underlying growth was running below its potential and relying heavily on household spending.

“PRISONER OF PAST”

Haldane used his speech to warn that markets and the public had grown too accustomed to ultra-low interest rates, a marked contrast in tone from 2016, when he defended “sledgehammer” stimulus after Britain voted to leave the EU.

“It is important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop,” Haldane said.

“Super-charging the supply side of the economy is what is now needed,” he added.

On Monday Britain’s National Institute of Economic and Social Research said a no-deal Brexit would hit the economy’s supply capacity and lower economic output by 5% relative to a softer Brexit.

Haldane said there was no better time to sort out deep-seated structural issues around education, training and transport links.

Johnson has said he wants to cut income taxes for higher earners as well as raise payroll tax thresholds, which would represent a major loosening of Britain’s fiscal policy.

Reporting by David Milliken

Source: Yahoo Finance UK

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Will the Bank of England raise or cut interest rates after UK inflation data?

UK inflation has grown at an annual rate of two per cent for the second month in a row, official statistics confirmed today.

The consumer price index (CPI) figure is bang on the Bank of England’s target. It thinks two per cent inflation is ideal for ensuring smooth growth in the economy.

But what does this mean for the Bank’s main interest rate, which currently stands at 0.75 per cent?

If inflation drops below two per cent, the BoE should theoretically cut rates to encourage borrowing and spending, and vice versa.

However, Brexit uncertainty has made the Bank reluctant to take any action for fear of destabilising the economy.

“There is little pressure for the [Bank] to adjust interest rates in either direction,” said Andrew Wishart, UK economist at Capital Economics, in response to today’s figures.

“There was still little sign of rising underlying inflationary pressures despite the continued strength of pay growth in May,” he said. Official figures yesterday showed real pay grew by 1.7 per cent in the year to May.

“A fall in energy price inflation and a reduction in Ofgem’s energy price cap in October should take 0.3 percentage points off inflation over the second half of the year,” Wishart said.

Brexit fog
Investec economist Victoria Clarke said: “For the Bank of England the close-to-target inflation readings helps the institution to maintain its wait and see position amidst continuing questions over Brexit’s likely course”.

“We maintain our view that the BoE is happy sitting tight throughout this year and through much of next year too,” she said.

The way Britain leaves the European Union will be at the forefront of the Bank’s mind. It has hinted it could slash rates to ease the economic turbulence of a no-deal exit.

“On-target inflation gives the Bank of England plenty of room to cut interest rates in the event of sharp slowdown,” said Ian Stewart, chief economist at Deloitte. “The likelihood of the UK joining the global move to easier monetary policy is rising.”

But George Buckley, Nomura’s chief UK and euro area economist, said: “The response of inflation to a hard Brexit may be for a sizeable rise” due to higher tariffs, restrictions on incoming goods from Europe, and a lower pound.

Such a rise would ordinarily trigger a rate cut, but the Bank will likely wait and see exactly what happens to the economy immediately after a no-deal exit, should it occur.

Certain elements of today’s inflation figures, such as lower producer input and output prices, are “helpful for the Bank,” said Howard Archer, chief economic adviser to the EY ITEM Club.

The data gives “decent scope” for the BoE “to adopt a flexible approach on interest rates should the economy continue its current struggles amid Brexit uncertainties,” he said.

By Harry Robertson

Source: City AM

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Bank of England could cut interest rates to near zero in no-deal Brexit

Interest rates could be cut to almost zero if Britain leaves the European Union without a deal, a top official at the Bank of England said today.

Gertjan Vlieghe, a member of the Bank’s rate-setting monetary policy committee (MPC), told an audience in London today that Threadneedle Street might have to slash rates to nearly zero in the event of a no-deal Brexit.

The comments mark one of the strongest indications yet given from an MPC member of the potential direction the BoE could take if Britain and the EU failed to reach an agreement by the deadline of 31 October.

Boris Johnson, the bookies’ favourite to succeed Theresa May as the next Prime Minister, has pledged to take Britain out of the EU with or without a deal by the end of October, raising expectations of a potential no-deal exit.

In a speech given at Thomson Reuters, Vlieghe said: “On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to zero per cent in the event of a no-deal scenario.”

Sterling remained roughly flat at 1.252 against the dollar.

Vlieghe, who was once a bond strategist at Deutsche Bank, said it was “highly uncertain when I would want to reverse these interest rate cuts”, as it would depend on the rate of recovery from a potential no-deal shock to the markets.

In June the rate-setting committee at the Bank voted unanimously to hold interest rates.

It had raised rates to 0.75 per cent last August from a low of 0.25 per cent.

Yesterday governor Mark Carney refused to be drawn on whether he has his eyes set on the top job at the International Monetary Fund (IMF) after he leaves the Bank in January.

Carney said there were “a few orderly transitions” he had to look after at Threadneedle Street before he focused on anything else.

By Sebastian McCarthy

Source: City AM

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No rush for Bank of England to raise rates after a Brexit deal

The Bank of England probably has more time than it previously thought before it will need to raise interest rates, assuming Britain can leave the European Union with a transition deal, BoE interest-rate setter Silvana Tenreyro said on Wednesday.

The pound would probably rise after a Brexit deal, Tenreyro said. Combined with the ongoing slowdown in the world economy this would probably offset the inflation pressure building in Britain’s labour market and allow the BoE to keep rates on hold at their current level of 0.75% for a while.

“Coupled with signs of a weaker global outlook, recent developments likely lengthen the period until there is a sufficient pick-up in inflationary pressures for me to vote to raise Bank Rate,” Tenreyro said in a speech. “I do not currently anticipate such a pick-up in the next few months.”

Tenreyro said a “small amount of policy tightening” would be needed over the next three years in the event of a Brexit deal.

The BoE has long advised investors that rates are likely to go up in a gradual and limited way, as long as a Brexit deal is done.

In the event that Britain leaves the EU without a deal, it was more likely than not that the BoE would need to ease monetary policy to soften the shock, she said, repeating comments she made in March.

But this was “by no means certain,” she added.

The fall in yields on British debt reflected worries about the world economy and not just Brexit, she said.

Many investors are betting that the BoE’s next rate move will be a cut, not an increase, given their fear that a no-deal Brexit looks more likely.

Both contenders to replace Theresa May as the next prime minister have said they are prepared to take the country out of the EU without a deal if necessary.

BoE Governor Mark Carney said last week that the risks of a no-deal Brexit and an escalation of global trade tensions were rising, adding to bets in markets on a BoE rate cut.

Source: Investing

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Bank of England holds interest rate at 0.75% as ‘downside risks’ increase

The Bank of England on Thursday held the headline UK interest rate at 0.75%.

The central bank delivered its June interest rate decision at 12pm on Thursday. The 9-person Monetary Policy Committee (MPC) voted unanimously to hold the bank borrowing rate at 0.75%. Analysts and economists had widely forecast this outcome.

The MPC said UK economic growth appears to have “weakened slightly in the first half of the year” and said “downside risks to growth have increased.”

“Globally, trade tensions have intensified,” the MPC said in a statement. “Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further.”

Pound falls on decision

The pound fell against the dollar and the euro in the immediate aftermath of the Bank’s decision, although not significantly.

The pound was down about 0.1% against the euro at €1.123 10 minutes after the decision, having traded at €1.125 just before the announcement. Sterling was up 0.4% against the dollar at $1.269 but had been as high as $1.272 earlier in the morning.

The drop-off came as investors judged that Thursday’s update meant a future interest hike from the Bank of England looked less likely.

The Bank of England and governor Mark Carney have consistently said they plan to gradually raise the UK interest rate.

The MPC said on Thursday that if the economy develops “broadly in line” with forecasts and there is a smooth Brexit, then “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate.”

However, analyst and economists say the failure to resolve Brexit means the bank is unlikely to make any major changes this year.

“Despite a growing number of hawkish signals coming from the Monetary Policy Committee, in reality the Bank’s room for manoeuvre is limited until Brexit uncertainty clears,” Tej Parikh, chief economist at the Institute of Directors, said in a statement.

The MPC admitted on Thursday: “The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal.”

Brexit cloud hangs over the Bank

Despite the Bank’s signals about raising rates, Investors believe the Bank of England is more likely to cut interest rates than raise them, according to market data ahead of Thursday’s announcement.

The backdrop to Thursday’s decision was a mixed economic picture for the UK. Jobs and wage data has held up well so far in 2019, but GDP growth is sluggish and recent manufacturing data suggests it could remain that way.

The MPC said on Thursday that recent data has been “volatile, in large part due to Brexit-related effects on financial markets and businesses.”

However, the committee repeated the statement that its “response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” Carney has in the past said that the Bank could raise interest rates in response to a no-deal Brexit, although economists and investors largely think he is bluffing.

Central banks load the ‘bazookas’

The Bank of England’s decision to hold rates steady came as other major central banks this week signalled intentions to loosen monetary policy.

European Central Bank chief Mario Draghi said earlier this week that more stimulus may be needed in the eurozone if conditions do not improve. The US Federal Reserve held its benchmark interest rate unchanged at 2.5% on Wednesday but signalled a future interest rate cut looks increasingly likely.

IMF head Christine Lagarde warned in January that “the world economy is growing more slowly than expected and risks are rising.” Conditions have not improved markedly since then, with key issues such as the US-China trade war and Brexit yet to be resolved.

Bank of England governor Mark Carney will give a speech at the annual Mansion House dinner in London on Thursday evening. Carney could give more details on his outlook for the UK economy and future rate movements.

By Oscar Williams-Grut

Source: Yahoo Finance UK