Election result leaves interest rate outlook unmoved (video)

The Bank of England (BoE) is tipped to be one of the first central banks (after the US Federal Reserve) to start normalising its monetary policy.

The release of the BoE’s latest inflation report confirmed the view most investors and UK economists already have: that there’ll be an interest rate rise sometime around May 2016.

In yesterday’s (13 May) report, the BoE revised down expectations for growth from 2.9% in both 2015 and 2016 to 2.5% and 2.7% respectively. Employment figures were also released yesterday, and they showed that the unemployment rate fell to 5.5% and that average hourly earnings are up 1.9% year-on-year (against an expectation of 1.7%).

Springtime comes to the Eurozone

In the Eurozone, GDP data showed the first results of an improving macroeconomic climate. The Eurozone’s economy grew 0.4% in 2015’s first quarter, up from 0.3% in the fourth quarter of last year. The increase in growth may not be big, but it is noteworthy when you consider that France grew faster than Germany, and that Italy came out of recession with its first quarter of growth since quarter three of 2013.

The euro’s weakness played a very large part in the recovery, and quantitative easing and cheap oil also contributed to GDP growth across the region.

US dollar continues to disappoint

In the currency world, the biggest loser is the US dollar: recent reports have revealed a deterioration in the US’s economic outlook. The disappointing reports have made investors wonder when the US Federal Reserve will raise interest rates. Most US policymakers are still supporting a rate rise at some point this year, because they see the deterioration in data as merely a passing squall.

Investors are now a bit more cautious, however, as the numbers continue to disappoint. According to the latest report (13 May), retail sales growth stagnated last month after rising 1.1% in March.

Import prices also fell for the third month in a row (by 0.3%), which is also a sign that inflation pressures are non-existent. Without more consistent improvement in US data, the dollar may have a hard time finding support. The releases scheduled for today (14 May) – producer prices and jobless claims – will be the subject of keen interest for the markets. 

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