Bank of Canada Raise Interest Rates as IMF Warn of Market Bubble, UK Retail & Construction Decline…


As interest rates continue to rise globally, the trend of consumers coming under increasing pressure to sustain the cost of servicing debt becomes more profound. The latest rate hike, courtesy of the Bank of Canada, came as a survey was released in the country illustrating the amount people who have little to no cash left after paying bills. In the UK, retail suffered it’s worst December since 2010 and the aftermath of the ‘great financial crisis‘. A growing number of businesses, including Carpetright and Mothercare, have issued profit warnings. Begbies Traynor, an insolvency specialist, have reported that up to half a million UK firms are now experiencing severe financial stress. And yet, the intention for further rate hikes from the Bank of England remains on course. The situation is the same in the United States. 

We have seen recently how the World Bank issued a warning on rising interest rates, linking it directly to heightened levels of inflation. Now the IMF are issuing further warnings of the risk of a bubble developing in financial markets. Probable causes remain protectionism, increased geopolitical tensions and how sustainable the rapid rise in asset prices will prove (particularly in the U.S.).

As it stands, the language coming out of the Bank of England points to rates remaining unchanged in February. The next inflation report, which will accompany the decision, should provide a clearer insight into how the BOE intends to position itself in the months ahead. As usual, Brexit will be a focal point in their communications. After all, it was Mark Carney who described Brexit a few months ago as ‘inflationary‘. Carney also stated after November’s rate rise that should a economic downturn ensue as a result of a bad Brexit deal, the bank would not be able to respond by cutting rates due to the inflationary pressure it would generate.

The fall in sterling after the EU referendum continues to be blamed for rising inflation in the UK. The dollar has also been falling (it suffered it’s worst yearly loss in fourteen years in 2017). If the next financial downturn proves to be a currency led crisis, the overriding result will be higher inflation which central banks will respond to by increasing interest rates at a faster pace than forecast, pushing people further into debt.

The fact that this is already being telegraphed, with central banks positioning themselves as a necessary respondent to geopolitical fallout, suggests they will escape culpability. In the minds of the public, Brexit and Donald Trump will be held up as responsible for a financial collapse. The real cause will be the banks themselves, and perversely they will also be the ones who seek to implement a solution to a problem they created.

CBC News: Prospect of higher rates has Canadians worried about paying bills, survey shows

  • Canadians are feeling increasingly worried about their personal debt, with an increasing number close to being unable to pay the bills every month as higher interest rates start to make an impact, a new Ipsos survey suggests.
  • More than a third of the over 2,000 respondents to an online survey done for the MNP Debt Index said they have no money left at the end of the month after paying bills and are unable to cover their payments.
  • In the online survey, conducted by Ipsos in December for insolvency trustee MNP Ltd., nearly half of the Canadians surveyed — 48 per cent — said they are now $200 or less away from not being able to meet their monthly financial obligations.
  • The 48 per cent figure is eight points higher than the same survey in September.

Sky News: Retailers suffer worst December since 2010 – ONS

  • Retail sales fell more sharply than expected in the core Christmas month, capping the worst December performance for volumes since 2010.
  • The Office for National Statistics (ONS) issued the grim update on the health of the high street just hours after Carpetright became the latest big name chain to announce a profit warning.
  • The retail figures showed sales volumes fell 1.5% on November, which was boosted by strong Black Friday trade.
  • December’s result marked the biggest month-on-month fall since June 2016 – the month when the UK was focused on the Brexit vote on 23 June.

CNBC: World entering ‘critical period of intensified risks’ in 2018, WEF says

  • Extreme weather events and natural disasters are the likeliest global risks to occur in 2018, according to experts surveyed by the World Economic Forum.
  • WEF’s latest Global Risks Report 2018, published Wednesday, showed that environmental disasters, cybercrime, large-scale involuntary migration and illicit trade were among the most notable risks, in terms of likelihood, facing the world this year.
  • As with previous reports, the top-ranking global risk in terms of impact was the use of weapons of mass destruction. But this was followed in the table of top 10 risks by three environmental risks: Extreme weather events, natural disasters and a failure of climate-change mitigation and adaptation.

Telegraph: Financial markets at risk from bubble, IMF warns

  • The global economic recovery is strong and accelerating but it faces threats from weak wage growth and overheating financial markets, the International Monetary Fund has warned.
  • Speaking in front of an audience in Hong Kong, David Lipton, a senior official at the world’s lender of last resort, praised China’s growth, noting that it accounted for a third of global expansion.
  • Chief among Mr Lipton’s warnings was that “the rapid appreciation of asset valuations” during the past year ought to “heighten our concern” about how susceptible to a crash some financial markets might be.
  • Other major worries were that rising political tensions might not only lead to greater protectionism in the global economy but also “overt security conflicts”.
  • The greatest risks to the longer term health of global prosperity however, and “a cloud” hanging over growth prospects, are low wages and sluggish productivity.

CITY A.M: UK pay growth will accelerate and jobless rate will hit fresh lows, insists Bank of England’s Michael Saunders

  • Michael Saunders, a member of the Bank of England’s monetary policy committee, has insisted that UK pay growth will accelerate this year as the labour market tightens.
  • “To be sure, recent data show a slight drop in employment over the last three months. However, wider labour market trends do not look weak in my view,” Saunders said at the launch of Financial Intermediary and Broker Association in London.
  • “For example, surveys suggest that firms’ hiring intentions are slightly above average, while the level of job vacancies is around a record high.”
  • Saunders said that the economy would probably grow at between 1.5 per cent and two per cent in the near-term, though consumer spending would likely remain “sluggish”.

Guardian: Nearly half a million UK firms facing ‘significant’ financial distress

  • Almost half a million UK businesses have started 2018 in significant financial distress, according to insolvency specialists.
  • In its latest “red flag alert”, Begbies Traynor said firms across all UK regions and sectors were feeling the repercussions of higher inflation, rising interest rates, growing business uncertainty, and weaker consumer spending.
  • A total of 493,296 businesses were experiencing significant financial distress in the final quarter of 2017 according to Begbies’ latest “red flag alert”, which monitors the health of UK companies. That was 36% higher than at the same point in 2016, and 10% higher than in the third quarter of 2017.

Reuters: ‘Ample time’ before next Bank of England rate move needed: Tenreyro

  • The Bank of England probably has “ample time” before it needs to consider raising interest rates again after its first hike in more than a decade in November, BoE policymaker Silvana Tenreyro said on Monday.
  • “In December, with unit labor cost growth still subdued and inflation likely to be around its peak, my view was that there was ample time for us to continue to monitor the transmission of the November policy change before voting for another change in interest rates,” Tenreyro said in a speech.
  • In her speech on Monday, Tenreyro said she expected that a couple more increases in Bank Rate would be needed over the next three years. Her comments echoed those of BoE Governor Mark Carney and other top officials at the central bank.
  • However, Tenreyro said it was possible that productivity growth, a key driver of the overall economy which can also help keep a lid on inflation, could be stronger than the weak improvement that the BoE has predicted.

CITY A.M: UK construction output just fell by the most since 2012

  • The UK’s construction industry showed more weakness in November as output shrank for the sixth quarter in a row in the three months to November, according to official data.
  • Figures published by the Office for National Statistics (ONS) showed output contracted by two per cent in the three months to November, the largest fall since August 2012.
  • However, on a month-on-month basis, output edged up 0.4 per cent between October and November.

BBC: UK inflation rate drops back to 3%

  • The UK’s inflation rate has fallen for the first time since June, mainly because of the impact of air fares.
  • The inflation rate dipped to 3% in December, down from November’s rate of 3.1% – a six-year high.
  • The ONS said it was too early to say whether this was the start of a longer-term reduction in the rate of inflation.
  • The Bank of England has said it thinks inflation peaked at the end of 2017 and will fall back to its target of 2% this year.

Telegraph: Fed to hike US interest rates faster than expected, Fitch warns

  • Interest rates could shoot up much faster than expected over the next 18 months, stunning markets and delivering a sharp shock to borrowers, credit ratings agency Fitch has warned.
  • The US Federal Reserve’s base rate could rise to 3.25pc by autumn next year, smashing through the 3pc mark at least a year before the average Fed policymaker’s forecast.
  • Fitch’s forecast includes four rate rises this year, double the pace of two which markets currently anticipate. “Our impression of the Fed is that it wants to get on with this, and the rationale for leaving rates lower for longer has disappeared,” said James McCormack, in charge of sovereign ratings at the agency.

ABC News: Low interest rates cut productivity, breed zombie firms: Bank for International Settlements

  • Persistently low interest rates are cutting productivity and creating so-called zombie firms, the Swiss-based central bank of central banks has warned.
  • The Bank for International Settlements (BIS) is owned by its 60-member central banks and facilitates transactions between them. It also provides research and policy analysis to help promote financial stability.
  • One possible answer, argued the bank, is the low interest rates that led to the global financial crisis, and the even lower interest rates since in an attempt to halt economic declines and restart growth.

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