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UK: Should interest rates go up as Brexit approaches?

 

Britain’s economy grew at its slowest pace since 2013 in the 12 months after Brexit vote. The Bank of England might prepare to raise interest rates for the first time in a decade.

The world’s fifth-biggest economy was just 1.5 percent bigger than a year earlier in the second quarter. The weakest expansion in more than four years and down from a rate of 1.8 percent in the first three months of the year.

Britain’s Office for National Statistics had previously estimated second-quarter growth at 1.7 percent. None of the economists had expected such a big downward revision.

Sterling fell after the UK data

The recent data also showed a monthly fall in output for the services sector in July, boding poorly for third-quarter growth. Sterling fell after the data and prompted some economists to reconsider their prediction of a rate hike at the end of the BoE’s next meeting on Nov. 2.

BoE Governor Mark Carney said last week the economy was on track for a rate hike “in the relatively near term”, two weeks after the BoE jolted markets by flagging a rate rise “in the coming months,” despite weak growth this year. The BoE has downgraded its estimate of how fast Britain’s economy can grow without generating excess inflation because of the impact of Brexit.

The U.S. economy grew faster

In the same time, the U.S. economy grew a bit faster than previously estimated in the second quarter, recording its quickest pace in more than two years, Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a slightly faster pace of inventory investment.

Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.

The U.S. still have a strong labor market despite hurricanes

Estimates for the growth rate in the July-September period are just above 2.2 percent.Harvey and Irma continue to impact the labor market and are expected to cut into job growth this month. In a third report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended Sept. 23. Claims have now been below the 300,000 threshold, which is associated with a robust labor market, for 134 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.

Yellen: FED needs to continue gradual rate hikes

Prices for U.S. Treasuries held losses after the data and the dollar fell to a session low against a basket of currencies. U.S. stock index futures were trading lower. The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen added that acknowledged the central bank’s struggles to forecast one of its key policy objectives.

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