On Thursday, the Bank of England Monetary Policy Committee unanimously decided to raise interest rates by 25 basis points to 0.75 per cent as policymakers were more concerned about above target inflation than Brexit uncertainties. The bank had earlier hiked its key rate by 25 basis points in November 2017, which was the first increase in a decade.

The MPC also voted 9-0 to maintain the quantitative easing at £435 billion. It stated that a dip in the UK output in the first quarter had been temporary, with momentum recovering in the second quarter. The labour market had continued to tighten and unit labour cost growth had firmed. The BoE noted that “given these developments, a 0.25 percentage point increase in the Bank Rate was warranted at this meeting to return inflation sustainably to the target”.

CPI inflation is forecast to remain slightly above two per cent through most of the forecasted period, reaching the target in the third year. Inflation is seen at 2.2 per cent by the third quarter of 2019, and 2.1 per cent by 2020. The MPC reiterated that any future increases in the Bank Rate will be gradual and limited.

Eurozone economy expands at slower pace in Q2

Recent preliminary estimates from Eurostat showed that the euro area economy grew at a slower pace in the second quarter. GDP grew 0.3 per cent from the first quarter, when the economy expanded 0.4 per cent. A similar slower growth was last seen in the second quarter of 2016. On a yearly basis, GDP growth eased to 2.1 per cent from 2.5 per cent in the previous quarter. The unemployment rate held steady at the lowest level since December 2008, with the jobless rate at 8.3 per cent in June.

US Central Bank leaves interest rates unchanged

As widely expected, the US Federal Reserve Bank left interest rates unchanged. The Fed said it decided to maintain the target range for the federal funds rate at 1.75 to two per cent, due to prevailing and expected labour market conditions and inflation. This decision came after the Fed raised rates by a quarter point in June and forecasted two additional rate hikes this year. Given the widely expected no rate change stance, closer attention was given to the accompanying statement, which included only minor changes from the June statement.

The Fed stated that economic activity has been rising at a “strong rate” and also noted that the unemployment rate has stayed low after pointing out that the unemployment rate had declined in June.

The Fed also said the annual rate of inflation currently remains near two per cent after noting inflation moved close to two per cent in the previous statement. The central bank also reiterated that “further gradual increases” in interest rates will be consistent with its objectives and once again called risks to the economic outlook “roughly balanced”.

Report compiled by Bank of Valletta for general information purposes only.

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