World Economic News Roundup: 18th June 2018

An update on some of the most important news stories in the world economy last week.

IMF Concerned US Trade Policy Could Damage World Economy

Christine Lagarde, Managing Director of the International Monetary Fund, has said that the IMF is concerned about the impact US trade tariffs, although ostensibly aimed at Chinese imports, could have on the entire world economy.

Speaking this week Lagarde said: “Recent actions by the US to impose tariffs on imports come with further risks. Unilateral trade actions can be disruptive and may even prove counterproductive to the functioning of the global economy and trading system. As I have said before, in a so-called trade war, driven by reciprocal increases of import tariffs, nobody wins. One generally finds losers on both sides. Also, let us not understate the macroeconomic impact. It would be serious, not only if the United States took action, but especially if other countries were to retaliate, notably those who would be most affected, such as Canada, Europe, and Germany, in particular.”

Lagarde urged the US to work constructively with trading partners to resolve disagreements without the use of tariff and non-tariff barriers.

UK Inflation Rate Remains At 2.4%

The UK Consumer Prices Index (CPI) 12 month rate held at 2.4% in May 2018, unchanged from April. The Office for National Statistics said that rising motor fuel prices produced the largest upward contribution to the rate, as well as the costs of air and sea travel, while moderating food prices helped to mediate it.

The inflation rate could have a direct impact on the likelihood of a UK interest rate rise. It has been widely expected that a rising inflation rate could see an interest rate rise this August. However, some commentators now suggest a stable rate could see this postponed until 2019. The next meeting of the Bank of England’s Monetary Policy Committee at which any interest rate adjustment will be decided is on 21 June.

US Interest Rate Rises Again

The Federal Open Market Committee (FOMC) of the US Federal Reserve voted to raise the US interest rate at its meeting this week. The Federal Reserve said that, particularly in view of both realised and expected labour market conditions and inflation, the Committee had decided to raise the target range for the federal funds rate to 1.75-2%.

Commentators suggest the rate rises are aimed at moving the US back to a more normal interest rate regime, following the sharp cuts to interest rates around the world after the 2008 financial crisis – and they predict there could be two more US interest rate rises this year. The latest rise widens the interest rate gap between the US and other major world economies which are maintaining a ‘cheap money’ regime.

European Central Bank Begins Phase Out Of Economic Stimulus

The ECB has announced that it will begin to phase out its current financial stimulus programme in the autumn. The bank has been pursuing its Asset Purchase Programme (APP) at a monthly net rate of €30 billion since 2015. However, it has said that this will reduce this to €15 billion monthly at the end of September before ending any further net purchases completely in December, assuming financial conditions remain favourable.

The Bank said it felt this move was appropriate due to the underlying strength of the eurozone economy and favourable forecasts for inflation. However, some commentators have expressed surprise over the decision, suggesting economic prospects for the eurozone are still very far from positive.

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