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Next week's economics: 30 July - 3 Aug

The Bank of England might raise interest rates next week while the Fed probably won't – although data will show a stronger case for a rise in the US than in the UK.
July 26, 2018

We might finally get a long-awaited rise in Bank rate next week. The MPC could raise it by a quarter-point to 0.75 per cent on Thursday.

We’ll see a reason in the week for it to do this. Purchasing managers’ surveys should report growth in manufacturing, construction and services: in fact, the latter could hit its fastest rate since early last year.

But we’ll also see reasons for it not to move. Bank of England figures on Monday could show that bank lending to companies is very weak, especially to smaller ones: this might well be a sign of companies’ reluctance to expand. A survey by GfK the following day could show that consumer confidence is flat and quite weak. And we’ll also get evidence that the housing market is depressed. Bank data should show flat mortgage approvals while the Nationwide might repeat last month’s finding that annual house price growth, at around 2 per cent, is at a five-year low.

In fact, we’ll probably see far stronger justifications for a rise in US rates than UK ones next week. There, we might see consumer confidence close to an 18-year high, while the ISM could report manufacturing growth near a seven-year high. And on Friday official figures should show another net rise in non-farm jobs of over 200,000. Those figures might also show that annual wage inflation is finally creeping up, albeit very gently.

Despite all this, the US Federal Reserve is expected to leave the Fed funds rate unchanged at Wednesday’s meeting. This, though, will be only a pause for breath: it raised rates at its last meeting in June. Most economists expect two more rises this year, probably in September and December.

By contrast, the eurozone economy seems to be cooling off. Final purchasing managers’ surveys should confirm flash ones, which showed a slowdown in growth. Official retail sales figures should corroborate this. They could show that sales volumes have flatlined since March.

Inflation, however, is not a problem. Although initial estimates on Tuesday could show that headline inflation is around 2 per cent – slightly above its target; this will be due mainly to higher oil prices. The core rate – which excludes food and energy – should be around 1.2 per cent, which means it has barely changed for months. All this means there’s no reason for the ECB to raise rates for perhaps a very long time, unless the euro weakens so much as to threaten significantly higher inflation.