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UK Monetary Policy Change is Just Over the Horizon

 5 min read / 

Now is a time when investors and policy makers are beginning to question when the Bank of England will initiate an interest rate hike, following its six-years near the zero bound level of 0.5%. Elevated anticipation of a rise in interest rate stems from ‘Super Thursday’ inflation data, indicating that UK’s CPI has returned to positive territory, from zero to 0.1% in July. The UK’s highly volatile CPI has been below the central bank’s target of 2% for the last 19 months, and fell into negative territory in April for the first time in the last half century. The Office of National Statistics (ONS) claimed that the underlying reason behind the inflation growth was due to fewer general discounts in the summer sales, in addition to an increase in airfares, despite the recent plummet in oil prices. These upward-riding factors were partially undermined by tumbling food prices. However, an increase in summer bargains is hardly substantial evidence to influence the Monetary Policy Committee (MPC) to show its hand.

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The central bank’s enthusiasm about the UK economy’s current situation and near-future beckons a rate hike. For the first time, the Bank of England communications format included the inflation report together with the interest rate decision and MPC minutes. It is predicted that the economy will expand by 2.8% this year, up 0.3% from the past forecast, partly due to anticipated oil price recovery. This should be well underway by the end of the year, in turn heightening inflation more considerably than the 0.1% increase.

A significant decrease in unemployment rate – now standing at just 5.6% – is also a convincing indicator of a rise in interest rates. A tightening labour market implies that the UK is close to full employment, in comparison to its EU neighbours. Not only has the ratio of job vacancies to unemployment been restored to pre-crisis levels, but also the proportion of people unemployed for less than a year. Consequently, the central bank has projected a 4% increase in wages by 2017. With wage-growth picking up, employers would have the ability to increase wages whilst perpetrating an upward spiral of inflation and avoiding mounting prices.

However, Bank of England governor Mark Carney, has expressed a few concerns with an proximate change in monetary policy. After a six-year sojourn of a 0.5% interest rate, any stint will affect markets significantly. In turn, this would heighten the effect of a shift in the rate, as well as perhaps offset economic recovery. It is also feared that delaying a shift in interest rate – due to the anticipated disproportionate impact on markets – would lead to a frantic response in the future. This would cause further anxiety for businesses and investors, who would, as a consequence, lose a weighty amount of their usual monetary fix.

This second concern has led to great differences between the Institute of Directors and the British Chamber of Commerce. Whilst the Institute of Directors are urging the MPC to vote a 0.25% interest rate increase at its meeting next week, the British Chamber of Commerce believe that a proposed hike would highlight the ‘fragility of the economic recovery, especially in the face of a highly uncertain international backdrop’. The most tangible solution would be for the Bank of England to shift interest rates slightly less than the conventional 0.25%. Therefore, a 0.1% interest rate increase sounds judicious, as it would not only prove that the MPC is able to stand its ground, but also be understanding to the angst felt by markets and businesses.

Despite an interest rate hike appearing to be just around the corner, there are several reasons why we shouldn’t expect a shift anytime soon. Annual inflation is likely to continue to be volatile, bouncing around zero as it has been doing for recent months, thus fall as well as rise. This month will present more official numbers for inflation, but the recent drop in commodity prices will be likely to decrease inflation. For instance, the cost of crude oil has decreased by 20% within the last month. However, this figure was released too late to be included in July’s CPI. Furthermore, the currently strong sterling – which has had a 6% trade-weighted index since January – has ensued cheaper imports. This has done particular favours for manufacturers, whose cost of fuel and raw materials fell by 0.9% last month. However, the robust pound is offsetting inflationary pressure, thus contributing to the hold back of an interest rate increase.

The MPC has warned that an interest rate hike is just over the horizon, although we can only speculate when because their exact trigger for such an action has not been disclosed. After a recent major monetary speech given by Carney, it is suspected that a rate rise will be introduced as early as January 2016.

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Global Affairs

BP and Iraq Sign Development Deal for Kirkuk Oil Fields

 2 min read / 

BP Kirkuk deal

Iraqi Government and British energy giant BP have signed an agreement for the future development of the Kirkuk oil fields in Northern Iraq.

A statement on the Iraqi Oil Ministry’s website said the “memorandum of understanding” between the government and the London-based oil company would enable further development of the oil fields as well as “to open a new page of work” for the North Oil Company, a subsidiary of the Oil Ministry, on “solid foundations”.

BP Director, Michael Townsend, said the company would conduct the necessary surveys and prepare the required statistics.  He claims the company will increase production by 750,000 barrels of oil a day.

The Kirkuk Oil Field, discovered in 1927, is one of the largest oil fields in the world, producing half of Iraq’s oil exports, a reported million barrels a day. However, it has also been a wellspring for local instability: the fields had been seized in 2014 by the Kurdistan Regional Government, who piped oil across the Turkish border, a few hundred kilometres to the north. The fields were only retaken by government forces in October 2017.

Baghdad is attempting to reassert its authority throughout its provinces and according to Iraq’s Minister for Oil, Jahbar Ali al-Allaibi, Thursday’s announcement will “speed up the rehabilitation process”.

During the Saddam Hussein era, the fields suffered irrecoverable damage due to poor management. Excess production was reinjected back into the ground making Kirkuk’s oil thicker and therefore harder to extract.

On Wednesday al-Allaibi met with Britain’s ambassador, John Wilkes, where according to the ministry’s website, they talked about joint cooperation between the two countries in the oil and gas industry.

Keep reading |  2 min read

America

Trump’s Presidency and Russian Relationship: The Future

 4 min read / 

Trump Russia

Much has been said about Donald J. Trump’s love affair with Russia. Questions deserve a thorough and honest investigation. As distasteful and risky it may be, the best outcome of the enquiry is accusations continue to swirl, Trump limps through three more years, and in 2020, he is crushed at the ballot box. The world moves on. If removed from office, odds are Trump whips his base into a frenzy. Only the height and duration of civil unrest is in question. A worse case is that Trump emerges emboldened, eager to settle Putin’s longstanding challenge.

Putin Mocks Trump

The competition is real. Putin’s economic and political dominance gnaws Trump. Putin knows this. So, he taunts the President and dares Trump to employ the same ruthless tactics he exploited to consolidate power and possibly become the world’s richest man. Since Trump only sees green, he took the bait. The race is on to be the world’s first trillionaire.

Russia’s population is 142 million. Its $3.86trn translates into a measly $26,900 per capita GDP. In contrast, the 326 million people of the United States generate $18.62trn in GDP, nearly five times Russia’s total. The US per capita GDP of $57,600 more than doubles Russia’s. Despite Russia’s meek economy and reports  that Putin has embezzled up to $200bn in assets, Putin remains incredibly popular in Russia.

The apathy regarding this unparalleled heist makes Trump and Putin salivate over what they could jointly pilfer from the world economy. To advance their contest, the pair will identify a common threat. US-Russia relations will warm. Under the guise of “Peace through strength,” Russian sanctions will be lifted, and the Magnitsky Act repealed.

The administrative state in retreat, animal spirits will run wild. Trump’s name will be emblazoned across the globe. Countries desperate for jobs will be compelled to forge deals sponsored by Putin and Trump. Ethics be damned, the race to the bottom of the $120trn global economy will prompt a wave of corruption never seen before. Every facet of human decency will be compromised: environmental regulations, free and fair-trade by-laws, intellectual property, and human rights protections. The collusion is real.

In time, complicity will turn to double-crossing. It’s the Trump-Putin way. Makeshift “me-first” trade deals will collapse. Boycotts, divestitures and sanctions will be commonplace. Cooperation will evaporate. New political boundaries will be drawn with little world condemnation.

It doesn’t have to happen this way. Patience is a virtue. The checks and balances of the three branches of government are powerful mechanisms to thwart overt corruption.

Yet, for the impatient who seek Trump’s impeachment or removal via the 25th Amendment, be careful what you wish for. Only Trump can tame his army. To assume Trump will plead mercy at the feet of the administrative state contradicts Trump’s lifelong persona. He will relentlessly counterpunch and encourage his followers to do likewise. The short and long-term political and social risks are astronomical.

If Trump stems the tide, consolidates power and aggressively partakes in Putin’s race for two terms, the risks outstrip his forced removal. The consequences will be multi-generational.

Rope-a-Dope Is the Key to Containing Trump

The only path that possibly prevents extensive collateral damage is to check Trump into policy oblivion. Legislators must play rope-a-dope for as long as it takes, even three years if necessary. If Democrats take back both houses in 2018, the tactic will not set up Trump and his base for a final knock-out punch in 2020. For that to occur, numerous members of the GOP must join the effort. They too must throw periodic jabs at Trump then absorb a barrage Trump’s counterpunches.

With foes in every corner, even Trump – the self-proclaimed greatest counterpuncher in history—and his base will wear themselves out well before 2020. Then the decisive knockout punch can be delivered at the ballot box—without collateral damage.

Trump is severely wounded. If he gracefully and peacefully surrenders the Presidency, great. But don’t expect it. Rope-a-dope deployed by both parties is the countries best hope for a peaceful end to the Trump Presidency. Any other scenario risks the once unthinkable; an ‘American Spring’.

Keep reading |  4 min read

Europe

May Meets Macron

May Macron

The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.

Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.

Read more on Europe:

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