Key takeaways
- Tit-for-tat trade tariffs continue between the US and Canada
- UK household bills set to rise again with an energy price cap uplift
- ECB’s Schnabel argues for rate hikes for a resilient economy
- Australia set for rate hike after CPI overshoot
Tit-for-tat trade tariffs continue between the US and Canada
According to reports from Bloomberg, the US administration is considering additional tariffs on Canadian products after Canadian Prime Minister Mark Carney announced that US tariffs would be matched reciprocally, dollar-for-dollar. The prospect of further tariffs on Canadian goods marks another escalation in the war of words between the two nations and risks more persistent inflation in both economies.
I continue to view the use of tariffs as a retrograde and inefficient policy. They tend to harm the domestic economy first and foremost through higher prices and weaker demand. In my view, the risks associated with escalating trade disputes between formerly close trading partners also threaten to undermine global investment.
The last time US tariffs increased substantially was in the period leading up to, and following, the 1929 Wall Street Crash. I sincerely hope markets are not heading in a similar direction.
UK household bills set to rise again with an energy price cap uplift
The UK faces a further increase in energy bills in October, with energy regulator Ofgem confirming a 4% rise in the energy price cap from 1 October.
This will lift headline inflation heading into year-end but, in my view, should be insufficient to prompt any increase in interest rates from the Bank of England.
For the government, this is likely to create an additional challenge. The recently announced VAT cut on electricity bills will be more than offset by this increase, meaning consumers are unlikely to experience any benefit. Furthermore, it is likely to create a negative backdrop ahead of the UK Budget on 28 October, where the government is expected to announce further tax rises.
There is currently little to support GBP. It continues to hold firm against the USD and EUR largely because of challenges facing those economies rather than an improving outlook for the UK.
ECB’s Schnabel argues for rate hikes for a resilient economy
In remarks yesterday, ECB Executive Board member Isabel Schnabel told Bloomberg that further interest rate hikes would be needed to return inflation to target and prevent broader second-round price effects from emerging.
The ECB retains room for manoeuvre on monetary policy because real interest rates remain the most negative among the major Western economies. The ECB had also cut interest rates proportionately more than economies such as the US and UK in response to weak demand.
This could add to negative sentiment towards the EUR, alongside a French Budget showdown expected in the coming months. That is likely to see the main political parties in parliament face off against Prime Minister Lecornu as he attempts to reduce the deficit and bring spending under control.
Australia set for rate hike after CPI overshoot
Australia’s CPI inflation rate did not fall as much as expected in July, according to data released this morning. Food and housing costs rose more than anticipated, while clothing and footwear prices increased sharply following discounting in May and June. Alcohol and tobacco prices also recorded a significant rise.
This could bring about a further increase in interest rates from the Reserve Bank of Australia. However, it contrasts with weakness in both the housing market and employment data.
The path towards higher Australian interest rates therefore remains unclear, despite markets pricing in a near 90% probability of a rate hike before the end of the year. The AUD strengthened following the release, climbing to fresh two-and-a-half-month highs against the USD, while GBP/AUD fell to fresh two-month lows.
Credit to MoneyCorp