Financial Market Review for February 09 2018 In the UK yesterday, The Bank of England (BOE) has signaled the need for interest rate rises earlier and potentially larger than previously predicted, preparing markets for impending higher borrowing costs. In its first meeting of 2018, the Bank's Monetary Policy Committee (MPC) judged that, were the economy to move broadly in line with its projections, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period," than anticipated during its last report in November. This would be required to "return inflation sustainably" to its target and over a "more conventional horizon," the report said. Sterling spiked against the dollar on the news as higher rates in an economy tend to favour the local currency with the anticipation of more investment. The pound broke above 1.400 against the greenback after trading close to 1.388 before the announcements. At the same time as the inflation report, the Bank voted unanimously to keep interest rates unchanged on Thursday. The rate decision and hawkish comments come on the back of significantly improved global growth, a modest improvement to the U.K.'s growth outlook and increasing domestic cost pressures as wages look to rise. The BOE noted that the market believes that interest rates could reach 1.2 percent by 2021, suggesting three rate hikes in that period. However, this would still leave inflation above target which hinted at a possible hiking cycle that was quicker than investors were expecting. BOE Governor Mark Carney insisted in his subsequent press conference that any rate moves would be gradual. He added that rates would not move more rapidly, and reiterated this point on several occasions when quizzed by journalists on Thursday. However, he added that the message to markets was that U.K. interest rates could move somewhat sooner and to a somewhat greater extent than previously expected. Moving to the Asian session today, Asian shares sank on Friday, with Chinese equities on track for their worst day in two years, as fears of higher U.S. interest rates shredded global investor confidence. On top of pressure from the drop in global shares, Chinese equities were weighed down as investors sought to stay liquid ahead of the Lunar New Year holidays and pressure was felt to meet rising margin calls. The Shanghai Composite Index tumbled 6.0 percent to its lowest since May 2017, and the blue chip CSI300 index dived as 6.1 percent. Both indexes were on track for their largest single-day losses since February 2016. Japan’s Nikkei shed 2.9 percent, en route for a weekly loss of 8.6 percent - its biggest since February 2016. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.2 percent to a two-month low. The index, which hit a record high on Jan. 29, was on track for its sixth straight day of losses and stood to fall 7.6 percent on the week.
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