Publication date: 5 September 2016 | Covering: August 2016
Monthly Briefing
- Jackson Hole August 26: Yellen says “case for rate increase has strengthened”; September or December hike signalled
- FRESH: Bank of England cuts to 0.25% August 4 (32 days ago); first cut since 2009; £60bn QE expansion; Brexit response
- Fed July holds; US July payrolls 255,000 beat expectations; labour market recovery confirmed
- Rio de Janeiro Olympics: Jamaica wins gold medals; global audience; tourism and brand awareness
- Brexit aftermath: pound remains weak; UK data better than feared; recession fears recede
- BOJ easing; Jamaica IMF EFF; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Jackson Hole: Yellen Signals Hike Coming ‘Relatively Soon’
Chair Janet Yellen’s keynote address at the Jackson Hole Economic Symposium on 26 August was the most closely watched speech in global financial markets this month. Yellen stated that “the case for an increase in the federal funds rate has strengthened in recent months”, a formulation that markets interpreted as a clear signal that September or December 2016 represented live dates for the next rate increase. The speech was among the most hawkish of Yellen’s tenure as Chair, explicitly linking the strengthening of the case for tightening to the improvement in both labour market and inflation indicators since the post-Brexit hesitation of June. Vice Chair Stanley Fischer added to the hawkish tone in a separate interview at Jackson Hole, suggesting that a September hike was consistent with Yellen’s remarks and that one or two hikes in 2016 remained plausible. Following the Jackson Hole statements, market pricing for a September hike rose sharply before partial retreat in the days that followed. The Fed’s credibility on its guidance had been somewhat impaired by the repeated delays in following through on rate increase signals, and markets remained sceptical about the precise timing even as the direction was increasingly clear.
Bank of England’s Post-Brexit Easing Package
The Bank of England delivered its most significant policy easing package in years at its August 4 meeting, responding to the economic uncertainty created by the Brexit referendum result of 23 June. The Bank cut its policy rate from 0.50 per cent to 0.25 per cent — the first rate cut since March 2009 and a new historic low — and announced a package of additional measures: £60 billion in new gilt purchases under its quantitative easing programme, £10 billion in corporate bond purchases, and a new Term Funding Scheme to ensure that the rate cut passed through to bank lending rates. Governor Mark Carney, who had been criticised by Brexit campaigners during the referendum campaign for warning of the economic risks of leaving the EU, presented the package as a pre-emptive response to the anticipated economic slowdown. Early post-referendum data suggested the immediate damage was less severe than the Bank’s own stress-test forecasts had suggested, with the August composite PMI recovering and retail sales better than feared. Nonetheless, the Bank’s assessment remained that a significant slowdown was in prospect as uncertainty depressed investment and household spending.
Rio Olympics and Jamaica’s Global Brand
The Rio de Janeiro Summer Olympics of August 5 to 21 provided Jamaica with a world-class stage for its athletic prowess and global brand. Usain Bolt secured his third consecutive gold medal in the 100 metres, 200 metres, and 4×100 metres relay — completing an unprecedented “triple triple” — confirming his status as the greatest sprinter in history and cementing Jamaica’s global sporting reputation. Jamaica’s performance across the athletics programme reinforced the island’s brand as a destination of dynamism, excellence, and world-class competitive spirit. For tourism promotion and foreign direct investment, Jamaica’s Olympic visibility was a valuable asset: the global television audience for the athletics events in which Jamaica competed numbered in the hundreds of millions. The tourism sector, already performing strongly in 2016 with visitor arrivals at record levels, anticipated a continued brand dividend from the Olympic exposure.
Jamaica Mortgage Market in August
Jamaica’s mortgage market continued its recovery through August 2016. The BOJ’s accommodative monetary policy, the stable IMF programme framework, and the improving economic outlook — with tourism, remittances, and business process outsourcing all performing solidly — provided a constructive backdrop for mortgage lending. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent continued to provide the accessible affordable housing finance structure for qualifying contributors. The summer diaspora property investment season brought increased enquiries from overseas-based Jamaicans, particularly in the US, UK, and Canada, seeking to invest in residential and commercial property on the island. Commercial lenders were gradually adjusting mortgage product pricing as the BOJ’s rate reductions fed through to their cost of funds.
Looking Ahead
The Federal Reserve’s September 20 to 21 meeting is the immediate focus of global interest rate watchers: after Yellen’s Jackson Hole remarks and the strong July payrolls, the probability of a September hike has risen, though many analysts expect the Committee will wait until December given continued below-target inflation and international uncertainty. The US presidential election on 8 November is approaching, and its potential impact on policy and markets has begun to attract more serious financial market attention. For Jamaica, the approaching hurricane season peak in September and October is the perennial seasonal risk, and the fiscal year midpoint budget assessment will provide a read on Jamaica’s performance under its IMF programme targets.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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