Page 5 - June 2017

OVERVIEW

Global economic and financial developments

As widely expected, the US Federal Reserve increased its Federal funds rate in June 2017,
thereby accentuating the policy divergence with other major advanced economies, which
kept monetary policy stances accommodative. On 14 June 2017, the US Federal Reserve raised
its target range of the Federal funds rate by 25 basis points to 1.00-1.25 per cent. The Fed continued
to unwind its huge economic stimulus, premised on the fact that economic activity and the labor
market have continued to strengthen albeit inflation rate may fall short of its 2 per cent target this
year. The European Central Bank (ECB) left its benchmark interest rate unchanged at its monetary
policy council meeting on 8 June 2017 and stated that interest rates were expected to "remain at
present levels for an extended period of time". Quarter-on-quarter for 2017Q1, the eurozone GDP
growth was revised up to 0.6 per cent, from an earlier estimate of 0.5 per cent. The Bank of England
(BoE) maintained its benchmark interest rate at 0.25 per cent and government bond purchases
unchanged at £435 billion at its monetary policy committee (MPC) meeting of 15 June 2017.
However, three out of the eight MPC members voted in favour of a rate hike, possibly raising hopes
for a tightening in the near term. Quarter-on-quarter, the UK GDP growth rate was 0.2 per cent in
2017Q1, the lowest across all the 28 members of European Union.

In June 2017, the US dollar weakened against the euro while the pound sterling came under
huge pressure. In early June, political worries in the US provoked a sell-off of the US dollar, which,
however, recouped some ground ahead of the quarter-point rate hike in the US Federal funds rate
and following the Fed’s signal for an additional rate hike later this year. Towards the end of the
month, the US currency tumbled after a vote on US healthcare legislation was delayed and hawkish
comments from G7 central banks’ officials. The euro traded at an average of US$1.1232 in June
compared to $1.1048 in May 2017. Initially on a defensive course as the ECB left its monetary stance
unchanged, the euro reached a peak of US$1.1437 on 30 June 2017, as ECB President Mario Draghi
stated that “deflationary forces had been replaced by reflationary ones”. The Pound sterling fell
sharply after British Prime Minister Theresa May's Conservative Party did not gain the expected
majority in the UK general elections and a hung parliament was seen to weigh on Brexit
negotiations with the European Union. It reached a low of US$1.2628 on 21 June 2017. Thereafter,
the Pound moved higher after BoE Governor Mark Carney supported the view to raise interest rates

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