Bank of England leaves monetary policy unchanged

Financial Markets
Credit risk for the Gulf’s richest governments surged after they flooded the market with external bonds.
The average cost of sovereign credit-default swaps for Saudi Arabia, Qatar, and Abu Dhabi jumped by a
third in less than two months to 137 basis points (bps). It is reported that the sharp rise in bond issuance
from the regions’ sovereign and quasi-sovereign borrowers is the main driver of rising default risk. The
cost to insure Saudi Arabia’s sovereign debt against the default for 5 years surged to 190 bps this week,
the highest level since February.

Oil prices slumped for a six straight session on Thursday, pressured by market uncertainties over the
looming U.K. referendum and mixed U.S. oil data. The strengthening dollar also weighed on prices. Brent
crude fell 1.7 percent to $48.97 a barrel, while West Texas Intermediate (WTI) slid 2.8 percent to $46.67
a barrel, the lowest level since mid-May. Since June 9, Brent has declined about $5 a barrel (or almost
10 percent).


Advanced Markets
U.S. consumer prices rose 1 percent (y/y) in May, less than expected and easing slightly from a 1.1
percent rise in April. Food and transportation services costs slowed while energy cost fell at a faster pace.
On a monthly basis, consumer prices rose 0.2 percent in May, after rising 0.4 percent in April. Excluding
volatile food and energy prices, core inflation accelerated slightly to 2.2 percent in May (y/y) from 2.1
percent in April. Separately, the Labor Department report showed an increase in the initial jobless claims
by 13,000 to 277,000 in the week ended June 11th, a one-month high, from unrevised 264,000 in the
previous week, and below the markets expectation of 270,000 claims. The latest figure remains below the
300,000 threshold level normally associated with a healthy labor market for the 67th continuous week.

The U.K. central bank retained the benchmark rate at 0.5 percent, a record low for the past 7 years, and
also maintained quantitative easing at £375 billion, as widely expected. The Bank of England noted that
the most significant risk to the economic outlook concerns the U.K.’s referendum on the European Union
(EU) membership on June 23.

Euro Area remained in the deflationary territory as consumer prices edged down -0.1 percent (y/y) in May,
after a 0.2 percent fall in April, and in line with the economists’ forecast. The consumer prices failed to
rise for the fourth consecutive month, dragged down by falling energy cost, final figures by the Eurostat
showed. Among the member countries, Cyprus suffered the biggest decline in prices at -1.9 percent,
while Belgium recorded the highest inflation rate at 1.6 per cent. Excluding volatile food and energy
prices, consumer prices rose 0.8 percent in May, up from 0.7 percent in April.

Switzerland’s central bank retained the benchmark policy rate at -0.75 percent in its latest quarterly
meeting, and in line with market expectation. The Swiss National Bank (SNB) cited the impending U.K.
referendum on the EU membership as a major economic risk. At the same time, the SNB indicated that it
will remain active in the foreign exchange market as deemed necessary, to ease appreciation pressure
on the Swiss franc.



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Emerging and Developing Economies
Europe and Central Asia

Russia’s industrial production rose 0.7 percent (y/y) in May, following 0.5 percent growth in April, while
below market expectations of 1.0 percent. Manufacturing, mining and quarrying, and utility output all rose.
On a monthly basis, industrial output fell 1.2 percent.


Middle East and North Africa

Israel's GDP rose 1.3 percent (q/q saar) in Q1, after an upwardly revised 3.4 percent expansion in Q4.
Private consumption and investment grew, while government expenditure contracted. Exports shrank
and imports expanded, implying weaker net exports.

The central bank of Egypt hiked its benchmark overnight deposit interest rate by 100 bps to 11.75
percent. It is the second rate hike so far this year, after the inflation rate reached a nearly 6-year high of
12.3 percent in May. The lending rate and the discount rate were also raised by 100 bps to 11.75 percent
and 11.25 percent respectively.

June 16, 2016



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variety of macroeconomic topics, covered by the Group, may be found at:
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