US averts default

In the US Senate and House of Representatives leaders struck a deal to reopen the government and raise the debt ceiling. The bipartisan deal should fund the federal government until January 15, 2014 and raise the debt cap to $16.7 trillion until February 7, 2014. The agreement averted a potentially devastating default of the US Government which would have run out of cash on October 17. Earlier in the week, credit rating agency Fitch placed the US’s AAA credit grade on watch negative, citing the Government’s failure to raise its borrowing limit as the debt limit deadline approached.

Meanwhile, confidence among German investors soared to its highest level in three-and-a-half years in October as Europe’s largest economy began to turn the corner and the continent started showing signs of recovery. According to a survey by the Centre for European Economic Research, or ZEW, German investor confidence climbed to 52.8 in October from 49.6 in September, topping consensus estimates. The indicator has now increased for a third month in a row. Economists polled by Bloomberg News had forecast the October reading to remain at the same level as in September.

Finally, UK inflation was unchanged at 2.7 per cent year-on-year in September, slightly above forecasts of 2.6 per cent. The largest upward contribution came from air fares, although this was offset by lower petrol and diesel prices. The reading is well above the Bank of England’s (BOE) target of two per cent. However, because of the high unemployment rate, the BOE is holding off from raising interest rates.

In the meantime, the UK unemployment rate remained steady at 7.7 per cent in the three months to August, with the number of people in employment rising by 155,000 to leave 29.869 million people in employment. That is the highest figure on record. At the same time, there was an 18,000 drop in the number of people looking for a job. The data may support the view that unemployment will fall towards the level that could lead the Bank of England to raise interest rates faster than anticipated.

This article was compiled by Bank of Valletta for general information purposes only.