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Interest rates could rise in May 2019

Brexit and slowing economy growth have quashed the likelihood of an interest rate rise from the Bank of England in early 2019 but expect a move in May, a leading economist group has said.

The UK economy grew by 0.4% in the three months to October, down from 0.6% in the previous three months, data showed this week.

At the same time, the prime minister Theresa May has delayed a crucial parliament vote on her Brexit deal.

It means the uncertainty over how the UK will leave the European Union (EU) is set to continue for longer.

Markets now only give a 5% chance to the Monetary Policy Committee (MPC) raising the base rate in February, and 30% in May.

However, the chances applied to a May hike “looks like an overreaction”, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

He said: “Even if, as we still expect, the prime minister eventually forces a modified Brexit deal through parliament, the economic data likely won’t have perked up before the MPC’s meeting on May 2.

“Nonetheless, the committee regularly hikes due to its expectations for growth and underlying inflation, and it likely will expect both to strengthen, as investment recovers and the chancellor’s fiscal stimulus kicks in.

“As such, we still think the odds of a May rate hike exceed 50%.”

Strong wage and employment data released today could also strengthen the case for rates rising sooner rather than later.

Wage growth has increased to 3.3% both including and excluding bonuses, while employment is at a record high.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “After yesterday’s weaker than expected GDP figures and more Brexit uncertainty after Theresa May’s last-minute decision to abort today’s Brexit vote, today’s wage growth figures provide UK workers with a little bit of pre-Christmas cheer.

“However, while we have now seen wage growth rise for four consecutive months, we are still not out of the woods.

“With the ongoing political and economic uncertainty, the recent steps forward could be reversed. Britain’s pay growth continues to lag our main competitors since the financial crisis.

“The current cocktail of concerns offers the Bank of England little incentive to hike interest rates any time soon.

“And even if the central bank does plan to increase rates over time, it expects to do so at a ‘gradual pace and to a limited extent’.”

Source: Your Money

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UK inflation expectations hit five-year high – BoE

The British public’s expectations for inflation in a year’s time have risen to a five-year high but fewer people expect an interest rate hike over the next 12 months, a Bank of England survey showed on Friday.

The BoE said median expectations for inflation in a year’s time rose to 3.2 percent from 3.0 percent in August’s survey.

That was the highest since the survey published in November 2013.

Britain’s inflation rate hit a recent peak of 3.1 percent in November 2017, pushed up by the fall in the value of the pound after the Brexit vote in 2016.

The consumer price index has since fallen back to 2.4 percent but remains above the BoE’s target of 2 percent.

Expectations for inflation in two years’ time eased back to 2.8 percent from 2.9 percent in August.

Inflation in five years’ time was seen at 3.5 percent, compared with 3.6 percent three months earlier.

The survey also showed 53 percent of respondents expected an interest rate increase over the next 12 months, down from 58 percent in August.

The BoE has raised interest rates twice since November 2017 and expects to continue pushing them up gradually, assuming Britain’s departure from the European Union goes smoothly.

The BoE’s data was based on a survey conducted by polling company TNS between Nov. 2 and 6.

Source: UK Reuters

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Bank’s Brexit report ‘extreme’ and ‘implausible’, says former rate-setter

A former UK interest rate-setter has slammed the Bank of England’s doomsday Brexit report as “extreme” and “implausible”.

Andrew Sentance, who is a former member of the Monetary Policy Committee (MPC), told MPs the central bank’s Brexit analysis last week assumed a “very extreme” no deal scenario of long-term disruption coupled with high interest rates.

In a hearing with the Treasury Select Committee, Mr Sentance – an ardent critic of Bank governor Mark Carney and the Bank’s recent policy – also took aim at the Bank’s independence and communication.

Bank of England
Bank governor Mark Carney was forced to defend the Bank’s Brexit report after it came under heavy fire (Daniel Leal-Olivas/PA)

He said: “They seem to assume that the disruption from a no deal scenario would be very long lasting, which seemed to me to be rather extreme.

“Secondly, they put in assumptions about the response of policymakers, particularly the MPC, that it would actually raise interest rates to about 5.5%.

“If you look at how the MPC has behaved over the last decade or so, that seems to be very implausible.”

His appearance in front of the cross-party committee of MPs comes after Mr Carney insisted on Tuesday that some criticisms of the report were “unfair”.

The Bank’s independence doesn’t seem to stand so strong as perhaps it had in the first 10 or 15 years as an independent central bank

Andrew Sentance, former MPC member

The analysis published last week prompted a vicious backlash, with pro-Brexit Conservative MP Jacob-Rees Mogg describing Mr Carney as a “second-tier Canadian politician” and claiming he had damaged the Bank’s reputation with his repeated Brexit warnings.

Mr Sentance is a Remainer, but still believes the Bank’s report went too far and was poorly communicated.

“The way it came across in the media wasn’t really totally clear that it was a very extreme view, even in the Bank’s own terms,” he said.

“The communication of it was less than ideal.”

Mr Carney told the committee on Tuesday that the analysis was only published at the request of the committee, while he admitted the worst-case scenario impact of Brexit was a “low probability”.

He also denied MP suggestions that he had colluded with Number 10 Downing Street to publish the report on the same day as the Treasury’s analysis – with the committee confirming it had driven the timing of its release.

But Mr Sentance said the Bank had not been “careful enough” to distance itself from the Government.

He said: “I have some concerns … that the Bank’s independence doesn’t seem to stand so strong as perhaps it had in the first 10 or 15 years as an independent central bank.”

He also hit back at Mr Carney’s comments to MPs on Tuesday of a “simpler but less successful time, when all the Bank did was focus on inflation”.

Mr Sentance, who served on the MPC from 2006 to 2011, said: “I’m not sure it was a simpler time in terms of dealing with the financial crisis.”

But he agreed with the Bank that a no-deal Brexit, where the UK is left on World Trade Organisation rules, would be bad for the economy.

He said he found it “hard to see that, even if you look 10/15 years ahead, we’ll be better off” after Brexit.

Mr Sentance, who recently retired from PwC where he worked for seven years and now acts as an independent business economist, has been highly critical of Mr Carney’s appointment in the past.

In an interview with the Press Association in June, he said the Treasury should not look overseas again when it hired a successor to Mr Carney.

In an explosive critique of Mr Carney’s reign, Mr Sentance also said the Governor’s “lack of confidence” with raising interest rates was because he was “not familiar with the UK economy”.

Source: Express and Star

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Bank of England Stand by View Pound Sterling Can Suffer Deep Falls on Disruptive Brexit

Bank of England policy makers have stood by analysis suggesting the British Pound is at risk of losing substantial ground in the event of a disruptive ‘no deal’ Brexit taking place in 2019.

“The fall (in Sterling) since the referendum represents the market’s view on a range of possible outcomes. And essentially the larger the effect on UK trade, the UK exit, the further the sterling is likely to fall, for various reasons. So at the moment what is ‘priced in’ to the level of the exchange rate is a number of possible outcomes,” says Ben Broadbent, Deputy Governor of the Bank of England.

Broadbent and other Bank of England were giving evidence to parliament’s Treasury Select Committee about a BoE report on the potential economic impact of Brexit in Britain’s parliament on Tuesday.

“So if the eventual exit is towards the better end of that range, you would expect sterling to rise from here, if it’s towards the worse end of that range, you would expect it to fall further. And generally, the greater the economic dislocation, the worse the exchange rate is going to be, there’s a direct relationship,” adds Broadbent.

Bank of England Governor Mark Carney adds that currency market participants have not yet fully factored in a disorderly Brexit into the price of Pound Sterling, suggesting to us that the Governor sees the potential for deeper falls in the value of the currency.

On November 29 the Bank of England released a ‘war gaming’ analysis of the potential impact to the UK economy of various Brexit scenarios.

Notably, a disorderly ‘no deal’ Brexit could crash Sterling, which would in turn force the Bank of England to hike interest rates sharply towards the 5.5% mark in order to combat inflation stemming from the currency’s decline.

According to the analysis, aimed at testing the resilience of the UK financial system, if Prime Minister Theresa May fails to pass her Brexit plan Sterling would fall 25% under a worst-case scenario.

Source: Pound Sterling Live

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UK consumer lending growth slows to new three-year low, mortgage approvals jump

Lending to British consumers slowed again last month to its weakest rate in more than three years, but there was a pick-up in the housing market with a jump in mortgage approvals, Bank of England data showed on Thursday.

The BoE figures showed the annual growth rate in unsecured consumer lending fell to 7.5 percent in October, its weakest since May 2015 from 7.9 percent in September, when there was a sharp drop in new car purchases.

Other economic data in recent months have mostly shown slower consumer demand since an unexpectedly robust summer, as shoppers rein in purchases and express concern about how leaving the European Union in March next year will affect them.

However, the BoE said the number of mortgages approved for house purchase rose to 67,086 in October from 65,726 in September, the highest number since January and above all forecasts by economists in a Reuters poll.

The housing market has slowed for most of this year, with major mortgage lenders reporting price growth slowing to a five-year low.

Net mortgage lending, which tends to lag behind approvals, also beat all forecasts at 4.121 billion pounds last month, up from 4.015 billion the month before, the BoE said.

On Monday industry body UK Finance reported the number of approvals for house purchase picked up to a four-month high in October, though they were still slightly down on a year earlier.

British house price growth has slowed this year, mostly due to falling prices in much of central London, where demand has been hit by higher purchase taxes on expensive homes and reduced foreign investor appetite since 2016’s Brexit vote.

Wednesday saw BoE Governor Mark Carney warn that in the unlikely – though growing – possibility of a “disorderly” departure from the EU in March next year, house prices could fall 30 percent as part of broader economic dislocation.

The central bank also said demand for consumer lending had been subdued by Brexit uncertainty, but could ramp up again once the prospects for Brexit were clearer.

Figures for October alone showed a 0.894 billion pound increase in unsecured lending, slightly below economists’ forecasts of a 1.0 billion pound rise.

Source: UK Reuters

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No deal Brexit would cause pound to crash, say Bank of England

The Bank of England has warned the pound would crash, inflation soar, interest rates would have to rise and Britain’s growth would plummet in the event of a no deal disorderly Brexit.

The apocalyptic outcome, contained in the Bank’s analysis of various EU withdrawal scenarios, would also see unemployment skyrocket.

In the event of a disorderly no deal, no transition Brexit, Britain’s GDP could fall by 8%, according to a worst case scenario analysis by the Bank.

The unemployment rate would rise 7.5%, inflation would surge to 6.5% while interest rates would rise as high as 5.5%.

House prices are forecast to decline 30%, while commercial property prices are set to fall 48%. The pound would fall by 25% to less than parity against both the US dollar and the euro, according to the bombshell report.

Prime Minister Theresa May is aiming to convince sceptical MPs to back her EU withdrawal agreement she reached with Brussels. Parliament is set to vote on the deal on December 11 and if the deal is not approved it will see the UK lose the transition period.

The Bank’s doomsday analysis comes hours after the Government released its own impact assessment, which found that withdrawal from the EU under Theresa May’s plans could cut the UK’s GDP by up to 3.9% over the next 15 years.

But leaving without a deal could deliver a 9.3% hit to GDP over the same period, said the analysis produced by departments across Whitehall. And the UK will be poorer in economic terms under any version of Brexit, compared with staying in the EU.

The Bank of England added that in the event of a disruptive Brexit, where there is no change to border trade or financial markets, GDP may fall 3% from its level in the first quarter in 2019.

In this scenario, the unemployment rate will hit 5.75% and inflation rises to 4.25%.

House prices decline 14% and commercial property prices fall 27%. The pound would fall by 15% against the US dollar to 1.10.

However, major British banks have “levels of capital and liquidity to withstand even a severe economic shock that could be associated with a disorderly Brexit”, the Bank concluded from tests of banks’ financial resilience.

Britain’s banking system is “strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit”, the Bank said.

Source: iTV

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Resilience of UK banks to doomsday Brexit scenario to be revealed

The Bank of England’s annual stress test will put the seven largest lenders through extreme scenarios. The ability of Britain’s biggest lenders to withstand the economic shock of a no-deal Brexit will be revealed this week when the Bank of England publishes the results of its annual health check on the sector.

The stress tests put the UK’s seven largest banks – Lloyds Banking Group, Barclays, Royal Bank of Scotland, HSBC, Santander, Nationwide Building Society and Standard Chartered – through extreme scenarios, equivalent to the UK crashing out of the EU without a deal.

The Bank has already warned that a no-deal cliff-edge Brexit would have the potential to send the pound plunging further, hit economic growth and even lead to interest rate rises if falls in the value of sterling ramp up inflation.

But Governor Mark Carney has repeatedly stressed that the UK’s financial sector is resilient and last year’s stress test found all banks were sturdy enough to withstand the worst-case Brexit scenario and still keep lending.

It was revealed last year, however, that Barclays and RBS emerged as the weakest and only passed thanks to action they took over the year to boost their balance sheets.

The latest stress test results on Wednesday will reveal how resilient the banks are now and come as fears mount that Prime Minister Theresa May will struggle to secure backing for her Brexit deal.

The Bank, which also publishes its bi-annual financial stability report on Wednesday, will a day later send a keenly-awaited report on the potential economic impacts of a no-deal withdrawal to MPs on the Treasury Select Committee.

This will be included in an analysis of how the EU withdrawal agreement will affect the Bank’s ability to deliver on its monetary and financial stability remits, as requested by the Commons committee.

Mr Carney warned in a recent hearing with the cross-party committee of MPs that a no-deal, no-transition Brexit would be the “worst outcome” and was “not in the interests of either party”.

“There would be an economic shock in Europe as well, and particularly in Ireland,” he warned.

This year’s bank stress test will contain the same economic doomsday scenario as in 2017, including deep simultaneous recessions in the UK and global economies, large falls in asset prices – compounded by the additional stress of misconduct costs.

It will also test banks against a 33% fall in house prices, interest rates surging from 0.75% to 4% within two years, and the unemployment rate rising to 9.5%.

Source: Shropshire Star

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Bank of England’s Saunders sees higher rates if Brexit goes smoothly

The Bank of England would probably need to raise interest rates faster than investors expect if Britain manages a smooth exit from the European Union, though Brexit’s implications for the BoE remain unclear, rate-setter Michael Saunders said.

Britain is due to leave the EU, its main trading partner, in little more than four months’ time and Prime Minister Theresa May is struggling to get her Conservative Party behind the withdrawal deal she has hammered out with Brussels.

Saunders said a Brexit deal would boost Britain’s economy and probably justify further increases in rates.

“My own hunch is that, conditioned on our Brexit assumptions, capacity pressures will probably build somewhat faster than envisaged in our latest Inflation Report projections, reinforcing upward pressure on pay growth,” he said in a speech to business leaders in Bath, southwest England.

“In this case, we would probably need to return to something like a neutral stance rather earlier than implied by the current yield curve.”

Financial markets only fully price in the possibility of the next BoE rate hike for the end of 2019.

Saunders was one of the BoE’s earliest advocates for its gradual push to raise borrowing costs away from their all-time lows, which started in November last year.

However, he warned it was hard to be sure that higher rates would be needed in the event of a smooth Brexit because the inflation pressure from stronger economic growth could be offset by the disinflationary effects of a rise in sterling.

“It is unclear whether it would be appropriate to tighten monetary policy more or less than implied by the current yield curve, or indeed not adjust policy at all, or to loosen,” he said in his speech, most of which dealt with the demographic challenge to Britain’s economy in the decades ahead.

It was also hard to tell what the BoE would need to do if Britain left the EU with no transition deal, he added.

“The net effect would probably be higher inflation and lower growth, and it may be hard to tell in real time whether any weakness in growth exceeds the deterioration in potential growth,” he said. “The monetary policy implications could go in either direction.”

BoE Governor Mark Carney and other top officials have also previously warned investors not to assume they would cut rates in the event of a no-deal Brexit shock to Britain’s economy.

Source: Yahoo News UK

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Bank of England chief Carney backs UK PM May’s Brexit deal

Bank of England Governor Mark Carney gave his backing to a Brexit deal struck by British Prime Minister Theresa May, saying the alternative of leaving the European Union with no transition could be akin to the 1970s oil shock.

“We have emphasized from the start the importance of having some transition between the current arrangements and the ultimate arrangements,” Carney said, speaking to lawmakers on Tuesday. “So we welcome the transition arrangements in the withdrawal agreement … and take note of the possibility of extending that transition period.”

May agreed with Brussels last week on a deal for Britain’s withdrawal from the EU in little more than four months’ time. But the agreement faces stiff resistance in her Conservative Party, meaning it could fail in parliament.

The value of sterling fell sharply on concerns that Britain could leave the EU with no deal.

Carney angered many euroskeptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU. On Tuesday he said a lack of a transition would deliver a “large negative shock” to the British economy

“This would be a very unusual situation,” he said. “It is very rare to see a large negative supply shock in an advanced economy. You would have to stretch back at least in our analysis until the 1970s to find analogies.”

An oil embargo by OPEC exporters imposed over the 1973 Arab-Israeli war and a leap in crude prices plunged many western economies into deep recessions.

Carney also said there were limits to what the BoE could do in the event of a Brexit shock to the economy, both in terms of offsetting a fall in demand and ensuring the country’s banking industry was able to continue lending.

“I think we’ve put (the financial sector) in a position … where it would dampen it,” he said. “That is not the same thing as saying it will be alright.”

Carney and other BoE officials speaking alongside him on Tuesday repeated their warning to investors not to assume that the central bank would respond to a no-deal shock by cutting interest rates, as it did after the Brexit referendum in 2016.

“That depends on the balance of demand, supply and the exchange rate… We could see either scenario,” Carney said.

He also said a planned analysis by the central bank of the economic implications of Brexit would not include a scenario in which Britain stays in the bloc.

Some of the analysis is due to be published on Nov. 28 alongside the latest bank stress tests and an assessment of Britain’s financial stability by the BoE.

Source: UK Reuters

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Brexit deal remains most likely outcome, says the Bank of England

The Bank of England predicted today that a deal remains the most likely Brexit outcome, despite ongoing uncertainty around UK and EU negotiations.

“I still think it’s the most likely outcome, but obviously over time, every day there are headlines – positive, negative – which will send the currency in particular one direction or the other,” deputy governor Ben Broadbent told CNBC.

“But for our part we have to make a particular assumption on which to condition our forecasts, that seems to me still to be the most likely outcome and that’s the one we choose.”

His comments come after former education minister Justine Greening said this morning that parliament would reject Theresa May’s Chequers deal.

Meanwhile, the Prime Minister suffered a setback after the EU reportedly rejected her proposal that the UK can decide to quit a so-called backstop agreement on the Irish border that would put the whole of the UK into a temporary customs union with the EU.

Sterling fell one per cent amid ongoing uncertainty.

In the event of a positive Brexit deal, Broadbent predicted businesses would begin to invest more after relatively weak spending since the referendum.

“If we get a good deal, a good transition, I think we can expect to see investment spending pick up, domestic demand growth pick up,” he said. “On the other hand, sterling presumably would also be stronger, and those act in different directions on inflation.”

However, the Bank predicts that the UK economy’s growth will slow in the fourth quarter, though there are signs that pay pressure is gradually building.

“The signs are we’ll have somewhat weaker growth in the fourth quarter,” Broadbent said.

But the BoE said pay pressure has been increasing, according to business surveys the Bank has conducted as well as official figures.

Wage growth hit its fastest rate since before the financial crisis in the three months to the end of August, the Office for National Statistics revealed last month, after a 40-year unemployment low helped push wages up.

“In terms of inflationary pressure we are seeing some signs of that domestically now,” Broadbent said.

The Bank monetary policy committee decided to hold interest rates at 0.75 per cent at the start of the month, in light of Brexit uncertainty, and Broadbent attempted to reassure businesses and households that rates were not going to rise quickly.

While the Bank has predicted “limited and gradual” interest rate increases, Broadbent said this wouldn’t necessarily come in the form of one rate hike a year.

A smooth transition to life outside the EU may mean that the Bank tightens monetary policy over the next three years to cut inflation to a two per cent target.

“We will do whatever we think we have to do to meet the remit,” Broadbent said. “The point of that box was to say that unfortunately either having a deal or not having a deal is not definitive in terms of the behaviour of interest rates.”

Source: City A.M.