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UK confidence signs grow as Bank of England nears rate decision

British households grew more confident about their finances and a measure of house prices rose by a record amount for January, according to surveys which added to other signs of a brightening mood in the economy since last month’s election.

Ten days before the Bank of England decides whether to cut interest rates, the surveys published on Monday suggested that some of the uncertainty that has weighed on the economy has lifted after Prime Minister Boris Johnson’s big election win.

IHS Markit, a data firm, said its Household Finance Index rose to a one-year high of 44.6 in January from 43.2 in December, chiming with other sentiment surveys from both businesses and consumers that have shown an increase in optimism.

Earlier on Monday, property website Rightmove said asking prices for houses increased in January at a record pace for the month, up 2.3% compared with December.

Still, BoE officials are likely to want to see whether the cheerier mood has translated into actual spending as they weigh up whether to cut rates on Jan. 30.

“What data there has been released capturing the post-election period suggests that the outcome has had a positive effect on consumer and business sentiment,” analysts at RBC said in a research note.

“Our view remains that a majority of (BoE officials) will prefer to wait for evidence of how the economy is responding to the outcome of December’s election and the removal of near-term Brexit uncertainty before deciding on a policy move.”

Money markets currently price in a roughly 65% chance that the BoE will cut interest rates on Jan. 30, although economists in a Reuters poll of economists published last week are more skeptical. Sixty out of 68 forecast no change to rates.

Investors will be watching Friday’s “flash” IHS Markit/CIPS purchasing managers’ indexes carefully for an early indication of the economy’s health this month.

Retail sales data last Friday showed an unexpected drop in December and investors will be eyeing Tuesday’s official labor market data for November carefully.

“Latest survey data certainly show some post-election bounce for UK households, with the headline index up to a one-year high and house price expectations at their strongest since October 2018,” Joe Hayes, an economist at IHS Markit, said.

Weakening inflation had helped to ease pressure on living costs, the survey showed.

However, a separate index measuring households’ expectations of future financial wellbeing slid back into negative territory in January, as gauges of perceptions of workplace activity and income weakened.

The proportion of households expecting a BoE rate cut “at some time” increased to 23.1%, while those expecting a rate hike in the next three months went down slightly to 19.5%, IHS Markit said.

Editing by William Schomberg and Andrew Heavens

Source: UK Reuters

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Pound Falls Against Australian Dollar Owing to Poor UK Retail Sales

The Pound has fallen against the Australian Dollar at the end of the week after some very disappointing UK economic data.

UK Retail Sales showed a drop year on year for December to 0.9% from the expectation of 2.6%.

This highlights a real problem for the high street in what is typically one of its busiest periods of the year.

The Bank of England have already hinted that they may be gearing up to cut interest rates so with consumers not spending as much as expected could this give the central bank enough evidence to warrant a rate cut towards the end of this month?

Earlier in the week on Wednesday the UK also confirmed a fall in the inflation level. Typically if inflation is falling then a central bank will often look to cut rates to stimulate the economy. Therefore, could this be another factor in the Bank of England’s decision?

The Bank of England are due to meet on 30th January so if we see an interest rate cut happening this could cause movement for GBPAUD exchange rates.

Chinese problems cause issues for the Australian Dollar

In the meantime the Australian Dollar has also experienced its own problems. According to the recent data China’s economy has grown by just 6.1% last year which is its lowest growth on record in almost thirty years.

The US China trade wars appear to have moved forward but during last year it is clear that they had an impact on the Chinese economy.

Back in 1990 Chinese growth was 3.9% so even though the growth was measured at 6.1% it is still a lot stronger.

However, as far as the Australian Dollar is concerned as China is its largest trading partner any slowdown in the world’s second largest economy can have a negative impact on the value of the Australian Dollar.

By Tom Holian

Source: Pound Sterling Forecast

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Bank of England policymaker maintains interest rate cut view

Bank of England (BoE) policymaker Michael Saunders has said he is sticking to his view that interest rates should be cut because of weaknesses in the UK’s labour market and wider economy.

“It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the two per cent inflation target,” Saunders said in a speech on Wednesday morning.

“With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.”

Saunders was one of two of the BoE’s monetary policy committee’s (MPC) nine members who voted to cut interest rates late last year.

Since then, several other MPC members — including outgoing BoE governor Mark Carney — have suggested a rate cut may be necessary.

Saunders said that while some recent surveys had suggested Britain’s economy had improved, while others had worsened and remained sluggish.

“But, taken as a whole … business surveys are generally soft and consistent with little or no growth in the economy,” he said.

“My own view is that, even if the economy improves slightly from the recent pace, risks for the next year or two are on the side of a more protracted period of sluggish growth than the MPR (Monetary Policy Report) forecast,” Saunders added.

Sterling was 0.2 per cent down against the dollar in morning trading on Wednesday.

By Anna Menin

Source: City AM

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UK economic growth weakest since 2012 in November

Britain’s economy grew at its weakest annual pace in more than seven years in November, raising expectations that the Bank of England will cut interest rates later this month.

Monday’s official figures showed the economy in November – before last month’s decisive election win for Prime Minister Boris Johnson – was just 0.6% larger than a year before, the weakest expansion since June 2012.

The November figure represented a slowdown from annual growth of 1.0% in October, after that month’s growth pace was revised up from previously reported data.

Output in November alone shrank by 0.3%, the biggest drop since April. Economists polled by Reuters had expected unchanged output for the month.

The weak data, reflected the uncertainty of last autumn about Brexit and the election, said John Hawksworth, chief economist for accountants PwC.

“It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer, but our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election,” he said.

Sterling fell and government bond yields headed lower as financial markets priced in a 50% chance the Bank of England will cut interest rates on Jan. 30, after its next meeting.

The BoE predicted in November that the economy would eke out limited growth in the fourth quarter, before recovering in 2020. That forecast assumes progress towards a post-Brexit trade deal and a reduction in U.S.-China trade tensions.

In the past week, BoE Governor Mark Carney – who steps down in March – and two other rate-setters, Silvana Tenreyro and Gertjan Vlieghe, said a rate cut could be needed if those assumptions prove over-optimistic.

Two more policymakers, Michael Saunders and Jonathan Haskel, already support a rate cut.

However, there have been some signs that business confidence has revived since Johnson’s Conservatives won an unexpectedly large majority in the Dec. 12 election.

That victory put Britain on course to leave the European Union on Jan. 31 with a transition deal. However, Johnson has only given himself 11 months to reach a long-term trade deal with the EU, and some businesses fear they could face tariffs and other obstacles to trade with the EU from 2021.

Looking at the three months to November, which smoothes out some volatility, the economy grew by 0.1% versus poll forecasts for a 0.1% fall, due to unexpected upward revisions to September and October output, which the ONS said reflected late survey returns.

“Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing,” ONS statistician Rob Kent-Smith said.

Editing by William Schomberg, Larry King

Source: UK Reuters

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Pound drops as Bank of England signals rate cut

The value of sterling has dropped after a trio of officials on the Bank of England’s Monetary Policy Committee (MPC) indicated that UK interest rates are likely to be cut in the coming months.

Outgoing governor Mark Carney told FTAdviser’s sister publication the Financial Times last week (January 7) that the central bank could cut interest rates to support economic growth.

Data released this morning (13 January) by the Office for National Statistics showed UK economic activity contracted by 0.3 per cent in November, the month prior to the general election, to reach a year-on-year growth of 0.6 per cent.

This and the trio’s remarks have led to sterling falling 0.7 per cent this morning and more than 2 per cent since the start of the year.

Mr Carney warned in the next economic downturn there would be limits to how much politicians can rely on central banks to boost economic growth, as most of the tools, including rate cuts and quantitative easing, are already being deployed.

But he said with the UK base rate presently at 0.75 per cent there was some scope for the UK central bank to cut rates.

UK interest rates are presently higher than those of the Eurozone and Japan, where interest rates are negative.

Mr Carney leaves his role as governor in March to be replaced by Andrew Bailey, the current FCA chief executive.

Jonathan Haskel, another member of the MPC, which sets interest rates at the Bank of England, said in a speech to the Resolution Foundation at the end of December that current economic indicators pointed to the UK economy and inflation slowing.

He said: “The global economic outlook has weakened materially since 2018, turning gloomier and less supportive of UK growth.

“This was mainly the result of heightened uncertainty combined with a slower pace of recovery in the Euro Area and, in particular, the escalation of US-China trade tensions.”

He said in the immediate aftermath of the UK voting to leave the EU the fall in the value of sterling had created a sharp increase in inflation to above 3 per cent, much higher than the inflation rate in other countries.

At first the higher prices did not, Mr Haskel said, translate into slower economic growth, as people maintained their consumption by reducing the amount they saved.

But while the UK savings rate fell to less than 3 per cent at the time, the lowest level since 1963, it has since risen to 4.5 per cent, and more recently to 6.75 per cent in the final quarter of 2019. The long-term average is 8 per cent.

If individuals are saving more and consuming less this means demand in the economy is weaker and so economic growth falls while consumption is also falling, meaning the rate of inflation falls.

Cutting interest rates makes saving cash less attractive, and so may encourage more spending, boosting growth and pushing inflation upwards. The current UK inflation rate is forecast to be below target at 1.5 per cent.

The Bank of England’s remit is to achieve inflation of around 2 per cent a year, if it falls materially below that level, then cutting rates to push inflation upwards towards the target would be the expected course of action.

A third member of the committee, Gertjan Vlieghe said he would favour an interest rate cut if economic data does not improve quickly.

He told the Financial Times on the weekend (January 12) that he expects there to be a pick up in UK economic activity as a result of the greater level of certainty as a result of Conservative party general election victory, but if this doesn’t happen, then rates will need to be cut.

He said it will be obvious by the end of January whether this has happened or not.

By David Thorpe

Source: FT Adviser

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Carney says BoE could cut interest rates if weakness persists

Bank of England Governor Mark Carney said on Thursday that the central bank could cut interest rates if it looks like weakness in the economy will persist.

His comments sent sterling to a near two-week low against the U.S. dollar as he outlined a debate on the Monetary Policy Committee about whether interest rates needed to be cut now.

Last month and in November, two of the nine policymakers on the BoE’s interest rate-setting committee voted to cut interest rates to 0.5% from 0.75%, though Carney himself backed keeping rates on hold.

Britain’s economy grew at its joint-weakest annual rate since 2012 late last year, and many indicators of the economy remain downbeat despite signs of optimism among businesses and consumers following Prime Minister Boris Johnson’s landslide election win last month.

While Carney also described reasons for optimism, investors honed in on the comments about a possible rate cut, which he linked directly to the current economic outlook — whereas previously he talked about cuts more as a contingency.

“With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” Carney said in a speech at a BoE event on inflation targeting.

Similar language was used in the most recent MPC minutes by Michael Saunders and Jonathan Haskel, who both voted for a rate cut.

Combining possible interest rate cuts and the prospect of more asset purchases, Carney said the BoE’s current armoury was the equivalent of cutting Bank Rate by 2.5 percentage points.

Money markets now price in a roughly 14% chance of a rate cut at the BoE’s Jan. 30 meeting, Carney’s last before he hands over the reins to Financial Conduct Authority chief executive Andrew Bailey, who takes over on March 16.

Markets price in a roughly 50% chance of a rate cut by the middle of the year.

“While this shouldn’t come as a huge surprise given that there has been a couple of MPC dissenters calling for lower rates at the past two policy meetings, it is the strongest hint yet for a rate cut in the not too distant future,” currency strategist David Cheetham of brokerage XTB said.

On asset purchases, Carney said there was room to “at least double” the BoE’s 60 billion pound stimulus package of August 2016, a sum that will increase further as more government bonds are issued over time.

Carney also gave reasons why the BoE might not cut interest rates, citing “tentative” signs that global growth was stabilising and ongoing tightness in Britain’s labour market.

He also said there were early indicators that there had been some reduction in business uncertainty since Johnson’s sweeping Dec. 12 election win.

The rest of his speech focused on possible changes to the BoE’s inflation targeting framework, which he said had served Britain well.

Carney said raising the inflation target, as advocated by some economists as a way to spur growth and escape from years of low interest rates, worked better in theory than in practice.

He also pushed back against those who think the BoE should use its quantitative easing stimulus to directly fund infrastructure or environmental spending.

“In my view, these should be resisted,” Carney said. “While carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot address broader societal challenges.”

Reporting by Andy Bruce

Source: UK Reuters

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Bank of England holds interest rate at 0.75 per cent

The Bank of England has decided to hold interest rates at 0.75 per cent in its last meeting of 2019 as it warned there was little chance of significant economic growth this quarter.

The Bank’s Monetary Policy Committee (MPC) voted 7-2 in favour of maintaining the rate, as it did at its previous meeting in November.

Sterling lost roughly half a per cent against the dollar after the announcement.

UK GDP increased by 0.3 per cent in the third quarter and is expected to rise only marginally in the year’s final quarter.

The monetary policymakers did point out that both sterling and the FTSE had rallied in the last month, with the pound’s exchange rate appreciating by around two per cent.

Minutes from the three-day meeting showed that Jonathan Haskel and Michael Saunders had voted to cut rates by 0.25 per cent.

The two argued: “The economy had been a little softer than expected, and there was a modest but rising amount of spare capacity.

“Core inflation was subdued. Employment growth was slowing and seemed likely to weaken further given trends in vacancies and firms’ hiring intentions.”

However, the MPC said it was yet unclear whether Boris Johnson’s victory would lift the uncertainty hanging over the UK economy.

The MPC said: “If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.”

It added: “Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.”

Analysts said that the Bank’s wait-and-see approach was “perfectly appropriate for some time yet”, due to the reduction in political risks from the result of the General Election.

Dr Kerstin Braun, president of Stenn Group, said: “Boris Johnson’s win provides the much-needed solidity the UK has been craving.

“Businesses can begin to see their future and now Brexit is confirmed to go ahead, The Bank of England needs to keep the economy steady as we navigate Britain’s exit from the EU.

“But a prolonged period of low growth, low inflation, and low interest rates will limit the Bank’s ability to create stimulus when needed.”

There had been speculation that the MPC would commit to a rates cut. In the Bank’s November meeting, two of the nine-member committee voted for a cut.

The decision comes after inflation data showed that the Consumer Prices Index stood at 1.5 per cent in November, flat on October and half a per cent below the Bank’s target of two per cent.

Earlier this month the US Federal Reserve left interest rates on hold, bringing to an end the cutting cycle instigated in July.

The European Central Bank also held rates in Christine Lagarde’s first meeting as president, downgrading its 2020 growth forecast in the process.

The announcement comes after the Bank said it had referred the hacking of its market-sensitive press conferences to the financial watchdog, after it emerged that an audio feed was supplied to high-speed traders before they were officially broadcast.

The Bank confirmed what it called a “wholly unacceptable” use of a back-up audio feed by a third-party supplier, and said it had reported the matter to the Financial Conduct Authority (FCA).

By Edward Thicknesse

Source: City AM

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BoE will cut rates twice in 2020, BofA says

Uncertainty around the future trading relationship between the UK and European Union will lead to two interest rate cuts by the Bank of England in 2020, a top-ranked research team said.

According to analysts at Bank of America Global Research, Britain’s gross domestic product was set to flatline in the last quarter of 2019.

However, rate-setters at the Old Lady of Threadneedle Street would wait to see how the economic data panned out following the general election before acting.

Their forecast was for a quarterly rate of growth of 0.0% over the three months ending in December.

“Uncertainty remains as unclear what UK-EU trade relationship will apply after next year. We expect short-lived growth bounce,” BofA said in a research note sent to clients.

Purchasing managers indices for the UK needed to “surge” in order to result in even a “mini” growth bounce, they added.

By Alexander Bueso

Source: ShareCast

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Long-term fixed savings rates drop to levels last seen before 2017 base rate rise

Longer-term fixed savings rates have plummeted to levels not seen since the Bank of England base rate rose in November 2017, according to Moneyfacts UK Savings Trends Treasury Report.

The research found that the average longer-term fixed bond rate (1.54 per cent) fell to its lowest point since July 2017 (when it stood at 1.49 per cent) and the average longer-term fixed ISA rate (1.35 per cent) fell to its lowest point since October 2017 (when it stood at 1.32 per cent).

Meanwhile, the average one-year fixed bond rate (1.28 per cent) is at its lowest level since June 2018 (when it also stood at 1.28 per cent), and the average one-year fixed ISA rate (1.21 per cent) is at its lowest level since May 2018 (when it stood at 1.19 per cent).

Rachel Springall, finance expert at Moneyfacts, said: “It will be disappointing news for savers to find the positive impact of both competition among challenger banks and two base rate rises over the past two years has unravelled in such a short space of time. Indeed, this year both the longer-term fixed bond and ISA average rates hit their highest peak since the 2017 base rate rise.

“In March 2019, the longer-term fixed bond rate hit 1.89 per cent, and the average longer-term fixed ISA rate had reached 1.62 per cent, meaning they have dropped by 0.35 per cent and 0.27 per cent respectively over the past eight months.”

Moneyfacts blamed the rate cut on savings providers not wanting to risk paying out an inflated rate to consumers if they feel interest rates are expected to fall over the next few years.

On the opposite side, savers may not want to invest in a longer-term fixed bond or ISA, and are instead opting to keep their cash close to hand. Pensioners may also be using easy access accounts instead of fixed while they decide what to do with their pension freedoms cash.

“The economic uncertainties could well be the cause as to why the amount invested within interest-bearing sight deposits more than doubled in September year-on-year, one month before the UK was due to depart the EU. In comparison, money continued to flow out of interest-bearing time deposits in September 2019, according to Bank of England statistics,” said Springall. “Savers are also still playing it safe by placing their cash within the high street banks, even though they do not pay the best interest rates on the market. The biggest banks are more robust than during the financial crash as they have had to amass more capital reserves.”

Written by: Emma Lunn

Source: Your Money

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Inflation fall could ‘fan expectations’ for interest rate cut, say economists

The fall in UK inflation could fan expectations that the Bank of England might cut interest rates, City analysts have said.

The Consumer Price Index (CPI) slid to 1.5% in October from 1.7% the previous month, according to the Office for National Statistics (ONS).

The decrease, which was greater than analysts had predicted, suggested households will have more spending power ahead of Christmas and next month’s General Election.

Economists have said falling prices will drive calls for lower interest rates, potentially following moves by the US and European central banks to make cuts.

Howard Archer, chief economic adviser for the EY Item Club, said: “Inflation dipping more than expected to 1.5% in October will also likely fan expectations that the Bank of England will cut interest rates before too long if the economy fails to pick up from its current struggles.

“Consumer price inflation looks likely to remain close to 1.5% over the rest of the year and through the early months of 2020 – and it could conceivably edge down further.”

Last week the Bank of England voted to hold rates, despite two members of its Monetary Policy Committee (MPC) calling for a cut.

The policymakers referenced signs that the labour market was cooling, while colleagues were cautious about Brexit uncertainty and a slowdown in the global economy.

David Cheetham, chief market analyst at XTB, agreed that the decrease will push calls for the cut but time is not on the side of the MPC.

He said: “A larger than expected fall in the most widely followed gauge of inflation could lead to further calls for the Bank of England to lower interest rates.

“Either way it is still highly unlikely that we get any movements in rates before the year is out, with the final policy decision due just one week after the General Election.”

On Tuesday, the ONS also revealed that wage growth had slowed to 3.6% in September from 3.8% the previous month. It remains significantly above the rate of inflation.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said the inflation slowdown could be “welcome news” for consumers.

She added: “Inflation continues to languish below the Bank of England’s target of 2%, highlighting the impact of a year of uncertainty upon the UK economy.

“With a General Election and Brexit on the horizon, it’s difficult to foresee exactly when the political and economic environment might stabilise, and if nothing changes for the better the Bank of England will be under pressure to introduce an interest rate cut in early 2020.

“Should this happen, savers and investors need to think carefully about how to make their money work hardest, with the prospect of cash returns dwindling even further.”

The inflation announcement had little impact on the pound, fell 0.07% to 1.283 against the dollar.

Source: Shropshire Star