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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

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UK job growth slows as Bank of England entertains interest rate cut

The demand for staff from UK employers grew at its slowest rate for almost eight years in October, according to a survey revealed on Friday, appearing to justify two Bank of England rate-setters backing an interest rate cut yesterday.

A monthly index of job vacancies from the Recruitment and Employment Confederation and accountants KPMG fell to 51.7 from 52.6 in September.

It is the index’s lowest level since January 2012 and highlights concerns from the Bank of England that the UK’s labour market may be losing its strength.

It comes a day after two of the Bank of England’s nine interest-rate setters voted to cut interest rates again.

The pair cited signs that the labour marker may be on the turn, despite it being one of the economy’s strong points since the Brexit vote.

The REC report released on Friday showed permanent job placements fell for an eighth consecutive month and at a faster rate than last month.

It comes as official data showed job creation was waning ahead of the previous end of October Brexit deadline.

Vice chairman at KMPG, James Stewart, said the uncertainty around Brexit and the upcoming general election on 12 December had dampened companies’ hiring plans.

“It’s not just businesses that are being cautious, however, and over October we’ve seen job-seekers become increasingly nervous about making a career change,” he said.

By Michael Searles

Source: City AM

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Bank of England Surprise sends Pound Sterling Lower

The British Pound was put on the back foot on Thursday, November 07 after two members of the Bank of England’s Monetary Policy Committee unexpectedly voted to cut interest rates at the Bank’s November policy meeting.

Michael Saunders and Jonathan Haskel became the first MPC members to vote for lower interest rates since the Bank last cut rates in August 2016.

The surprise votes suggest the Bank is leaning towards delivering an interest rate cut in the first half of 2020, unless a notable pick up in the UK’s economic trajectory is reflected in the data.

The Pound fell on the news, as currencies tend to fall when their issuing central bank enters an interest rate cutting cycle.

“Sterling was shocked lower by a dovish Bank of England, which voted 7-2 to leave rates on hold. It was a bit of a surprise in that two members voted for an immediate cut – Saunders and Haskell both opting to cut now. This leaves the door open for a cut to come soon, signals the direction of travel and was the first split since the summer of 2018,” says Neil Wilson, Chief Market Analyst at Markets.com.

Saunders and Haskel said their vote to cut interest rates was largely owed to their view that the UK’s jobs market has begun to deteriorate somewhat – while the UK retains an ability to generate wages and employment is at all-time records, the number of vacancies in the economy has shrank dramatically of late.

The drop in vacancies suggests the jobs market could soon deteriorate and cutting interest rates would offer the economy some support under such conditions.

However, for the majority of MPC members, the economy continues to perform along a path that is consistent with keeping interest rates unchanged at 0.75%, at least for now.

“If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation,” the MPC said in a statement.

But this in itself marks a departure from previous guidance at the Bank, where the expectation was that interest rates would rise in the future, particularly under an orderly Brexit scenario; now the talk is of rates having to be cut.

In short, the Bank has flipped into rate-cutting mode and this should offer some downside to Sterling, at least in the near-term.

The Bank’s MPC will have also noted that their commitment to raising rates in the future puts them out of step with their global peers, an outcome that might disadvantage the UK economy. The U.S. Federal Reserve has been cutting interest rates of late, the European Central Bank has restarted its money printing programme and the Bank of Japan this month signalled it was looking at cutting short-term rates.

“The Bank of England seems to have finally accepted that the world is in an easing cycle and it can’t fight this tide. We can safely say the hawkish bias has gone. Because we are at the start of an election campaign the Bank was never going to vote for a cut today. But had we not been, there could have been more members calling to ease. There is the age-old debate of whether it’s best to go for an insurance cut now to see off weaker growth etc, or to keep the powder dry for when/if it goes completely wrong,” says Wilson.

“The message from the BoE is pointing to the downside for the Pound. Surprising votes for rate cuts voicing concern over domestic & global risks.Given how the UK is such an international economy, this is understandable,” says Neil Jones, head of hedge fund FX sales at Mizuho.

Markets had been anticipating the BoE would not only leave rates unchanged but that it would do so unanimously, which might explain why Sterling tumbled when the decision was published.

Dissent on the MPC brings closer a majority that might be in favour of a rate cut, and markets are not prepared for that to happen any time soon.

The Bank of England also released their Monetary Policy Report today, which contains the Bank’s forecasts for economic growth, inflation and other economic variables.

These in themselves can have an impact on the Pound as it suggests how the Bank sees the economy evolving over time.

“Looking through Brexit-related volatility, underlying UK GDP growth has slowed materially this year and a small margin of excess supply has opened up. That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainties,” the report noted.

Compared to the earlier forecasts, the Bank has this month forecast end-2019 economic growth to be at 1.0%, up from 0.9% forecast in August.

The end-2020 growth forecast was lowered to 1.6% from 1.8% expected back in August.

Inflation for end-2019 is forecast at 1.4%, down from 1.6% forecast in August, while inflation for end-2020 has been cut from 2.1% to 1.5%.

These inflation forecast cuts are sizeable and will certainly in themselves present to markets a signal that the Bank is no longer looking to raise rates.

Indeed, these inflation expectations suggest the Bank could quite comfortably justify a rate cut over coming months.

The Bank’s forecasts are however conditioned that a Brexit deal, of the kind struck between the UK and EU, is ultimately passed in coming months.

“Reflecting government policy, the MPC’s projections are now conditioned on the assumption that the UK moves to a deep free trade agreement with the EU,” said the Bank in its MPR statement.

“For our economic base case, we expect Prime Minister Boris Johnson and the Conservative Party to win a majority of seats at the election. That should enable an orderly Brexit to happen on 31 January next year. In line with the MPC’s latest guidance, we look for the BoE to hike the Bank Rate in Q3 2020 followed by another hike in 2021, by 0.25bp each time. That would take the bank rate to 1.25% by end-2020. Of course, if the election ends in a hung parliament the BoE would change its tune fast and, could, as signalled in the updated guidance, even cut rates,” says Kallum Pickering, an economist with Berenberg Bank in London.

Written by Gary Howes

Source: Pound Sterling Live

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Why the Bank of England should keep interest rates on hold

The Bank of England must leave interest rates on hold tomorrow and resist the urge to tinker until Britain’s economy is out of the General Election and Brexit fog, City A.M.’s panel of expert economists has said.

Much has changed in British politics since the BoE’s last monetary policy committee (MPC) decision in September. Prime Minister Boris Johnson failed to push his new deal quickly through parliament, leading him to request a Brexit extension and ultimately call a General Election, bringing yet more uncertainty to the economy.

City A.M.’s Shadow MPC today voted eight to one in favour of keeping the main interest rate on hold at 0.75 per cent. The consensus view was that with politics in flux, any move would be guess work and not grounded in any reliable expectations about the future.

Here’s what our Shadow MPC said:

Guest chair: Frances Haque – Santander

Hold: The bank rate should be kept flat. Inflation remains below the two per cent mark with economic growth data for the third quarter looking more positive than the previous quarter. And with real wage growth continuing, there is less of a rush required to create further stimulus. With the current political landscape now in General Election mode and further fiscal boosts on the cards, it seems prudent to wait and see the outcome of the election before making a change. However, if there is further Brexit delay leading to slower economic growth a cut may be required.

Jeavon Lolay – Lloyds Bank

Hold: There is a strong case for waiting for further news before any move. Brexit developments remain conditional on the upcoming election, adding another layer of uncertainty to the economic outlook.

Peter Dixon – Commerzbank

Hold: Economic conditions remain benign and inflation is contained. With the Brexit deadline merely having been postponed another three months, the prudent strategy is to keep the powder dry for now.

Vicky Pryce – CEBR

Hold: And be prepared to do more if needed. UK economy appears to be stagnating as world economy slows down, Brexit worries continue to dampen business and consumer sentiment and forthcoming general election is adding to uncertainty.

Mike Bell – JP Morgan Asset Management

Hold: With an election approaching that could potentially provide more clarity on what type of Brexit, if any, we are heading for, it makes sense to stay on hold for now.

Simon Ward – Janus Henderson

Cut: The case for easing is at least as strong as elsewhere. Inflation is below target and falling while economic weakness has spread to the labour market, with unemployment and redundancies picking up.

Ruth Gregory – Capital Economics

Hold: The chance of a Brexit deal in January suggests a cut would be premature. But unless the headwinds of weak global growth and Brexit uncertainty fade, the next move in rates may be down.

Tej Parikh – Institute of Directors

Hold: With the upcoming election largely making calculations about Brexit and the future path of the economy moot, it’s best to hold interest rates for now.

Joshua Mahony – IG

Hold: Carney had his hands burnt by the mistakenly cutting rates immediately after the referendum. With Brexit and election uncertainty looming, now is the time to wait for the dust to settle.

By Harry Robertson

Source: City AM

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One in four UK households now predict the Bank of England to cut interest rates

The number of households expecting the Bank of England (BoE) to cut interest rates has risen to its highest level since the Brexit referendum, survey data showed today, as Britons remain downbeat about their financial health over the coming months.

Households are pessimistic despite wages rising at a fast pace and unemployment close to record lows. Brexit uncertainty has been one factor dampening the mood, and there are signs that Britain’s jobs boom is slowing down.

The UK household finance index – a gauge of people’s perceptions of financial wellbeing by data firm IHS Markit – edged up to 44.4 in October from 43.1 in September.

The figure was the gauge’s highest mark since January but nonetheless signalled pessimism among households about their finances. A score of under 50 is considered a negative reading.

IHS Markit economist Joe Hayes said the “latest survey results from UK households continue to show how economic and political uncertainty is holding back what could have been a more resilient growth period for the UK economy”.

“These concerns, coupled with the uncertain economic outlook, have led to an increased proportion of UK households expecting the Bank of England to cut interest rates.”

At the start of the year over 70 per cent of UK households through the BoE would hike rates when it went to change them. That number has now fallen to around 58 per cent, its lowest level in two years.

A growing number of households – 25 per cent – now expect the Bank’s next move to be a cut, the highest proportion since October 2016.

Hayes said: “Negative job security perceptions and a pessimistic financial health outlook have led UK households to delay spending, with major purchases suffering as a result.”

By Harry Robertson

Source: City AM

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Bank of England deputy suggests Brexit deal could see rates rise

Deputy Bank of England governor Dave Ramsden has said he thinks gradually increasing interest rates could still be the right path if Britain achieves a smooth exit from the European Union.

Threadneedle Street has repeatedly struck a more hawkish tone than its American and European counterparts, saying it foresees “limited and gradual” rate rises unless Britain’s economy takes a downturn.

Ramsden spoke to Bloomberg yesterday after Prime Minister Boris Johnson announced a “great new” deal with the EU that would see existing trading arrangements stay as they are for at least a year while a new trade deal was reached.

“The kind of guidance we’ve been giving – in the world of a deal it still applies,” Ramsden said in the interview, published today. “We’re not saying over what timeframe, but limited and gradual is a reasonable qualitative framing.”

Ramsden’s view diverges from some of his Bank of England policymaker colleagues. Extern monetary policy committee (MPC) members Gertjan Vlieghe and Michael Saunders have suggested rates should be lower even in the event of a deal.

The BoE deputy said a Brexit deal and some certainty for UK businesses will lead to “some pickup in investment” and will bolster demand and “hopefully” productivity.

Business investment has slumped in 2019, with firms reticent to spend until there is greater certainty over Brexit.

Johnson’s new Brexit deal goes before MPs tomorrow in what looks set to be an incredibly tight vote. Ramsden said the BoE will keep an eye on currency movements after the vote.

By Harry Robertson

Source: City AM

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Bank of England deputy governor flags concerns over ‘low for long’ interest rates

Economic downturns are at risk of becoming more severe as a result of prolonged low interest rates, the deputy governor of the Bank of England has warned.

The current environment of ‘low for long’ interest rates will make “demand management of the economy more difficult in downturns”, according to Jon Cunliffe.

The Threadneedle Street official flagged a series of challenges for financial stability in the wake of recent monetary policy shifts.

Cunliffe said that a “slow or an unwilling adjustment” to weaker returns from lower interest rates could lead to both greater risk taking and less resilience among companies in the financial sector.

“In short, the adjustment to a low for long world is likely to lead to upward pressure on financial sector risk taking and downward pressure on resilience. We have started to see evidence of these effects in some sectors. One would expect such pressures to continue,” Cunliffe said in a speech to the Society of Professional Economists in London.

He added: “A low for long world is likely to be a more challenging environment for financial stability. The first and, in my view, most important policy conclusion to draw from this is the need for active and powerful macro-prudential institutions and policy.”

European economies have been adjusting to a downward push in interest rates, as central bankers attempt to rejuvenate markets that have been slowing down in the last 12 months.

Last month the European Central Bank (ECB) embarked on fresh stimulus measures to boost the eurozone, including cutting a key interest rate.

Cunliffe, who is among the contenders to replace Mark Carney as the next BoE governor, did not address Brexit or the BoE’s near-term policy plans in his speech.

However, he added that “releasing buffers can have a powerful effect in a downturn by reducing the pressure on banks to cut back on lending and so avoid a credit crunch amplifying the macro-economic shock.”

“The question perhaps is whether that buffer needs to be made more powerful in a low for long world given the greater risk of severe downturns.”

By Sebastian McCarthy

Source: City AM

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Brexit deal hopes push pound to highest in over three months

Sterling surged on Friday as investors rushed to reprice the prospect of a last-minute Brexit deal, after the European Union gave its chief negotiator the go-ahead to re-open negotiations with London.

The pound has rallied more than 3% since Thursday, its biggest two-day gain since mid-June 2016, before the British public voted to leave the EU. On Friday, it surged by more than 2% to a three-and-a-half-month high.

Many investors were positioned for another Brexit delay as the most likely outcome, believing that the chances of an agreement before the end of October were virtually zero. The surprising news that talks were back on squeezed those betting against the pound, exaggerating the move higher, traders said.

EU Brexit negotiator Michel Barnier said on Friday that he’d had a “constructive” meeting with his British counterpart, Stephen Barclay, and the 27 countries in the EU gave him the go-ahead to try and agree withdrawal arrangements before the Oct. 31 deadline.

Barnier told member states that Britain has changed its position and now accepts that there cannot be the customs border on the island of Ireland, two EU sources said.

That followed a meeting on Thursday between the Irish and British prime ministers, who released a joint statement saying they could see “a pathway to a possible deal”.

The pound jumped 2% to $1.2708, its highest since late June at GBP=D3, in late London trading. It gained as much as 1.6% to 87.03 pence against the euro EURGBP=D3.

British stocks also rallied, gilt yields rose and money markets no longer fully priced in a 25-basis-point cut in interest rates by the Bank of England before December 2020.

Derivatives traders also regained confidence in the pound, with bullish bets exceeding bearish views on Friday for the first time since January 2018, according to the currency derivatives market, suggesting further gains for sterling.

Traders scrambled to cover positions amid the newfound optimism that a Brexit deal would be reached, said Kenneth Broux, FX strategist at Societe Generale.

“I think it’s very important to specify that sterling liquidity is very thin so volatility is high,” Broux said.

But he added that given the broadly bearish positions in sterling markets, “the obvious conclusion is that we’ll see a squeeze higher”.

Frederik Ducrozet, a strategist at Pictet Wealth Management echoed these sentiments. Irish officials have raised expectations for a deal, he said, and “if you get a path to a deal, there could be a massive squeeze in rates going higher and a re-steepening of yield curve.

“If that’s the case, then what we’ve seen today could just be the beginning of a bigger move,” Ducrozet said. “But we have been here before, so expectations may be a bit more limited.”

`TIME IS PRACTICALLY UP’
Despite the flurry of activity, it remains uncertain on what terms the UK will leave, when, and even whether it will do so at all.

Sounding a more cautious tone, top EU official Donald Tusk said “time is practically up” for Britain to reach a Brexit deal. That hurt the pound temporarily.

One dealer in London attributed price swings to “algos” – or computer-generated trading algorithms – in a headline-driven market.

Hopes are that a meeting between British and EU negotiators will pave the way for a Brexit transition deal at an Oct. 17-18 summit.. But some doubt Johnson will get the agreement past Britain’s parliament.

Deutsche Bank’s forex strategist George Saravelos said he was “turning more optimistic on Brexit” and no longer negative on the pound, while JPMorgan said the Anglo-Irish statement may have “changed everything”.

(For a graphic on ‘Sterling holds onto Thursday’s gains’ click tmsnrt.rs/2Mt66aq)

The sterling rally undermined UK’s export-heavy FTSE 100 .FTSE stocks index, but domestically focused UK retailers, banks and housebuilders benefited, rising 4% to 6%.

Irish stocks also rallied. Irish government bond yields fell .ISEQ IE10YT=RR.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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UK economy starts to show cracks under Brexit and global strains

UK economy is increasingly showing signs of strain as the Brexit crisis and the global slowdown intensify, with the loss of momentum appearing to spread to areas which have hitherto been sources of growth.

Confidence among businesses has ebbed to its lowest levels since the global financial crisis.

The labour market, which has long been a silver lining for the economy, is also starting to show signs of slowing, raising questions about the strength of consumer spending.

The different Brexit scenarios for the world’s fifth-largest economy make it hard to gauge the outlook for the year ahead, not least for the Bank of England, and some investors fear Britain is already flirting with recession.

Economists polled by Reuters last month put the probability of a recession within a year at 35%.

Below are some indicators of the British economy and how they have changed since the June 2016 Brexit vote.

BUSINESSES STRUGGLE
Pessimism among businesses has reached the highest levels in years.

The gauges of future activity in the Lloyds Business Barometer, CBI Growth Indicator and IHS Markit/CIPS surveys have all turned weakened recently.

The closely watched IHS Markit/CIPS survey last week showed Britain’s dominant services sector contracted unexpectedly in September — and marked the worst reading in a major developed economy.

HOUSEHOLDS STILL SPENDING

Household spending has supported Britain’s economy since the Brexit vote, although there are signs that households have spent more on non-discretionary goods such as food, while spending in restaurants and hotels has weakened.

As of the second quarter, spending on the latter was about 1.5% lower than in mid-2016, but nearly 7% higher for food and non-alcoholic drinks, according to official data.

Figures from the British Retail Consortium and payment card company Barclaycard published on Monday showed shop chains had their worst September since records started in 1995, although spending on entertainment increased.

LABOUR MARKET

The labour market is the strong point of Britain’s economy but some cracks have appeared recently. Employment fell in annualised terms in the six months to July 2019 to the greatest extent since early 2012.

Wage growth is at a decade-high although the BoE has said it may have peaked and there has been no pickup in productivity.

A measure that BoE policymakers like to look at — the three-month annualised growth rate of private sector earnings, excluding bonuses — slowed in July from an almost five-year high of 5.9% in June.

INVESTMENT

Although the Office for National Statistics has revised up the level of business investment in Britain’s economy lately, the figures still show capital expenditure has stagnated since the Brexit vote.

Business investment is running about 5 billion pounds lower than it would have been had it followed its pre-Brexit vote trend since the financial crisis, according to the latest data.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters