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UK inflation rate holds steady at 1.9 per cent sending Britons’ real wages higher

The UK’s headline annual inflation rate remained unchanged in March, staying at 1.9 per cent, meaning Britons’ real wages are increasing as pay growth outstrips price rises.

Meanwhile the inflation rate including housing costs and council tax stayed at 1.8 per cent, where it has stood since January, monthly figures from the Office for National Statistics (ONS) have shown.

With wages rising at 3.4 per cent, Britons are seeing sustained real wage growth, although weekly pay is yet to return to its pre-financial crisis levels.

While the headline rate is below the Bank of England’s two per cent target, it remains unlikely to change interest rates while Brexit uncertainty clouds the economy.

Both the headline rate and the inflation rate including house prices were 0.1 percentage point below economists’ expectations.

The largest downward contributions to inflation came from falls in recreation and culture, and food and non-alcoholic beverages.

However, there were upward contributions from a variety of categories including transport, principally increases in both petrol and diesel prices, miscellaneous goods and services, and from clothing and footwear.

Mike Hardie, head of inflation at the ONS, said: “Inflation is stable, with motor fuel prices rising between February and March this year, offset by falls in food prices as well as the cost of computer games growing more slowly than it did at this time last year.”

Tom Stevenson, investment director for personal investing at Fidelity International, said: “The Bank of England will view today’s inflation data as the least problematic of the week’s three economic announcements.”

“Prices are rising pretty much in line with the Old Lady’s two per cent target, giving the central bank cover to continue sitting on its hands,” he said. “As such the CPI data sits between yesterday’s employment data – which pointed towards higher interest rates in due course – and tomorrow’s retail sales numbers – which probably won’t.”

Chief economic adviser to the EY Item Club, Howard Archer, said: “Any help to consumer purchasing power is particularly welcome as the economy is likely to be hampered by prolonged Brexit uncertainties following the flexible extension of the UK’s exit from the EU to 31 October.”

“Consumers have generally been the most resilient part of the economy and they have been helped by real earnings growth climbing to 1.6 per cent in the three months to February, which was the best level since mid-2016,” he said.

By Harry Robertson

Source: City AM

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UK parliament very likely to consider new Brexit referendum – Hammond

The idea of a second Brexit referendum is very likely to be put before Britain’s parliament again although the government remains opposed to any new plebiscite, the British finance minister said on Friday.

Philip Hammond said he hoped parliament would break the Brexit impasse by passing a deal by the end of June, potentially ending the calls for a new referendum, and there was a “good chance” of a breakthrough in talks with the opposition Labour Party.

“I remain optimistic that over the next couple of months we will get a deal done,” he told reporters in Washington where he is attending meetings at the International Monetary Fund.

But a second referendum could not be ruled out.

“It’s a proposition that could and, on all the evidence, is very likely to be put to parliament at some stage,” Hammond said.

Prime Minister Theresa May has so far failed to get her own Conservative Party behind the Brexit divorce deal she agreed with other European Union leaders last year, forcing her to ask the bloc for a delay and to start talks with Labour about how to break the impasse in parliament.

Many Labour lawmakers are pressing their leader Jeremy Corbyn to demand a new referendum in talks with the government.

Hammond said that while the government was opposed to a new public vote, other Labour demands – such as a customs union with the EU – were up for debate.

Hammond said about six months would be needed to hold a referendum, so if parliament voted in a couple of months’ time to make one a condition of approving a Brexit deal, there would be no time before Britain is due to leave the EU on Oct. 31.

One of May’s most pro-EU ministers, Hammond has faced criticism from Brexit supporters for saying Britain should stay close to the bloc. He angered them again recently by describing another Brexit referendum as a “perfectly credible proposition”.

“(A second referendum) in the end is an issue about parliament and parliamentary numbers, and where the Labour Party ends up on this, as the Labour Party itself is deeply divided on this issue and at some point will have to decide on where it stands,” Hammond said.

Parliament has previously rejected the idea of a new referendum and other possible solutions the Brexit impasse.

BREXIT DIVIDEND?

Hammond said the risk of a no-deal Brexit had been reduced but not averted by this week’s delay of Britain’s exit and such an outcome would be felt in the global economy.

Ending the uncertainty would “unleash the very large stock of potential investment that is hanging over the UK economy in suspended animation,” he said.

Bank of England Governor Mark Carney said on Thursday that Brexit had pushed business uncertainty “through the roof”.

Carney is due to step down at the end of January, having delayed his departure twice to help Brexit preparations.

Hammond said Brexit could put off some qualified candidates in the search for the next BoE governor which was now underway.

“There may be some candidates who might be deterred from an application because of the political debate around Brexit, which inevitably the governor of the Bank of England can’t avoid being part of,” he said.

Supporters of Brexit have often accused Carney of giving over-gloomy assessments of the costs of leaving the EU.

Hammond also said the Brexit delay was hampering government efforts to improve economic productivity and could throw off course a planned multi-year budget for government departments due late this year.

Reporting by David Milliken; Writing by William Schomberg; Editing by Stephen Addison and Angus MacSwan

Soruce: UK Reuters

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Bank of England survey of attitudes to inflation and interest rates

This news release describes the results of the Bank of England’s latest quarterly survey of public attitudes to inflation, undertaken between 8 and 9 February 2019.

Q: When asked about the future path of interest rates, 22% said rates might stay about the same over the next twelve months, compared with 19% in November. 47% of respondents expected rates to rise over the next 12 months, down from 53% in November.

Q: Asked what would be ‘best for the economy’ – higher interest rates, lower rates or no change – 17% thought rates should ‘go up’, down from 19% in November. 17% of respondents thought that interest rates should ‘go down’, down from 19% in November. 37% thought interest rates should ‘stay where they are’, up from 34% in November.

Q: When asked what would be ‘best for you personally’, 22% of respondents said interest rates should ‘go up’, up from 21% in November. 28% of respondents said it would be better for them if interest rates were to ‘go down’, down from 31% in November.

Q: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.

Q: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, up from 2.8% in November.

Q: Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, down from 3.5% in November.

Q: By a margin of 56% to 6%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster, compared with 53% to 9% in November.

Q: 49% of respondents thought the inflation target was ‘about right’, remaining the same as in November, while the proportions saying the target was ‘too high’ or ‘too low’ were 22% and 13% respectively.

Click here for the full report and statistics.

Source: Property118

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Jump in UK labor costs add to sign of growing inflation pressure

A key measure of employers’ labor costs in Britain rose by the most in five years in late 2018, adding to inflation pressures that the Bank of England has said will need to be offset by higher interest rates.

Unit labor costs rose by an annual 3.1 percent in the final three months of 2018, the Office for National Statistics said, up from 2.9 percent in the previous three-month period and the biggest increase since late 2013.

British employers have been increasing their pay for workers at the fastest pace in a decade as they try to hire and retain staff with the unemployment rate at its lowest since the 1970s.

While the strong jobs market is helping households recover some of the spending power they lost after the global financial crisis, the hiring surge has aggravated Britain’s weak growth in productivity which is key for higher pay over the long term.

The ONS said output-per-hour, a measure of productivity, rose by only 0.5 percent in 2018 as a whole, well below the annual average of 2 percent before the financial crisis and half its rate in 2017.

“Our latest figures show a continuation of a decade of weak growth, often referred to as the ‘productivity puzzle’, with labor productivity growth lower over the last decade than at any time in the 20th century,” ONS economist Richard Heys said.

“It has taken the UK a decade to deliver 2 percent growth, which historically was achieved in a single year.”

The BoE has said Britain’s slow productivity growth is likely to add to the case for gradual increases in interest rates, although it has held off from raising borrowing costs while it waits to see if Brexit deals a shock to the economy.

British finance minister Philip Hammond has said Britain’s planned exit from the European Union, which is expected to exert a drag on overall economic growth, underscores the need to tackle the country’s productivity problem.

Reporting by William Schomberg, editing by David Milliken

Source: UK Reuters

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Pound Sterling “Set up for a Fall” against the Euro: Analyst

Prepare for a fall in the Pound says one foreign exchange analyst we follow.

According to Jeremy Boulton, an analyst who sits on the Thomson Reuters foreign exchange desk in London, foreign exchange traders could be guilty of focussing exclusively on Brexit and ignoring worrying distress signals coming out of the UK economy.

“A market that only has eyes for how soft or hard Brexit is hasn’t paid much attention to data, and data say buying the Pound has set it up for a fall,” says Boulton.

The remarks come in the wake of a poor turnout for the services sector of the economy. The latest IHS Markit Service Sector PMI read at 48.9 in March, down from 51.3 previously, where markets had looked for a decline to only 51.0.

This means the UK’s largest economic sector contracted for the first time in two years. “Intense political uncertainty,” was cited by respondents to the survey.

But it’s not just the PMI that is bothering Boulton.

“London house prices – which are critical for the real estate market, which is critical for the economy – are falling,” says the analyst.

Image courtesy of Nationwide.

And the implications are negative for the British Pound outlook we are told.

“That means it’s worth betting on a bearish shift in sentiment towards Sterling. The Pound has rallied 3.5% in value this year and few are betting on a fall. Sterling shorts previously worked to brake drops in the Pound’s value; no such safety net exists to prevent that drop now,” says Boulton, adding:

“Traders should expect dovish chatter from the Bank of England, which recently hiked interest rates and has a lot more room to cut than the European Central Bank.”

It is worth pointing out that markets expect a strong recovery in UK business activity should a Brexit deal be ratified by the UK parliament, hence why there has been no substantial sell-off in Sterling, yet.

The risk is that any decline in Sterling in the event of a sudden deterioration in Brexit sentiment is much sharper and deeper now that the economy is not playing the role of safety net for the currency.

While markets have bid Sterling higher on the assumption that a Brexit deal will ultimately be ratified by the UK parliament, or that a lengthy Brexit delay looms, the prospect for political disappointment cannot be underestimated.

Prime Minister Theresa May has met Labour leader Jeremy Corbyn to try and thrash out an agreement on the type of Brexit both parties can back and push through the House of Commons.

While Corbyn’s initial response was one of constructive engagement, members of his party remain sceptical.

“I thought momentarily last night May’s ‘offer’ might be genuine,” says Labour lawmaker Ben Bradshaw, but having heard Brexit Secretary Stephen Barclay giving an interview on BBC Radio Bradshaw says “it is clearly a trap designed to try to get May’s terrible deal through, which some people have fallen for, but Labour mustn’t.”

We are hearing on Thursday that the red lines set out by the Labour Party membership, particularly that any backing of a deal be contingent on a second EU referendum, are too entrenched for Corbyn to shift.

We see a remote possibility to the two sides agreeing on something that genuinely has the backing of a majority of the House of Commons before next Wednesday’s meeting of EU leaders when they will consider whether or not to grant another Brexit extension.

We feel a breakdown in talks between May and Corbyn could hurt Sterling.

However, for now markets are focussing on the positives.

Another Labour Party lawmaker said her party will not make particular topics off-limit when its leader, Jeremy Corbyn, starts talks with Prime Minister Theresa May.

“We must find common ground now and we must find that very, very quickly and that’s why Jeremy has been very clear about not setting any limitations and keeping a very open mind,” Rebecca Long-Bailey, Labour’s business spokeswoman, told Reuters.

General Election Fears

We note in a recent article another risk on the horizon for the UK currency is a prospective General Election should Conservative Party Brexiteers feel they would rather go to the electorate than back their government and its Brexit deal.

The initial Conservative response to May’s latest gamble has been anything but welcoming and for us the likelihood of a general election has risen. The Pound tends to struggle in times of political uncertainty, and the prospect of a devoutly left-wing government taking the reins of the UK economy would likely see declines in Sterling.

“A Corbyn led government would spark fear of re-nationalisations in the market are could unleash further downside pressure on the Pound,” says Jane Foley, a strategist at Rabobank. “Currently we are forecasting EUR/GBP at 0.82 in 6 months on the view that a Brexit deal will be agreed. However, a period of messy domestic politics could make this forecast appear optimistic.”

EUR/GBP at 0.82 gives a Pound-to-Euro exchange rate of 1.22.

“We turned Negative GBP recently due to markets not pricing the risk of a Corbyn government adequately in our view,” says Thanos Papasavvas, Founder & CIO of ABP Invest. “The population is getting fed up with the Tories’ constant internal crises and their inability to form policy.”

However, strategists with the world’s largest currency dealer – Citi – say they are not yet concerned on the matter of a general election.

Strategists at Citi say while election risk is higher since last week, they think the Conservative Party’s desire to avoid this outcome is under-appreciated by the market.

“GBP will be dominated less by the outcomes of various votes this week and more by the reaction function of Conservative Brexiteers. If election risk has not followed through by the end of this week, GBP should be higher,” says a recent note from Citi.

For now markets are in agreement, but we would expect the shape of any Conservative-Labour deal to determine just how sizeable any Conservative MP mutiny might be.

Written by Gary Howes

Source: Pound Sterling Live

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The British Pound is a Buy says Morgan Stanley

The Pound remains the best performing currency in the G10 universe for 2019 but the British currency has much further to rise, according to analysts at Morgan Stanley, who’ve recently told clients to buy the British currency.

Morgan Stanley forecasts double digit upside from Thursday’s level for the Pound-to-Dollar rate before the year is out and around a 3% increase for the Pound-to-Euro rate, the latter of which has already risen 5.4% thus far in 2019.

Analysts at the bank also advocated that clients buy the Pound-to-Dollar rate earlier in March, as they themselves are targeting a move up to 1.3650, although their year-end forecast for that exchange rate is much higher.

Expected changes in relative interest rates are key to much of the projected increase but the anticipated shift in base rates and bond yields could not happen without a resolution of the Brexit saga that’s ongoing in the UK parliament.

“This week’s Brexit news affirms our view that the probability of a softer Brexit is continuing to rise, particularly a Brexit that includes tighter economic linkages to the EU. Meanwhile the risks of a hawkish BoE remain underpriced – wage growth continues to rise in the UK while capacity pressures bite, suggesting potential inflation pressures,” says Hans Redeker, head of FX strategy.

Significant numbers of MPs have indicated they will now back Prime Minister Theresa May’s EU Withdrawal Agreement for fear of losing sight of the exit door entirely, including former foreign secretary Boris Johnson and at least 25 others.

Those pledges of support came after PM May offered to resign once her signature bill is through the House of Commons. However, a large number of MPs still oppose it and the Democratic Unionist Party (DUP) of Northern Ireland is so-far unmoved in its opposition to the treaty.

The withdrawal agreement will set the stage for negotiations on the future relationship so a change of Prime Minister would not address its deficiencies If it is not passed this week the UK will receive from the EU an Article 50 extension that runs only until April 12.

At that point MPs will choose between a so-called no deal Brexit and a much longer extension that would require participation in EU elections while politicians establish a way forward. PM May has said she will not allow a “no deal” exit unless parliament consents to it, but MPs voted on Wednesday with a majority  of 240 to reject that idea.

“The announcement of a proposed Brexit extension raises the risk of a public vote to ultimately solve Brexit, which may add some short-term risk premium and uncertainty into the currency. However, the long-term probability of a softer Brexit outcome is, as a result, rising, making GBP longs still attractive in our view,” Redeker says.

This will give the Bank of England (BoE) an opportunity to lift its interest rate again, by eliminating the risk of a “no deal Brexit”, which has long been seen as the difference between whether the BoE hikes or cuts its rate next.

The trade tariffs and non-tariff barriers on bilateral trade that would come with a “no deal Brexit” could potentially undermine the outlook for inflation by reducing demand in the economy. As a result, the BoE has been reluctant to make any changes to interest rates before it knows exactly how the Brexit saga will end.

The Bank of England has raised its interest rate by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, it highest level since before the global financial crisis.

But the central bank has said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it’ll need to keep raising rates in the coming quarters.

“GBP is most highly correlated to local rates and rate differentials, suggesting that a hawkish shift [at the Bank of England] should propel GBP higher. A key risk to the trade is that UK economic data softens, reducing the probability that the BoE raises rates,” Redeker says, in a note to clients.

Interest rate changes influence exchange rates through their impact on the attractiveness of related investments, particularly those in the bond market. They do that by reducing, or widening already-negative, interest rate differentials.

International capital tends to flow wherever relative interest returns are most favourable so if the gap between two interest rates moves in favour of one currency that is on one side of an exchange rate, that currency will normally be rewarded with a bid from the market.

The U.S. Federal Funds rate of 2.5% is substantially higher than the BoE’s 0.75% but markets are already speculating the Federal Reserve could cut its interest rate next year so if the BoE were to lift Bank Rate the Pound-to-Dollar rate differential would move in favour of Sterling.

It is a gradual increase in market bets on BoE rate hikes that Redeker says will drive the Pound-to-Dollar rate up to Morgan Stanley’s forecast of 1.52 by year-end, from 1.32 on Thursday, which implies an increase of 15% to come on top of the 3.5% gain already under the exchange rate’s belt.

The Pound-to-Euro rate is forecast to rise by almost 3% to just below the 1.22 level, from 1.1720 Thursday. The lesser increase in that exchange rate owes itself to the fact the Euro-to-Dollar rate is also projected to rise substantially, to 1.25, from 1.1250 Thursday.

By James Skinner

Source: Pound Sterling Live

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No-deal Brexit could lead to transfer values being cut

Leaving the European Union without a deal could lead trustees to cut transfer values to protect defined benefit pension schemes, experts have warned.

Malcolm McLean, senior consultant at Barnet Waddingham, told FTAdviser recent estimates had correctly predicted a no-deal Brexit would increase pension deficits by billions of pounds.

This in turn could have an adverse effect on transfer values, he suggested.

He said: “Crashing out of the EU without any sort of deal would almost certainly increase market volatility and continued uncertainty as to the future direction of travel for the economy as a whole.

“This could impact on gilt yields and inflation expectations, all of which could have a damaging effect on DB funding levels and transfer value rates.

“In a more extreme scenario, trustees could be forced to cut transfer values in the interests of protecting the fund and holding on to the employer covenant.”

According to analysis from Colombia Threadneedle, UK DB schemes would see their deficit increase by £35bn if the UK leaves the EU without an agreement.

This is because while UK DB funds’ assets would rise in a no-deal scenario, as they are invested overwhelmingly in non-domestic assets, liabilities would increase even further.

If, on the other hand, the government agreed to a softer Brexit, schemes could be in line for a £85bn surplus, as liabilities wouldn’t rise as much.

Mr McLean said a softer Brexit “would bring a degree of certainty to the proceedings, something that markets always like to hear”.

He added: “Whether that would in itself materially affect DB fund holdings and ultimately increase transfer values is not absolutely certain, but it could enable a return to the more stable conditions we have seen in this respect previously.”

Counterbalancing this theory is the possible impact of a no-deal on interest rates.

Sir Steve Webb, former pensions minister and director of policy at Royal London, explained that if the Bank of England felt it needed to cut interest rates again to prop up the economy, then this could also affect long-term interest rates, which could drive up transfer values.

He said: “But the impact on the stock market would also be important. If shares also fell then this could also increase deficits, especially for less mature DB schemes.”

Kay Ingram, director of public policy at national firm LEBC, also believes that transfer values generally would rise in the immediate aftermath of no-deal, due to a weaker sterling combined with low bond yields.

She said: “Schemes with assets invested primarily in global equities would benefit from the continued sterling weakness.

“Using this investment dividend to offload future growing liabilities would make sense for schemes with this asset allocation.

“Those schemes with a reliance on UK fixed interest and domestic stocks would see deficits widen but could benefit if the Bank of England responded to this scenario with interest rate cuts and reintroduction of asset purchases.”

But Ian Neale, director at pensions specialist Aries Insight, cautioned against generalising across all DB schemes.

Mr Neale noted that market factors, including possible tariffs, the proportion of scheme investments dependent on the UK economy, and the business sector in which the scheme sponsor operates will be material for the impact of Brexit for pension schemes.

He said: “The general feeling in the industry seems to be that if UK exit does happen, then it is more likely to depress than enhance scheme valuations.”

By Maria Espadinha

Source: FT Adviser

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BoE Unanimous In Keeping Interest Rates Unchanged

As was widely expected the rate-setters for the BoE have voted unanimously to keep the base rate on hold at 0.75%. It’s not surprising the bank have decided to remain in wait-and-see mode given the major political uncertainty at present, and don’t expect anything drastic from them until there’s greater clarity on Brexit.

The market reaction has been pretty quiet with the GBP/USD rate remaining near its lowest level of the day at $1.32.

UK retail sales add to recent strong data streak

Given the calamitous state of UK politics with it now being over 1000 days since the Brexit referendum and we’re still none the wiser as to what our exit from the EU will look like – let alone the relationship going forward – it is truly remarkable how solid, the economic data remains.

The latest figures reveal a pleasing strength in consumer confidence, as retail sales numbers topped estimates with the 3.7% increase for the 3 months to February representing the largest year-on-year rise since January 2017.

Economic surprise indices for the UK are about as positive as they’ve been for a couple of years, but for the foreseeable future Brexit remains the only game in town as far as currency traders are concerned and the uncertainty is weighing on sterling.

Dovish Fed weighs on USD but stocks fail to rally

The US central bank confirmed their policy U-turn with the announcement last night that rate-setters see no interest rate hikes this year, and only a token 1 in 2020. The market has been expecting this for a while since Chair Powell’s speech at the start of the year, with no 2019 hikes already priced-in before the latest meeting, but the Fedwent above and beyond what most expected by also announcing a slowing of its balance sheet reduction – also known as Quantitative Tightening (QT) beginning in May.

This dovish move caused an immediate drop in the buck, which depreciated across the board while stock and treasuries rallied.

No Powell Put?

What’s important to note is the reaction function of different markets to this change in tack, with equities already seemingly heavily discounting the move, whereas FX markets have been slower to price it in.

For instance, the large gains seen for US stock markets this year have been arguably driven by this shift in Fed policy more than any other factor, while the US dollar still remains higher than it did at the start of the year (according to a trade-weighted index of the buck.) Why this is crucial to note is what it means going forward, with the scope for a sustained move lower in the US dollar now seemingly far greater than a sustained rally in stocks – if we look purely based on Fed policy.

Indeed after an initial move higher as the news broke, US stocks gave up most of the gains, with both the S&P 500 and Dow Jones Industrial Average ending the day in the red.

A failure to extend the year-to-date rally on what is essentially good news could prove ominous and those who still believe in a “Powell Put” should be aware that the S&P500 has only managed to post a gain on 1 of the 9 days of a Fed rate decision since his tenure began.

By David Cheetham

Source: Investing

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Bank to ‘sit tight’ on interest rates amid Brexit ‘fog’

The Bank of England is expected to hold interest rates at 0.75% once more on Thursday as Brexit uncertainties reach their peak.

With still no clear sight of the Brexit outcome just over a week before the planned March 29 EU exit date, members of the Bank’s nine-strong Monetary Policy Committee (MPC) are set to vote unanimously to leave rates unchanged.

Experts believe policymakers will remain firmly in wait-and-see mode for some time until there is greater clarity.

There looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected

Howard Archer, EY Item Club

But the decision comes after a better-than-expected set of employment and wages data on Tuesday, which some economists have said bolsters the case for a rate rise later in the year, should there be a lengthy Brexit delay or if a deal is eventually struck.

Yet with inflation still below target at 1.9% in February and economic growth set to remain weak in the first quarter of 2019, there is little chance the Bank will look to make any moves until some of the damaging uncertainty over Brexit is lifted.

Or, as Bank Governor Mark Carney recently put it, the “fog” of Brexit, which is weighing heavily on growth.

Howard Archer, chief economic adviser to the EY Item Club, said: “Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

“With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.”

Bank of England
Bank of England Governor Mark Carney has said the ‘fog’ of Brexit is hurting the economy (Kirsty O’Connor/PA)

The rates outlook would alter dramatically should there be a no-deal scenario, with most economists expecting a cut despite the Bank’s repeated warnings that policy could move in “either direction”.

Recent data has pointed to economic growth stalling at 0.2% in the first quarter, unchanged on the previous three months as Brexit uncertainty has seen sharp falls in business investment.

The recent official data revealed a 0.5% month-on-month rise in January in a rebound after a 0.4% fall in December, but growth edged just 0.2% higher overall in the three months to January.

Closely-watched purchasing managers’ index surveys have also signalled growth easing back to just 0.1% between January and March, while the latest manufacturing poll from the CBI on Wednesday showed the weakest activity since last May.

It also showed that a quarter of manufacturers were actively stock-building in preparation for a possible no-deal.

If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer

James Knightley, ING

The Bank and independent forecasters at the Office for Budget Responsibility have both downgraded the growth outlook to the weakest for a decade in 2019, at 1.2% this year.

There is some hope of a marginal bounce-back should a Brexit deal be struck and business investment recovers, but Mr Carney and many other economists have been quick to warn that uncertainty will remain for some time yet even if an agreement is secured.

James Knightley, an economist at ING, is less gloomy on the prospects.

He said the better-than-expected 222,000 rise in employment in the recent data, the 3.4% rise in wage growth, and the fact that the UK’s jobless rate has fallen below 4% for the first time since 1975 cannot be ignored.

He said: “The UK labour data looks astonishingly strong for an economy that is supposedly slowing on most other measures.

“If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer.”

Source: Shropshire Star

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Brexit more important for interest rates than inflation

The Bank of England is hedging its bets about the direction of UK interest rates this year and Brexit will be the most important factor on the horizon, according to Ben Brettell, senior economist at Hargreaves Lansdown.

Mr Brettell said the Brexit outcome was more important than the inflation rate, which was released this morning (March 20) and had risen modestly to 1.9 per cent in February, up from the 1.8 per cent in January.

February marked the first month in which inflation has risen since the summer of 2018 but the rise was in line with expectation.

In its report, the Office for National Statistics, which compiles the data, cited higher food and alcohol prices during the month as the reason inflation rose slightly.

Mr Brettell said the market had been “unmoved” by the news, as the outcome of the Brexit was more relevant. Sterling returned to the rate it was on Monday following the announcement.

He said: “The Bank of England has been setting a neutral tone as Brexit approaches, with policymakers hamstrung by political uncertainty and a deteriorating global growth outlook.

“The Bank has said it thinks higher interest rates will be appropriate in the coming months, as it aims to keep inflation close to its long-term 2 per cent target.

“News from the labour market yesterday suggests companies at least are carrying on regardless, hiring workers at the fastest pace for three years. A tight labour market would normally lead to calls for higher rates, but these are far from normal times.

“If Theresa May can somehow find a way to break the political deadlock in Westminster and Brexit happens in a relatively orderly fashion, we could see rates gently nudge up later this year.

“If we leave with no deal, however, all bets are off. I’d expect inflation to spike as sterling weakens, but the Bank has shown willingness in the past to look through this type of inflation and keep interest rates low to support the economy. I’d expect them to do the same here.”

Inflation comes in two forms, demand side, and supply side. Demand side inflation happens when demand for goods and services in an economy rises and is generally positive for economic growth.

Mr Brettell’s view is that if there is a Brexit with a deal, then demand side inflation would rise, and the Bank of England is likely to lift interest rates.

Supply side inflation, is caused by an increase in the cost of getting goods to market. In a no-deal Brexit scenario, Mr Brettell expects the value of sterling to fall, and this increases the cost to producers of getting goods to market, as oil and other commodities are priced in dollars, so weaker sterling makes the cost of those inputs rise.

Mr Brettell noted that when sterling fell in the immediate aftermath of the EU referendum in 2016, it was supply side factors which caused inflation to rise above the 2 per cent target, but the Bank of England ignored this because it viewed currency driven inflation as temporary.

Mr Brettell said he would expect the same to happen in a no-deal Brexit, with the currency falling and inflation rising but the bank declining to put rates up.

Kate Smith, head of pensions at Aegon, said: “Whilst inflation remains low, individuals should look to save any additional income where they can, particularly given that auto-enrolment pension contributions are about to increase and there is continued uncertainty around what impact Brexit may have on people’s spending power.”

By David Thorpe

Source: FT Adviser