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Rising UK borrowing sets stage for Bank of England rate hike

Britain’s housing market is perking up and consumer confidence has neared a two-year high, according to figures on Monday that probably keep the Bank of England on track to raise interest rates this week.

The data from the BoE and European Commission are likely to bolster the central bank’s view that Britain’s economy, while growing only slowly, has recovered from an early 2018 slowdown caused by an unusually cold winter.

Britain has lagged behind most other rich economies since the 2016 vote to leave the European Union. But the BoE has said it needs to raise rates because even Britain’s slow growth is likely to generate too much inflation.

The BoE said British lenders approved 65,619 mortgages in June, a five-month high and up from 64,684 in May. A Reuters poll of economists had pointed to a reading of 65,500. There was also a bigger-than-expected increase in lending to consumers.

Separately, a European Commission survey on Monday indicated that British consumer confidence rose to its highest level since September 2016, shortly after the Brexit referendum.

“The further pick-up in households’ and corporates’ borrowing in June strengthens the case for the (BoE) to raise interest rates at its meeting on Thursday, though we doubt that the recovery has further to run,” Samuel Tombs, an economist at consultancy Pantheon Macroeconomics, said.

Previously published surveys have shown a downbeat outlook for the housing market and subdued lending plans from major British banks, he said.

Most economists polled by Reuters think the BoE will raise rates to a new post-financial crisis high of 0.75 percent on Thursday. [BOE/INT]

However, some economists are concerned that domestically generated inflation pressure – mostly from wage growth – is actually weakening, which would make a rate hike unnecessary and even damaging to households.

“Mindful of the global and domestic macro and political backdrop – namely ongoing UK government instability – I continue to believe that a prospective rate hike is an unnecessary risk,” Sajiv Vaid, a portfolio manager with Fidelity, said.

Monday’s BoE figures showed net mortgage lending rose by 3.851 billion pounds, while consumer lending increased by 1.567 billion pounds compared with a forecast rise of 1.3 billion pounds.

Consumer credit growth has been slowing gradually since it peaked at nearly 11 percent in January 2016.

The BoE has played down any suggestion of a debt bubble, though it has acknowledged pockets of risk and required banks to set aside more money against the risk of bad loans.

Source: UK Reuters

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Bank vote could see interest rates hit their highest level since 2009

THE Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.

In what would mark another milestone for the economy in its recovery since the financial crisis, members of nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5 per cent to 0.75 per cent on Thursday.

The move would see rates hit their highest level since March 2009, when they were slashed from 1 per cent to 0.5 per cent as the financial meltdown and recession wrought havoc.

Investec economist George Brown said he is “fairly confident” the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

He believes the economy has performed in line with the Bank’s last forecasts in May, when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June, while wage growth has also been weak.

He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting – most likely following a split vote.”

He added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5 per cent or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise, with many economists expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May that this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise.

A rate rise in August would be the second hike in the past year, after the Bank voted for an increase from 0.25 per cent to 0.5 per cent in November – the first such move for more than 10 years and reversing the cut made in the aftermath of the Brexit vote.

Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.

Source: Irish News

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Bank of England expected to hike interest rates next week

The Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.

In what would mark another milestone for the economy in its recovery since the financial crisis, members of the nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5 per cent to 0.75 per cent on Thursday.

The move would see rates hit their highest level since March 2009, when they were slashed from 1 per cent to 0.5 per cent as the financial meltdown and recession wrought havoc.

Investec economist George Brown said he was “fairly confident” the bank would move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

He believes the economy has performed in line with the bank’s last forecasts in May when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June, while wage growth has also been weak.

He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting, most likely following a split vote.” He added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5% or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise. Many economists are expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise. A rate rise in August would be the second hike in the past year after the bank voted for an increase from 0.25 per cent to 0.5 per cent in November – the first such move for more than ten years and reversing the cut made in the aftermath of the Brexit vote.

Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.

Source: Scotsman

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Bank of England poised to push rates above crisis lows

The Bank of England looks set to pass a post-financial crisis milestone next week by finally raising interest rates above their emergency levels set more than nine years ago.

But with a potentially messy Brexit nearing, Governor Mark Carney may sound cautious about the pace of further moves away from the BoE’s still-powerful stimulus programme.

In March 2009, when the financial crisis was raging, the BoE slashed its benchmark rate to 0.5 percent to stave off the risk of a depression.

Bank Rate has sat there since, apart from a 15-month period after the shock referendum vote in 2016 for Britain to leave the European Union, when it was cut again to 0.25 percent – the lowest in the three-century history of the central bank.

Now, Carney and his colleagues are expected to nudge rates up to 0.75 percent on Aug. 2, going beyond last November’s increase back up to 0.5 percent.

However, taking rates above their crisis levels will not be a vote of confidence in the world’s fifth-biggest economy.

Britain has gone from having the strongest growth of the Group of Seven rich nations to being one of the slowest after the Brexit decision.

The terms of Britain’s future relationship with the EU are still unclear, eight months before Brexit, and Prime Minister Theresa May could yet be unseated by her own Conservative Party which is split on how close the country should remain to the bloc.

At the same time, consumers are still feeling a squeeze on their spending power. And inflation, while above the BoE’s 2 percent target at 2.4 percent, has been weaker than expected.

Nonetheless, the BoE says the economy cannot grow even at its current sluggish rate without causing too much inflation, given Britain’s chronically weak productivity growth.

A BoE decision to raise borrowing costs could also be backed up by a new estimate of what it considers the neutral interest rate for Britain’s economy, which neither stimulates nor suppresses demand and which is likely to be rising in the coming years as the effects of the financial crisis fade.

U-TURN AHEAD?

BoE officials have tried to soothe concerns about raising rates, something they promise will be gradual and limited.

“Voting for a 25 basis-point rate rise, a full decade after monetary policy was first placed on an emergency setting, is hardly either surprising or radical,” Chief Economist Andy Haldane said in late June.

But some analysts believe raising borrowing costs is an unnecessary risk that the central bank is taking because it failed to deliver on previous signals that a hike was coming.

John Wraith, a strategist at UBS, said domestic inflation pressure — chiefly from wage growth — was very benign while tighter monetary conditions risked triggering a squeeze on indebted consumers and cooling domestic demand.

“If and when that happens, the interest rate market may start to anticipate a reversion by the (BoE) to a neutral policy stance, especially if there are ongoing headwinds and downside risks to the outlook emanating from the UK’s protracted exit from the EU,” he said in a note to clients, adding that investors might even start to bet on a rate cut ahead.

Yet the chance of an increase on Thursday is rated at 80 percent by financial markets, and eight of the BoE’s nine monetary policymakers are likely to back a rise, analysts say.

Investors will be listening closely for whatever signals Carney gives about the outlook for further increases.

Markets are not pricing in an increase in borrowing costs to 1 percent for at least another year.

In the past, Carney has warned investors they are being too relaxed about the prospect of further hikes.

Victoria Clarke, an economist with Investec, said the BoE might want to send another reminder to the market to remain on guard, as long as Britain manages to secure a deal with the EU and avoid a damaging “cliff-edge” Brexit.

“We don’t know what politics will bring but I think Carney would want to push those expectations up a bit,” Clarke said.

Source: UK Reuters

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Tame UK inflation knocks BoE rate hike expectations

British inflation unexpectedly held steady last month, denting market confidence about a Bank of England interest rate hike next month and sending sterling to a 10-month low against the dollar.

The pound tumbled towards $1.30 and 10-year British government bond yields GB10YT=RR fell to their lowest since the end of May following the data, which also showed weakening in an underlying measure of inflation.

Despite motor fuel prices rising to their highest since 2014, annual consumer price inflation held in June at 2.4 percent, the Office for National Statistics (ONS) said.

Economists polled by Reuters had on average expected to see the first increase this year, to 2.6 percent.

Britain’s economy appears to be picking up after a slow first three months of the year, when unusually heavy snow hurt demand.

While the central bank worries that growth is close to the modest pace at which it will start to push up inflation, Wednesday’s data brought little sign of this.

Core inflation, which strips out energy, food, alcohol and tobacco prices, fell to 1.9 percent from 2.1 percent in May — below all forecasts and the weakest reading since March 2017.

“The large downside surprise adds more uncertainty around what had until now appeared a near-certain August rate hike,” JPMorgan economist Allan Monks said.

Comments from BoE officials over the next week could be a “game changer”, Monks said, drawing parallels with May, when a spate of poor data thwarted a widely expected rate hike.

One measure of financial market pricing after Wednesday’s figures showed a roughly 70 percent chance of a move next month compared with nearly 80 percent before BOEWATCH.

PRESSURE IN THE PIPELINE?

On Tuesday data showed British workers’ wages rose at the slowest rate in six months during the three months to May despite a record number of people in jobs, challenging the BoE as it considers raising rates next month.

A Reuters poll of economists published on Tuesday showed 47 out of 75 thought the BoE would raise rates to a new post-financial crisis high of 0.75 percent in August. The remainder thought it would stay on hold. [BOE/INT]

Some economists said the weakness in June’s inflation data was driven by volatile components such as clothing, computer games and air fares which could soon rebound.

The ONS reported the biggest month-on-month drop in clothing prices for any June since 2012 as shops slashed prices for the summer sales.

Wednesday’s data suggested rising pressure in the pipeline for consumer prices, however.

Manufacturers increased the prices they charged by 3.1 percent in June compared with 3.0 percent in May. While a slightly weaker increase than expected, it marked the strongest rise this year.

The cost of raw materials – many of them imported – was 10.2 percent higher than in June 2017, the strongest rise in a year.

“The continued pick-up in producer prices suggests that inflation may rise a little in the short term as the recent oil price increases pass through supply chains,” said Suren Thiru, head of economics at the British Chambers of Commerce.

But any period of rising price growth was likely to be temporary, he added.

Source: UK Reuters

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UK economy brightens as Bank of England nears rate decision

Britain’s economy picked up a bit of speed in May after slowing in early 2018, according to official figures that will give the Bank of England more confidence about raising interest rates next month for only the second time in over a decade.

A new monthly reading of gross domestic product showed the world’s fifth-biggest economy grew by 0.3 percent in May from April, the strongest performance since November and up from growth of 0.2 percent a month earlier.

The figure was in line with the forecast in a Reuters poll of economists, but sterling fell. Growth came mostly from the dominant services sector while factory output disappointed, the Office for National Statistics said.

“There is good news and bad news in this release, but on balance the Bank of England will likely focus on the good,” HSBC economist Elizabeth Martins said.

The good weather that helped spending in May continued into June and July, promising a pickup in growth. A British Retail Consortium survey earlier on Tuesday also showed a boost to sales from the soccer World Cup.

“Whether this pace of growth is sustainable, once the good weather and World Cup end, is another question,” Martins said.

Governor Mark Carney and other BoE officials opted not to raise rates in May because of the winter slowdown and decided to wait to be sure cold weather was to blame, not broader problems ahead of Britain’s exit from the European Union next year.

 However, Prime Minister Theresa May’s attempts to keep a grip on the ruling Conservative Party, which is deeply split over Brexit, could yet affect confidence among employers, a potential new hurdle for the BoE.

In the three months to May, Britain’s economy grew by 0.2 percent after stagnating in the three months to April and was 1.5 percent bigger than in May last year, the ONS said.

Bolstering hopes of momentum returning to the economy, GDP looks set to grow by 0.4 percent and 0.5 percent in the second and third quarters, the National Institute of Economic and Social Research, a think tank, said.

The BoE is expected to raise rates by 25 basis points to 0.75 percent on Aug. 2, according to a Reuters poll of economists. It raised rates in November for the first time since before the financial crisis and has signaled it will raise them gradually over the next three years.

SERVICES-LED GROWTH

The ONS said the warm weather and spending around the royal wedding of Prince Harry and Meghan Markle helped the economy.

Britain’s services industry grew 0.3 percent month-on-month in May, slowing from an upwardly revised 0.4 percent in April.

Over the three months to May, growth in services — which makes up 80 percent of economic output — picked up speed to 0.4 percent from 0.2 percent.

But industrial output fell unexpectedly in May by 0.4 percent on the month, hit by the shutdown of the Sullom Voe oil and gas terminal.

Manufacturing growth also disappointed, rising only 0.4 percent on the month — less than half the growth rate expected in the Reuters poll.

May capped the weakest three months for British factories since December 2012.

There was better news from construction, which had struggled in the bad weather of early 2018. Output jumped 2.9 percent in May, far exceeding expectations and marking the first growth in the sector since December.

Separate data showed Britain’s deficit in goods trade during May was broadly unchanged from April at 12.362 billion pounds ($16.37 billion).

Source: UK Reuters

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Bank of England chief raises expectations of August rate rise

Bank of England governor Mark Carney has raised expectations of an interest rate rise next month, after talking up the UK’s economic performance.

Data points to a pick-up in growth in the second quarter of the year, after a disappointing start to 2018, according to the chief monetary policymaker.

In a speech, Carney said: “The incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate.

“A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1.”

The job market has remained strong and headline inflation is expected to rise in the short-term because of higher energy prices, the governor said.

Economy evolving

He added that the economy is evolving largely in line with the May inflation report projections.

In this scenario, raising interest rates would be appropriate to return inflation to its target, according to Carney.

The Bank of England’s rate-setting Monetary Policy Committee is due to meet again in August.

At the last meeting in June, three members of the committee voted to immediately raise rates to 0.75%, from the current level of 0.5%.

Carney voted to hold rates in June, but following his remarks today, it appears he could switch and favour a rate rise next month.

Source: Your Money

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Bank of England rate-setter Michael Saunders says rate hike needed faster than markets expect

Interest rates may have to rise faster than markets are pricing, according to one of the most hawkish members of the Bank of England’s monetary policy committee (MPC).

Michael Saunders today said that against a background of stronger inflationary pressures “rates might need to rise a little faster”.

Saunders was one of the three members of the rate-setting MPC to vote for interest rates to rise to 0.75 per cent at the last meeting in June, when chief economist Andy Haldane surprised City observers with a vote to hike.

The split vote highlights the difficult trade-off for the MPC, with what it sees as signs of rising inflation on the domestic front amid relatively weak economic data.

Speaking to CNBC, Saunders today said that he wants an “earlier return to a neutral rate” for monetary policy, at which it does not stoke further inflation.

He said: “I think the neutral rate is significantly lower than it used to be. And even if rates were to rise a little faster than markets price in I think that the general picture is still limited and gradual, not too far, and not too fast.”

A rebound in UK growth after a weak (albeit upwardly revised) GDP reading of 0.2 per cent in the first quarter and a “tightening in the labour market feeding through to pay growth” are key to the rates outlook, Saunders said.

Yet despite his hawkish message on rates, Saunders delivered a fairly downbeat assessment of the strength of the UK economy.

Brexit has held back the “big cyclical investment surge” which would normally be expected in similar economic conditions; “It’s clear that Brexit is dampening investment intentions compared to what we would otherwise have,” Saunders said, although adding that it has still grown.

The neutral rate for interest rates has been lowered by a combination of demographic pressures – with an ageing population – and lower productivity growth, he said, alongside tighter fiscal policy since the financial crisis.

Source: City A.M.

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UK housing market perks up in May but consumers subdued – BoE

Britain’s housing market perked up in May but there were more signs of caution among consumers ahead of Brexit next year, Bank of England figures showed on Friday.

The BoE is watching for clear signs that consumer spending has recovered before it raises interest rates, after Britain’s economy slowed sharply in the first three months of the year.

 It said the number of mortgages approved for house purchase rose to a four-month high of 64,526 in May from 62,941 in April — above all forecasts in a Reuters poll of economists that had pointed to 62,200 approvals.

Britain’s housing market slowed sharply last year and growth in property prices has cooled, but the BoE figures added to tentative signs that activity may be picking up again.

Still, the signals from Britain’s consumer economy remain subdued despite a modest pick-up in wage growth. Earlier on Friday, consumer confidence fell unexpectedly as Britons became more downbeat about the economic outlook, nine months before Britain is due to leave the European Union.

 The BoE data showed the growth rate in unsecured consumer lending slowed to 8.5 percent in the year to May, the weakest since November 2015, from April’s 8.7 percent.

This week a BoE survey showed growth in the consumer services sector slid to a five-year low in recent months.

Earlier this week the BoE said consumer credit continued to expand rapidly, but measures already taken to stop overheating were having an impact, with banks reporting a significant tightening of unsecured credit.

 Net mortgage lending rose by 3.861 billion pounds, while consumer lending increased by 1.405 billion pounds compared with a forecast rise of 1.5 billion pounds.

Consumer credit growth has been slowing gradually since it peaked at nearly 11 percent in January 2016.

Source: UK Reuters

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Why Bank of England is likely to hold interest rates

Americans were told last week that their cost of borrowing will rise for the seventh time since 2015 But, in the UK, borrowers are again expected to avoid a rise in interest rates when the Bank of England announces the outcome of its rate-setting meeting on Thursday.

UK interest rates are expected to be held to at 0.5%. Analysts at Hargreaves Lansdown say that tougher economic data means the market is not anticipating a rate rise until August.

In November, when the Bank’s Monetary Policy Committee voted to unwind the cut to 0.25% that took place after the EU referendum, the market had been expecting that rates would have risen by now.

But Laith Khalaf, senior analyst at Hargreaves Lansdown, said a June rate rise was unlikely, pricing in a 50-50 chance in August and chances of a rise by the end of the year at 67%.

“And it wouldn’t be entirely surprising to get to the end of the year without a rate rise. It is a sign of poor confidence in the UK economy,” said Khalaf, and contrasts the situation in the US where the Federal Reserve last week not only pushed up rates but signalled two more hikes this year.

The European Central Bank, which sets interest rate for the eurozone, also signalled that rate rises were unlikely before September 2019, but announced it would scale back the bond-buying programme it has embarked upon since the financial crisis.

Further rate rises in the UK , where the central bank has a mandate to keep inflation at 2%, are being held back by a number of factors.

Khalaf cited the latest GDP data for the first three months of the year showing growth of 0.1% – albeit possibly constrained by a blip caused by the cold weather at the start of the year – the slow rate of wage growth and the “existential state of angst” in the retail sector.

Hardly a day goes by without a retailer reporting problems. Last week department store chain House of Fraser announced it would shut 31 of its 59 shops while earlier this week discount retailer Poundworld entered administration.

Economists at ING see the challenges facing the retail sector as one of the main factors that could deter a rate rise in August.

“While our base case is for the Bank of England to hike rates in August, the challenges facing the retail sector are probably the biggest risk to this view,” said the Dutch bank’s economist James Smith in a research note. 2018 so far has been one of the toughest years for retailers since the financial crisis, he said. While retail sales rose a sharper than expected 1.3% in May, analysts believe it was largely the result of the better weather that month and the Royal Wedding.

Smith told Yahoo Finance that if rates were not increased by a quarter point in August it would be “quite a long time” before they moved because of the uncertainties created by Brexit, due to take place in March 2019.

Aside from the post-referendum cut, rates in the UK have been at 0.5% since the financial crisis. In November, when the rate was lifted to 0.5%, the Bank of England found that 2 million households with mortgages – a fifth of those with a home loan – would never have experienced a rise in the bank rate since taking out their loan. It calculated that a quarter point rise in interest rates increases monthly payments on an average mortgage of £15 a month.

Charities are concerned too. In November, StepChange warned of the impact for households which are “just holding on by their finger tips”. One in 10 of its clients with a mortgage would end up with a budget deficit after a rate rise.

Savers also have little to cheer about. Helen Saxon, chief product analyst at MoneySavingExpert.com said: “On 2 November when the MPC decided to raise interest rates, the top easy access account paid 1.3% in interest. This week, the top easy access account also paid 1.3% in interest to savers – it’s fair to say that the rise back to a 0.5% base rate didn’t really have too much effect.

“In fixed savings, however, we have seen a small rise – for example a one year fix today could get you 2.05%, compared with 1.85% in November – though this is an outlier; the next best one-year fix pays 1.87%.

“Overall, it remains a dismal picture for savers wanting a return on their cash.”

Source: Yahoo Finance UK