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UK wage growth at new decade high as employers hire in the face of Brexit

British workers’ pay grew at its joint fastest pace in over a decade as employers extended their hiring spree, adding to signs that uncertainty about Brexit is prompting firms to take on workers rather than commit to longer-term investments.

Contrasting with other sluggish readings of Britain’s economy, total earnings, including bonuses, rose by an annual 3.5 percent in the three months to February, official data showed, in line with a Reuters poll of economists.

That was the joint highest rate since mid-2008 although in the month of February on its own the pace of wage growth slowed.

Britain’s labor market has defied the approach of Brexit, helping households whose spending drives the economy. Last week, Britain’s exit from the EU was delayed until October.

Employment grew by 179,000 in the three months to February, in line with the Reuters poll forecast, helping to keep the unemployment rate at 3.9 percent, its lowest since early 1975, the Office for National Statistics said.

However, the jobs surge could reflect nervousness among employers about Brexit and risks aggravating Britain’s long-standing productivity problem, the Achilles heel of the world’s fifth-biggest economy.

Workers can be hired and then fired if the economy takes a hit, whereas investment in technology and new machinery — which helps the economy over the long term — fell throughout 2018.

PRODUCTIVITY PROBLEM

“The elongated period of uncertainty has kept businesses in a hiring cycle,” Tej Parikh, an economist at the Institute of Directors, an employers group, said.

“Without a pick-up in investment, low productivity will also keep wages from growing further, particularly when considering the higher regulatory costs businesses are facing this tax year.”

Data earlier this month showed output-per-hour rose by only 0.5 percent in 2018, well below the annual average of 2 percent before the global financial crisis.

Accountancy firm Deloitte said on Monday that large British-based businesses were increasingly focused on cashflow as they worried about the long-term economic hit from Brexit.

The ONS said the increase in jobs over the past year was all coming from full-time workers, both employees and self-employed.

Average weekly earnings, excluding bonuses, rose by an annual 3.4 percent, the ONS said, in line with the Reuters poll and down from 3.5 percent in the three months to January.

It was the first fall in that measure of pay growth since the middle of last year.

The strength of the labor market is pushing up wages more quickly than the Bank of England has forecast, leading some economists to think it might move quickly to raise interest rates once the Brexit uncertainty lifts.

The BoE forecast in February that wage growth would slow to 3.0 percent by the end of 2019 with the overall economy likely to grow at its slowest pace in a decade.

Writing by William Schomberg; Editing by Peter Graff

Source: UK Reuters

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No-deal Brexit – what it might mean for UK economy

Britain is due to leave the European Union on April 12 unless Prime Minister Theresa May can break the deadlock in parliament or asks Brussels for more time, raising the prospect of an abrupt, no-deal Brexit for the world’s fifth-biggest economy.

EU officials said on Tuesday that a no-deal Brexit was becoming more likely and the European Central Bank said financial markets needed to price in the growing risk.

Here is an outline of the potential economic impact for Britain of leaving the EU without the cushion of a transition.

UK ECONOMY

The Bank of England estimates a worst-case Brexit — involving border delays and markets losing confidence in Britain — could shock the economy into a 5 percent contraction within a year, nearly as much as during the global financial crisis.

Output in a less severe but still disruptive no-deal Brexit — in which Britain and the EU avoid snarl-ups at the borders, for example — would fall by around 3 percent.

Over the longer term, Britain’s finance ministry has said the economy could be 8 percent smaller by 2035 after a no-deal Brexit than if Britain stayed in the EU. The hit would be bigger if migration slowed sharply, the ministry has said.

The BoE also sees a risk in Britain’s wide current account deficit. Governor Mark Carney has said the deficit leaves Britain reliant on “the kindness of strangers” and a no-deal Brexit could turn foreign investors off British assets.

Brexit supporters have dismissed the warnings as scare-mongering but say economy is likely to suffer a short-term hit. Former BoE Governor Mervyn King has said the long-term costs of Brexit might not be very different from staying in the bloc.

TRADE

Barriers to trade would be raised for British companies as the EU imposes import tariffs which average 5 percent but are higher for some exports such as cars. Britain’s automotive industry employs more than 800,000 people.

Britain would also lose the benefits of the EU’s trade deals with countries around the world.

For its part, Britain plans to eliminate import tariffs for many products for up to a year in the event of a no-deal Brexit. That would help reduce the inflationary hit to consumers but would expose many British companies to tougher competition.

Manufacturers are also worried about border delays which would hurt their just-in-time production.

Brexit supporters say those fears are overblown because technology would ease any border delays and exports would flow freely once Britain gets a future EU free trade deal.

Deals with faster-growing nations such as the United States, India and China would be a big boost for Britain, Brexit supporters say. But Britain’s official budget forecasters say the benefits of such trade deals are likely to be small.

PORTS AND STOCKPILING

The government has identified stretches of motorway to use as truck parks, and plans to use a small airport in southern England to cope with any tail-backs at ports on the English Channel.

Academics at Imperial College say two extra minutes spent checking each vehicle at Dover and Folkestone could lead to traffic queues of 29 miles (47 km) on nearby highways.

Many manufacturers are stockpiling parts to keep working. A measure of inventory-building hit the highest ever measured for a Group of Seven economy in March. Britain has asked drugmakers to stockpile medicines for six weeks above normal operations.

Brexit supporters point to comments by the head of the port in Calais, in France, who said trucks would continue to move through without delays in the event of a no-deal Brexit.

France has said it plans to hire hundreds of additional customs officers and create extra border control facilities.

HELP FROM THE BUDGET AND THE BANK OF ENGLAND?

Finance minister Philip Hammond has built up a fiscal war-chest to spend more in case of a Brexit shock to the economy.

But he has also warned that, longer term, a no-deal Brexit would mean a rethink of his promise to end austerity because the economy would grow more slowly, hurting tax revenues.

Brexit supporters say leaving the EU with no deal would help the public finances because it would mean an immediate end to payments by London into the EU budget.

The BoE has warned investors not to assume that it would rush to cut borrowing costs after a no-deal shock. A fall in the value of the pound would push up inflation, something that would argue against a rate cut.

But some officials, including Carney, have said their most likely response would be to help the economy.

POUND

Given the likely economic hit, a no-deal Brexit would probably push the pound down, adding to its losses against the U.S dollar of about 13 percent since the 2016 referendum.

Under the BoE’s worst-case Brexit scenario, sterling would slump 25 percent to about the same value as the U.S. dollar.

FTSE

A weaker pound could push up the share prices of many of Britain’s biggest companies which do business around the world such as British American Tobacco and GSK. The companies in the FTSE 100 make 70 percent of their income overseas.

But there could be punishment for the more domestically focused FTSE 250 companies who make half their money at home.

BONDS

The economic shock of a no-deal Brexit would usually spur investors to seek the safe haven of British government bonds.

However, investors are bracing for the possibility of a snap election. The Labour Party has plans for more public spending, potentially including the renationalisation of some utilities and rail operators, which might unsettle investors.

Writing by William Schomberg

Source: UK Reuters

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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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UK finance sector will have just 15 months to adapt to new post-Brexit rules

The financial services industry has been forewarned: if there’s a messy no-deal Brexit in March, they’ll have 15 months to get their act together and fully comply with new rules laid out by the country’s financial regulators.

The Bank of England (BoE) and the Financial Conduct Authority (FCA) published a “near final” version of the UK rules that would come into effect if Britain leaves the European Union on 29 March without a transition deal.

Banks, asset managers, insurers and brokers would be covered by these updated rules and could face penalties if they don’t comply in time.

The final version of the rulebook is expected to be published on 28 March, a day before Brexit, if the the UK and EU do not ratify a divorce deal.

However, if there is a Brexit transition deal, financial firms would continue operating under EU rules until the end of 2020 when the UK wants new trading terms with the bloc to begin.

The FCA’s executive director of international operations, Nausicaa Delfas, said Thursday’s announcement marked a significant milestone in the financial sector’s preparations for a no-deal Brexit.

“They ensure that there is a functioning regulatory regime from day one, and that firms are clear as to the requirements they need to meet by end March 2019 and beyond, so they can continue to meet the needs of their customers,” Delfas said.

The BoE regulates banks across the country, including Royal Bank of Scotland (RBS.L) and Barclays (BARC.L). It’s also in charge of setting interest rates, maintaining financial stability and issuing new bank notes.

The FCA also regulates Britain’s financial services industry and works to protect consumers and promote healthy competition in the sector. It has oversight over 58,000 firms.

Source: Yahoo Finance UK

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Bank of England Stands Pat on Interest Rate Outlook, Focus on Brexit Reaction

The Bank of England reiterated its stance that interest rates could move in either direction depending on the outcome of negotiations for the U.K.’s withdrawal from the European Union.

In the Inflation Report hearings delivered to the U.K. Treasury Select Committee, BoE governor Mark Carney repeated his view that Brexit was causing tension for British consumers and businesses but promised that the central bank would “provide all stimulus possible” in the event of a no-deal outcome.

Gertjan Vlieghe, a member of the BoE’s Monetary Policy Committee, told the committee that, in the event of a shock to consumer confidence from a ‘no-deal’ Brexit, the central bank would likely hold policy steady or cut interest rates.

However, that risk appeared to have shrunk considerably Tuesday, after both the U.K.’s major parties appeared to shift their policy stances on Brexit. Prime Minister Theresa May is set to propose to her cabinet that the government rule out the possibility of leaving the EU without a transitional agreement in place. The opposition Labour Party, meanwhile, has said it will back a second referendum on Brexit if there is no majority in parliament for a withdrawal agreement.

Carney, however, noted that if the economy performed as currently forecast a gradual increase in rates would be warranted.

The hearings come after the Bank slashed its growth forecasts earlier this month. It now sees the British economy growing only 1.2%, the slowest pace since the financial crisis, amid uncertainty surrounding the U.K.’s departure from the EU and the broader economic slowdown worldwide.

“The fog of Brexit is causing short term volatility in economic data, and more fundamentally is creating a series of tensions in the economy,” Carney said at the Feb. 7 press conference following the BoE’s decision to hold interest rates steady.

“Although many companies are stepping up their contingency planning, the economy as a whole is still not yet prepared for a no deal, no transition exit,” he warned.

The BoE left the possibility of rate hikes “at a gradual pace and to a limited extent” on the table at that meeting.

Source: Investing

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First Brexit, now global slowdown to weigh on Bank of England

The Bank of England will have more than Brexit on its mind when it meets next week, as a slowdown in the global economy tests its plan to return to raising interest rates before too long.

Governor Mark Carney and his fellow interest rate-setters are expected to keep borrowing costs on hold at 0.75 percent on Thursday, with Britain at risk of leaving the European Union just 50 days later without a transition deal in place to ease the shock.

Prime Minister Theresa May, trying to placate lawmakers in her Conservative Party, is pushing for concessions from EU leaders on a key part of the Brexit deal that she agreed with them last year. That is something the bloc has said it will not do.

On top of the uncertainty about the Brexit stand-off, the loss of momentum in the world economy and in particular in the biggest EU countries is likely to exert a drag on Britain’s stumbling economy.

On Wednesday, the U.S. Federal Reserve signalled its three-year run of raising rates might be ending, and the European Central Bank has sounded more worried that the euro zone’s recovery has run out of steam.

“Is the global slowdown just temporary? We think so, but it has lasted quite a long time. Maybe we are at the peak of the cycle,” George Brown, an economist with Investec, said. “Perhaps that’s the view that the BoE takes, although it’s not our view.”

The BoE – which bases its forecasts on the assumption of a smooth Brexit – will try to balance the drag on Britain from a weaker global economic outlook with the potential boost from finance minister Philip Hammond’s relaxation of his grip on public spending.

The BoE’s forecasts for Britain’s economic growth might therefore be little changed when it publishes its quarterly Inflation Report alongside its decision on rates on Thursday.

But some economists say there is a chance of a higher inflation forecast that makes investors rethink their bets against a BoE rate hike until the end of 2019 at the earliest.

Although inflation has fallen to within a whisker of the BoE’s 2.0 percent target, the wages of British workers are rising at their fastest pace in a decade, surprising the BoE and potentially pushing up prices.

A minority of economists think one member of the nine-strong Monetary Policy Committee will vote for a rate hike next week.

That, plus the chance of the BoE turning even more pessimistic about the inflationary “speed limit” of Britain’s low-productivity economy, “would set the UK apart as a hawkish story in an increasingly dovish world,” HSBC economist Elizabeth Martins said. “It might come as a surprise to the market.”

By the time the MPC announces its next policy decision on March 21, a few days before the scheduled Brexit date of March 29, the picture could look very different.

By then it should be clearer if the United States and China have avoided the prospect of a trade war, and – more importantly for the BoE – whether Britain will avoid a damaging no-deal Brexit, at least in the immediate future.

The BoE has warned that a worst-case Brexit scenario could hurt Britain’s economy more than the global financial crisis.

Paul Dales, an economist with Capital Economics, said a deal on Brexit could lead to the unusual situation of the BoE raising interest rates at a time when the U.S. Fed is cutting them.

“It doesn’t happen often, but nor does Brexit,” he said. “Yes, the global economy seems to be turning. But the BoE has room for catch-up.”

Source: UK Reuters

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BoE’s Haldane sees higher rates if UK economy ‘ticks along’ – Daily Mail

The Bank of England is likely to continue to raise interest rates gradually if the economy keeps growing, but will be “flexible” if there is a downturn, the central bank’s chief economist said in an interview published late on Wednesday.

“If the economy continues to tick along, as we expect, then we might expect some further limited and gradual rises,” central bank rate-setter Andy Haldane told the Daily Mail newspaper, repeating familiar BoE language.

The BoE raised interest rates for only the second time since the 2008-09 financial crisis in August 2018, and almost all economists expect further increases to depend on Britain avoiding a disruptive exit from the European Union in March.

“On the assumption that some deal is done, that would reduce uncertainty and, we think, cause people to take their finger of the pause button and do a bit more investment spending,” Haldane was quoted as saying.

“If the economy begins to change direction, we will be flexible in the face of that,” he added.

BoE Governor Mark Carney has previously said that a disorderly Brexit could cause sterling to slide while damaging the productive capacity of the economy — potentially boosting inflation at the same time as slowing growth.

Foreign ownership of British companies had been important in improving management practices and economic productivity more generally, Haldane said.

The BoE will publish its next interest rate decision on Feb. 7.

Source: UK Reuters

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UK inflation falls again, leaving BoE under no pressure on rates

UK inflation hit its lowest in nearly two years in December as fuel prices fell, leaving the Bank of England under no pressure to carry on raising interest rates as uncertainty over Brexit dominates the economic outlook.

Consumer prices rose at an annual rate of 2.1 percent in December, slowing from 2.3 percent in November, the Office for National Statistics said, as a Reuters poll of economists had predicted. The rise was the smallest since January 2017.

Although inflation remained just above the Bank’s 2 percent target, it was likely to fall below that level soon and there was little immediate urgency for the BoE to move, economists said.

The central bank has sketched out a range of Brexit scenarios including a worst-case no-deal outcome in which sterling would plunge to parity against the dollar, inflation would exceed 6 percent and the economy contract by 8 percent.

On Tuesday, MPs voted against Prime Minister Theresa May’s Brexit plans by a crushing margin. BoE Governor Mark Carney said on Wednesday that sterling’s rise after the vote suggested investors felt the risk of a no-deal Brexit had diminished, or that the departure process would be extended.

May faces a vote of no confidence in her government moved by the opposition Labour Party on Wednesday that she is expected to win.

“Although we think that Brexit uncertainty will keep the Monetary Policy Committee on hold for the time being, we doubt the Bank will miss out on the global tightening cycle altogether,” Ruth Gregory, senior UK economist at Capital Economics, said.

The central bank has raised interest rates twice since late 2017 and has said it plans to carry on increasing borrowing costs gradually.

Wednesday’s inflation figures could be a relief for British consumers who have been pressured by inflation since the Brexit referendum in June 2016 which triggered a slump in sterling of more than 10 percent against the dollar and euro.

Inflation peaked at a five-year high of 3.1 percent in November 2017. It has fallen since then and wages have grown at their fastest in a decade.

But businesses have reported a downturn in consumer spending in recent months, and surveys show households are worried about the outlook for 2019.

Sterling and UK government bonds were little moved by Wednesday’s data which suggested less short-term pressure in the pipeline for consumer prices, with factory input costs rising at the weakest rate since June 2016.

The ONS also said house prices in November rose by an annual 2.8 percent nationwide compared with 2.7 percent in October. Prices in London alone fell 0.7 percent, the fifth month of decline — a run last seen during the financial crisis.

Source: UK Reuters

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Pound Sterling to Rise by 5% against the U.S. Dollar in 2019 says Lloyds Bank

The Britsh Pound will rise by more than 5% against the U.S. Dollar next year, according to analysts at Lloyds Bank, as an orderly exit from the EU enables the Bank of England(BoE) to lift its interest rate again just as the Federal Reserve (Fed) brings its own tightening cycle to a close.

Pound Sterling will be volatile until the end of the first-quarter 2019, the bank says, as markets fret over whether Prime Minister Theresa May will be able to pass her Withdrawal Agreement through parliament. However, ratification of the deal early next year is forecast to see the UK exit the EU in an orderly manner.

That should enable markets and the Bank of England to address mounting inflation pressures in the economy, where a falling unemployment rate has been encouraging wage growth for workers. The BoE has already flagged this repeatedly as a likely threat to its 2% inflation target over coming years.

“The BoE has been clear in its guidance, reiterating that, should the economy progress in line with its expectations, a gradual tightening of monetary conditions would be appropriate. There is broad agreement on the MPC that this is consistent with a 25bp rate hike per year over the next three years,” says Gajan Mahadevan, a strategist at Lloyds Bank.

Mahadevan says the BoE will raise the base rate again in August 2019, taking it up to 1%, after PM May is succesful in passing her Withdrawal Agreement through the House of Commons. Meanwhile, the Federal Reserve is expected to ease off on its tightening of monetary policy.

“Among key developed market economies, the US has been the outperformer for some time. Having hit an annualised rate of 4.2% in Q2, GDP growth slowed in Q3 to a still impressive 3.5%,” Mahadevan writes. “However, there are signs that the rises in interest rates over the course of the last few years are starting to take their toll.”

Mahadevan and the Lloyds team say the Federal Reserve will raise interest rates only twice in 2019 as earlier policy tightening takes its toll on the US economy, leading the central bank to bring its multi-year cycle of interest rate hikes to a close. That would mark a turning point for the U.S. Dollar, especially against the Pound.

If the Fed stops raising its interest rate at the same times as markets are becoming willing to bet more confidently on further BoE policy tightening over coming years then it could effectively pull the rug out from beneath the U.S. Dollar.

The Fed raised its interest rate to 2.5% last week, marking its fourth rate hike of 2018, but used its so-called dot plot to signal that it will raise rates on only two occassions next year.

The Dollar index has risen by 5.2% in 2018 after reversing what was once a 4% year-to-date loss wracked up mostly during the first quarter. A superior performance from the U.S. economy was behind the move, because it enabled the Fed to raise rates as economies elsewhere slowed and their respective central banks sat on their hands.

“We expect the currency pair to rally towards 1.35 by June 2019, before settling around 1.33 at year-end. However, the high degree of uncertainty, particularly around the UK’s withdrawal from the EU, means that at this stage our conviction is low,” Mahadevan writes, in a recent note to clients.

Mahadevan’s target of 1.33 for the Pound-to-Dollar rate at the end of 2019 implies a 5.1% increase from Thursday’s 1.2657 level. However, while Sterling may easily recover lost ground from the Dollar before the end of 2019, other analysts have warned that steep losses could be likely before March 2019 comes to a close.

“We will enter 2019 with the most important aspects of the Brexit situation still unresolved. December was an enormously bad month for Theresa May,” says Stephen Gallo, European head of FX strategy at BMO. “To the detriment of the GBP, the remaining Brexit permutations appear to be declining in number.”

Prime Minister Theresa May survived a leadership challenge in December but she still lacks enough support in parliament for her Brexit Withdrawal Agreement to make it onto the statute book.

Analysts and traders have been readying themselves for a seemingly inevitable defeat of the government when the House of Commons gets its “meaningful vote” on the Withdrawal Agreement in January.

Lawmakers on all sides of the House have pledged to vote against the proposals for a variety of reasons and the PM is currently expected to lose the ballot in the Commons.

Approval before March 29, 2019 is key if the UK is to avoid leaving the EU without any preferable arrangements in March 2019 and defaulting to trading with the bloc on WTO terms.

“The first permutation is a “hard Brexit” in which the UK legally exits the EU on March 29th without a deal, forcing the country to revert to WTO rules. We would assign a 45% probability to that outcome at this stage and assume a level of $1.20 in GBPUSD if that comes to pass,” Gallo writes, in a note to clients.

Source: Pound Sterling Live

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UK inflation expectations hit five-year high – BoE

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

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

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

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

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

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

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

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

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

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

Source: UK Reuters