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It’s hard to believe, but Britain’s economy doesn’t look too bad right now

Wages are rising. Employment is at record levels. Inflation is relatively tame. The cost of borrowing is low. House prices are flat or barely rising. The economy is growing.

Where is this paradise?

Chances are, you live there.

Yesterday, we learned that inflation in the UK was not as high as expected last month.

Inflation is one of the most politically sensitive national statistics out there. Even the most economically uninterested people get quite engaged when you talk about the cost of living.

You can usually tell how important a statistic is by counting the number of ways there are to measure it. And inflation doesn’t disappoint.

There are many ways to measure inflation. And oddly enough, the measures that the government seems to prefer are the ones that show that prices aren’t rising as fast as you might think they are.

There’s the consumer prices index (CPI). This is the official inflation measure – the one that the Bank of England has to maintain within one percentage point either side of 2%.

CPI in September grew at an annual rate of 2.4%, according to the Office for National Statistics (ONS). That was down from 2.7% in August and also below expectations for 2.6%.

There’s the retail prices index (RPI). This was the basis for the Bank’s old inflation target, although the Bank targeted a version known as RPIX, which excluded mortgage costs from the inflation figures (because if you didn’t exclude mortgage costs, then when the Bank raised interest rates to target inflation, it would in fact drive inflation higher). Under RPIX, the target was 2.5%.

These days, RPI has been cast into the outer darkness as it’s considered to be flawed (if you’re interested in arcane statistical arguments then you can read all the arguments on the Office for National Statistics website).

As a result, it takes a bit of effort (not much, but enough to put off your average newbie journalist with no history of reporting on inflation data) to find it. It also – completely coincidentally, I’m sure – almost always shows inflation to be higher than the CPI does.

RPIX rose at an annual rate of 3.3%, down a bit from 3.4% in August.

There’s another measure that the ONS is currently trying to push very hard. If you look at the inflation data, then before you even get to CPI, you get CPIH. That is, CPI including owner occupiers’ housing costs.

Right now, according to CPIH, inflation is even lower – rocking in at a mere 2.2%.

At the end of the day, we can play around with the statistics all we want. And it’s good to look at these things with a somewhat jaundiced eye. The idea that we need inflation to be rising at a specific level is a very recent conviction and one I suspect that future generations will wonder about.

But we are where we are, and the good news for the Bank of England is that an inflation reading like this gives the central bank all the cover it needs to keep interest rates on hold. That of course, is not great news for savers – but savers are used to that by now, aren’t you?

The UK economy has been in worse condition

So what does all of this point to?

Well, taken as a moment in time, this is all actually rather good news for the UK. First, wages are rising at 2.7% a year (including bonuses) or 3.1% a year without them. You can quibble about why this is (one-off rises for the NHS, for example). But the fact remains that wages are rising more rapidly than they have in quite some time.

If you want to use CPI, this means that wages are rising in “real” terms (after inflation). If you want to use RPI, it means they’re still falling, but less steeply than they were.

If wages are going up, and unemployment is going down, then that means as a whole, consumers are going to have more money to spend. That’s good news.

Secondly, the other big bane of our lives – ridiculously high house prices – shows signs of slowly changing. Using the ONS house prices index, prices went up by 3.2% in August, compared to 3.4% in July (this latter was revised up from 3.1% – not all of the figures are available when the first estimate is released).

So on a national basis, prices are rising a little more rapidly than wages, but nowhere near at the rate they were. And both measures are going in the right direction – wages growth is rising and house price growth is slowing.

It doesn’t mean that any of this will last. It doesn’t mean we’ll get the “beautiful deleveraging” (to steal a Ray Dalio phrase) on UK house prices that we hope for.

But I would suggest that if the national conversation wasn’t being dominated by Brexit, then people would probably be feeling relatively upbeat about the UK economy. And that if the Brexit gloom ever lifts, then having at least some exposure to the UK market might turn out to be a good bet in the longer run.

Source: Money Week

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Bank of England might cut or raise rates after no-deal Brexit – Haldane

Bank of England Chief Economist Andy Haldane said on Thursday that the central bank could decide to raise interest rates or to cut them if there was a disorderly, no-deal Brexit.

The decision would depend on the balance of factors such as a fall in the value of the pound and the reduction in supply — such as less investment and fewer migrant workers — which would push up inflation, against the hit to demand, he said.

“It is genuinely two-sided which way we might act and how we will act will depend upon that balance of demand, supply and the exchange rate, just as it did pre-referendum,” Haldane said during a question-and-answer event at the Institute for Government think tank in London.

Source: UK Reuters

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UK households’ mood boosted by easing inflation squeeze

British households grew more positive about their finances this month as they faced less of a squeeze from inflation and benefited from higher pay – though most will be in for a shock if the Bank of England raises interest rates next month.

Financial data company IHS Markit said its monthly Household Finance Index rose in July to its second-highest level since December 2016 at 44.6, up one point since June and above its long-run average.

“July data indicated light at the end of the tunnel for UK household budgets,” said Sam Teague, an economist at IHS Markit.

Britain’s economy has picked up since a weak start to the year, when growth was hit by bad weather as well as high inflation sparked by 2016’s Brexit vote. But last week the International Monetary Fund forecast that full-year growth would still be the lowest since 2012.

Nonetheless, most economists polled by Reuters think the Bank of England will raise interest rates next month for only the second time since the financial crisis, as it judges even modest growth risks pushing up domestic inflation pressures.

Just 8 percent of households surveyed by IHS Markit expect a rate rise next month, though 51 percent think one will come over the next six months, up from 45 percent in June.

Households also judged inflation pressures to be at a 13-month low in July. Official data last week showed consumer price inflation unexpectedly held at its lowest in over a year.

Separately, the EEF manufacturers’ association said its members had enjoyed “very strong” growth over the past year but that concern over Britain’s departure from the European Union in less than a year was holding back investment.

“This domestic uncertainty is now being exacerbated by global trade tensions which could add up to potentially different dynamics over the next year,” EEF chief economist Lee Hopley said.

Source: UK Reuters

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Inflation bounce set to help BoE hawks’ claims

Economists expect data this week to show a June jump in inflation, in a development which would boost the hawks on the Bank of England ahead of a crucial decision on interest rates next month.

Consumer price index (CPI) inflation will rise from 2.4 per cent in April and May to 2.6 per cent in June, according to consensus forecasts. The latest data will be published by the Office for National Statistics on Wednesday, providing the Bank with one of the last major pieces of economic data ahead of its 2 August monetary policy committee (MPC) meeting.

A rise in inflation would add to the case put forward by multiple Bank of England economists for an interest rate hike in the near term. Governor Mark Carney, chief economist Andy Haldane and others on the MPC have made remarks recently hinting that they may vote to raise rates.

The MPC hawks argue that rising wage pressures from a tight labour market justify withdrawing stimulus.

However, the view that domestic inflationary pressure is increasing is highly contentious among economists, with recent rises in oil prices – which feed through to petrol prices –further muddying the waters.

A decision to raise rates would take place against a backdrop of relatively weak economic growth, as well as the potential for disruption from the Brexit process and the looming possibility of a global trade war.

Analysis by EY Item Club to be published today will predict GDP growth for the current year of only 1.4 per cent, the weakest since 2012, thanks to higher inflation, lower consumer spending, and a moderation in growth in the Eurozone economy.

Mark Gregory, EY’s chief economist, said: “Businesses should be prepared for a low growth economy over the next three years. Regardless of the outcome of the Brexit negotiations, the resulting adjustment is likely to act as a drag on the economy.”

Source: City A.M.

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Interest rates to remain at 0.5% amid growing dilemma for Bank

The Bank of England is expected to keep interest rates on hold next week, but faces a growing dilemma over when to hike next amid mixed economic data and rising inflation fears.

Members of the Monetary Policy Committee (MPC) are expected to vote to keep rates at 0.5% on Thursday, having backed away from a rise last month after growth almost ground to a halt.

The Bank has already said it wants to wait and see “how the data unfolded” over the coming months before raising rates.

Economists had said this left the door firmly open for an August rise, when the Bank’s next set of quarterly forecasts are published.

But recent data showing that wage growth has stalled, as well as a mixed performance so far in the second quarter, combined with fears over resurgent inflation, have all left the Bank with a difficult decision.

Howard Archer, chief economic adviser at the EY Item Club, said: “It is currently touch and go as to whether the Bank of England raises interest rates in August or holds off until November.

“There will need to be sustained clear evidence that the UK economy has improved since the first quarter for the MPC to act.”

Official figures revealed the Consumer Prices Index remained at 2.4% in May, but it is thought inflation might edge up again over the summer as fuel costs rocket due to rising oil prices.

The Bank has previously said inflation would fall down to the 2% target this year as pressure from the Brexit-hit pound falls away.

But it has also said rates will likely need to rise to combat building domestic inflation, while fuel costs have added further upward pressure.

However, growth slowed to its weakest level for more than five years in the first quarter at 0.1%.

 And while the Bank believes this was largely down to the Beast from the East snow disruption, it is unclear if the economy has bounced back in the second quarter.

Official data for the construction, manufacturing and services sectors in April was mixed, while survey evidence from the purchasing managers for May has been lacklustre for all but services.

Wage growth – which is being watched closely by the Bank as a case for raising rates – has also appeared to ease back, with the last set of figures showing average earnings increased by 2.5% in the year to April, down by 0.1% on the previous month.

Mr Archer is predicting the Bank will now raise rates just once in 2018 to 0.75% – potentially in August or November – though he believes there will be two more in 2019 as it looks to bring rates in line with more normal levels after over 10 years at emergency lows.

Source: Shropshire Star

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Inflation holds steady weakening case for interest rate rise

The rate of inflation remained unchanged in May, holding steady at 2.4%, further weakening the case for an interest rate rise this summer.

Rising airfares and higher petrol prices were offset by falls in the cost of games, toys, hobbies, food and non-alcoholic beverages, according to the Office for National Statistics (ONS).

Inflation had been expected to tick up to 2.5% last month.

Today’s data follows yesterday’s lower than expected wage growth and Monday’s weak manufacturing data.

Alistair Wilson, head of retail platform strategy at Zurich, said: “With inflation now within touching distance of the Bank of England’s 2% target, the Bank’s Monetary Policy Committee will be feeling less pressure to raise rates, and they may well now hold fire until later in the year.”

‘Missed opportunity to raise rates’

Tom Stevenson, investment director for personal investing at Fidelity, said the Bank of England may have “missed the opportunity” to raise rates this year.

“The Bank of England is desperate to lift interest rates off the floor in order to provide some dry powder for when the next downturn bites. If interest rates remain close to zero, the central bank will struggle to offset a slowing economy when it needs to. With inflation heading back to target, and the link between buoyant employment and price rises now apparently broken, the Old Lady looks increasingly powerless to act.

“If real wage growth continues to stutter, inflation falls back from here, and economic activity remains subdued then we could see the Bank of England put off its decision to raise rates to next year.”

Source: Your Money

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Will UK interest rates rise in May?

Rate rises are important to many in the UK, particularly those whose wealth is tied to the value of their homes and the mortgage debt they pay on them.

A rate rise could have a substantial impact on both, potentially driving down the value of the home while increasing mortgage costs.

It can also have an impact on markets and certain types of assets, which is explored here.

The next UK interest rate announcement will be made on 10 May 2018.

The Bank of England (BoE) is trying to raise interest rates, but with the economy slowing and Brexit on the horizon the chances of rates rising sooner rather than later have fallen significantly.

The market is now pricing in a 17 per cent chance of a rate rise in May, having been at 100 per cent on 29 March 2018, after recent data pointed to a more buoyant economic outlook.

More recently, data from the Office for National Statistics has shown that the UK economy almost stalled in the first quarter of 2018 growing by just 0.1 per cent, the weakest quarterly growth since 2012. Furthermore, inflation fell to 2.5% in March, from 2.7% in February. It was the lowest rate in a year.

If growth had remained solid and inflation high then the decision to raise rates would not have been so complicated.

However, the data surprised many, including the Bank of England’s rate-setting monetary policy committee (MPC). It prompted the Bank’s governor, Mark Carney, to reiterate that he didn’t want to get too focused on the precise timing of a rate increase, more the general path.

The BoE raised interest rates for the first time in a decade in November 2017, taking the headline borrowing rate to 0.5% from 0.25%. Through this period of volatile forecasts, the Schroders Economics Team has maintained its view that November will mark the next rise in rates. It expects only one rise in 2018 and two in 2019, with rates reaching 1.25%.

Given the uncertainty Azad Zangana, senior European economist and strategist at Schroders, answers some of the most pressing questions.

Why wouldn’t the BoE raise rates in May?

Recent data suggests that the UK economy may not have been as strong as previously thought. Bad weather in February and March probably played a role, but the data suggested that there was something else behind the weakness. Rather than take a risk and hike anyway, the BoE is likely to wait to see whether the data improves in coming months.

What effect would not raising rates in May have?

Very little. A hike would have meant a rise in borrowing costs for mortgage holders, and potentially slightly higher interest rates for savers. However, without the hike, borrowers and savers are unlikely to see any change.

When will UK interest rates rise?

We think the next interest rate rise is likely to happen in November 2018, by 0.25% to 0.75%. By then, economic data should have recovered, and uncertainty over Brexit should be lower.

How quickly do you think rates will rise thereafter?

We think we could see two more (0.25%) rate rises in 2019. The economy is likely to gather momentum, and the UK will have departed from the European Union, albeit into a transition phase. While two more hikes is an acceleration compared to this year and last, it is still a very slow pace of hikes compared to history.

What would be the harm in leaving interest rates as they are?

At the moment, there is little harm. However, as the economy continues to recover, the risk of higher inflation grows. Raising interest rates to more normal levels would help slow the economy to a more stable pace of growth, which should reduce the risk that inflation overshoots the BoE’s target. High inflation not only hurts the purchasing power of households, but it also erodes the value of savings.

Source: City A.M.

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What’s the relationship between inflation and interest rates?

Inflation reports and interest rate announcements are two of the most important events to watch for any forex trader. But how do the two affect each other, and what does that mean for the currency markets?

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Interest rates set to be held, but May hike ‘in play’ despite falling inflation

Policymakers are expected to keep interest rates on hold at 0.5% after inflation fell to a seven-month low, but experts believe a hike may still be on the cards for May.

The rates decision comes after official figures showed inflation falling to 2.7% in February – its lowest level since July last year – as the squeeze on household finances finally begins to ease off.

While inflation cooled more than the Bank of England expected, economists predict the Monetary Policy Committee (MPC) will still be keen to bring rates up to more normal levels after more than 10 years of record low borrowing costs.

Howard Archer, chief economic adviser to the EY ITEM Club, said falling inflation “should make little difference to the monetary policy outlook and we expect this week’s meeting to prepare the ground for the MPC to hike rates again in May”.

James Smith, an economist at ING, added that improving wage growth may also spur the Bank into action.

Office for National Statistics figures on Wednesday showed that wage growth lifted to 2.8% in the year to January, a rise of 0.1% on the previous month, and the highest since September 2015.

But it still failed to outpace inflation, which was running at 3% in January.

Mr Smith said: “Policymakers are increasingly focusing on wage growth, which has been showing signs of life recently, potentially suggesting firms are increasingly having to lift pay more rapidly in a bid to retain and attract talent.

“This, combined with the latest Brexit progress – which bolsters the Bank’s argument that the move to the post-Brexit world will be smooth, makes a May rate hike increasingly likely.”

Governor Mark Carney has already warned borrowers that rates will need to rise “somewhat earlier and by a somewhat greater degree” to get inflation back on target after stronger-than-expected growth in the economy.

Experts believe the comments last month paved the way for two rate rises in 2018, and another in 2019, which would see rates climb to 1.25%.

The MPC is expected to raise rates alongside the next set of quarterly inflation forecasts in May, according to economists.

However, this month’s meeting comes amid signs that the economy is also struggling to pick up pace.

Official figures showed the economy grew by less than previously thought, up by 0.4% in the final quarter of 2017 against the 0.5% initial estimate.

This means it has remained in line with the 0.4% seen in the previous quarter, while experts are pencilling in 0.4% again in the first quarter of 2018 as construction and manufacturing sectors struggle.

The powerhouse services sector continues to be a bright spot, unexpectedly reaching a four-month high in February, according to the most recent purchasing managers’ index.

Chris Williamson, IHS Markit’s chief business economist, said the services sector boost keeps a May interest rate hike from the Bank of England “very much in play”.

But not all economists are convinced over the rates outlook, with Samuel Tombs at Pantheon Macroeconomics saying the latest inflation figures “give the MPC reason to doubt the case for raising interest rates again as soon as May”.

Source: BT.com

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Interest rates to be kept on hold, but May hike ‘still in play’

The Bank of England is expected to keep interest rates unchanged at 0.5% next week, but the meeting will be watched closely amid expectations over another hike in May.

Governor Mark Carney has already warned borrowers that rates will need to rise “somewhat earlier and by a somewhat greater degree” to get inflation back on target after stronger-than-expected growth in the economy.

Experts believe the comments last month paved the way for another quarter point rate rise as soon as May, with one more due by the end of the year, and another in 2019, which would see rates climb to 1.25%.

Investec economist Philip Shaw said that some of the nine policymakers on the MPC may even call for an immediate 0.25% rise.

“Although the MPC will most likely stand pat next week, we would not be surprised to see some dissent on rates, with one, or even perhaps two, members backing an immediate 25 basis point hike in the Bank rate,” he said.

Likely candidates are Ian McCafferty, Michael Saunders or Andy Haldane, according to Mr Shaw.

“This should smooth the way for the committee to make a move on rates in May, as long as this is still warranted by the economic data,” he said.

Official inflation figures are also out next week and Investec predicts they could see the Consumer Prices Index dip to 2.7% in February from 3% in January.

But Mr Shaw said this would be unlikely to dent the MPC’s view that more rate hikes are needed.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is pencilling in an easing of inflation to 2.8% off the back of falling oil prices.

He said: “The fall in oil prices to 65 US dollars, from 70 US dollars in early February, has increased the chances that inflation undershoots the MPC’s forecast over the coming months.”

However, the meeting comes amid signs that the economy is struggling to pick up pace.

Official figures showed the economy grew by less than previously thought, up by 0.4% in the final quarter of 2017 against the 0.5% initial estimate.

This means it has remained in line with the 0.4% seen in the previous quarter, while experts are pencilling in 0.4% again in the first quarter of 2018 as construction and manufacturing sectors struggle.

Recent industry surveys showed the manufacturing industry drifted to an eight-month low in February, while the construction sector remains under
pressure from weak confidence and political uncertainty.

The powerhouse services sector continues to be a bright spot, unexpectedly reaching a four-month high in February, according to the most recent purchasing managers’ index.

Chris Williamson, IHS Markit’s chief business economist, said the services sector boost keeps a May interest rate hike from the Bank of England “very much in play”.

Meanwhile, the Office for Budget Responsibility hiked its outlook for economic growth this year – to 1.5%, from 1.4% previously predicted – in its Spring Statement forecasts.

It also said it believed inflation would fall back to the Bank’s 2% target this year.

The Bank is more upbeat on the growth outlook, pencilling in 1.8% expansion this year, although it is not so cheery on the path of inflation.

It said in its February report that rising oil prices would keep inflation above 3% in the short-term and see it take longer to return to target.

Source: Shropshire Star