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Higher interest rates expected under new chancellor

Advisers should expect higher inflation and interest rates as a result of Rishi Sanuk’s appointment as chancellor.

Mr Sanuk was appointed to the lead role in the Treasury yesterday (February 13) after Sajid Javid threw in the towel in a show of defiance against the prime minister’s demands.

It was reported that Boris Johnson had asked the chancellor to fire his advisers in a bid to achieve a closer alignment with Number 10.

As a result industry participants believe the new chancellor will work more closely with Number 10, leading to more government spending, higher inflation and higher rates.

Mohammed Kazmi, portfolio manager for UBP’s Fixed Income team, said: “The market reaction of gilts selling off, a steeper rates curve and a stronger sterling clearly indicate that expectations are increasing for fiscal stimulus announcements to be made at the March Budget.

“The incentive for such spending comes from the results of the general election itself, which saw the Conservatives win in some traditional Labour Party strongholds, who most likely voted Conservative due to their Brexit pledge, however would probably require fiscal spending to be persuaded to vote for the party again.”

Since the news of the new chancellor became public sterling has risen to its highest level against the euro for three months, having gained 1.1 per cent ,and gained 0.7 per cent gain against the dollar.

Josh Mahony, market strategist at IG Group, said the rise in sterling since the announcement of the appointment of Mr Sanuk was the result of the market expecting a higher level of government spending than under his predecessor, which would lead to higher inflation.

As the Bank of England’s job is to target inflation at or near 2 per cent, if higher government spending leads to higher inflation, it is likely the central bank would have to put rates up.

The higher level of government spending may also lead to a higher rate of economic growth, which would boost demand in the economy, and also contribute to higher inflation.

Meanwhile investors sold off UK government bonds, leading to gilt yields rising from 0.61 per cent to 0.65 per cent on the 10-year bond.

David Zahn, head of European Fixed Income at Franklin Templeton, said government bonds have sold off because the market anticipates that inflation will rise, and this will make the income from bonds less attractive.

But Anthony Rayner, multi-asset fund manager at Premier Miton, said the general lack of inflation and growth in the world economy over the past decade means central banks are now more focused on maintaining economic growth and so won’t rush to put interest rates up, even if inflation does rise.

At the most recent meeting of the Bank of England’s monetary policy committee (MPC), the group that sets interest rates, the decision was made to leave rates at 0.75 per cent, as inflation was 1.3 per cent, considerably below the bank’s 2 per cent target.

The level of economic growth was also viewed as being likely to rise in the coming months, as other countries around the world have already cut interest rates, and this would boost the level of growth in the UK, so a rate cut is not needed.

By David Thorpe

Source: FT Adviser

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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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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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Inflation pulled down by falling energy prices

Inflation fell to a two-year low in January according to the Office of National Statistics (ONS).

The 12-month CPI (Consumer Price Index) inflation rate was 1.8% in January 2019, down from 2.0% in December 2018. This drop is largely a result of falling energy and fuel prices.

Between December 2018 and January 2019 consumer prices for gas fell by 8.5%, the biggest fall in three decades. This coincided with energy regulator Ofgem’s implementation of their energy price cap which, after coming into effect in January, helped drive down inflation according to ONS.

Mike Hardie, ONS head of inflation, said: “The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year.”

This latest reduction marks the end of a long run of CPI inflation sitting above the Bank of England’s 2% target. The Brexit referendum caused the value of the pound to fall, which pushed inflation higher. Increasing costs of imported goods meant that Brits’ household disposable income shrank. Inflation peaked at a five-year high of 3.1% in November 2017, when households faced much greater price increases than the EU average.

Stephen Clarke, senior economist at the Resolution Foundation, reported that this drop in inflation should lead to a  “welcome boost to people’s spending power” and “that next month we’re likely to see real wage growth of around 1.5%, the fastest since mid-2016”.

He added “This cannot come too soon for households, with average earnings yet to be restored to their pre-crisis levels.”

Tej Parikh, senior economist at the Institute of Directors, said the lower inflation was a “boon” for the economy as it attempts to weather the effects of Brexit fueled uncertainty: “For the past two years, households have been squeezed between high prices and weak wage growth. With inflation now at a two-year low and growing upward momentum in pay packets, consumers are likely to feel less of a pinch on their wallets.”

Mr Parikh continued, “This easing in the cost of living should provide some uplift for the High Street just as consumer confidence appears to be waning”.

Ian Stewart, chief economist at Deloitte, suggested that the changes should also provide relief for high street retailers. He said falling inflation alongside rising earnings was “delivering a powerful uplift to spending power” and added “Brexit dominates at the moment but were Brexit risks to ease, consumers would be well placed to hit the High Street”.

Due to falling crude oil prices, petrol prices have also fallen by 2.1% per litre between December 2018 and January 2019, which should also come as a pleasant surprise for motorists.

The question now is, will inflation continue to decrease in the future?

Ofgem’s cap is a ceiling that can move up and down twice a year depending on the costs facing energy firms. That cap will be raised this April and this is likely to feed into future CPI figures.

On Wednesday 13th February, npower became the third of Britain’s six major energy providers to say it would raise prices from April following E.ON and EDF which raised their prices on Monday and Tuesday.

Howard Archer, chief economic advisor to the EY Item Club, has said that inflation is largely going to depend on the course of Brexit negotiations in upcoming months.

“Domestic inflationary pressures are expected to pick-up only modestly over the coming months amid likely limited UK growth,” said Mr Archer.

With a Brexit deal, he said inflation could stay below 2% this year – and even dip to 1.6%.

Without a deal, Mr Archer said the Bank of England could cut interest rates as “economic activity would likely take a significant hit”, suggesting a totally different outcome.

Source: Money Expert

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UK households gloomy for 2019, lower inflation eases near-term worries

UK households’ hopes for their finances over the year ahead remain near a five-year low, due to growing concern about job security ahead of Brexit, though easing inflation pressures have offered some short-term cheer.

IHS Markit said its monthly Household Finances Index picked up to a three-month high in January, on the back of households’ perception that their living costs were rising at the slowest rate since October 2016.

The official measure of consumer price inflation dropped to its lowest in nearly two years in December at 2.1 percent.

But households’ expectations for their finances over the year to come, when Britain is due to leave the European Union, remained close to their lowest level since early 2014.

“Political deadlock over Brexit merely adds extra uncertainty to an already unfavourable financial environment for UK households,” IHS Markit economist Joe Hayes said.

Prime Minister Theresa May suffered a historic parliamentary defeat over her Brexit plans last week, raising the prospect that Britain could leave the European Union on March 29 with no transition agreement to ensure trade continues smoothly.

Businesses have put investment on hold because of Brexit, and activity slowed towards the end of 2018.

“Job security perceptions deteriorated to a near one-year low, while there was no bounce-back from the stark drop in house price expectations seen in December,” Hayes said.

Figures from property website Rightmove earlier on Monday showed the weakest start to the year since 2012 for property asking prices.

However, most of the 1,500 adults surveyed by polling company Ipsos MORI for IHS Markit still expect the Bank of England to raise interest rates in the first half of 2019, while 73 percent expect an increase before the end of the year.

Economists polled previously by Reuters on average expect the BoE to raise rates once or twice in 2019, assuming Brexit proceeds smoothly.

Source: UK Reuters

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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