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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

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Bank of England hikes rates for the 2nd time since the financial crisis

  • The Bank of England increased interest rates for just the second time since the financial crisis on Thursday.
  • Britain’s central bank raised its benchmark interest rate to 0.75% from 0.5%.
  • Members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

The Bank of England raised interest rates for just the second time since the financial crisis on Thursday, in a move widely expected by commentators and market participants alike.

Britain’s central bank raised its base rate of interest from 0.5% to 0.75%, its second hike in less than a year as it continues the process of slowly normalizing monetary policy following more than a decade of unprecedented stimulus. The bank’s key rate now stands at its highest level since March 2009.

The nine members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

“Today, employment is at a record high, there is very limited spare capacity, real wages are picking up and external price pressures are declining,” the Bank of England’s Governor, Mark Carney, said at a press conference after the announcement.

“With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there.”

Prior to the announcement, markets were pricing in a more than 90% chance of a hike, with Carney and the other eight members of the MPC signaling for several months that a hike was likely to come at its August meeting.

The pound jumped on the announcement, before falling sharply after Governor Mark Carney began to speak to reporters. By 12.55 p.m. BST (7.55 a.m. ET) it was close to 0.7% lower against the dollar.

Within the announcement, the Bank of England made clear that it stands ready to continue the normalization of monetary policy.

“The Committee judged that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon,” the BOE said.

Reaction to the hike was mixed, with some analysts questioning the expediency of the bank raising rates less than a year before the potential hit to the economy that Brexit may bring.

“At first glance, raising rates now looks something of a strange decision,” Ben Brettell, senior economist at FTSE 100 investment manager Hargreaves Lansdown said in an email.

“Inflation is above the 2% target, but not disastrously so. And a large chunk of the inflation we’re seeing is down to higher oil prices – something beyond the Bank of England’s control. Wage growth is relatively subdued, and the economy isn’t exactly overheating at the moment,” he added.

Source: Business Insider UK

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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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Banks push back Bank of England rate forecasts after growth data shock

Banks have pushed out their predictions for when the Bank of England will raise interest rates after data last week showed a sharp and unexpected slowdown in Britain’s economic growth.

Expectations the British central bank would raise borrowing costs in May had already weakened after Governor Mark Carney highlighted “mixed” economic data and noted there were also “other meetings” this year in an April 19 interview.

Economists now forecast the BoE will not act until August and may even wait until 2019. Before Friday’s GDP data most economists had expected the central bank to tighten monetary policy next month.

The changed expectations have hurt the pound, which has fallen sharply in value since the GDP release.

HSBC became the latest bank to erase its solitary rate hike call for 2018, saying on Monday that likely downward revisions to the BoE’s growth forecasts in May would make it harder to justify a rate hike.

“Our view of no rate rises beyond May remains intact: we’ve gone from ‘May and done’ to just ‘done’,” Simon Wells and Elizabeth Martins, analysts at the bank, wrote in a note.

The BoE raised interest rates for the first time in a decade last November, by 25 basis points to 0.5 percent.

Market expectations of a rate hike in May, as measured by swap markets, have fallen following the GDP data to less than 20 percent from around 50 percent. Friday’s figures showed Britain’s economy expanded by just 0.1 percent between January and March, the weakest quarter since 2012.

Earlier this month the market was pricing in as much as a 90 percent chance of a May rate rise.

The change in banks’ forecasts signals a much weaker outlook for the pound, which has been among the best performing major currencies in 2018. For the year, it is now up less than 2 percent against the dollar after having been up more than 6 percent two weeks ago.

Expectations of higher rates lifted sterling to its highest since the Brexit referendum in June 2016 at $1.4377 (1.05 pounds) on April 17 but it has tanked nearly 5 percent since then, to $1.3715 on Monday.

The likelihood that the BoE will not hike next month also means bond prices could rally further and presents a more volatile backdrop for the UK stock market.

UBS scrapped its estimate of a single rate rise in 2018 after the weaker-than-expected growth figures while Nomura, which has long been hawkish on UK interest rates, now sees a first hike in August.

John Wraith, a UBS economist, said inflation could fall back to the central bank’s target of 2 percent later this year and that concerns about talks between Britain and the European Union over the terms of their divorce could resurface.

FINELY BALANCED

Bank of America Merrill Lynch and Natwest Markets strategists pushed back their May rate hike calls to November.

“We view the (economic) slowdown as more serious, and see no prospect of hikes in 2018,” said UBS, the world’s largest wealth manager, in a note.

The market is now also forecasting no more than one 25 basis point rate hike over the remainder of 2018, from a near-certain two rate rises expected a fortnight ago.

But some analysts such as Sam Hill, a senior UK economist at RBC Europe still believes a rate hike is on the cards unless a raft of survey data this week tanks sharply.

“We are still holding on to a May hike call though we think it is a more finely balanced decision now than earlier as we believe,” RBC’s Hill said.

Source: UK Reuters

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After Carney surprise, chance of May BoE rate hike down but not out

Bank of England Governor Mark Carney surprised investors last week when he hinted that interest rates might not go up next month – but economists say it would be wrong to rule out an increase.

‘Forward guidance’ about central bank policy intentions was Carney’s signature policy when he arrived at the BoE from Canada in 2013. Yet even now, as he nears the end of his British sojourn, financial markets are still trying to figure him out.

“The Bank of England has been behaving like the Grand Old Duke of York,” said Lena Komileva, managing director of G+ Economics, likening Carney to the commander mocked in a British nursery rhyme for leading troops pointlessly up and down a hill.

Since the second half of last year, the BoE has warned that Britain’s economy is at risk of persistent inflation even as the approach of its exit from the European Union causes growth to lag that of other rich nations.

The BoE raised rates in November for the first time since 2007, and in February Carney and his fellow rate-setters said interest rates might need to rise slightly faster than the bank judged that markets were expecting.

In March, two members of the BoE’s Monetary Policy Committee voted for a rate rise and economists were confident an MPC majority would back a rise to 0.75 percent in May.

This all changed on Thursday when Carney alluded to “mixed data”, differences of opinion on the MPC and the possibility of rate rises later in the year in a BBC interview.

Sterling tumbled by more than a cent, short-dated bond yields recorded their biggest fall this year, and financial markets chopped the odds on a May rate rise to less than 40 percent from 65 percent before, according to Thomson Reuters calculations. BOEWATCH

PREVIOUS JOLTS

Investors should not lose track of the bigger picture, said Mike Amey, a fund manager at PIMCO, the world’s largest bond investor, as market pricing of the chance of a May move crept back up to around 50 percent.

“Whether they hike in May or not is an open question,” Amey said. “But we think the underlying momentum in the economy is holding up quite well, and therefore that in due course we will see higher rates than are currently priced in for the next couple of years.”

PIMCO expects BoE rates to rise once or twice both this year and next – compared with the single rate rises in November 2018 and August 2019 factored in by markets.

April purchasing managers’ surveys from British businesses will probably be more important for the BoE’s May decision than the weather-affected preliminary first-quarter gross domestic product figures on Friday, Amey added.

Overall, the economy has held up better than most economists expected after the June 2016 Brexit vote, despite lagging the global rebound. And the high inflation that hit consumer demand last year is slowing as sterling recoups some of its losses.

Unemployment has fallen to a 43-year low of 4.2 percent, and a record proportion of Britons are in work.

Komileva said she saw little case to delay a rate rise.

“If the Bank were to miss May, it would create serious questions about … what it would take for them to move again,” Komileva said.

The BoE’s signals on rates felt more arbitrary than those of the U.S. Federal Reserve or the European Central Bank, she said.

Fed policymakers make individual projections for rates while ECB President Mario Draghi regularly offers hints on policy.

This is not the first time markets have been jolted by Carney. In 2013 the BoE linked policy to the jobless rate, only for unemployment to fall far faster than policymakers forecast. And in mid-2014 and mid-2015 Carney suggested rates might rise sooner than markets expected – only to backtrack both times.

Just two months ago, Carney had said he felt he could stop giving hints on rates because markets understood the BoE’s thinking well enough to draw their own conclusions.

After that, Brexit worries eased as Britain secured an outline Brexit transition deal until the end of 2020, and economists said signs of economic weakness were the result of freak snow storms, adding to the sense that another rate hike was coming.

WAITING FOR WAGES?

The missing piece of the picture for the BoE is wage growth, the key factor for inflation pressure. At an annual 2.8 percent, wage growth is roughly in line with BoE expectations but remains weak by historic standards, especially given low unemployment.

Former BoE policymaker David Blanchflower thinks the central bank should hold off raising rates and look harder at the number of people in part-time work but who want to work longer hours, suggesting wages are unlikely to pick up sharply.

The BoE might feel it has more time to see if wages rise after a bigger-than-expected fall in inflation in March. Furthermore, sterling’s recent recovery should curb inflation pressures.

Even Michael Saunders – who voted for a rate rise last month and looks set to do so again – has said the muted response of wages to the fall in unemployment defied simple formulae.

For now, economists are still trying to gauge whether Carney’s comments were a warning that rates are unlikely to rise in May.

Alan Clarke at Scotiabank, who has dropped his forecast of a May rate rise, said they were probably intended to stop MPC members feeling they were committed to a hike next month.

Komileva said they might have the effect of dissuading wavering MPC members from backing a rate rise for fear of wrong-footing markets again.

But HSBC economists Simon Wells and Elizabeth Martins – who for now are holding with their view of a May rate rise – said they would take the comments with a grain of salt.

“Not reacting to every word the BoE utters has been a good strategy recently. We stick to this.”

Source: UK Reuters

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BoE future rate hikes will have little impact on UK property

The Monetary Policy Committee kept the Bank of England base rate at 0.5 per cent for March, but previously warned that due to inflation and strong economic performance, rates are likely to rise faster than previously expected.

Some economists are predicting a 0.25 per cent rise as early as May, with potential for another increase later in the year.

Against this backdrop, is now a good time to invest in residential property?

Yes, for three key reasons.

First, we expect the impact on house prices of small interest rate rises will be concentrated in more expensive markets where people need very large deposits and higher incomes to support higher mortgage costs.

We’ve already seen house price falls in parts of London and the surrounding commuter belt, and affordability pressures and other economic uncertainties could lead to further reductions.

However, the Mortgage Market Review to stress test new mortgage offers against higher interest rates provides significant protection against default and, crucially for investors, house price falls are not a consistent story across the country.

In contrast to London, we’re seeing house price rises across the Midlands, south west and some of the northern regions. We expect house price growth in these areas to continue, albeit at a slower rate, regardless of Brexit uncertainty and interest rate rises, as average earnings have kept pace with house prices, aiding affordability.

Second, when investing in residential property, rental income is as important as capital growth, if not more so.

Private rental income, in contrast to commercial property, has proven to be extremely resilient across all economic cycles.

Fundamentally, we all need somewhere to live and the UK has a serious problem with undersupply of housing.

The government has said we should be building around 300,000 new houses a year, but in the last decade we have not even reached 200,000 a year.

Help to Buy and changes to stamp duty for first-time buyers have largely failed to stimulate growth in supply.

Brexit will not change this basic problem: even if immigration were to fall, with a growing domestic population and increasing longevity, the number of UK households will continue to rise.

And with uncertainty around interest rates, more people may choose the flexibility of renting rather than buying.

A significant minority of rented homes fail to meet Decent Homes Standards, meaning landlords of high quality, modern homes have an increased chance of attracting good tenants.

These factors all point to continued demand for well managed private rental accommodation and the outlook for residential rental income remains strong.

And finally, residential property offers an important diversification opportunity for both capital and income risk.

As an asset class, it shows low correlation with UK equities, fixed interest and cash over the medium- to long-term, through a combination of lower volatility and different underlying drivers and provides a diversified stream of income compared to traditional sources, such as bonds or dividends.

It also has a different risk return profile to commercial property and greater liquidity due to residential’s smaller average property sizes and larger volumes of transactions. As every property is different, investment at scale in the sector can be used to spread risk across a variety of locations and property types, and a large number of tenants.

Historically, residential property has provided attractive returns and low volatility over the longer term, regardless of the economic cycle, alongside low correlation to other mainstream asset classes.

Changes in interest rates will not change these fundamental investment benefits.

Alan Collett is chairman and fund manager at Hearthstone Investments

Source: FT Adviser

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Interest rate rises ‘can harm’ mental health

RESEARCHERS from the University of Stirling have warned that interest rate hikes can damage the mental health of people in debt.

The news has come ahead of a Bank of England rate-setting meeting this week, with rates expected to remain unchanged before a rise in May.

Researchers at the universities of Stirling and Nottingham, conducted a study involving more than 15,000 people in the UK.

Funded by the Economic and Social Research Council and published in the Journal of Affective Disorders, the study found that for each one per cent increase in interest rates, there was a 2.6 per cent increase in the incidence of mental health issues experienced by those heavily in debt. UK-wide, researchers estimated each percentage point increase would result in 20,000 additional cases of mental health difficulty – at an overall cost to society of £156 million.

Lead researcher, Dr Christopher Boyce from the Stirling Management School, believes the study – which is the first of its kind – has important implications for economic and social policy.

He said: “Whilst it is important to avoid high unemployment and instability – which in themselves can be detrimental to mental health – central bankers need to understand that the tools they use to maintain economic stability can also have direct consequences to mental health.

“Low interest rates encourage the uptake of debt, potentially creating unsustainable debt levels and putting many at risk when there are future interest rate rises. When this happens, we need to ensure those in debt receive adequate support.

“One way to improve the economy, as others have argued, while at the same time reducing the mental health risk for individuals, would be to give people money in the form of a debt jubilee.”

Bank of England governor, Mark Carney, has already warned borrowers that rates will need to rise “somewhat earlier and by a somewhat greater degree” to meet inflation targets.

Source: The National

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The Bank of England will almost certainly hike rates in May

The question of the next rise in UK interest rates has shifted definitively from if to when.

Last week an uncharacteristically hawkish press conference by the Bank of England Governor Mark Carney left the markets in little doubt that it could come as early as May.

At the start of the week the probability of a May rate hike rose was rated as 50 per cent, yet by Friday this had risen to 80 per cent.

That momentum will have been strengthened by the confirmation yesterday that UK Consumer Price Inflation stayed at 3 per cent in January, confounding economists’ forecasts that it would nudge down to 2.9 per cent.

There are several potential explanations for inflation staying so far above the Bank of England’s 2 per cent target. But the main one alluded to by Governor Carney last week was that there is very little spare capacity left in the economy.

In other words, the UK economy is close to full employment. This should be a cause for celebration; as full employment tends to also signify wage rises, business investment and rising productivity.

All of which are good in themselves, but also because such a collection of indicators should theoretically mean the economy is expanding by more than most current forecasts suggest.

Good vs bad inflation

Not only that, but dig down into the Office for National Statistics (ONS) inflation data for January and food prices are coming down. In fact, one of the main drivers of inflation in January seems to have been higher fuel prices – which are determined by the vagaries of the global oil market rather than the fundamentals of the UK economy – which still rose by less than they did this time last year.

So this could be good inflation: inflation driven by rising wages, driven by full employment and a growing economy rather than driven by a weak Pound inflating imports and input costs.

But the problem for the Bank of England is that it will have to play a waiting game before it really knows which type of inflation Britain is experiencing.

The answer is unlikely to come before April, when the UK’s first quarter GDP numbers will be published. That data is very likely to determine whether the Monetary Policy Committee (MPC) hikes interest rates the following month.

Brexit

If GDP is weak, the MPC might stay its hand, but if the UK is benefitting from the global economic boom as many think it currently is, the GDP figure should be relatively strong.

The MPC will hope the economy is strong enough to withstand a rate hike because, as mentioned before in this column, it will want rates to be high enough for it to have the option of reducing them to mitigate the potential economic shock when Britain leaves the European Union (EU) 10 months later.

But even if GDP is not that strong in the first three months of 2018, the Bank could still push ahead with a May rate rise.

Above target inflation and weak economic growth as Britain heads for the EU exit is highly undesirable.

Take back control

The MPC may have essentially made up its mind to act already. In which case, Tuesday’s inflation data will have confirmed to Mr Carney that hiking rates to bring inflation under control more quickly rather than letting it fall naturally is the right course of action.

Sadly such sophistry will provide zero solace to hard-pressed households struggling because the cost of living is still outpacing average monthly wage rises.

And while that could change as the year progresses, we are all stuck between interest rates and inflation: either way costs are going up. The only difference is that hiking interest rates gives the Bank some semblance of control.

Source: City A.M.

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Rising wage growth means households can take rate hike, says BoE official

Households are ready to withstand interest rate hikes because Britain’s buoyant jobs market is boosting wage growth, according to a Bank of England official.

Dr Gertjan Vlieghe, a member of the Bank’s rate-setting Monetary Policy Committee (MPC), said a pick-up in wages and an increase in household debt meant the UK economy was “ready for somewhat higher interest rates”.

Speaking at a Resolution Foundation event in London, he said resurgent global growth was also laying the groundwork for a lift in the cost of borrowing.

He said: “The move from deleveraging to re-leveraging tells me that households are more willing to spend their marginal pound earned, which means debt is now less of a headwind to the economy, then it was previously.

“And that in turn means that the economy is ready for somewhat higher interest rates.

“Of course there are many other things going on in the economy than just moving from deleveraging to re-leveraging.

“First, there is the very significant improvement in the global economic outlook over the past 18 months, which has been unambiguously beneficial for the UK.

“The second is the Brexit-related headwinds to economy, which are pushing in the other direction.

“And the third is the increased evidence that tight labour markets are having some upward effect on wages.”

His comments come after the Bank moved to prepare borrowers for further and faster interest rate hikes last week in response to stronger-than-expected growth from the UK economy.

The move from deleveraging to re-leveraging tells me that households are more willing to spend their marginal pound earned, which means debt is now less of a headwind to the economy, then it was previously. And that in turn means that the economy is ready for somewhat higher interest rates

Gertjan Vlieghe

Bank Governor Mark Carney said on Thursday that rates would need to rise sooner and by more than expected at the time of the Bank’s last forecasts in November to get inflation back to target.

It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.

Dr Vlieghe said on Monday that the Bank’s decision on whether to lift rates or not would depend on the performance of the UK economy.

However, the more dovish member of the MPC, who has become increasingly hawkish in recent months, said low interest rates were not to blame for the surging costs within Britain’s housing market.

He said there were economies across the globe who have enforced low interest rates, but do not have the same housing market make-up as the UK.

Policymakers on the nine-strong MPC voted unanimously to leave rates unchanged at 0.5% last week.

Source: BT.com

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The next interest rate hike could be as soon as May

The Bank of England could raise interest rates as soon as May if a transition deal is struck in Brexit negotiations, new analysis has suggested.

UBS analyst John Wraith suggested stronger than expected GDP growth in the fourth quarter of last year and an improved momentum in the first month of 2018 could lead members of the Bank’s monetary policy committee (MPC) to raise rates by 25 basis points by the middle of the year.

Such a hike would put the base rate at 0.75 per cent, its highest in almost nine years.

However, Wraith added that the scenario is “explicitly conditional” on a transitional deal being agreed by March at the latest.

The Bank last hiked interest rates at its November meeting, raising them from their historic low of 0.25 per cent to 0.5 per cent. But weak consumer confidence and low wage growth has caused economists to suggest the Bank should keep rates on hold for the foreseeable future. Last month, City A.M.’s shadow MPC unanimously voted to hold rates where they are.

But in his note today, Wraith gave a 50 per cent probability to a rate hike by May. However, he added:

We are sceptical that the smooth path effectively priced in thereafter will materialise, and believe any optimism from an early transitional deal could soon run into fresh doubt as the challenges relating to more permanent arrangements resurface.

Source: City A.M.