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Interest rates could rise in May 2019

Brexit and slowing economy growth have quashed the likelihood of an interest rate rise from the Bank of England in early 2019 but expect a move in May, a leading economist group has said.

The UK economy grew by 0.4% in the three months to October, down from 0.6% in the previous three months, data showed this week.

At the same time, the prime minister Theresa May has delayed a crucial parliament vote on her Brexit deal.

It means the uncertainty over how the UK will leave the European Union (EU) is set to continue for longer.

Markets now only give a 5% chance to the Monetary Policy Committee (MPC) raising the base rate in February, and 30% in May.

However, the chances applied to a May hike “looks like an overreaction”, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

He said: “Even if, as we still expect, the prime minister eventually forces a modified Brexit deal through parliament, the economic data likely won’t have perked up before the MPC’s meeting on May 2.

“Nonetheless, the committee regularly hikes due to its expectations for growth and underlying inflation, and it likely will expect both to strengthen, as investment recovers and the chancellor’s fiscal stimulus kicks in.

“As such, we still think the odds of a May rate hike exceed 50%.”

Strong wage and employment data released today could also strengthen the case for rates rising sooner rather than later.

Wage growth has increased to 3.3% both including and excluding bonuses, while employment is at a record high.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “After yesterday’s weaker than expected GDP figures and more Brexit uncertainty after Theresa May’s last-minute decision to abort today’s Brexit vote, today’s wage growth figures provide UK workers with a little bit of pre-Christmas cheer.

“However, while we have now seen wage growth rise for four consecutive months, we are still not out of the woods.

“With the ongoing political and economic uncertainty, the recent steps forward could be reversed. Britain’s pay growth continues to lag our main competitors since the financial crisis.

“The current cocktail of concerns offers the Bank of England little incentive to hike interest rates any time soon.

“And even if the central bank does plan to increase rates over time, it expects to do so at a ‘gradual pace and to a limited extent’.”

Source: Your Money

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Bank’s Brexit report ‘extreme’ and ‘implausible’, says former rate-setter

A former UK interest rate-setter has slammed the Bank of England’s doomsday Brexit report as “extreme” and “implausible”.

Andrew Sentance, who is a former member of the Monetary Policy Committee (MPC), told MPs the central bank’s Brexit analysis last week assumed a “very extreme” no deal scenario of long-term disruption coupled with high interest rates.

In a hearing with the Treasury Select Committee, Mr Sentance – an ardent critic of Bank governor Mark Carney and the Bank’s recent policy – also took aim at the Bank’s independence and communication.

Bank of England
Bank governor Mark Carney was forced to defend the Bank’s Brexit report after it came under heavy fire (Daniel Leal-Olivas/PA)

He said: “They seem to assume that the disruption from a no deal scenario would be very long lasting, which seemed to me to be rather extreme.

“Secondly, they put in assumptions about the response of policymakers, particularly the MPC, that it would actually raise interest rates to about 5.5%.

“If you look at how the MPC has behaved over the last decade or so, that seems to be very implausible.”

His appearance in front of the cross-party committee of MPs comes after Mr Carney insisted on Tuesday that some criticisms of the report were “unfair”.

The Bank’s independence doesn’t seem to stand so strong as perhaps it had in the first 10 or 15 years as an independent central bank

Andrew Sentance, former MPC member

The analysis published last week prompted a vicious backlash, with pro-Brexit Conservative MP Jacob-Rees Mogg describing Mr Carney as a “second-tier Canadian politician” and claiming he had damaged the Bank’s reputation with his repeated Brexit warnings.

Mr Sentance is a Remainer, but still believes the Bank’s report went too far and was poorly communicated.

“The way it came across in the media wasn’t really totally clear that it was a very extreme view, even in the Bank’s own terms,” he said.

“The communication of it was less than ideal.”

Mr Carney told the committee on Tuesday that the analysis was only published at the request of the committee, while he admitted the worst-case scenario impact of Brexit was a “low probability”.

He also denied MP suggestions that he had colluded with Number 10 Downing Street to publish the report on the same day as the Treasury’s analysis – with the committee confirming it had driven the timing of its release.

But Mr Sentance said the Bank had not been “careful enough” to distance itself from the Government.

He said: “I have some concerns … that the Bank’s independence doesn’t seem to stand so strong as perhaps it had in the first 10 or 15 years as an independent central bank.”

He also hit back at Mr Carney’s comments to MPs on Tuesday of a “simpler but less successful time, when all the Bank did was focus on inflation”.

Mr Sentance, who served on the MPC from 2006 to 2011, said: “I’m not sure it was a simpler time in terms of dealing with the financial crisis.”

But he agreed with the Bank that a no-deal Brexit, where the UK is left on World Trade Organisation rules, would be bad for the economy.

He said he found it “hard to see that, even if you look 10/15 years ahead, we’ll be better off” after Brexit.

Mr Sentance, who recently retired from PwC where he worked for seven years and now acts as an independent business economist, has been highly critical of Mr Carney’s appointment in the past.

In an interview with the Press Association in June, he said the Treasury should not look overseas again when it hired a successor to Mr Carney.

In an explosive critique of Mr Carney’s reign, Mr Sentance also said the Governor’s “lack of confidence” with raising interest rates was because he was “not familiar with the UK economy”.

Source: Express and Star

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Bank of England’s Saunders sees higher rates if Brexit goes smoothly

The Bank of England would probably need to raise interest rates faster than investors expect if Britain manages a smooth exit from the European Union, though Brexit’s implications for the BoE remain unclear, rate-setter Michael Saunders said.

Britain is due to leave the EU, its main trading partner, in little more than four months’ time and Prime Minister Theresa May is struggling to get her Conservative Party behind the withdrawal deal she has hammered out with Brussels.

Saunders said a Brexit deal would boost Britain’s economy and probably justify further increases in rates.

“My own hunch is that, conditioned on our Brexit assumptions, capacity pressures will probably build somewhat faster than envisaged in our latest Inflation Report projections, reinforcing upward pressure on pay growth,” he said in a speech to business leaders in Bath, southwest England.

“In this case, we would probably need to return to something like a neutral stance rather earlier than implied by the current yield curve.”

Financial markets only fully price in the possibility of the next BoE rate hike for the end of 2019.

Saunders was one of the BoE’s earliest advocates for its gradual push to raise borrowing costs away from their all-time lows, which started in November last year.

However, he warned it was hard to be sure that higher rates would be needed in the event of a smooth Brexit because the inflation pressure from stronger economic growth could be offset by the disinflationary effects of a rise in sterling.

“It is unclear whether it would be appropriate to tighten monetary policy more or less than implied by the current yield curve, or indeed not adjust policy at all, or to loosen,” he said in his speech, most of which dealt with the demographic challenge to Britain’s economy in the decades ahead.

It was also hard to tell what the BoE would need to do if Britain left the EU with no transition deal, he added.

“The net effect would probably be higher inflation and lower growth, and it may be hard to tell in real time whether any weakness in growth exceeds the deterioration in potential growth,” he said. “The monetary policy implications could go in either direction.”

BoE Governor Mark Carney and other top officials have also previously warned investors not to assume they would cut rates in the event of a no-deal Brexit shock to Britain’s economy.

Source: Yahoo News UK

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Bank of England hints at faster hikes, but says Brexit options wide open

The Bank of England said on Thursday that interest rates might need to rise a bit faster than investors expect, but it warned that all bets would be off if Britain leaves the European Union without a deal in less than five months.

The BoE’s nine rate-setters all voted to hold rates at 0.75 percent, as expected in a Reuters poll of economists, after raising them in August for only the second time in a decade.

Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

Brexit is dominating the outlook for the world’s fifth-largest economy which has slowed since 2016’s referendum.

“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney told a news conference.

The BoE cut rates and ramped up its bond-buying program after the shock referendum vote. Carney cautioned against assuming it would do the same in the event of a no-deal Brexit.

Unlike 2016, inflation is above target and the BoE would be responding to actual economic damage, not a fall in confidence.

Sterling would probably fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates, Carney said.

On the other hand, policymakers would need to balance the hit to growth from lost trade, uncertainty and tighter financial conditions. That would normally make a case for lower rates.

Sterling briefly edged up against the dollar GBP= after the BoE policy announcement and was on track for one its biggest daily gains this year due to optimism about Brexit talks and broader dollar weakness.

The BoE penciled into its forecasts the bets in financial markets that there will be almost three quarter-point rate rises over the next three years. That compared with just over one in the forecasts that accompanied August’s rate rise.

Asked whether investors were pricing in enough rate hikes, Carney pointed to the BoE’s forecast that inflation would still be above its target in two years’ time, suggesting he thought investors were being a bit too cautious about the pace of hikes.

“November’s statement makes it pretty clear the Bank of England would like to be hiking rates further,” ING economist James Smith said.

“But given that it may be quite some time before we know for sure that a no-deal Brexit has been avoided, we suspect policymakers will struggle to hike rates before May 2019 at the earliest.”

Most economists do not expect rates to rise again until the middle of next year.

CONSUMERS RESILIENT, BUSINESSES NERVOUS

The BoE said consumer spending had beaten its expectations but businesses were holding back on investment.

Prime Minister Theresa May has yet to secure a transition deal to ease Britain’s exit from the EU.

Assuming Brexit goes smoothly, the economy was likely to continue to grow by around 1.75 percent a year, the BoE said, below the rate of above 2 percent before the Brexit vote.

But the BoE said the economy was at full capacity and inflation would take three years to drop from 2.4 percent now to its 2 percent target.

The economy was expected to start running above capacity in late 2019, sooner than the BoE previously forecast, creating inflation pressure.

The forecasts did not include the stimulus from higher public spending and tax cuts in finance minister Philip Hammond’s Oct. 29 budget. Like Carney, Hammond has said he might need to review his plans after Brexit.

“The (BoE) would be minded to offset such additional demand by raising interest rates a little more rapidly than the ‘one hike per annum’ over the next three years, which it is guiding toward,” Investec economist Philip Shaw said.

Source: UK Reuters

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Bank of England warns of economic shock if Brexit talks fail

The Bank of England warned Thursday that Britain could suffer an economic shock if it crashes out of the European Union without a deal, saying it could cause gridlock at ports and an inflation-rearing fall in the pound that could require higher interest rates.

After the bank decided to keep its main rate at 0.75 percent, Governor Mark Carney said the British economy’s supply capacity — that is, what the country is able to produce — could “fall sharply” in case of a disorderly Brexit.

“An abrupt and disorderly withdrawal could result in delays at borders, disruptions to supply chains, and more rapid and costly shifts in patterns of production, severely impairing the productive capacity of some U.K. businesses,” he said.

Carney said policymakers would have to try to work out which of the changes were short-term — caused by logistical challenges related to the end of free movement of goods and services, for example — and which would affect the economy in the longer-term.

The bank could be forced to raise interest rates, depending on how the pound reacts, he said. After Britain voted to leave the EU in June 2016, the currency fell 15 percent against major currencies, stoking inflation by making imports more expensive.

The bank, which is tasked with keeping inflation stable, is predicting another fall in the pound if Britain leaves the EU without a deal and no transition to smoothen out the exit.

“There are scenarios where policy would have to be tightened,” Carney told a news conference, while adding that a no-deal Brexit is “not the most likely scenario.”

Many economists doubt the central bank’s initial response to a disorderly Brexit would be to increase rates. After the 2016 referendum, when the pound had fallen, the bank cut rates.

The Bank of England, which has raised its key rate twice over the past year, is more likely to slash its benchmark rate to zero, economists say. And it could add stimulus by buying corporate bonds.

Carney’s comments come as Prime Minister Theresa May struggles to keep her divided Conservative Party in check in the Brexit discussions.

The talks are hung up in particular on the question of how to avoid reinstating a hard between EU member Ireland and Northern Ireland, which is part of the United Kingdom.

A summit of EU leaders in October was supposed to be the moment by which to reach a Brexit deal. Now officials are talking about a summit in December as the last chance for a deal. By then, many Britain-based firms may have already activated contingency plans that could include transferring business to the continent and cutting jobs.

May’s proposal for a Brexit deal is to essentially keep Britain in the European single market for goods, which would avoid tariffs and help keep supply chains operating without delays.

Though households have weathered the uncertainty and continued to spend thanks to an increase in wages, the uncertainty has hit business investment. In a survey, the Bank of England found that more than 50 percent of firms identified Brexit as being one of the top three sources of uncertainty in September and October, up around 10 percentage points from August.

The bank said there has been little evidence of significant precautionary stock-building ahead of Brexit, though it said it’s possible that could occur over the rest of this year and early next if concerns about Brexit persist. If the Brexit transition goes smoothly, the central bank is predicting a pick-up in business investment next year.

That would help growth rise to around 1.75 percent a year on average over the coming three years. Under this scenario, interest rates would rise by a quarter percentage point per year over the period.

But, echoing comments by the Treasury chief this week, Carney said the bank would have to revisit its forecasts in the event of a no-deal Brexit.

“The economic outlook depends significantly on the nature of EU withdrawal, in particular the form of new trading arrangements between the EU and U.K. and whether the transition to them is abrupt or smooth and how households, businesses and financial markets respond,” he said.

Source: Yahoo News UK

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UK mortgage approvals drop to six-month low

British banks approved the fewest mortgages for house purchase since March last month and demand to refinance home loans also fell following the Bank of England’s interest rate rise in August, industry data showed on Wednesday.

The number of mortgages approved for house purchase dropped to a six-month low of 38,505 in September from 39,241 in August, down 6.7 percent on a year earlier, the seasonally adjusted figures from UK Finance showed.

Britain’s housing market has slowed since the Brexit vote in June 2016. Most of the weakness has been in London and neighbouring areas, which have also been hit by a rise in purchase taxes for property worth over 1 million pounds.

Net mortgage lending dropped to 1.550 billion pounds last month from 1.617 billion pounds, the weakest since January.

“The mortgage market softened slightly in September, following strong remortgaging activity in the months preceding the recent base rate rise,” UK Finance’s managing director of personal finance, Eric Leenders, said.

Unsecured consumer lending was more stable, growing by an annual 4.0 percent in September, but lending to non-financial companies was down by 2 percent on the year, extending a run of falls seen since April.

“Economic uncertainty continues to impact on businesses’ appetite for finance as overall lending remains slightly below the same period last year,” said Stephen Pegge, UK Finance’s managing director for commercial finance.

The Confederation of British Industry said on Tuesday that factories were scaling back investment as uncertainty about Britain’s relationship with the European Union remained unclear, little more than five months before Brexit.

Source: UK Reuters

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Sterling rises as wage growth hits nine-year high

The value of sterling rose against its peer currencies as the latest data from the Office for National Statistics (ONS) showed wage growth of 3.1 per cent for the three months to the end of August.

This is the highest level of wage growth since January 2009, up from 2.9 per cent in the previous quarter.

Inflation for the period was 2.5 per cent, so real wage growth, that is, wage growth after inflation was 0.6 per cent.

Sterling rose above £1.32 to the dollar in the immediate aftermath of the announcement as investors believe higher wage growth will lead to higher inflation and cause the Bank of England to raise interest rates.

The rise in wages was expected by the Bank, with its chief economist Andy Haldane saying last week he expected wages to rise persistently above inflation.

Joshua Mahony, market strategist at IG Group, said the rise in the value of sterling was a reflection the market was focusing on actual economic data rather than political speculation.

Edward Park, investment director at Brooks Macdonald, said: “Based on the current state of negotiations our base case is we see a deal agreed before the end of March and we assign around a 75 per cent probability to that.

“Should that occur we expect to see  sterling trade around 5/10 per cent higher but not reach its pre-Brexit level as regardless of the deal the new arrangement is very likely to have more frictions to trade than the status quo.”

Meanwhile the accompanying unemployment number was unchanged at 4 per cent.

The Bank of England define full employment in the economy as being at 4.5 per cent, a number they revised downwards in recent years to reflect the insecure and temporary nature of some jobs.

Source: FT Adviser

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Annual growth in consumer credit slowed to three-year low in August

HOUSEHOLDS are showing signs of increased caution over their borrowing following August’s hike in interest rates, as annual growth in consumer credit weakened to its lowest levels in three years.

Borrowing from sources such as credit cards, personal loans and overdrafts increased by 8.1 per cent annually in August, down from 8.5 per cent growth in July, Bank of England figures show.

It was the lowest annual growth seen since an 8 per cent increase in August 2015.

The Bank said that, within the 8.1 per cent annual growth in consumer credit in the latest figures, growth in personal loans and overdrafts was at its weakest since December 2014, while growth in credit card borrowing has remained “broadly stable” for the past 18 months.

The Bank said annual growth in consumer credit is now “well below” a peak of 10.9 per cent seen in November 2016.

The Bank of England base rate was increased from 0.5 per cent to 0.75 per cent in early August, pushing up costs for some borrowers.

Howard Archer, chief economic adviser at EY ITEM Club, said: “It may well be that August’s rise in interest rates fuelled consumer caution over borrowing.”

“The recent impression has been that consumers have become relatively cautious in their borrowing while lenders have certainly become warier about advancing unsecured credit and tightened their lending standards,” he continued.

Recent figures from Moneyfacts.co.uk suggest conditions for borrowers are getting tougher.

It found that the number of balance transfer credit card deals on the market which have an introductory zero-interest period has fallen to its lowest level since Moneyfacts’ records started in 2006.

This could make life harder for credit card borrowers who rely on shifting their debt from one interest-free credit card deal to another.

Peter Tutton, head of policy at StepChange Debt Charity, said: “With consumer confidence slipping over the summer against a backdrop of uncertainty caused by Brexit, it’s perhaps not surprising that credit growth has continued its downward trend.”

“We must keep an eye out for issues arising out of emergency borrowing to ensure lending remains affordable and sustainable in the long term,” he added.

The Bank’s Money and Credit report also showed that 66,440 mortgage approvals were made to home buyers in August – the highest figure in seven months.

The number of approvals for remortgaging increased to 53,125 in August – the highest figure since November 2017.

“Consumer caution over making house purchases may well be magnified in the near term at least by current heightened uncertainties over Brexit,” Mr Archer said.

Source: Irish News

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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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When will the Bank of England raise interest rates again?

There are only really two ways to deal with burdensome debts, if you’re an individual.

You can repay them. Or you can refuse to repay them (default).

But if you happen to be a sovereign country, there’s a third option which combines the two in an apparently painless manner.

Inflation.

Getting rid of debt the painless way

Inflating away debt is an attractive option for governments. You don’t outright default. You pay your creditors the money you owe them. But the money they are getting is worth less than it was when you first borrowed the cash. So you win.

One of the key solutions (unspoken, because you can’t talk about inflating away your debt, or people get wise to the fact that you’re trying to do it) to the legacy of the financial crisis, has been to try to drive up inflation in order to make the level of indebtedness less painful.

It has taken a very long time. But it’s starting to look as though the strategy is gaining some traction.

We heard yesterday that the UK’s annual inflation rate (as measured by the consumer prices index – CPI), rose to 2.7% in August. Meanwhile “core” inflation (which excludes volatile essentials such as food, energy, cigarettes and booze) rose to 2.1%, from 1.9%.

Both of those readings were higher than either analysts or the Bank of England had expected – CPI was forecast to fall to 2.4%, for example.

Commentators have generally dismissed the reading as being “noise”, driven mainly by random things like computer game prices rising, and a big jump in clothing prices after a big fall the previous month. That said, as Capital Economics notes, “admittedly, utility and fuel price rises will probably hinder downward progress in inflation in the next few months”.

Yet while the Bank of England might hope that the CPI inflation rate won’t rise above 3% (as that means it’ll be at risk of having to write a letter to the Treasury), it probably isn’t too unhappy about inflation ticking higher.

There’s a couple of reasons for that. Firstly, despite the rise in inflation, wages are still rising ever so slightly more rapidly than prices, which means that individuals are at least able to keep up with the rising cost of living.

(And in fact, most people who have been in jobs for a while are probably doing a good bit better than that, as Merryn points out in her recent blog on wage rises).

So “real” wages are still rising, which means that consumers aren’t getting poorer, despite rising inflation.

Secondly, house price growth is moderating too. The latest official data suggests that annual house price growth came in at 3.1% in July, which is also barely above inflation (and in fact it’s below the retail price index measure).

This scenario is ideal for the Bank. The housing market is one of the biggest potential sources of political and financial instability in the UK. You don’t want prices to crash as that hurts everyone’s balance sheets, but you don’t want prices booming either, as that sets you up for problems in the future, not to mention the general sense of discontent it creates.

So as we’ve noted before, a gentle decline in “real” terms would be ideal – it improves affordability for those who feel locked out of the market, while inflation helps to make the mortgage burden on existing owners steadily lighter.

If Brexit isn’t a total disaster, it could give the Bank a headache

So for now, all the big numbers are going in roughly the right direction.

The tricky thing, of course, is that the Bank does need to be seen to be at least attempting to address inflation. It has raised interest rates this year, but not by very much.

Indeed, as the Bank’s own staff have pointed out in the past (and we’ve highlighted here), if interest rates were anywhere near approaching “normal”, then they’d already be a great deal higher. For example, given where inflation is now, the Bank rate would be above 3%. Instead, it’s currently at 0.75%.

So are rates likely to move again soon?

I suspect not. Given the Bank’s obsession with Brexit, it’s hard to see interest rates being moved much in the short term. Indeed, Capital Economics reckons the Bank won’t move them again until May 2019.

However, what’s more interesting is to consider what could happen if a Brexit deal is done – and then nothing particularly devastating happens to the economy.

In the “best-case” scenario, sterling would probably rebound somewhat, which would take some of the inflationary pressure off. But this would still leave the Bank playing catch-up on rate rises.

We’ll see. In the meantime, don’t expect your savings account to suddenly start paying out a decent rate of interest again anytime soon.

Source: Money Week