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Will the Bank of England raise or cut interest rates after UK inflation data?

UK inflation has grown at an annual rate of two per cent for the second month in a row, official statistics confirmed today.

The consumer price index (CPI) figure is bang on the Bank of England’s target. It thinks two per cent inflation is ideal for ensuring smooth growth in the economy.

But what does this mean for the Bank’s main interest rate, which currently stands at 0.75 per cent?

If inflation drops below two per cent, the BoE should theoretically cut rates to encourage borrowing and spending, and vice versa.

However, Brexit uncertainty has made the Bank reluctant to take any action for fear of destabilising the economy.

“There is little pressure for the [Bank] to adjust interest rates in either direction,” said Andrew Wishart, UK economist at Capital Economics, in response to today’s figures.

“There was still little sign of rising underlying inflationary pressures despite the continued strength of pay growth in May,” he said. Official figures yesterday showed real pay grew by 1.7 per cent in the year to May.

“A fall in energy price inflation and a reduction in Ofgem’s energy price cap in October should take 0.3 percentage points off inflation over the second half of the year,” Wishart said.

Brexit fog
Investec economist Victoria Clarke said: “For the Bank of England the close-to-target inflation readings helps the institution to maintain its wait and see position amidst continuing questions over Brexit’s likely course”.

“We maintain our view that the BoE is happy sitting tight throughout this year and through much of next year too,” she said.

The way Britain leaves the European Union will be at the forefront of the Bank’s mind. It has hinted it could slash rates to ease the economic turbulence of a no-deal exit.

“On-target inflation gives the Bank of England plenty of room to cut interest rates in the event of sharp slowdown,” said Ian Stewart, chief economist at Deloitte. “The likelihood of the UK joining the global move to easier monetary policy is rising.”

But George Buckley, Nomura’s chief UK and euro area economist, said: “The response of inflation to a hard Brexit may be for a sizeable rise” due to higher tariffs, restrictions on incoming goods from Europe, and a lower pound.

Such a rise would ordinarily trigger a rate cut, but the Bank will likely wait and see exactly what happens to the economy immediately after a no-deal exit, should it occur.

Certain elements of today’s inflation figures, such as lower producer input and output prices, are “helpful for the Bank,” said Howard Archer, chief economic adviser to the EY ITEM Club.

The data gives “decent scope” for the BoE “to adopt a flexible approach on interest rates should the economy continue its current struggles amid Brexit uncertainties,” he said.

By Harry Robertson

Source: City AM

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Inflation takes off on higher air fares and energy prices

UK inflation was higher in April, as the Easter getaway rush boosted air fares and the higher energy price cap was introduced.

Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) was 2.1% last month compared with 1.9% in March.

Economists had been expecting inflation to rise to 2.2%.

It is the first time in 2019 that the rate has risen above the Bank of England’s 2% inflation target.

Household bills were one of the main contributing factors to the higher rates, after increases to Ofgem’s energy price cap came into effect.

Electricity and gas prices rose 10.9% and 9.3% respectively between March and April.

Transport costs were also higher, especially for flights, due to the timing of Easter. Coming at the end of the month, the holiday helped to push air fares up by 26.4%.

But travellers also paid more for other forms of transport, with international rail, coach and sea fares all rising.

However the timing also contributed to a downward effect from hotels, where the cost of overnight stays rose by less than a year ago.

Meanwhile, drivers faced higher costs at the pumps as motor fuel prices rose.

ECONOMY Inflation
(PA Graphics)

Petrol prices rose by 3.8p on the month to 124.1p per litre. This was a bigger rise than the same time last year, when prices were up 1.5p.

Diesel was also pricier, climbing 2.3p to 133p per litre.

The largest downward contribution came from recreation and culture, especially in the volatile computer games category. Prices for games are calculated based on the bestseller charts, meaning they can vary depending on the number and popularity of new releases.

Prices in the games, toys and hobbies category were down 5.8% on the month, compared with a smaller decline of 1.6% last year.

(PA Graphics)
(PA Graphics)

Cigarettes and beer, especially cans of lager, also had lower prices. The wider alcohol and tobacco category was down 0.4%, despite a 2.1% uplift in the price of spirits.

The CPI, including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 2% in April, up from 1.8% in March.

The Retail Prices Index (RPI) was 3%, up from 2.4% in February.

Higher inflation would usually bring pressure on the central bank to raise interest rates – but these are far from normal times

Ben Brettell, Hargreaves Lansdown

Ben Brettell, senior economist at Hargreaves Lansdown, said the inflation rate had received a muted reaction from the markets, and may have little weight in the Bank of England’s decision on whether to raise interest rates.

“Higher inflation would usually bring pressure on the central bank to raise interest rates – but these are far from normal times,” he said.

“The MPC is rightly reluctant to tweak policy while Brexit hangs over the economy like the Sword of Damocles.”

Source: BT.com

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UK inflation rises in April by less than Bank of England expected

UK inflation rose last month by less than the Bank of England and investors had expected, but still hit its highest level this year, pushed up by a rise in energy bills.

Consumer prices rose at an annual rate of 2.1% in April after a 1.9% increase in March, the Office for National Statistics said on Wednesday. A Reuters poll of economists had pointed to a rate of 2.2%, the same as the BoE’s forecast.

Sterling and government bonds were little changed by the data as core inflation, which excludes energy and food prices, held steady at 1.8% for the third month in a row.

“In principle, this is another reason to think the Bank of England will keep rates on hold for the foreseeable future,” ING economist James Smith said.

But he added that a strong labour market meant an interest rate hike in November could not be ruled out.

A recent weakening of inflation, combined with the lowest unemployment rate in 44 years and rising wages, has taken the edge off the uncertainty about Brexit for many households whose spending drives Britain’s economy.

But Britain’s energy regulator raised a price cap on energy providers by 10% with effect from April, and all big six suppliers raised their standard prices by the same amount, which the BoE said would push inflation above target briefly.

Electricity and gas prices were the biggest driver of inflation last month, the ONS said. Computer game and package holiday prices helped to offset the impact of the higher bills.

The ONS figures also suggested less short-term pressure in the pipeline for consumer prices than expected.

Manufacturers’ costs for raw materials – many of them imported – were 3.8% higher than in April 2018, much less than the 4.5% rise predicted by the Reuters poll.

The ONS said house prices in March rose by an annual 1.4% across the United Kingdom as a whole compared with 1.0% in February, marking the first increase in house price inflation since September. Prices in London alone fell by 1.9 percent, a smaller drop than in February.

The ONS also revised down its estimate for Britain’s budget deficit in the last 2018/19 financial year that ended in March.

The headline measure of public sector net borrowing amounted to 23.5 billion pounds that year or 1.1% of gross domestic product, compared with the previous estimate of 24.7 billion pounds or 1.2% of GDP.

In April, the first year of the 2019/20 financial year, the deficit stood at 5.8 billion pounds, as expected by economists.

Reporting by Andy Bruce; Editing by Alison Williams

Source: UK Reuters

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UK inflation up, London house prices fall by most since 2009

Britain’s main inflation rate ticked up last month but stayed close to January’s two-year low, helping consumers maintain their spending power as wage growth also picked up, even though the timing of Brexit remained uncertain.

Wednesday’s official data also showed house prices rose at the weakest annual pace in 5 1/2 years in January, curtailed by the biggest drop in London prices since September 2009, just after the low point of the global financial crisis.

Consumer prices rose at an annual rate of 1.9 percent in February after a 1.8 percent increase in January, the Office for National Statistics said. A Reuters poll of economists had forecast an unchanged rate of inflation.

Economists said they expected inflation to rise above the Bank of England’s 2 percent target soon, especially as many household utility bills are due to increase in April.

“Inflation picked-up for the first time since August 2018, with rising prices across a range of items, including food and alcohol,” said Suren Thiru, an economist at the British Chambers of Commerce.

“Businesses also continue to report that the cost of imported raw materials is rising. As these high input costs filter through supply chains, they could increase the upward pressure on consumer prices in the short-term,” he added.

Still, British government bond futures rose slightly after the data showed core inflation, which strips out volatile food and energy prices, edged down, leaving the overall picture of domestic price pressures in Britain muted ahead of Brexit.

Weaker inflation, combined with rising wages and the lowest unemployment rate in 44 years, has taken the edge off the uncertainty about Brexit for many households, whose spending drives Britain’s economy.

Data due on Thursday are expected to show that retail sales grew an annual 3.3 percent last month, weaker than just before the referendum in 2016 to leave the European Union but above its average for much of the last decade.

Britain’s modest inflation is also helping the Bank of England as it holds off on raising interest rates while it waits for the outcome of Britain’s Brexit impasse.

Several policymakers at the central bank have said they want to see firm evidence domestic inflation pressure is building before they vote to raise rates.

The ONS said house prices in January rose by an annual 1.7 percent across the United Kingdom as a whole, the smallest increase since June 2013, when Britain was still struggling to shake off the effects of the global financial crisis.

Prices in London alone fell by 1.6 percent, marking 11 months where prices have not risen.

The ONS said prices in the capital were down 3.3 percent from their recent peak in June 2017, compared with an almost 18 percent peak-to-trough fall during the financial crisis.

By Andy Bruce, William Schomberg

Source: UK Reuters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: UK Reuters

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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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Sterling slides on stronger dollar, below-forecast UK wage growth

Sterling slid to a new 13-month low on Tuesday after a rebound in the dollar and as weaker-than-forecast wage growth offset an unexpected fall in Britain’s unemployment rate.

The pound had risen to as high as $1.2827 after official data showed unemployment fell to its lowest rate since 1975 during the second quarter.

But sterling trimmed its gains after annual wage growth – at a nine-month low of 2.4 percent and below forecasts of 2.5 percent – diluted the positive employment numbers.

A recovery in the dollar then sent sterling lower, leaving it as weak as $1.2705, its lowest since late June 2017.

Against the euro, sterling was stronger, at 89.175 pence per euro.

The Bank of England has said it wants to see rising wage growth pressures if it is to speed up its planned rate of monetary policy tightening.

Sterling fell heavily last week, hammered by a stronger dollar and concerns about the state of negotiations with the European Union over a trade deal for when Britain leaves the bloc. Foreign minister Jeremy Hunt added his voice on Tuesday to recent warnings about the prospect of a disorderly departure.

“Everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” he said.

The direction of monetary policy following a Bank of England interest rate rise earlier this month has recently taken a backseat against market worries about Brexit.

BoE Governor Mark Carney said markets should prepare for further rate hikes, although borrowing costs would increase to a gradual and limited extent and depend on a smooth Brexit transition.

“Today’s wage growth figures could undermine this, particularly with the increasing threat of a no-deal Brexit. Should this happen, the bank’s next move could be to reverse their most recent rate decision and cut rates to keep the economy afloat,” Felix Blom, a researcher at forex payments platform OFX, said.

UK inflation data and retail sales numbers for July are also due out this week.

Source: UK Reuters

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Tame UK inflation knocks BoE rate hike expectations

British inflation unexpectedly held steady last month, denting market confidence about a Bank of England interest rate hike next month and sending sterling to a 10-month low against the dollar.

The pound tumbled towards $1.30 and 10-year British government bond yields GB10YT=RR fell to their lowest since the end of May following the data, which also showed weakening in an underlying measure of inflation.

Despite motor fuel prices rising to their highest since 2014, annual consumer price inflation held in June at 2.4 percent, the Office for National Statistics (ONS) said.

Economists polled by Reuters had on average expected to see the first increase this year, to 2.6 percent.

Britain’s economy appears to be picking up after a slow first three months of the year, when unusually heavy snow hurt demand.

While the central bank worries that growth is close to the modest pace at which it will start to push up inflation, Wednesday’s data brought little sign of this.

Core inflation, which strips out energy, food, alcohol and tobacco prices, fell to 1.9 percent from 2.1 percent in May — below all forecasts and the weakest reading since March 2017.

“The large downside surprise adds more uncertainty around what had until now appeared a near-certain August rate hike,” JPMorgan economist Allan Monks said.

Comments from BoE officials over the next week could be a “game changer”, Monks said, drawing parallels with May, when a spate of poor data thwarted a widely expected rate hike.

One measure of financial market pricing after Wednesday’s figures showed a roughly 70 percent chance of a move next month compared with nearly 80 percent before BOEWATCH.

PRESSURE IN THE PIPELINE?

On Tuesday data showed British workers’ wages rose at the slowest rate in six months during the three months to May despite a record number of people in jobs, challenging the BoE as it considers raising rates next month.

A Reuters poll of economists published on Tuesday showed 47 out of 75 thought the BoE would raise rates to a new post-financial crisis high of 0.75 percent in August. The remainder thought it would stay on hold. [BOE/INT]

Some economists said the weakness in June’s inflation data was driven by volatile components such as clothing, computer games and air fares which could soon rebound.

The ONS reported the biggest month-on-month drop in clothing prices for any June since 2012 as shops slashed prices for the summer sales.

Wednesday’s data suggested rising pressure in the pipeline for consumer prices, however.

Manufacturers increased the prices they charged by 3.1 percent in June compared with 3.0 percent in May. While a slightly weaker increase than expected, it marked the strongest rise this year.

The cost of raw materials – many of them imported – was 10.2 percent higher than in June 2017, the strongest rise in a year.

“The continued pick-up in producer prices suggests that inflation may rise a little in the short term as the recent oil price increases pass through supply chains,” said Suren Thiru, head of economics at the British Chambers of Commerce.

But any period of rising price growth was likely to be temporary, he added.

Source: UK Reuters

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Surprise fall in UK inflation muddies Bank of England rates picture

British inflation fell unexpectedly in April, according to data that prompted fresh questions about when the Bank of England would next raise interest rates and pushed sterling to its lowest level against the dollar this year.

Consumer prices rose by an annual 2.4 percent, the Office for National Statistics said on Wednesday, marking a 13-month low as the timing of the Easter holidays meant air fares pushed down on inflation last month.

Although the BoE had expected inflation to ease in April, most economists in a Reuters poll thought it would hold steady at 2.5 percent and some had forecast a rise. It was the second surprise fall in a row after a drop in March’s figures.

“With consumers remaining cautious and borrowing appearing to have fallen substantially, a rate hike over the next few months is certainly not a done deal,” ING economist James Smith said.

Investors priced in a one-in-three chance of the BoE raising borrowing costs in August — the next time it updates its economic forecasts — down from 50/50 earlier this week.

Two weeks ago the BoE refrained from a hike that had at one point been widely expected as it waited to see if the economy’s weak start to the year simply reflected heavy snowfall.

A Reuters poll of economists, conducted before Wednesday’s data, showed most still expected an August hike. [BOE/INT]

High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers last year. Although it has receded from its November peak of 3.1 percent, it is running above the BoE’s target of 2.0 percent.

On Tuesday, Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation in Britain “probably tips up a bit” in the coming months before resuming a decline.

The ONS said soft drink prices rose sharply over the last couple of months but the overall impact on inflation was small.

Data last week showed inflation in the euro zone also slowed in April.

Wednesday’s figures pointed to some signs of inflation pressure still in the pipeline in Britain.

Prices of goods leaving factories increased at a faster rate than expected last month and the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.

Source: UK Reuters