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Mortgage arrears fall in fourth quarter: UK Finance

The number of homeowners in arrears on their mortgage continued to decline in the fourth quarter of 2021, despite the removal of the government’s furlough scheme at the end of the September.

Figures from the UK Finance show there were a total of 79,620 homeowner mortgages in arrears at the end of December 2021. This is 750 fewer mortgages when compared to the previous quarter’s figures.

These figures related to mortgages where arrears are 2.5% or more of the outstanding mortgage balance.

Within this total there were 26,850 homeowner mortgages in early arrears (those between 2.5% and 5% of balance in arrears), a decrease of 2% on the previous quarter and 14% fewer than the same period in 2020.

UK Finance says these early arrears figures remain substantially lower than the numbers seen before the pandemic began.

However, UK Finance says the number of homeowners with more significant arrears (representing 10% or more of the outstanding mortgage balance) has risen. In total there were 30,010 mortgage holders in this position, 350 more cases than the previous quarter. This figure has risen — from a low base — since Q1 2020, although the rate of increase has slowed.

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UK Finance says these customers were already in relatively deep arrears positions prior to the pandemic, and will likely have made use of the full six months of Covid-19 payment deferrals scheme. They are equally likely to be receiving (or in need of) further support through lenders’ tailored forbearance options.

The figures show there were a total of 6,010 buy-to-let mortgages in arrears in the fourth quarter of 2021 – an increase of 2% compared with the previous quarter but 1% down on the number a year previously.

When it comes to repossessions, the figures show that there were 390 homeowner mortgaged properties and 320 buy-to-let mortgaged properties taken into possession in the final quarter of 2021.

UK Finance says year-on-year comparisons will look unusually large due to the ‘Possession Moratorium’ from March 2020 to 1 April 2021, over which period no enforced possessions took place.

In absolute terms, there were 20 fewer possessions in Q4 2021 compared with the previous quarter. The voluntary possessions moratorium ended on 4 January 2022, and the number of possessions will now gradually increase as the courts resume working through the backlog of cases accumulated over the first moratorium.

Commenting on these figures Equifax’s chief data and analytics officer Paul Heywood says while these figures are encouraging there are potential dangers on the horizon.

He says: “Far fewer homeowners than feared fell into arrears on their mortgage repayments in the early months of the pandemic, thanks in part to emergency consumer protections such as furlough and mortgage payment holidays.

“Even today, we are still seeing a relatively low level of arrears as most homeowners in the UK took advantage of lockdowns to build up rainy day savings and insulate against future income shocks.

“That picture, however, is quickly changing. Prices are rising, interest rates are creeping up, and unless wages keep pace, most borrowers will see their finances squeezed over the coming months.

“Equifax data suggests that these financial pressures are already leading to growing numbers of people falling behind on loan repayments in the consumer credit and motor finance space, and we would expect mortgage arrears to follow suit in the coming months.”

He adds: “As the UK walks headlong into a cost of living crisis, credit affordability is more important than ever, and we encourage credit providers, whether they be lenders or utility companies, to be looking closely at how innovations such as Open Banking can help them to identify people in need of help before they fall into acute financial difficulty.”

Source: Mortgage Finance Gazette

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UK economy grew 7.5% in 2021, mostly recovering from its pandemic plunge

The UK economy grew 7.5% in 2021, official figures revealed Friday, rebounding from its historic 9.4% plunge in 2020 when pandemic restrictions stifled activity.

On a quarterly basis, U.K. GDP (gross domestic product) is estimated to have increased by 1% in the final three months of the year. It follows a downwardly revised 1% increase the previous quarter, the Office for National Statistics (ONS) said on Friday.

In December, GDP contracted by 0.2% as the omicron Covid-19 variant forced renewed caution and containment measures, though economists polled by Reuters had expected a more severe 0.6% contraction.

The largest contributors to the quarterly rise in output were from “human health and social work activities driven by increased GP visits at the start of the quarter,” according to the ONS, along with a “large increase in coronavirus (Covid-19) testing and tracing activities and the extension of the vaccination programme.”

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The ONS said economic output in the fourth quarter remained 0.4% below its pre-pandemic level (in the fourth quarter of 2019).

“The UK’s self-imposed lockdown to ‘protect Christmas’ has turned out to have only a mild impact on growth in December. This is an encouraging sign for the health of the economy,” said Emma Mogford, fund manager of the Premier Miton Monthly Income Fund.

Though the omicron variant did not present the significant setback initially feared in November, the UK economy faces a raft of challenges in 2022.

The Bank of England now expects inflation to peak at 7.2% in April and has imposed back-to-back interest rate hikes for the first time since 2004, taking the main Bank Rate from 0.1% to 0.5%, with more tightening expected.

Meanwhile, the country’s energy regulator has increased its price cap by £693 ($938) per year from April 1 because of soaring energy prices, placing further strain on millions of households.

The Bank of England also slashed its GDP growth forecasts last week, cautioning that the impact of inflation means the economy is likely to grow 3.75% in 2022 instead of the 5% it previously projected.

“The cost of living has become a big concern for millions of people and if it continues for a sustained period of time, it will be harmful to the wider economy,” said Annabelle Williams, personal finance specialist at British online investment management firm Nutmeg.

By Elliot Smith

Source: CNBC

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Sterling flat against euro ahead of BoE speaker

Sterling was flat against the euro not far from a 1-1/2 month low on Wednesday, while investors await a speech by a senior Bank of England official later in the day.

The pound fell sharply against the single currency last week after the ECB’s unexpected hawkish shift boosted euro zone yields, overshadowing the Bank of England’s move of raising rates by 25 basis points.

Bank of England Chief Economist Huw Pill, who will give a speech at the annual conference of Britain’s Society of Professional Economists, “was one of the majority five Monetary Policy Committee (MPC) members voting for just a 25bp hike last week”, ING analysts said.

“We think the BoE will welcome the role the strong pound sterling is playing in deflecting some of the energy price surges – and see no reason for the BoE to start railing against aggressive pricing of the BoE trajectory,” they added.

The pound was flat against the euro at 84.22 pence within striking distance of its post-ECB low at 84.74 pence.

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Money markets are still pricing in a 25 bps rate increase in March and 125 bps by December 2022, but some analysts have warned about the risks of excessive expectations.

They noted that Bank of England Governor Andrew Bailey said last week not to take for granted the BoE was embarking on a long series of rate hikes, while the BoE’s downward revision to inflation forecasts assumed interest rates at 1.5% by mid-2023.

The pound rose 0.2% versus a slightly weakening dollar to $1.3576.

The dollar stayed in a holding pattern a day before the release of U.S. consumer price data that may offer new clues on the pace of Federal Reserve policy tightening.

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Investors will also be monitoring political developments as Prime Minister Boris Johnson fights for his political survival.

On Tuesday, he reshuffled some ministers in his administration to appease his lawmakers, angered by a series of scandals.

“Even without a major change in the policy direction, the replacement of the UK prime minister with a less erratic and gaffe-prone alternative would a be positive for UK risk markets and sterling,” said Kallum Pickering, senior economist, director at Berenberg.

“While the risks may be tilting towards a scenario where Johnson somehow manages to cling on as prime minister, it remains more likely than not that the Conservatives will try to replace him soon, in our view,” he added.

Reporting by Stefano Rebaudo

Source: UK Reuters

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Bank of England poised to act under new inflation strain

Facing pressure to curb surging inflation, the Bank of England looks set to raise interest rates again on Thursday and signal further unwinding of its pandemic stimulus, including a gradual reversal of its huge bond-buying plan.

Twenty-nine of 45 economists polled by Reuters late last month said the BoE would raise Bank Rate to 0.5% from 0.25% at its February meeting, hot on the heels of December’s rate hike, the first by a major central bank since the pandemic.

It would mark the first back-to-back borrowing cost increases by the BoE since 2004, reflecting an urgent need to show it is on top of an inflationary surge.

Separately, British finance minister Rishi Sunak was expected to announce on Thursday measures to smooth a possible 50% jump in household energy bills. read more

The Bank of England forecast in December that inflation would peak at around 6% in April but price growth that month jumped by more than expected to 5.4%, its highest in almost 30 years.

The labour market has also tightened, something Governor Andrew Bailey says is key to the monetary policy outlook.

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Data published on Thursday showed employers were offering higher pay deals in the face of staff shortages and rising inflation. read more

“Members are likely to disregard what looks set to be a temporary bump in the path of the economic recovery around the turn of the year due to the spread of the Omicron variant,” said Investec chief economist Philip Shaw, predicting an unanimous 9-0 vote by the Monetary Policy Committee to raise rates.

The BoE’s stance contrasts with the European Central Bank, which looks set to leave policy on hold on Thursday. read more

The U.S. Federal Reserve is signalling a first rate hike in March although officials spoke cautiously on Monday about what might follow. read more

Investors will be looking for signs in the Bank of England’s new inflation forecasts whether it thinks investors are being too aggressive by betting on the Bank Rate reaching 1.5% by the end of 2022.

But Bailey may be wary about sending explicit messages after the BoE wrong-footed many investors last year.

Among MPC members, only Catherine Mann, Bailey and Deputy Governor Jon Cunliffe have spoken publicly in 2022.

“After the BoE’s communications fiasco late last year, it has decided to respond by saying less rather than more,” said JPMorgan economist Allan Monks, cautioning that investors’ conviction about a 25 basis point hike might be overdone.

The announcement is due at 1200 GMT. Bailey will lead a news conference half an hour later.

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LITTLE QT

If rates do go up to 0.5%, it marks the point at which the BoE has said it will begin a process called quantitative tightening (QT) – or reducing its vast holdings of government bonds, bought to stimulate Britain’s economy.

The Bank of England has said it will start by not reinvesting money from maturing gilts, possibly as soon as March when 25 billion pounds of bonds it owns are due to mature.

Bond investors want to know if the BoE intends to accelerate the QT process.

Last August, it said it would start to sell its gilts once Bank Rate hits at least 1%, depending on economic circumstances.

“Even though the market is actively pricing such a scenario, we continue to doubt that the hiking cycle will get that far,” said Rabobank strategist Stefan Koopman, who warned the BoE might find itself raising rates just as the economy slows.

Tax hikes on workers, as well as rising energy and food bills, are set to intensify a cost-of-living squeeze.

A survey from insurance and pensions company Aegon showed 38% of Britons were worried that rising interest rates would hit their finances. An Ipsos MORI poll for the Evening Standard newspaper showed economic morale at a one-year low.

By Andy Bruce

Source: UK Reuters

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Second charge mortgages: costs, how they work and when they could work for you

If you’re looking to carry out home improvements or consolidate your debts, and you don’t want to remortgage, then a second charge mortgage could be the perfect option.

How do second charge mortgages work?

Second charge mortgages are a way to borrow against your property that run alongside your existing mortgage.

Second charge mortgages work rather like first charge mortgages, in that you borrow a specific sum over a set term and then make monthly repayments in order to clear that debt.

There is one key difference, however. Rather than borrow against the value of the property, you instead borrow against the equity that you hold in the property.

Let’s take an example. I have a house worth £200,000, with a £150,000 outstanding mortgage.

If I want to take out a second charge mortgage, I’ll be borrowing against the £50,000 equity I hold in the property. In other words, the bit of the property that is mortgage free.

If things go wrong and your property is repossessed, then the funds raised from the sale will first go towards clearing your outstanding mortgage, with anything left then going to pay off the second charge mortgage.

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Are second mortgages popular?

There’s certainly been a striking increase in the number of borrowers opting for second charge mortgages in recent times.

The Finance and Leasing Association, the trade body for the sector, releases monthly figures highlighting both the volume and value of new second charge agreements.

In its latest release, it found that in November there were 2,584 new deals, worth a total of £114 million. That is up by 36% and 48% respectively on the previous month, while the volume and value of deals in the 12 months to November were up by 36% each.

In other words, significantly more people are now making use of second charge mortgages.

Another factor here is the massive house price growth seen since the start of the pandemic.

Significant numbers of homeowners now have larger equity stakes in their properties, and as a result, are better able to take advantage of that through a second charge mortgage.

Why do people take out second charge mortgages?

There are two common reasons for homeowners opting for a second charge mortgage, both of which are seeing far more interest than usual at the moment.

The first is home improvements. If you want to build an extension or convert an attic into a new room, then you may not have the savings set aside to cover the cost of that work.

That means having to borrow some money, and you may not be able to raise enough through credit cards and personal loans. Instead a second charge mortgage could work.

The other big driver of second charge mortgages is debt consolidation.

Some people may find they owe money across a host of different debts, and find keeping on top of the repayments ‒ as well as what they are actually being charged in interest ‒ tricky.

By combining them into a single debt, at a single rate of interest, it may make clearing that debt more straightforward.

Both of these drivers have seen a significant spike in recent times.

An awful lot of people have opted to adapt their homes through the pandemic, so that they are more appropriate as a workspace for part of the week, while the financial shocks of Covid-19 have caused some to take on additional debts in order to keep their heads above water, and they now want to get those debts under control by consolidating them.

The pros and cons of second charge mortgages

There are a few notable benefits to taking out a second charge mortgage, rather than remortgaging, if you need to raise funds.

If you opt to remortgage, then first and foremost you may have to pay an early repayment charge. This is calculated as a percentage of the outstanding mortgage, so can easily run into many thousands of pounds.

What’s more, doing so means you give up your existing rate and have to apply for a new one.

That’s great if rates today are lower than when you took out your initial loan, but the reverse could easily be true.

In addition, as you are increasing the size of your loan, you may find that you fall into a higher loan-to-value band for a mortgage, which means that you’ll have to take on a higher interest rate. All of those factors combined can make remortgaging in order to raise funds a pretty expensive method.

However, you don’t have to worry about those issues if you take out a second charge mortgage.

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As you are borrowing against the equity you own in your property, your first mortgage is left untouched. As a result, there are no exit fees or interest rate jumps to worry about ‒ you simply carry on enjoying that initial rate until it reaches the end of its term.

There are some downsides to be aware of though. Second charge mortgages tend to come with slightly higher rates than you will get from a first charge mortgage, which is important to bear in mind.

That’s because of the second charge mortgage sitting behind the original mortgage in the priority list in the event of a repossession.

In effect, the lender is taking a bigger risk lending to you, and as a result, wants to balance that out with a higher rate of interest.

What’s more, second charge mortgages are something of a specialist area of the market. Not all lenders off them, so you will undoubtedly have a much smaller range of options to choose from than with a simple remortgage.

In fact, some second charge lenders only offer their deals through mortgage brokers. As a result, securing one may mean that you need to make use of an adviser, which will likely mean incurring an advice fee.

Where can I get a second charge mortgage?

While some mainstream lenders offer second charge mortgages, the fact is that some of the most competitive deals come from lenders you’ve probably never heard of.

What’s more, they often only offer their deals through a mortgage broker.

That means that if you want the best range of options, and some guidance on which lenders are most likely to be happy to offer you a deal, you’re best off speaking to a mortgage broker.

By John Fitzsimons

Source: Love Money

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Bank of England increases interest rates amid inflation concerns

The Bank of England (BoE) has announced that the Monetary Policy Committee has voted to raise interest rates from 0.25% to 0.5%.

Inflation is continuing its upward trend, driven principally by price rises in energy, food, and tangible goods. The Bank’s forecast is that inflation will peak at 7.25% in April once the energy price cap increases by 54%. This will be the highest inflation seen since the early nineties.

The Bank of England is expecting inflation to fall back by the middle of the year, with an expectation that the 2% long term target will be achieved in two years.

Interest rates are the monetary policy lever that can be used to curb or accelerate inflation. Due to the levels of inflation shown above, the Bank has agreed to raise interest rates to 0.5%.

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This is following an original increase to 0.25% in October 2021. Analysts are expecting these rises to be the start of a series looking to bring inflation back to its 2% target. This may signal the end of the low interest rate environment seen since the financial crisis of 2008.

Inflation is a key concern for households when wage growth fails to keep apace, which was the case at the turn of the year. The Bank is optimistic, expecting strong wage growth over 2022. This, however, may lead to an increase in the unemployment level toward 5%.

Overall, the Bank of England is feeling relatively optimistic, but it is worth noting that several risks remain entrenched in the global economy over the medium term. The geopolitical stresses, freeing of supply bottlenecks and the ability of employers to peg pay to inflation, all remain unclear.

The inflationary pressure that the Bank is acting upon illustrates why IGD’s Shopper Confidence Index have slumped to historic lows in January.

Source: IGD

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UK economy gets moving again as diners and commuters return

The UK economy saw increased activity in the final week of January as the effects of the Omicron wave of Covid retreated and consumers saw the removal of Covid restrictions.

Near-term data from the ONS revealed the lifting of Plan B restrictions in England on January 27 helped the seven-day average estimate of UK seated diners increase by 9 percentage points in the week to 31 January 2022.

This was 106% of the level in the equivalent week of 2020.

In London and Manchester seated diners increased by 8 and 11 percentage points over the same period, respectively said the ONS.

The news indicates the all-important UK services sector – which accounts for over 80% of UK economic activity – is set for a recovery in February.

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The ONS says retail footfall in the UK increased by 2% from last week but was still at only 82% of the level seen in the equivalent week of 2019.

Nevertheless the ONS data shows this is the third consecutive week of increasing retail footfall and was again driven in part by weekly rises in high street footfall.

Consumers are spending again too; the aggregate CHAPS-based indicator of credit and debit card purchases – supplied to the ONS by the Bank of England – increased by 3 percentage points from the previous week, to 90% of its February 2020 average.

There were increases in all spending categories in the latest week, the largest of which were in “delayable” and “social” spending, both of which increased by 4 percentage points.

But, 69% of respondents to a regular ONS survey reported their cost of living had increased over the last month which was up slightly from the last period (66%).

Rising inflation and imminent tax and energy bill increases are all tipped by economists to place pressure on consumers in 2022, potentially denting the post-Covid economic recovery.

However the labour market remains in strong shape with the ONS saying the total volume of online job adverts on 28 January 2022 was at 141% of its February 2020 average level making for the third consecutive week-on-week increase.

This suggests a recovery following the dip in the volume of online job adverts over Christmas and New Year.

In all, the findings are consistent with an economy that is likely to recover in the first half of 2022, but the recovery will in all likelihood be stifled by rising costs.

Written by Gary Howes

Source: PSL

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Bank of England to Defend Pound Sterling’s Gains against Euro, Dollar says Analyst

In its quest to fight inflation the Bank of England will welcome onside the recent appreciation in the value of the British Pound.

The Bank of England will on Thursday likely raise interest rates again according to current market expectations in an attempt to stem surging inflation levels which could go as high as 7.0% this year and risk staying above the Bank’s 2.0% target for months to come.

For the Pound the steady build up in expectations for 2022 rate hikes at the Bank has proven a potent source of support: for the UK currency’s valuations to be maintained going forward these expectations must not be disappointed.

Expectations are certainly lofty with Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE, saying current pricing by money markets “is now at a staggering 1.35% for the December 2022 Bank of England meeting”.

This implies over 100 basis points of hikes are expected to be delivered in 2022, posing questions as to whether the market is getting ahead of itself.

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Given the Pound is priced according to these expectations, any paring back of such expectations could result in the Pound retreating from recent highs against the Euro while opening the door to a more concerted downtrend against the Dollar.

But Turner says the Bank won’t want to derail Pound Sterling as a stronger currency in fact helps ease inflationary pressures.

“In the past, in a deflationary environment with weak global demand a former BoE might have issued a verbal rate protest against such pricing – in order to weaken GBP. However, we suspect that the Bank of England is currently welcoming GBP strength in its fight against higher energy prices,” says Turner.

This year has seen the effective exchange rate of the Pound rise to its highest levels since 2016 when it fell in precipitous fashion following the UK’s vote to leave the EU.

The effective exchange rate is a basket of Pound exchange rates that weighs in favour of the country’s main trade partners.

Give the Eurozone is by far the UK’s largest trading partner it stands that the Pound to Euro exchange rate is the effective exchange rate’s largest constituent, and its recent rally to two-year highs has aided the UK’s purchasing power.

A stronger Pound makes the cost of imports cheaper, which is important given the UK is a net importer, thereby acting as a deflationary source.

Turner says a 25 basis point rate hike on Thursday and no protest against market pricing of rate hikes should see EUR/GBP pressing strong support near 0.8275. For those watching the GBP/EUR equation translates into a rise to 1.2084.

ING holds a base case expectation for the Bank to hike rates 25 basis points on a 8-1 vote, raise their inflation forecasts and say medium-term growth has not been impacted by Omicron.

They are expected to signal more “modest” rate hikes are coming but are vague about when they might come.

They are also expected to announce quantitive tightening will begin by not reinvesting maturing bonds purchased under their quantitative easing programme.

A more hawkish scenario – but which does not form ING’s base-case – is the Bank hikes on an unanimous decision and explicitly signals another rate hike in March or May. They also signal a desire to accelerate quantitative tightening via bond sales in coming months.

Here, EUR/GBP goes to 0.8250 (GBP/EUR up to 1.2121).

ING says a dovish outcome would see the Bank of England forgoing a rate hike courtesy of a split decision on the MPC, while signalling that a rate hike is likely at the March meeting.

They would justify going against the market’s expectations for a hike by saying they need more time to gather data regarding the impact of Omicron on the economy.

Here EUR/GBP is forecast to go to 0.8450 (GBP/EUR to 1.1834).

Written by Gary Howes

Source: Pound Sterling Live

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Cost of Covid-19 and Brexit to the UK economy now at at least £250bn each, with Brexit expected to cost more long-term: research

What do Brexit and Covid-19 have in common? They’ve each cost the UK at least £250bn so far, new research out this week suggests – adding that long-term, Brexit is set to prove the more expensive.

Parcel delivery comparison website ParcelHero this week analysed Government figures and publicly-available third-party economic assessments and forecasts to arrive at the totals.

ParcelHero head of consumer research David Jinks says: “British businesses have had a torrid few years. The impact of either Covid-19 or Brexit would have been bad enough; together they have proved disastrous. But which has been the heavier burden for them to bear? The shocking answer is that the entirely avoidable Brexit crisis has had as much of an impact on UK businesses as the unforeseeable Covid-19 tragedy, and its costs are still rising.”

ParcelHero’s calculations start with the cost of Covid-19, citing research from the Centre for Economics and Business Research which put the total for Covid-19 lockdowns at £251bn. It found that the value of goods and services produced by the economy was more than £250bn lower than it would have been, as represented by the GVA (gross value added) of the economy – the value of goods and services delivered minus the costs of producing them.

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Within that, business insurer Simply Business found that Covid-19 cost small businesses £126.6bn, and in November 2021, a Government report suggested that the UK government had set aside almost £365bn in announced budgetary measures in its response to Covid .

The Brexit column of the calculation starts with a 2020 Bloomberg Economics report that suggests the economic cost of Brexit would have top £200bn in lost revenues to UK companies, before it even happened, with the British economy by then 3% smaller than it otherwise would have been.

In August 2020, an Institute for Government suggested in August 2020 that the UK government expected to have spent £8.1bn on preparing for Brexit by the end of the transition period, which ended in January 2020. That included £4.4bn that the National Audit Office suggested had already been spent by January 31 2020.

And in November 2021, a report from the UK Trade Policy Observatory suggested that falling trade had cost UK businesses a further £43.5bn – divided between £32.5bn in imports and £11bn in exports.

Jinks says the two sums mean “the combined costs of Brexit and of the pandemic both equal around £250bn. However, in the long term, Brexit could end up costing even more than Covid-19.”

He points to comments by Thomas Sampson, associate professor at the London School of Economics, who predicted in an August 2020 blogpost that, “When measured in terms of their impact on the present value of UK GDP, the Brexit shock is forecast to be two to three times greater than the impact of COVID-19.”

And he cites forecasts from the Office for Budget Responsibility (OBR) last October that suggested leaving the EU would “reduce our long run GDP by around 4%.” That adds to a 2% hit from the pandemic.

The Government Business Insights report of January 13 2022 estimated that 66% of UK businesses experienced challenges with exporting and 79% with importing in December 2021, with 33.7% of transport and logistics companies closing, permanently (2.7%), temporarily (11.8%) or partially (19.3%).

By Chloe Rigby

Source: Internet Retailing

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Bank of England expected to impose back-to-back rate hikes for the first time since 2004

Economists expect the Bank of England to hike interest rates consecutively for the first time since 2004 as the central bank looks to steer the U.K. economy through persistent high inflation.

The Bank fired the starting gun on rate rises in December, hiking its main interest rate to 0.25% from its historic low of 0.1%. Since then, data has shown U.K. inflation soared to a 30-year high in December as higher energy costs, resurgent demand and supply chain issues continued to drive up consumer prices.

The December rate hike came despite the omicron Covid-19 variant spreading rapidly throughout the U.K. and threatening to destabilize the economic recovery once again. However, the Covid outlook has improved in recent weeks, compounding anticipation for a 25 basis point hike on Feb. 3.

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“If December’s surprise rate hike decision taught us anything, it was, firstly, that the Bank – and especially Governor Andrew Bailey – is clearly worried about elevated rates of headline inflation and the risk of a virtuous wage-price cycle,” James Smith, developed markets economist at ING, said.

Smith suggested that the high-frequency data points to only a “modest and short-lived” economic impact from omicron, making a 25 basis point hike to 0.5% the most likely course of action.

A ‘less hawkish’ high

Deutsche Bank also expects a 25 basis point increase, and senior economist Sanjay Raja expects the Monetary Policy Committee to vote unanimously in favor of such a move.

“With the Bank Rate reaching 0.5%, we expect the MPC to confirm that all APF (asset purchase facility) reinvestments will cease following the February decision,” Raja said in a note Thursday.

“This would see roughly GBP 28bn of reinvestments (~3% of APF) fall out from the Bank’s balance sheet next month with a further GBP 9bn dropped over the remainder of the year.”

Raja expects the MPC’s primary message to be that more modest tightening will be necessary to keep the economy stable, with economists now expecting inflation to peak at 6.5% and take longer to moderate, remaining above the Bank’s 2% target in two years’ time.

“Worries around rising wage expectations and thus services inflation, alongside lingering supply chain pressures should give the MPC further ammunition for more rate hikes over the next several quarters,” Raja said.

What’s more, Deutsche Bank expects the MPC to highlight the wide confidence bands around the inflation outlook.

“The jump in inflation, and particularly energy bills, should weigh on future demand. Tightening global financial conditions should also restrain global growth, and therefore U.K. external demand, and rate rises should also push up borrowing costs for households and firms, tempering GDP growth,” Raja said.

“We continue to see the MPC projecting excess supply at the very end of the forecast horizon (three years’ out), with inflation sitting below the Bank’s 2% target and the unemployment rate edging up as a result.”

This would enable the Bank to stick with a message of only “modest” tightening, and Deutsche sees another 25 basis points hike in August, followed by further hikes in February 2023 and August 2023, taking the Bank Rate to 1.25%.

BNP Paribas brought forward its call for the next hike from May to February as the Covid situation has improved and inflation continues to run even hotter than expected. The French lender’s economists similarly do not believe the MPC’s messaging will introduce any additional hawkishness, and also expects a 25 basis points hike on Thursday.

“In doing so, we expect the monetary policy committee to kick start the process of balance sheet reduction,” BNP Paribas economists said in a note on Wednesday.

“Still, the MPC is likely to be less hawkish next week than the action alone would imply, while we remain of the view that it will deliver a more gradual pace of rate hikes than is priced into markets.”

By Elliot Smith

Source: CNBC

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