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BoE may need to raise interest rates “a little bit,” Mann says

Bank of England monetary policymaker Catherine Mann said interest rates would probably have to go up “a little bit” further, and that in some ways Britain’s economy was already suffering from stagflation.

“We want to avoid inflation getting out of control. And it may mean that interest rates go up a little bit. We’ll just have to see where we are in May,” Mann said in a question-and-answer session after delivering a speech on Thursday.

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Asked about the risk of stagflation – a combination of slow growth and high inflation – Mann said “in some senses, we could say we’re already there” because of the jump in energy prices and slowing retail sales.

“But I think that, you know, it’s premature to kind of hearken back to the 1980s or the 1970s, in the U.S. context in particular, and use that vocabulary,” she said.

Source: Investing

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Bank of England poised to raise interest rates as high inflation takes toll

Interest rates are expected to increase this week for the third time in three months as the Bank of England tries to curb a rapid rise in the cost of living.

A hike to 0.75% from 0.5% is anticipated, which would return us to the level of March 2020 but comes against the backdrop of geopolitical volatility and the likelihood that inflation will exceed 7%.

Rising gas and electricity costs are the main factors pushing up prices across the economy.

Inflation, as measured by the consumer prices index (CPI), is expected to peak at 7.25% in April, and average close to 6% in 2022.

Despite inflationary pressures, demand for property remains strong.

The latest figures show that the number of new prospective buyers in the UK was 47% higher than the five-year average in the first week of March. The figure for the first nine weeks of the year was up by 54%.

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Meanwhile, the number of offers accepted was up by 81% in the first week of March, having risen 50% over the first nine weeks of the year.

Much-needed housing supply is also showing signs of picking up, with the number of market valuation appraisals 11.3% higher in the first nine weeks of the year. Sales instructions are catching up but were down by 6.3% over the same period.

Why is the market so active despite the current economic and political backdrop?

Tom Bill, head of UK residential research at Knight Frank explained: “The first reason is easily overlooked – the end of the pandemic. The lifting of final restrictions and return to normality is spurring people to take decisions about how and where they live. Crucially, it means demand is more needs-driven and less susceptible to external events.

“In higher-value property markets, larger bonuses in sectors including financial services and law have also provided some insulation against the spiralling cost of living.”

But growth is not limited to a narrow group of professions, according to Savvas Savouri, chief economist at Toscafund.

He believes challenger banks will drive competition in the mortgage market and put downwards pressure on rates in the same way Aldi and Lidl did in the supermarket sector.

Savouri commented: “Households are sitting on £250bn of excess savings compared to the start of the pandemic. House price growth has also created an extra £1trn in housing equity over the last two years.”

He expects the Bank of England base rate to end the year at 1.25% or 1.5% as the current uncertainty leads to a slightly shallower upwards trajectory. However, he remains bullish in his outlook for the UK economy this year.

“For a recession, you need the labour market or the banking system to collapse and we are nowhere near either,” he added.

Knight Frank expect house price growth to return to single-digits as supply continues to pick up and rates normalise, but the estate agency says that it seems unlikely it will get anywhere close to zero.


Source: Property Industry Eye

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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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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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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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Sterling edges up despite cooling UK economic data

Sterling was on track on Friday for weekly gains against the dollar and euro to start 2022, despite a mixed picture emerging for Britain’s economy.

The currency has strengthened since mid-December in part due to the Omicron variant of COVID-19 proving less disruptive to the economy than originally feared, analysts have said, with the government only lightly tightening restrictions so far.

Sterling was heading for a 0.4% gain versus the dollar for the week and 0.6% up against the euro.

On the day, the pound was up 0.3% versus the dollar at $1.35720.

Sterling’s gains partly reflected a weaker dollar across the board, after a December U.S. jobs report missed expectations.

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Against the euro, the pound fell 0.2% to 83.585 pence per euro.

Economic survey data this week showed Omicron has had an impact. Survey data for Britain’s construction sector on Friday showed growth cooled in December, falling to a three-month low.

A similar Purchasing Managers’ Index (PMI) survey for the services sector on Thursday showed the biggest loss of momentum since the country was last in lockdown, falling to a 10-month low in December.

The pound has nonetheless broadly maintained momentum versus the dollar, rising from a one-year low of $1.31615 hit in December.

Investors will closely watch to see if the Bank of England will further tighten policy, with a further interest rate rise expected as early as next month after a surprise hike in December.

Source: Reuters

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BoE still likely to lift rates at December meeting, says Deutsche Bank

BoE is still likely to hike interest rates by 15 basis points to 0.25% at its December meeting despite the rise in uncertainty around the Omicron variant, Deutsche Bank senior economist Sanjay Raja said on Thursday.

Raja said Deutsche was sticking to its call because fundamentally, news of the Omicron variant has changed little on the medium-term economic outlook.

“The labour market remains as tight as it has been in recent memory, in spite of the furlough scheme ending on 30 September,” he said. “And inflation continues to outpace staff forecasts, despite a sizeable upward revision in the November Monetary Policy Report.”

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Moreover, Raja said the potential disruption from Omicron may lead to even more inflationary pressures in the medium term, with supply chain bottlenecks and labour shortages/mismatches further exacerbated by rising restrictions, both domestically and globally.

“In the end, a 15bps hike would do little to disrupt the recovery, given the lengthy lag in monetary policy transmission,” he said.

Risks to Deutsche bank’s view are finely balanced, however. “As Saunders recently noted, there may be some marginal benefit in waiting for new information on the Omicron variant, including its impact on infections, hospitalisations and vaccine efficacy.

“But, we argue that there is also a cost to waiting – likely requiring a faster pace of tightening in the near term to keep medium-term inflation in check, something we think the Bank will likely want to avoid.”

By Michele Maatouk

Source: ShareCast

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BoE provides further support for interest rate hike

Ben Broadbent, the monetary policy chief for The Bank of England has said that inflation is likely to soar above 5% in the first half of next year. With forecasts comfortably above the BoE’s 2% inflation target, it is expected that interest rates will be hiked early in 2022. Despite the positive sentiment, GBP has found little support amongst its piers, continuing its downward trend against USD and struggling to break out of the 1.17 channel against EUR. Broadbent has indicated the Bank of England believes this accelerated inflation in the cost of goods has come as a result of short-term global supply chain squeeze and is likely to reverse slightly into next year as conditions improve.

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Some analysts and market makers are suffering from what could be coined interest rate “cold feet”. Market expectations have changed dramatically over the past 6 months, with forecasts placing a hike before the end of the year now being shunted towards the back end of Q1 2022. These continual shifts can create a “boy who cried wolf” scenario, producing a difficult landscape for GBP to find it’s much needed support. COVID-19 uncertainty is also playing a part – the rise of the new Omicron variant can put a dampener on economic policy change, with the UK Government needing fully understand the potential fallout prior to committing to a hike.


Source: World First

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Bank of England to look through Omicron and hike rates this month

The Bank of England will plough ahead and hike interest rates for the first time three years this month despite concerns the Omicron variant could whack the UK economy, according to City analysts.

Strong booster jab take up and high levels of existing immunity stemming from the successful vaccination programme has put the British economy in a strong position to withstand a fourth wave of coronavirus triggered by the new variant, experts at Goldman Sachs have predicted.

The emergence of the heavily mutated strain of coronavirus last week initially sparked fears over the health of the British economy due to the likelihood of strict restrictions to curb the spread of the disease.

These downbeat assessments cast doubt over whether the Bank would raise interest rates at its next meeting on December 16.

However, under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme,” the Wall Street investment banking giant said.

“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”

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Bullish assessments from global health leaders have emerged this week downplaying the severity of the Omicron, potentially pushing members of the Old Lady’s rate setting committee into lifting rates.

The World Health Organisation (WHO) tempered speculation that the existing crop of Covid-19 vaccines could be scuppered by the new variant by signaling there is no evidence the new strain reduces their efficacy.

GlaxoSmithKline also announced today its Covid-19 antiviral treatment is effective against Omicron.

Those upbeat health assessments have been echoed by economists this week, who have stressed the UK economy is in a much better position to function effectively even amid Covid-19 curbs.

A waning impact of the virus on the economy suggests it will be able to stand on its own two feet without ultra-loose monetary policy, paving the way for a rate hike.

Even before the emergence of the variant, the Bank was under intense pressure to hike rates to hose down runaway inflation.

The Old Lady stunned markets last month when it left rates unchanged at a record low 0.1 per cent despite expecting inflation to hit five per cent next spring.

Prices are already 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.

Goldman also expects the Bank of England to hike again in May next year, taking rates to 0.75 per cent by the end of 2022.


Source: City AM

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UK economy to return to anaemic growth as cost of living crisis spikes Brits

A triple threat of a worsening cost of living crisis, higher interest rates and a pulling of government Covid-19 support will throw the UK economy back into an anaemic state, according to new research published today.

Swelling energy bills and rising costs for basic necessities will cause households on tight budgets to rein in spending, according to predictions made by accountancy firm PwC.

Weaker spending from low income households will clamp down on the UK’s economic recovery from the Covid-19 crisis.

The forecast underlines the impact soaring inflation is having on the economy’s capacity for growth.

The UK economy is heavily reliant on consumer spending to generate output, meaning a reduction in spending from low income households would constrain growth.

Brits living on tight budgets “will feel the pinch from a combination of rising inflation, higher interest rates, and fiscal changes” and a looming 1.25 percentage point national insurance hike, cautioned Hoa Duong, economist at PwC.

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PwC’s experts said richer households would be able to shake off the impact of rising prices due to them having greater bandwidth to absorb a higher cost of living.

A surge in spending “will likely be concentrated on higher income households” as a result, the firm said.

Inflation in the UK has taken off in recent months, triggered by a combination of global supply chains breaking down, soaring wholesale energy costs and rising commodity prices.

The Office for National Statistics estimates prices are 4.2 per cent higher than they were a year ago, the highest rate of inflation in nearly a decade.

Yet, PwC expects the rate to scale even further and hit its highest level in three decades next spring.

“The rise in the energy price cap and the reversal of the VAT cuts for hospitality and tourism create a perfect storm that is set to push headline inflation rates to around five per cent and six per cent,” the firm said.

The downbeat projections will be a cause for concern for the Bank of England, which has a mandate to keep inflation at two per cent.

The Old Lady has come under intense scrutiny for keeping interest rates at a record low 0.1 per cent despite expecting inflation to rise to more than double its target.

Officials on Threadneedle Street will announce their next decision on rates on December 16. Earlier this month, they stunned markets when they left rates unchanged.


Source: City AM

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UK inflation surges, fuels expectations interest rates will rise

UK inflation surged to a 10-year high last month, fuelled by a jump in household energy bills and petrol prices, official data show.

Annual UK consumer prices index inflation surged to 4.2% in October, from 3.1% in September, and is now more than double the target set for the Bank of England by the Treasury.

While a sharp rise in inflation had been expected, with economists in a poll by Reuters having projected an October reading of 3.9%, the jump was even greater than expected and fuelled expectations of a rise in UK base rates from a record low of 0.1% next month.

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Colin Dyer, client director at financial services group abrdn, said: “Rising fuel and energy prices, paired with global supply chain disruptions, caused inflation to soar last month after a temporary respite in September.

“The cost of living has been increasing rapidly for much of 2021 because of the strong economic recovery from the coronavirus pandemic, but October’s inflationary rate is the highest we’ve seen in over a decade. And with the Bank of England now warning of it exceeding 5% early next year, it’s likely to remain an uncertain and uncomfortable period for many.”

He added: “For those trying to save, rumours of a rate rise on the horizon might seem positive, but this is unlikely to be substantial enough to show any real returns.”

By Ian McConnell

Source: Herald Scotland

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