Bank of England coronavirus Pound Sterling UK economy UK economic recovery UK Government borrowing UK economic recovery UK economy
Marketing No Comments

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.

To find out more about how we can assist you with your Second Charge Mortgage please click here

“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

Discover our Second Charge Mortgage Broker services.

UK GDP Sterling BoE UK economy UK economic growth Pound Sterling
Marketing No Comments

UK economy finally bigger than before pandemic in November

UK economy grew by a much stronger-than-expected 0.9% in November, finally taking it above its size just before the country went into its first COVID-19 lockdown, the Office for National Statistics said on Friday.

The world’s fifth-biggest economy was 0.7% bigger than it was in February 2020, the ONS said.

Economists polled by Reuters had forecast monthly gross domestic product growth of 0.4% for November.

“It’s amazing to see the size of the economy back to pre-pandemic levels in November – a testament to the grit and determination of the British people,” finance minister Rishi Sunak said.

Other economies have already recovered their pre-COVID size, chief among them the United States.

Despite November’s growth acceleration, GDP probably took a hit in December when the Omicron coronavirus variant swept Europe, and the loss of momentum is likely to have stretched into January with many firms reporting severe staff absences and consumers still wary of going out.

To find out more about how we can assist you with your Second Charge Mortgage please click here

But health officials think the Omicron infections wave has now peaked in Britain and analysts say the hit to the UK economy is likely to be short-lived, allowing the Bank of England to continue raising interest rates this year.

The ONS said, data revisions aside, GDP in quarterly terms would reach or surpass its pre-coronavirus level in the October-December period of last year, as long as economic output does not fall by more than 0.2% in December.

The ONS said architects, retailers, couriers and accountants had a bumper month in November and construction recovered from several weak months as raw materials became easier to source after problems in global supply chains.

Britain’s economy will still face challenges in the months ahead, even once coronavirus restrictions are relaxed.

“While the UK economy should rebound once Plan B measures are lifted, surging inflation and persistent supply chain disruption may mean that the UK’s economic growth prospects remain under pressure for much of 2022,” Suren Thiru, head of economics at the British Chambers of Commerce, said.

By Shepard Smith

Source: CNBC

Discover our Second Charge Mortgage Broker services.

Brexit
Marketing No Comments

Brexit and pandemic have cost UK businesses £250bn each but EU departure tally now rising faster than Covid disruption

The political choice of Brexit has cost UK businesses as much as the unforeseeable Covid pandemic.

British companies have lost over £250bn to Covid and an equal amount to Brexit by the end of 2021, but the Brexit tally is now rising faster.

The Centre for Economics and Business Research found that Covid-19 lockdowns had cost UK businesses £251bn by March of last year.

It revealed the value of the goods and services produced by the economy was more than £250bn lower than it would otherwise have been.

It calculated the Gross value added (GVA), which measures the value of the goods and services produced by the economy, minus the costs of inputs and raw materials needed to deliver them.

Covid-19 cost small businesses alone an estimated £126.6bn, according to the business insurer Simply Business, while a November 2021 Government report revealed the UK lost almost £365 billion in GDP from Covid overall.

Commenting on the figures, David Jinks, who is head of consumer research at delivery firm ParcelHero, said: “British businesses have had a torrid few years.”

To find out more about how we can assist you with your Second Charge Mortgage please click here

“Brexit or Covid, 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,” he added.

“No one could have foreseen the arrival of the pandemic and there was little that could have been done to shield UK businesses in advance. However, this is certainly not the case for the impact of Brexit on UK businesses,” Jinks said.

Negotiations

The confrontational handling of trade negotiations with the European Union made “a bad situation worse,” he stated.

Before Brexit had even happened, a 2020 report by Bloomberg Economics revealed that, by the end of that year, the economic cost of Brexit already exceeded £200bn in lost revenues to UK companies. It calculated the British economy was 3 per cent smaller than it otherwise would have been.

Since Brexit actually happened, on 1 January, 2021, the UK Trade Policy Observatory reveals that the reduction in trade has lost UK businesses a further £44bn.

“That breaks down to £32.5bn lost in potential imports to the UK and £11bn in exports to the EU,” Jinks pointed out.

The UK Government splashed a further £8.1bn on preparing for Brexit and the end of the transition period, according to the Institute for Government.

“In our view, that was money that should have been spent on promoting UK trade across the EU and beyond, not battening down the hatches,” noted Jinks.

The figures mean that 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.

Thomas Sampson, Associate Professor at the London School of Economics, said: “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.

Moreover, the Office for Budget Responsibility (OBR) told the BBC last October that leaving the EU would “reduce our long run GDP by around 4 per cent.”

It is believed the effect of the pandemic will reduce GDP output by only a further 2 per cent.

End of Covid restrictions

With the end of lockdown and travel restrictions, the impact of Covid measures is now receding but the Brexit bill continues to mount.

The most recent Government Business Insights report has revealed that, last month, 66 per cent of UK businesses experienced challenges with exporting and 79 per cent with importing.

“This has had a knock-on effect on transport and logistics companies. A staggering 36.7 per cent of transport and logistics companies either closed, paused trading entirely or continued trading only partially in December,” Jinks shared.

This is only how much the loss of physical goods sales has cost.

The Institute for Fiscal Studies sayidexports of professional services to the EU slumped from 44 per cent of the UK’s entire international services trade in 2016, before Brexit negotiations got underway, to just 30 per cent in 2021. It forecast a net drop in overall UK services exports.

By MICHIEL WILLEMS

Source: City AM

Discover our Second Charge Mortgage Broker services.

UK inflation Bank of England
Marketing No Comments

Inflation and supply chain crisis to throttle UK economy, IMF warns

The global supply crunch and roaring inflation will choke UK growth this year, the world’s economic watchdog warned today.

A combination of the supply chain crisis rumbling on and the cost of living corroding Brits’ incomes has prompted the International Monetary Fund (IMF) to downgrade their forecasts for UK economic growth this year to 4.7 per cent from five per cent previously.

Weaker confidence in Britain’s prospects underlines the severity of the inflation spike sweeping across the country.

The Bank of England needs to urgently tighten monetary policy in order to get on top of the soaring cost of living in the UK, the IMF said.

In developed economies “where high inflation runs the risk of becoming entrenched… extraordinary monetary policy support should be withdrawn,” Gita Gopinath, first deputy managing director at the IMF, warned.

To find out more about how we can assist you with your Second Charge Mortgage please click here

Inflation is running at its highest level in nearly 30 years, hitting 5.4 per cent last month, according to the Office for National Statistics.

Former members of the Bank’s rate setting committee have criticised Threadneedle Street’s inertia as contributing to the cost of living taking off.

Sir Charlie Bean yesterday said the Bank missed an opportunity to combat price rises at the back end of 2021, meaning it will have to launch a cycle of rapid rate hikes to tamp down on inflation.

Some economists expect the Bank to lift interest rates four times this year, taking them to 1.25 per cent by the end of 2022.

Jerome Powell, Chair of the US Federal Reserve, is also widely expected to tell markets to get ready for a rapid tightening of monetary policy this year at the central bank’s meeting of policymakers tomorrow.

Fears that a corrosion in Brits’ living standards caused by soaring inflation will trigger a pull back in consumer spending has ignited a flurry of top City economists to become more downbeat on the UK’s recovery.

Capital Economics, a consultancy, also today dropped their forecasts for UK growth this year to four per cent.

The UK economy is heavily reliant on people spending at services businesses, such as pubs and restaurants, to generate growth, indicating a dip in purchases would whack output.

The IMF downgraded projections for US economic growth this year to four per cent from 5.2 per cent.

EU countries are also expected to grow at a slower pace than first forecast, as is the global economy.

By JACK BARNETT

Source: City AM

Discover our Second Charge Mortgage Broker services.

UK inflation economy Omicron UK economic recovery UK Economy Bank of England
Marketing No Comments

UK economy falters as Omicron wave hits service sector

The UK economy faltered in January, a closely-watched survey showed on Monday, after the rapid spread of Omicron weighed heavily on the service sector.

The flash IHS Markit/CIPS UK Composite Output Index fell to an 11 month-low of 53.4, compared to December’s final reading of 53.6. Most analysts had expected a rise, with consensus at 54.0.

Within that, the flash manufacturing output index strengthened to a five-month high of 53.8 from 53.6 in December. But the manufacturing PMI eased to 56.9 from 57.9, while the services business activity index was 53.3, an 11 month-low compared to December’s 53.6.

IHS Markit noted: “With hospitality, leisure and travel all struggling due to Omicron restrictions, this offset resilient growth in business and financial services.”

Manufacturers fared better during the month as material shortages started to ease. But staff absences affected all sectors, while input cost inflation remained “stubbornly high”, largely reflecting stronger cost pressures in the service sector.

To find out more about how we can assist you with your Second Charge Mortgage please click here

Chris Williamson, chief business economist at IHS Markit, said: “A resilient rate of economic growth in the UK during January masks wide variations across different sectors. Consumer0facing businesses have been hit hard by Omicron, and manufacturers have reported a further worrying weakening of order book growth. But other business sectors have remained encouragingly robust.

“Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief.”

Duncan Brock, group director at Chartered Institute of Procurement & Supply, said: “Though professional and financial services in particular saw a resurgence in activity, hospitality and travel firms took another body blow as the market place stagnated.

“In the gloomiest month of the year, what is also disappointing for the UK economy is price inflation returning with a vengeance, with the second-highest jump in business expenses since 1998.

“The private sector may be experiencing a sense of two steps forward and one step back with price and supply challenges, but with the strongest level of optimism since August 2021, we may be looking forward to a more favourable trading environment in the months ahead.”

Pantheon Macroeconomics noted: “The further drop in Markit’s composite PMI in January suggests that the Omicron variant continued to weight on activity in the first half of the month.

“As things we stand, we think that GDP dropped by a further 0.2% month-to-month in January, after dropping by about 10.0% in December.

“The drop in the composite PMI, however, likely won’t dissuade the [Bank of England’s] Monetary Policy Committee from increases the Bank Rate at next week’s meeting. For a start, some of the survey’s forward-looking indicators improved: the new orders index of the services survey rose from 56.5, and businesses were the most upbeat about the outlook for in demand since August.

“In addition, near-real-time data show that activity has started to recover as January has progressed, indicating that month-to-month growth in GDP in February likely will be positive.”

The survey was sent to panels of around 650 manufacturers and 650 service provides, with responses collected between 12 and 20 January.

By Abigail Townsend

Source: Sharecast News

Discover our Second Charge Mortgage Broker services.

UK rates Bank of England UK Economy BoE governor UK inflation Interest rates BoE
Marketing No Comments

Bank of England target never been further out of reach as inflation accelerates to 30-year high

The Bank of England has never been further away from its legal inflation target, revealed official figures released today.

Spiralling inflation has heaped further criticism on the Bank’s decision to keep rates at record lows while UK inflation was taking off after the country emerged from the most onerous Covid-19 restrictions.

The cost of living hit its highest level in nearly 30 years in December, accelerating to 5.4 per cent, smashing the City’s expectations.

That is the hottest rate the consumer price index has reached since the Bank adopted it as its inflation targeting measure in 2003.

Former Bank rate setter, and senior advisor to Cambridge Econometrics, Andrew Sentance told City A.M. the Bank “has been slow to respond to this inflationary threat. Further interest rate rises will be needed this year and next to bring inflation back on track.”

To find out more about how we can assist you with your Second Charge Mortgage please click here

The Bank “will be playing catch-up this year,” he added.

Threadneedle Street has a legal requirement to keep inflation at two per cent, meaning today’s figure is nearing triple that goal.

Worryingly, the Bank is unlikely to get anywhere near its legal requirement anytime soon.

Most expect the rate of price rises to hit seven per cent in April, led higher by the energy price cap adjustment taking effect.

Inflation “will stay above four per cent for all of this year and will remain above the two per cent target until April 2023,” Paul Dales, chief UK economist at Capital Economics, warned.

Responding to a grilling by MPs on the Treasury Committee, Bailey said the central bank will do everything “to keep inflation under control”.

The elevated inflation reading ignited a flurry of top City economists placing bets on the Old Lady hiking interest rates for the second time in as many months at its next meeting on 3 February.

James Smith, developed markets economist at ING, said: “Inflation has surprised higher (again) and that’s only likely to increase the temptation for Bank of England policymakers to hike rates for a second consecutive meeting this February.”

By JACK BARNETT

Source: City AM

Discover our Second Charge Mortgage Broker services.

UK inflation economy Omicron UK economic recovery UK Economy Bank of England
Marketing No Comments

Rising costs seep into every sector of UK economy

Every sector of the UK economy is suffering from swelling costs in a sign that inflation will trend much higher in the coming months, reveals a fresh study published today.

Higher wages, compounded by soaring energy and raw material costs, are severely eroding firms margins, according to research carried out by high street lender Lloyds.

The fresh figures reinforce official data published by the Office for National Statistics yesterday showing British businesses’ input costs have soared 13.5 per cent over the last year.

To find out more about how we can assist you with your Second Charge Mortgage please click here

Jeavon Lolay, head of economics and market insight at Lloyds, said firms’ cost backdrop remains “acute as higher energy prices and wage bills pushed up firms’ expenses”.

Widespare cost increases have ensnared British businesses since the UK emerged from Covid-19 restrictions last spring, mainly triggered by a global supply chain crisis and an energy crunch on the Continent.

The spread between British firms’ costs and prices is the joint highest of any country tracked by Lloyds, raising the prospect of inflationary pressures worsening if businesses hike prices in an effort to shield their margins.

A looming 1.25 percentage point NI hike this April will add to firms’ costs.

By JACK BARNETT

Source: City AM

Discover our Second Charge Mortgage Broker services.

UK unemployment rate redundancies UK jobless rate UK unemployment rates employment
Marketing No Comments

Unemployment figures increase pressure on BoE as wages lag inflation

The UK’s unemployment rate continued to fall in December 2021, but commentators have warned that the figures should be “taken with a pinch of salt”, while adding further pressure on the Bank of England.

The latest data from the Office for National Statistics estimates that there were 29.5m employees in the UK in December, an increase of 184,000 on the revised November 2021 level and up 409,000 on February 2020 pre-Covid.

The UK’s unemployment rate fell 0.4 percentage points to 4.1% on the quarter, but economic inactivity rose.

The data, however, focuses on the unemployment rate for September to November – before the Bank of England hiked interest rates in response to soaring UK inflation, as well as the onset of Omicron, which has had a widespread impact on businesses and services across the country.

With UK inflation expected to peak further this year, household incomes are set to be squeezed further.

Danni Hewson, AJ Bell financial analyst, said: “Furlough was seen as the cotton wool that cushioned the UK’s jobs market from the ravages of Covid. The end of the scheme filled many with dread, a fear that those still being protected would find themselves out of work sending unemployment levels soaring.

“The reality is an intriguing picture with a record level of job vacancies, the number of employees more than 400,000 above that pre-pandemic and the redundancy rate at a record low.

To find out more about how we can assist you with your Second Charge Mortgage please click here

“So far so good, but that’s not quite the full story and between the lines is a complex situation that does require careful consideration.”

Hewson noted that despite an improvement in the number of new job vacancies coming to market, there is a “yawning chasm” between the number of workers available to employers and the number of workers needed to “thrive or in some cases survive”.

At the same time, the number of people categorised as ‘economically inactive’ grew by 0.2% from September to November to 21.3%, Hewson highlighted, despite the improvement in the overall unemployment figures.

Shane O’Neill, head of interest rate trading for Validus Risk Management, said: “This [unemployment] number, though positive, will be taken with a pinch of salt – it predates both the BoE rate hike and the onset of Omicron, which caused significant economic scarring.

“It will serve as partial confirmation that the decision to hike in December was the right course of action, though the true test for this will be post-Omicron data.

“These figures represent another box ticked on the path to more rate hikes, the first of which is expected as early as February. Focus will now turn to tomorrow’s inflation data.”

James Lynch, fixed income investment manager at Aegon Asset Management, said: “The labour market is key for the Bank of England’s medium-term outlook on inflation. If the signs are there for wage rises in the future, then inflation is going to be longer lasting than what is currently being driven by spiking energy prices.

“With inflation still to rise further over the next three months and Covid-19 restrictions being eased – which will help economic activity – plus a tight labour market, we expect the Bank of England to raise interest rates to 0.50% in its next MPC meeting on 3rd February.”

What an interest rate hike in February would mean for markets

Paul Craig, portfolio manager at Quilter Investors, argued that although the Omicron variant has had less of an impact than many anticipated, its emergence still saw many people cancelling or rearranging plans “which will have thrown a spanner in the works for many businesses”.

“Additionally, many employees are still currently being told to work from home where possible, which will continue to disrupt demand, particularly in city areas,” he said.

Craig added: “While the unemployment rate is looking generally positive, the true impact of the Omicron variant on businesses and their employees will likely play out in the coming months, particularly as government support schemes were so limited this time around.”

Nevertheless, interactive investor’s Myron Jobson noted that the UK job market is “very much alive and kicking”.

The personal finance campaigner said: “The UK job market remains robust, but wages continue to lag behind inflation which threatens to put pressure on household budgets, with higher taxes and further increases in the cost of living still to come.

“Concerns remain about the quality of employment. What percentage of young people in employment are on temporary contracts for example?”

UK GDP beats consensus forecasts but experts warn of bleak data for 2022

Jobson also highlighted the ongoing gulf between demand and supply in some sectors, such as the HGV driver shortage, while the hospitality sector’s “struggle to attract talent” is ongoing.

He added: “Many firms are still struggling to fill vacancies, which threatens to impact businesses’ ability to meet demand for goods and services – adding to supply chain pressures.”

But while employment rates in the UK rose in November last year, investor confidence in UK economic growth has fallen, with inflation and a squeeze on income unsettling markets.

Despite better than anticipated job growth, wages continue to lag inflation. The FTSE 100 fell following the ONS’s data, with Right Move one of the largest losers over concerns how the housing sector will be impacted with another interest rate rise looming.

According to the Hargreaves Lansdown investor confidence index, confidence in UK economic growth has fallen 2% since November.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’The financial and labour markets have batted away Omicron like an annoying fly, but worries are increasing that inflationary pressures combined with an income squeeze could come with a painful sting.

“The effect of the great resignation as workers search for higher pay is filtering through to wage growth, but the rises aren’t keeping pace with inflation.

“It’s a problem already buzzing in the ears of Bank of England policymakers, as they decide when and how quickly to raise rates to try and keep a lid on price rises.”

By Alex Rolandi

Source: Professional Adviser

Discover our Second Charge Mortgage Broker services.

Bank of England coronavirus Pound Sterling UK economy UK economic recovery UK Government borrowing UK economic recovery UK economy
Marketing No Comments

UK economy above pre-Covid levels in November

The UK economy surpassed pre-Covid levels for the first time in November after recording stronger-than-expected growth.

The Office for National Statistics said gross domestic product (GDP) expanded by 0.9% between October and November.

That was higher than economists’ expectations and meant the economy was 0.7% larger than in February 2020.

But there is concern growth slowed again after the spread of Omicron and the introduction of Plan B measures.

“The economy grew strongly in the month before Omicron struck, with architects, retailers, couriers and accountants having a bumper month,” said ONS chief economist Grant Fitzner.

“Construction also recovered from several weak months as many raw materials became easier to get hold of.”

Analysts at Capital Economics said the economy was boosted by 3.5% growth in the construction sector, adding “the unusually dry weather probably helped”.

It also said manufacturing output also improved and the professional sector also picked up, “apparently due to architectural and engineering activities being brought forward from December”.

What is GDP?

GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing.

It’s a measure – or an attempt to measure – all the activity of companies, governments and individuals in an economy.

GDP allows businesses to judge when to expand and hire more people, and for government to work out how much to tax and spend.

To find out more about how we can assist you with your Second Charge Mortgage please click here

Rising GDP means more jobs are likely to be created, and workers are more likely to get better pay rises.

If GDP is falling, then the economy is shrinking – bad news for businesses and workers.

The Covid pandemic caused the most severe recession seen in over 300 years, hurting business and employment, and forcing government to borrow hundreds of billions of pounds to support the economy.

Economists had been expecting GDP to expand by 0.4% in November.

Chancellor Rishi Sunak said the stronger growth was “a testament to the grit and determination of the British people”.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “GDP almost certainly dropped in December, as households hunkered down in response to the Omicron variant.”

The Omicron variant emerged at the end of November and Plan B measures were introduced on 8 December.

Mr Tombs said data such as restaurant diner numbers, transport usage and cinema revenues “point to a pullback in consumer services expenditure” last month, while “Omicron also depressed labour supply”.

However, he added: “Omicron looks set to fade almost as quickly as it arrived, thanks partly to the rapid rollout of booster jabs. As a result, we expect the government to allow Plan B rules to automatically expire on 26 January and for GDP to bounce back in February.”

These figures show that the reopening and recovery of the UK economy was motoring just before Omicron struck.

The economy had for the first time regained, on a monthly basis, all the very heavy losses during the pandemic lockdowns. Business had been returning to something approaching normality after the government’s decision to axe restrictions since the summer.

Monthly figures are quite volatile though and usually not provided by other countries. It is possible that the Omicron-linked hit to the economy in December could undo the impressive growth in November on the key fourth quarter figure. Using this more usual and internationally comparable quarterly basis, it is still not certain if the UK economy has recovered these losses.

The bigger question is about the impact of Omicron. With hopes that the rapidly-spreading variant has peaked, economists are now confident it will have far less of a hit than previous Covid waves. Retailers’ results over the festive period have been very encouraging.

But the response of the public and its attitude to going out and spending is the big economic unknown. And while Omicron concern fades, the hits to disposable income from rising prices are very real.

So while the chancellor called today’s GDP milestone “amazing” it’s probably not the moment for celebration.

The ONS said that, on a quarterly basis, in the final three months of 2021 the UK economy will reach or surpass pre-Covid levels seen in the last quarter of 2019 if GDP grows by at least 0.2% in December and there are no downward revisions to figures for October and November.

However, several economists pointed to a bumpy road for growth in the first months of this year.

“We expect growth to slow in 2022 as it will no longer be able to simply rely on the [Covid] rebound effect to propel it,” said Yael Selfin, chief economist at KPMG UK.

“In addition, rising taxes and borrowing costs, as well as elevated inflation, will squeeze households’ purchasing power, while the lingering effects of supply chain bottlenecks together with a persistent shortage of labour could constrain production this year.”

Inflation is expected to hit 6% by spring, according to the Bank of England which raised its key interest rate in December and is forecast to lift borrowing costs again this year.

The government will raise the National Living Wage by 6.6% for over 23 year-olds in April but that is the same month when energy regulator Ofgem will implement the new price cap on household gas and electricity bills.

Ofgem is widely expected to lift the price cap following a sharp rise in wholesale gas prices last year which forced around 20 smaller energy companies out of business.

Also from April, employers, workers and the self-employed will all pay 1.25p more in the pound for National Insurance.

By Dearbail Jordan

Source: BBC News

Discover our Second Charge Mortgage Broker services.

GBP sterling UK economy pound UK recovery
Marketing No Comments

The Pound Can Continue to Outperform says Barclays

Researchers at Barclays describe the British Pound’s recent performance as “resilient” as they anticipate the currency to continue outperforming key peers over coming weeks and months.

Gains for the currency come amidst ongoing expectations for a February rate hike at the Bank of England, easing Covid-19 cases and a lack of concern shown by investors to the woes befalling Prime Minister Boris Johnson.

Barclays says in a regular weekly currency market briefing that the Pound was the best performing G10 currency in the first week of 2022, helped by a positioning unwind and expectations for a February interest rate hike.

They find further outperformance can be expected should these two themes continue to play out over coming weeks.

The market now anticipates a ~75% chance of a second rate hike coming from the Bank of England at the February 03 policy meeting, odds of which have in turn been boosted by expectations for a more ‘hawkish’ U.S. Federal Reserve in 2022.

As Pound Sterling Live noted here, expectations for a ‘faster and sooner’ Fed rate hiking cycle provides the Bank of England with welcome cover to pursue its own rate hiking agenda.

Inflation in both the U.S. and UK are at multi-year highs and policy makers have warned the pandemic-driven boost to prices are not as transitory as they and many economists had anticipated at the start of 2021.

Therefore the market thesis, for now at least, appears to be that higher interest rates in the U.S. means higher rates in the UK, in turn supporting Pound Sterling.

To find out more about how we can assist you with your Second Charge Mortgage please click here

A February rate hike at the Bank of England would be the second lift in just two months. But how many hikes will be delivered in 2022 in total could prove to be a crucial determinant of how high the Pound can go.

“The Bank of England’s surprise December rate hike caused an immediate repricing of further near-term rate hikes. However, the rates market has historically struggled to price in a terminal BoE rate much above 1%,” says Erick Martinez, FX Strategist at Barclays.

Martinez says the start of 2021 has seen markets solidify pricing for the February and May 2022 meetings but, more importantly, succeeded in pricing in an extended hiking cycle, “with the GBP OIS curve significantly higher at the three-year maturity”.

Another driver of Sterling outperformance is repositioning amongst investors, finds Barclays.

According to CFTC data – the most widely referenced data set showing how currency participants are positioned – GBP positioning is still net short and was at its most extended in 19 months heading into the new year.

When the market is heavily ‘short’ against a currency a counter-trend shock can force these positions to unwind, creating a technical momentum that delivers further gains.

Investors will likely continue to exit the net short position built up against the Pound over coming days and take the market to a more balanced state.

But it would only be when a net ‘long’ position builds up – as was seen in the first part of 2021 – would positioning begin to become a headwind for the UK currency.

For now Barclays says the path of least resistance for Sterling is higher in the near-term.

“We continue to expect GBP to perform well in the coming week as these drivers gain further traction,” says Martinez.

Barclays hold a 2022 forecast profile for the Pound to Dollar exchange rate of 1.33 for the end of the first quarter, 1.37 for the end of the second quarter, 1.40 for the end of the third quarter and 1.42 for the end of 2022.

Their forecast profile for the Pound to Euro exchange rate is 1.15 for the end of the first quarter, 1.16 for the end of the second quarter, 1.18 for the end of the third quarter and 1.19 for the end of 2022.

The greater returns against the Dollar are explained by their against-consensus view that the U.S. Dollar will struggle in 2022.

“Positioning suggests that long USD is the consensus trade for the beginning of the year. However, consensus trades have historically performed poorly during the first quarter. Against market consensus and positioning, we continue to expect modest USD depreciation over 2022,” says Martinez.

Data from the CFTC shows the market remains ‘long’ on the Dollar, a position adopted by the market as far back as mid-2021 when the currency started to outperform peers in anticipation of a withdrawal of stimulus at the Federal Reserve.

Investor expectations for ‘more of the same’ in 2022 appear intact at the start of the year but the risk is that such crowded positioning in fact acts as a headwind to further upside.

Barclays finds that since 2013 consensus trades during the first few months of the year only performed well in 2015 (short EUR/USD) and modestly well during the beginning of last year (the reflation trade).

“This could be the result of crowded positioning, as markets had already pre-positioned for those trades at year-end,” says Martiznes.

Barclays hold a thesis that coming months will see a positive backdrop for risk and commodities and subsiding safe haven demand as the Omicron wave burns out.

Bond yields on U.S. government debt have soared to multi-month highs at the start of 2022 as investors price in up to four interest rate hikes at the Federal Reserve over the duration of the year, as well as the commencement of quantitative tightening.

Typically such dynamics would be positive for the Dollar as they imply greater returns for foreign holders of such assets.

But Barclays hold a view that U.S. rates will remain rangebound, underpinning “our moderately bearish USD outlook,” says Martinez.

Written by Gary Howes

Source: PSL

Discover our Second Charge Mortgage Broker services.