Bank of England hold UK loans rates for 12 months

The Bank of England's MPC voted to leave their rates unchanged and in addition held QE at £200 billion. 

The improved PMI data yesterday and the up tick in the revised Q4 GDP to 0.3% helped to reinforce this stance. 

It is now unlikely that there will be any change in monetary policy before the general election on rates or QE. 

However we have been surprised in the past by the BoE and we could be again; today the markets will be looking for any subtle changes in tome and sentiment on future monetary policy projections in the statement. 

The minutes in two weeks time will probably help to shed more light than todays decision from the BoE on future moves. 

Sterling has held firm after making gains yesterday against the USD and the JPY.

The 1.50 rate on GBP/USD is still the psychological level that the  Pound needs to hold above and build on.

Sterling was boosted by improvements in consumer confidence and PMI data and the new extra austerity measures announced by Greece. 

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 

Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 

This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.

The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 

Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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Sterling softens as UK debt is in the spotlight

Sterling has lost over 1% against the euro and just under 4% against the US Dollar in the last month. 

The surprising move is the fall against the euro as the Greek fallout has held court in the media for sometime now and yet sterling falls against the euro. 

Weaker retail sales and weak business and mortgage lending have compounded the weak sentiment, however the real danger for sterling is the UK deficit. 

The economists are arguing with each other on whether to cut now or later- the common agreement is that cuts are inevitable but when? Economists should focus more on the how and what to cut and the politicians should lay their cards on the table with their full deficit reducing plans outlined now to avoid further uncertainty. 

The credit agencies want credible plans and not political or economic disagreement.

Lots of politics thrown into the mix over the weekend with news of a narrowing in the polls and Heseltine touting a hung parliament did not dent sterling further. However we can expect the election run up and the focus on the deficit to continue to affect the pound.

Sterling also lost further ground against the USD following the Feds decision to increase its discount interest rate by 0.25% on Thursday evening. 

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US Dollar shines after positive minutes

Yesterday the markets digested the minutes of the February interest rate meetings for both the UK and the US. 

Firstly looking at the UK the vote was a unanimous 9-0 to keep interest rates on hold and also to hold QE at £200 billion. The feedback from the MPC was ambiguous in the sense that the decision was unanimous and yet the comments were that it was a "finely balanced" decision to keep QE on hold. 

The unanimous decision gave Sterling a boost which was then tempered by weaker than expected employment numbers. Going forward this does not change the sentiment for sterling which will struggle to appreciate until the outlook for the UK warrants a more hawkish approach from the MPC.

Over to the US and the FOMC upgraded their forecasts for the US economy reflecting a more bullish tone from the Fed. 

They also discussed trying to shrink their reserves over time although no time frame was announced to do this. The positive tone from the Fed with improved economic sentiment in the US coupled with loitering fear in the markets helped to push the USD higher.

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Inflation figures create another letter from Mervyn King

UK CPI inflation rate came in at 3.1% against the expectation of 3.2% so slightly lower than expected. 

However the year on year rate is +3.5% and will require a letter of explanation from Mervyn King to Alistair Darling to explain why. King has regularly banged the drum that inflation will come down as we move through 2010 and today’s data to a small extent justifies his forecasts. 

However the data did not move the FX markets which have been quiet today considering the amount of market feedback. What the data does assist with is the BoE continuing with their policy of low interest rates and leaving the door open for further QE if deemed necessary.

Today European finance ministers are meeting again concerning Greece- feedback so far again is largely talk with no real details of the fundamentals of how assistance will be delivered. 

The ongoing situation is leaving the markets flat as risk is held off the table until further clarity is divulged. We have seen a further expansion in the credit default rates today for Greece reflecting the lack of clarity.

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Political concerns weigh Sterling down

The Pound has lost ground today as political concerns and the prospect of the Bank of England’s policy meeting later in the week weighed down Sterling.
 

Two UK opinion polls over the weekend showed a general election, which has to held by June, would result in a hung parliament.

This weighed on sterling since many believe that such a result would lessen the likelihood of the UK getting to grips with its rising budget deficit.

Meanwhile, traders were wary ahead of the result of the Bank of England’s monetary policy committee meeting on Thursday.

By midday in New York, the pound fell 0.9 per cent to £0.8740 against the euro, lost 0.1 per cent to Y144.21 against the yen and fell 0.6 per cent to $1.5902 against the dollar.

Meanwhile, the dollar hit a six-month high on a trade-weighted basis, consolidating sharp gains after US growth figures came in stronger than expected last week. 

The figures helped give the dollar an additional boost given that the US currency was already benefiting from increased risk aversion.

Safe haven demand for the dollar was boosted as fears over Greece’s fiscal position and concerns over continued Chinese monetary tightening weighed on risk appetite and global equity markets.

The dollar index, which tracks its progress against a basket of six leading currencies, rose to a high of 79.534, it highest level since July 30. The dollar also rose to a six-month peak of $1.3850 against the euro before paring some its gains to stand down 0.3 per cent at $1.3905 and climbed 0.5 per cent to Y90.77 against the yen.

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Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 

First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 

There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Markets await central bank decisions tomorrow

Quiet economic data today with the focus looking forward to tomorrow's interest rate decisions from the Bank Of England and the European Central Bank. 

There is a possibility that the completion of the Quantitative Easing programme will be announced for the UK- however the ever cautious MPC will likely leave the door open for more if deemed necessary. Either way a pause or a cessation in QE should be largely beneficial for sterling in the short term. 

The statements following the respective decisions from the BoE and ECB will again be the highlight as future policy sentiment will be predicted by the markets.

Sterling had a bright start today against the USD pushing back through 1.60 and hitting a high of 1.6069 before slumping back to earlier levels. 

Reports of Asian Central banks buying GBP/USD earlier before the rally was sold back lower. EUR/USD also stuck its neck back above 1.40 again this morning to a high of 1.4026 before falling back to 1.40. 

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Greeks bonds tragedy in the making

The “Greek tragedy” continues with rumours swirling that the Greeks  have approached China looking to offload €25 billion of their debt. 

The European dream is starting to crumble when on the back of the warning from the ECB that the Greeks will have to sort out their own finances they look instead to the East for a solution.

The euro has again tumbled on the back of this and €1.40 is now the line in the sand. The spread of the 10-year Greek bond yield over benchmark German Bunds also hit a high not seen since Greece adopted the euro in 2001

The US Dollar moved higher yesterday evening after the Fed's monetary policy meeting ended. 

As expected, the central bank left interest rates on hold at the historically low range of 0 – 0.25%, and has been worded in previous statements indicated that it will continue to do so for an “extended period". 

However, it was noted that one member of the committee, Thomas Hoening, voted to eliminate the extended period phrase. It also confirmed the continued plan to unwind its support to financial and credit markets. 

Also of note was its presentation of a brighter economic outlook for the economy than highlighted in its previous statement in December.

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Sterling continues to stride ahead in 2010

Another bright start for Sterling which continues it's gains. 

Sterling hit a 6 month high against the euro and pushed higher against the USD. The move was initiated with the acceptance and recommendation from the board of Cadbury’s on the offer by Kraft. 

The Kraft offer values each Cadbury’s share at 840p and shareholders will be entitled to receive 10p per share in the form of a special dividend. Sterling gained on the back of the expected benefits from the M&A flows of the deal. 

Then at 9:30 official UK inflation data came in much better than expected- UK December CPI has come in at +0.6% month on month, +2.9% year on year, demonstrably stronger than median forecasts of +0.3%, +2.6% respectively. 

This has raised the prospects for a Bank of England interest rate rise in 2010 and it certainly offers the Bank of England something to think about in early Feb.

This data also heightens the view on the UK employment data later this week- better data here could reinforce the view that the UK is firmly on the road to recovery. 

The Pound hit a high of 1.1455 against the euro and 1.6457 against the USD before falling back from the highs- Mervyn King is due to speak later and the market will expect a cautious approach which could take the edge off sterling- we will see later..

The Euro is under pressure this morning as the fallout in Greece continues to undermine the single currency and in addition the German ZEW came in weaker than expected for the third month in a row. The euro is closing in on key technical levels against the USD and the EUR with EUR/USD close to breaking below 1.4275 and GBP/EUR targeting 1.15. 

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China and Eurozone centres of markets attention

China are scheduled to release their 4th Quarter GDP figure with market consensus looking for reported growth of 10.5%. 

The odds however are for an even stronger outcome and markets could react very positively towards the regions currencies and commodity currencies against those of the industrialised West. 

In The Land of the Rising Sun, this week should see further developments in the winding up of Japan Airlines. Reliable rumour has it that the company’s commercial activities, including their oil and fuel contract will be 100% guaranteed but that their forex hedges will be required to be unwound. This could mean the company needing to sell US Dollars against the Yen.

As expected last week, there was no change to the ECB’s policy interest rate and Trichet’s post-announcement was largely uneventful. 

Although he managed to achieve a balanced tone to his testimony, it was apparent that he was not overly concerned on imminent inflationary pressures within the zone. 

He acknowledged that current fiscal problems are placing a considerable burden on monetary policy but that individual States’ current difficulties would not cause the ECB to require a change in the collateral framework of any country.

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Financial markets wind down for Christmas

Financial markets get more and more illiquid and technicals become more and more relevant. 

To that end, Euro/Dollar remains the driver for forex markets and the target is very much the 200 day moving average level of just below 1.4200. 

Given the current penchant for buying Dollars, this looks a better than evens bet today. The turn in the dollar to date comes from a better relative economic performance than other majors, rather than any concern that the global recovery will derailed. 

As such, we should not necessarily be seeing weakness in high yield commodity and emerging currencies. Certainly the renewed strength in the dollar may be discouraging funding carry trades out of the dollar, and renewing the case for funding out of the JPY or even the EUR, but it suggests a broad carry trade unwind is unlikely to last. 

The recent improvement in the US Dollar against other major currencies reflects the relative rise in US bond yields. 

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Fed keeps US interest rates on hold

Last night the Federal reserve kept their interest rates on hold.

Reports indicate we may not see a rate hike until late 2010 or even possibly 2011. The dollar has gained against most currencies on the back of this, and US Dollar/Japanese Yen tipped higher for the third consecutive day.

UK retail sales figures for November MoM came in this morning at -0.3% against an expected 0.5% rise, pushing sterling lower against a basket of currencies. 

Sterling has moved below 1.61 on the back of last nights Fed decision to keep interest rates on hold, boosted by the poor UK retail figures. Key support levels around 1.6083 should see the dollar move towards 1.59 regions.

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Home Loans at Wise Money- bad credit and self employed helped

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Repayment crisis threatens millions of mortgages

Many of the four million homeowners who took out interest only mortgages are facing a crisis because they have no way of repaying their home loans.

Figures from the Financial Services Authority, which has regulated mortgages since 2004, show that 38 per cent of Britain’s 11.1 million mortgage borrowers — or more than one in three — may have made inadequate provision to pay off their capital sum.

Many are in negative equity and the savings products taken out to cover the capital repayments have fallen short. That 38 per cent figure does not include those with endowments or buy-to-let investors who took out interest-only mortgages to keep the cost down.

Experts said that homeowners who pinned their hopes on their house covering the cost of paying off the mortgage were most at risk after house price falls of 22 per cent from peak to trough, according to figures from Halifax.

A spokesman for the FSA said: “At the top of the market it was the case that for a lot of borrowers, interest only was the only way they could afford to buy. For these borrowers it becomes increasingly difficult to pay off the capital as time goes on.”

A spokeswoman for the Council of Mortgage Lenders said that at the moment homeowners cannot rely on house-price inflation to cover the capital repayment. “They will have fewer options available if they get into difficulty, as switching to interest-only is a coping strategy when you have payment problems.”

Interest only deals first appeared in the early eighties alongside endowment policies. Endowment mis-selling in the late eighties brought an end to their common use as a repayment vehicle but the concept of interest- only remained.

About 40 per cent of borrowers on interest-only deals took them out before 2003, according to moneysupermarket.com, although there was a surge in applications in 2006 and 2007, as house prices rose.

The proportion of loans that are being repaid on a capital and interest basis has fallen from 53.1 per cent at the end of 2007 to 51.7 per cent, indicating that switching to an interest only loan has continued.

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Bank of England split on expansion of quantitative easing

Yesterday morning we had the Bank of England minutes which fed through a vote of 6-3.

The market initially perceived the split of 3 to be in favour of a lesser increase than the £50 billion expansion in QE decided.

In fact the 3 – King, Besley and Miles wanted an expansion of £75 billion which confirms two things; one is that assumption is the mother of all errors especially when looking at current market conditions and also that the MPC are very very cautious and would rather do more than not enough.

This leaves the door open for more Quantitative Easing especially as Mervyn King was petitioning for larger stimulus and paints a pointedly negative slant on the UK economy from the MPC…hence this led to sterling weakness against the USD and EUR.

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Germany and France out of recession?

Official data has confirmed that Q2 GDP has come in positive 0.3% for both France and Germany.

Far better than expected and very surprising against a back drop of heavily contracting GDP for the nations at the back end of 2008 and early 2009.

In addition Eurozone GDP has just come in at -0.1% much better than the forecast of -0.5%- this means that the Eurozone as a whole is nearing a turn to positive growth.

In the markets the euro has gained a little against the USD but no move at all against the Pound. Personally I thing the good numbers should be taken with a pinch of salt as the GDP gains could align to stimulus input over a real turn in demand.

Recently we saw that Eurozone Industrial Production fell 0.6% with falls noted in France and Germany and credit conditions remain tight- especially in Germany.

I feel we need to look for more economic feedback to substantiate this gain in GDP before we can declare that France and Germany are on the road to recovery.

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Loans Markets wrongfooted as Bank of England signals rates will stay low

London's money markets were left reeling for a second time in less than a week as the Bank of England signalled that traders had got ahead of themselves in assuming that it would raise interest rates significantly in the coming years.

Yields on gilts dropped by five basis points after the Bank indicated that if it followed the market's expected path for interest rates and lifted them above 4pc over the next two and a half years it would send inflation below its 2pc target.

In its quarterly Inflation Report, the Bank indicated that although it may have now reached an end with its £175bn Quantitative Easing (QE) programme, it remains more concerned about the risk of deflation than inflation in the coming years.

But despite concerns that the QE programme has failed – having not succeeded in lifting the growth of money flowing around the broader economy – the Bank's Governor, Mervyn King, insisted that the scheme had been a success, saying that were it not for this cash injection, growth would have been weaker and unemployment higher.

The Bank's chief economist, Spencer Dale, added: "It's still too early to know the precise impact that the asset purchases will have on nominal spending. But there are encouraging signs: gilt yields are lower than they otherwise would have been and it appears that the functioning of the corporate credit markets have improved.

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Pound slides after QE expansion

The Pound dropped sharply on Thursday morning after the Bank of England extended its asset purchase scheme by more than expected after its policy meeting.

The Bank announced a £50bn extension to its programme to £175bn as it continued to use a policy started in March of quantitative easing to lift the UK economy out of recession.

”The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review,” the Bank said in a statement.

Ahead of the decision, forecasters were evenly split as to whether the Bank would announce that it planned to spend the remaining £25bn of the £150bn earmarked for its asset purchase programme or would remain on hold.

The more aggressive action sent sterling and gilt yields sharply lower.

Sterling , which on Wednesday hit a 10-month high of $1.7042 against the dollar, dropped 0.7 per cent to $1.6868, fell 0.5 per cent from a one-month high to £0.8529 against the euro and lost 0.2 per cent to Y160.86 against the yen.

The yield on 10-year gilts fell 14 basis points to 3.68 per cent, while the more interest rate sensitive 2-year gilt yield dropped 17 basis points to 1.1 per cent, not far from the low just above 1 per cent it hit in December.

The Bank also kept UK interest rates on hold at 0.5 per cent, but this was no surprise to investors.

Meanwhile, the euro held steady around multi-month highs against the dollar on Thursday as traders awaited the outcome of the European Central Bank’s policy meeting.

Like the Bank of England, the European Central Bank was widely expected to keep its main lending rate at 1 per cent after its policy meeting.

But analysts said the post-decision press conference with Jean-Claude Trichet, president, would be scrutinised for any signs that he had become more upbeat on the prospects for the region’s economy or any announcements over unconventional monetary policy measures.

Increased investor optimism over the prospects for global growth have boosted both the euro against the dollar this week, stemming haven demand for the US currency as traders abandoned the relative safety of the dollar in search of greater returns elsewhere.

On Wednesday, the euro hit a high of $1.4446 against the dollar, its best level since December.

Much of the optimism over global growth was provided by a string of above forecast surveys of activity in the manufacturing sector across the globe early in the week.

But analysts said some caution had been evident in the rally in riskier assets after the Institute for Supply Management’s survey of the US services sector came in below forecast and a survey of employment in the US private sector also undershot expectations on Wednesday.

The dollar also edged higher elsewhere, climbing 0.3 per cent to SFr1.0642 against the Swiss franc and rising 0.6 per cent to Y95.46 against the yen.

Elsewhere, the yen suffered as Asian equities posted strong gains, denting haven demand for the Japanese currency.

The yen fell 0.2 per cent to Y137.30 against the euro and lost 0.6 per cent to Y80.24 against the Australian dollar.

The New Zealand dollar was also hit after figures showed employment in the country dropped by more than expected in the second quarter.

New Zealand unemployment jumped to its highest level since mid-2000, sending the kiwi down 0.5 per cent to $0.6699 against the dollar.

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Pressure grows on Bank of England as money supply falls

Pressure on the Bank of England's interest rate setting committee to extend its scheme of quantitative easing (QE), or creating new money, mounted today as it emerged that a key measure of money supply in the economy fell to its lowest rate in a decade.

The gauge of M4 money, which excludes certain parts of the financial sector and is closely watched by the Bank as an indication of whether quantitative easing is working, rose by 3.1 per cent in the second quarter between April and June, down from growth of 3.8 per cent in the first three months of the year. It was the lowest rate of quarterly growth since 1999.

On an annual basis, the measure rose from 3.35 per cent in the first quarter to 3.7 per cent, despite the fact that the Bank of England has pumped £125 billion of newly created money directly into the economy.

The Bank of England's own figures also showed that lending to businesses tumbled by a record £14.7 billion between April and June.

The second quarter slump in lending to “non-financial corporations” is the biggest since the Bank of England’s data began in 1997 - with manufacturing, construction and services worst hit.

Last week, Alistair Darling called Britain's biggest lenders to a meeting to put pressure on banks to increase lending to small businesses and customers amid fears that Britons are not benefitting from lower borrowing costs.

However the Bank's Monetary Policy Committee will take heart from a slight lift in M4 lending which grew at an annual rate of 2.7 per cent in the second quarter, up from 1.9 per cent in the first three months of the year.

The Bank of England has said that it will take time for the effects of quantitative easing to filter through to the wider economy, but economists said that today's disappointing figures would do little to engender hopes that the economy could be on the road to recovery.

The Bank's Monetary Policy Committee, which starts its two-day rate meeting tomorrow, is likely to keep interest rates at a historic low of 0.5 per cent, but will decide whether to extend QE by a further £25 billion to bring the scheme to its prevously announced ceiling of £150 billion.

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Bank of England attacked for gilts sell off

Angry investors blasted the Bank of England on Thursday when it sparked a sell off in the gilts market after one of the biggest government bond offerings of the year.

In an interview published 20 minutes after the £5bn bond deal was finalised, Andrew Sentance, an external member of the Bank’s interest rate setting monetary policy committee, said it was considering whether to put on hold its quantitative easing programme designed to pump money into the economy.

Mr Sentance told Bloomberg that the issue at the committee’s next meeting, due to be held in early August, would be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy”.

His remarks raised expectations in financial markets that the Bank might be ready for a sustained pause in its injections of cash into the economy through the purchase of government bonds.

This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.

Benchmark 10-year gilt yields, which have an inverse relationship to the price of bonds, jumped 0.12 percentage points to 3.96 per cent on investor nervousness that quantitative easing could be nearing its end.

Investors said that, although yields on the inflation-linked bond sold on Thursday remained steady, Mr Sentance’s remarks spooked the market and could have repercussions for holders of gilts across all maturities.

The confusion overshadowed a successful bond offering by the UK Debt Management Office, which operates at arm’s length from the Treasury.

The inflation-linked gilt maturing in 2042 was the largest ever single transaction for a UK index-linked security.

Although it tries to avoid making statements at high-profile moments such as on Budget day, the Bank is not normally constrained by the operations of other branches of government.

As the chief arbiter of interest rates, the Bank would be concerned not to show any sign of trying to influence the cost of government debt. Any indication of collaboration could drive up the cost of debt if investors lost confidence in the Bank’s independence, analysts said.

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Banks and building societies under fresh pressure to cut mortgage rates

Banks and building societies are under fresh pressure to cut their mortgage rates after the rate at which they lend to each other fell to the lowest level for more than 20 years.

The rate, known as Libor, fell below one per cent for the first time since it was set up in 1986. This means that banks, in theory, have never been able to borrow money so cheaply.

However, home buyers have failed to benefit, with the average two-year tracker rate mortgage for new customers climbing from 3.73 per cent a month ago to 3.77 per cent yesterday, according to the financial publisher Moneyfacts.

Mortgage experts said lenders were being “unfair” to home owners and their stubborn refusal to cut rates was threatening a recovery in the housing market and the wider economy.

Some of the worst offenders are the nationalised and part-nationalised banks — Halifax, Lloyds Banking Group and Northern Rock. None of them offers a tracker rate mortgage below 3.25 per cent, despite being given billions by the taxpayer to rescue them from collapse.

Earlier this week, banks were accused of “ripping off” consumers after it was disclosed that they were pushing up the price of fixed-rate mortgages to their highest level — relative to the Bank of England rate — for at least 20 years.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “I just do not accept that it makes any sense for the nationalised and semi-nationalised banks to be building up capital reserves. There is no risk they will fail because they are owned by the taxpayer. Their primary requirement is to support the economy through lending.”

Mick McAteer, a former head of policy at Which? and now the head of the Financial Inclusion Centre think tank, said: “Banks have been using the cuts in the Bank of England rate to increase their revenues by billions.

“There is a basic lack of competition and they have a stranglehold. People are paying more than they should for credit cards and overdrafts as well.”

When banks borrow money to fund their variable rate mortgages, such as tracker-rate deals, they go to the wholesale money markets. Here, the cost of money is set by a rate known as three-month Libor.

This rate has fallen steadily in recent months as City investors become increasingly convinced that deflation will remain for some time and the Bank of England will keep its Bank Rate at 0.5 per cent into next year. In March, three-month Libor was above two per cent. Yesterday it fell from 1.01 to 0.99 per cent.

With mortgage rates increasing and banks’ borrowing costs falling, lenders are able to increase their profits.

Four million home owners have tracker mortgages that rise and fall with the Bank of England base rate, currently at its lowest level. However, banks have gradually raised the starting rate for trackers by withdrawing their most competitive deals.

The Council of Mortgage Lenders argued that the cost of borrowing was a “complex jigsaw” and not solely set by Libor. “It is misleading to assume that higher fixed rates simply reflect a desire to increase profitability,” a spokesman said.

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Bank of England injects £25bn more into economy

The Bank of England’s monetary policy committee (MPC) is expected to extend its programme of quantitative easing (QE) by £25 billion, though there are doubts whether it will take action beyond that.

The Bank has so far committed £125 billion of QE in an attempt to boost the money supply, mainly through purchases in the markets of gilts and other assets.

It has permission from the Treasury for a further £25 billion of such purchases, which analysts expect to be announced this week. Beyond this, it would have to seek new approval from the Treasury, which indemnifies the Bank against losses on the scheme.

The shadow MPC, a group of independent economists that meets under the auspices of the Institute of Economic Affairs (IEA), calls on the Bank to maintain the base rate at 0.5% and extend QE beyond the £150 billion it currently has permission to undertake.

Economists continue to debate whether QE is working, with bank lending still subdued. The policy has become of central importance to the gilt market. Traders fear that gilts — UK government bonds — will fall sharply once the Bank calls a halt to the programme.

The Bank will discuss if it should extend QE next month, when it has the benefit of a new forecast for its August inflation report. It will weigh signs that the economy has stabilised against other evidence suggesting a sustained recovery is some way off.

A report to be published this week is set to show that the pace of the job market’s decline is slowing. The KPMG/REC Report on Jobs, produced by the accountancy firm in conjunction with the Recruitment and Employment Confederation, will suggest that the pace of decline in permanent and temporary staff appointments has eased — a picture consistent with recent official data showing a smaller monthly increase in unemployment following record rises in the winter.

This also chimes with the purchasing managers’ indices, particularly for the service and manufacturing sector, which continued their improving trend last month.

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Mortgages- fixed rates could reach 6pc within weeks

The average cost of a two year fixed rate mortgage has broken through the 5pc barrier for the first time since January and could soon reach 6pc.

Lenders are now charging an average of 5.04pc to home owners who want to fix their repayments for two years, up from 4.92pc on Monday and 4.74pc at the beginning of last week.

The steep rise in the average rate seen in recent days has been driven by Nationwide's decision to increase the cost of some of its fixed rate deals for the second time in two weeks.

Nationwide was followed by the Woolwich, which raised the cost of one of its two-year fixed-rate deals by 0.7pc, and other lenders are now expected to increase their rates again in the days ahead.

Nationwide sparked the latest round of price increases when it repriced its entire fixed rate mortgage range on June 12.

Other lenders were quick to follow suit, with major groups such as Halifax, Cheltenham & Gloucester, Abbey and Alliance & Leicester all increasing the cost of the deals they offered.

The latest round of price rises is bad news for home owners, with almost 90pc of mortgage borrowers opting for a fixed-rate loan, according to Legal & General, in a bid to lock in to low borrowing costs before the base rate starts to rise again.

But there are still good deals available, with Mansfield Building Society offering a two-year fix of 3.39pc for people with a 25pc deposit who pay a £999 fee, while Britannia Building Society has a two-year rate of 5.99pc for those with only a 10pc deposit who pay a £599 fee.

For those looking to fix for five years, the Post Office has a rate of 4.45pc at a 60pc loan to value ratio with a £599 fee, and Britannia Building Society is offering 6.19pc at a 90pc LTV with a £999 fee.

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UK inflation falls less than expected to 2.2%

UK inflation fell by much less than expected in May, lengthening the odds of full blown deflation, official figures revealed today.

The consumer prices index (CPI) measure of inflation, the Bank of England's target measure, dropped to 2.2 per cent from 2.3 per cent. Analysts had expected a fall to 1.9 per cent. This is the 20th consecutive month it has been above the Bank's 2 per cent target.

The alternative retail prices index (RPI) inflation measure, which includes housing costs and upon which many pay deals are based, has already plunged into deflationary territory. But it delivered another surprise, edging up from -1.2 to -1.1 per cent last month on the back of rising mortgage rates, confounding economists' expectations of a further drop to -1.5 per cent.

In another sign that prices are rising, core inflation, which strips out volatile energy and food costs, also rose from 1.5 per cent to 1.6 per cent.

The increased price of cigarettes and alcohol, which rose as part of April's budget, helped to push inflation upwards, the Office for National Statistics said, but significant increases came from the rising cost of DVDs, televisions, clothing and footwear- indicating that sterling's weakness is filtering through as foreign made goods become more expensive.

However, policymakers and analysts still expect inflation to fall sharply over the coming months.

Sterling jumped by 0.6 per cent against the dollar to $1.6414 after the figures were released, and rose to the highest level this year against the euro, which fell to 84.44 pence against the pound.

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