UK interest rate debate continues

The Bank of England’s deputy governor for monetary policy has said that it would be “foolish to preannounce” a date for an interest rate increase.

UK interest rate debate continuesYesterday the Bank’s Monetary Policy Committee voted to keep interest rates at their current historic low of 0.5%.

Deputy governor Ben Broadbent said the Committee had no specific time in mind for a rise and comments by governor Mark Carney had been misinterpreted.

The interest rate has remained unchanged for 78 months.

The ultra low interest rate regime has boosted the housing market as homeowners enjoy record low mortgages rates, but penalised savers whose returns have dwindled to almost nothing.

Speaking to Radio 5 live’s Wake up to Money programme, Mr Broadbent said: “We are responding to things that are essentially… unpredictable.  And that means that it would not just be impossible, it would be foolish to pre-announce some fixed date of interest rate changes.”

Mr Broadbent said he saw no “urgency” to increase interest rates at present.

He added: “The economy clearly is recovering, but we had the most almighty financial crisis and there is still a bit of spare capacity left.”

“There is not that much inflationary pressure at the moment, [although] we expect that to build over time.”

The Consumer Prices Index, the most commonly used measure of inflation, fell to 0% in June, while earlier this week, the cost of a barrel of crude oil fell below $50, its lowest point since April.

Despite problems in the wider global economy, caused by the continuing crisis in Greece and fall in Chinese stock prices, Mr Broadbent said the overall outlook for the UK remained steady.

“We’ve seen unemployment come down pretty steeply,” he said, “and some signs of improving productivity growth. We’ve seen a material pick-up in wage growth, not sufficient to give us any big inflationary risk.

“But all of that would naturally lead to the case for some normalisation of interest rates to start building.”

He added that the economic recovery looked “well embedded and solid”, with the Bank expecting “steady growth over the next two years”.

Mr Broadbent was responding to media coverage of remarks made last month by the Bank’s governor, Mark Carney.

In a speech at Lincoln Cathedral on Monday Mr Carney gave what was interpreted as his clearest hint yet that the cost of borrowing would go up before 2016.

He said: “The decision as to when to start such a process of adjustment will probably come into sharper relief around the turn of this year.”

UK inflation rate goes positive

The UK inflation rate- as measured by Consumer Prices Index (CPI) rose to 0.1% in May, up from -0.1% in April.

UK inflation rate goes positiveThe biggest contribution to the rise came from transport, notably air fares, the Office for National Statistics said.

In April, CPI inflation turned negative for the first time since 1960, mainly due to a drop in air and sea fares.

ONS statistician Philip Gooding said: “Last month CPI turned negative, mainly because of falling transport fares due to the timing of Easter. This month, that fall has been reversed.”

He added that the falls in food and fuel costs over the past year “have eased this month, helping to push inflation up”.

While the prices of food and fuel rose in May from the previous month, the prices were still lower than a year earlier.

However, while the overall effect of food and fuel on CPI inflation pulled the rate down by about 0.5 percentage points in May, this was less pronounced than the month before when the prices had a negative effect of 0.7 percentage points.

In May Retail Prices Index (RPI) inflation, a separate measure which includes housing costs, was 1%, up from 0.9% in April.

Bank of England governor Mark Carney has said he expects inflation to remain low in the short term.

The Bank expects near-zero inflation to help the UK economy by boosting the spending power of households.

Chancellor George Osborne said “a powerful mix of low prices and rising wages” was “good news for working people and family budgets”.

Nevertheless, he said: “Of course the job is not done and we will continue to remain vigilant to all risks, particularly when the global economic situation is so uncertain.”

UK inflation rate remains zero in March

The UK’s inflation rate remained at it’s record low of 0pc in March- according to the Office for National Statistics.

UK inflation rate remains zero in MarchCheaper clothing and footwear, offset by a rise in petrol prices, helped to maintain the rate at 0% for a second month according to the official figures by the ONS.

The figure was the lowest rate of Consumer Prices Index (CPI) inflation since estimates of the measure began in the late 1980s.

It means the cost of living is broadly the same as it was a year earlier.

However, the ONS said that if the rate of inflation was calculated to two decimal places, prices were 0.01% lower than a year before – the first fall on record for the CPI measure.

One of the main reasons the CPI rate remained broadly unchanged was rising petrol and diesel prices between February and March, the ONS said.

But an overall fall in fuel prices over the past year has been a major contributor to low inflation, it added.

The CPI figure leaves inflation well below the Bank of England’s 2% target.

There had been speculation that the CPI rate – as measured to one decimal place – would fall below zero in March, and there remains a possibility that the rate could fall in the coming months.

However, few economists think the UK is at risk of the type of entrenched deflation that Japan has suffered from.

In March, inflation as measured by the Retail Prices Index (RPI) fell to 0.9% from 1.0% the previous month, the Office for National Statistics said.

Like CPI, RPI inflation is calculated from a sample of retail goods and services. However, RPI is calculated differently and includes data such as mortgage repayments.

King signs off with optimistic review

Mervyn King has signed out with an upbeat final quarterly inflation report with growth forecasts increased and inflation forecasts scaled down.King signs off with optimistic reviewKing expects to see unemployment gradually come down which backs up the official data today which showed unemployment levels falling.

The big positive is the expectation that growth expectations are looking rosier and at the same time inflation is softening, previously it has been the other way around.

The report is good news for consumers that have been hit with persistently high inflation and no end in sight for a return to growth.

Although the report gave a short term boost to the Pound on the upbeat growth forecasts, this was short lived as overall we expect the pound to fall in line with a more aggressive Bank Of England as Mark Carney replaces Mervyn King as Governor.

The sparks of life are now evident but until we see the UK economy truly fire into life we can expect the Bank Of England to be proactive and more aggressive which is likely to weaken the pound.

In other news Japanese preliminary GDP beat estimates and this help to continue the positive risk sentiment in Asia until it was dampened by weaker Japanese earning reports.

In the currency markets the Euro came under renewed pressure against the USD as speculation increases for a further rate cut from the ECB following yesterday’s disappointing Q1 GDP data.

In addition the US Dollar is making gains after hints that the Fed is moving closer to exiting their QE strategy.

US GDP contraction shocks wise money markets

The US economy shrank 0.1% in the fourth quarter of 2012 for the first time since the end of the recession in 2009.US GDP contraction shocks wise money marketsIf you contrast the contraction of 0.1% against the 3.1% growth in the third quarter then you can get some grasp of the sharpness of the fall and the surprise in the data.

The fall in GDP is being attributed to steep cuts in defence spending and weather related hits to consumer activity.

The FOMC in their monthly interest rate meeting were fairly upbeat about the US economy and suggested that the stall in growth was temporary as they left their $85 billion bond buying stimulus plan in place.

The US Dollar has continued to lose ground in the forex markets and the euro has now hit a 14 month high against the USD.

Interestingly the weak data which would normally lead to USD strength as a safe haven instead led to Euro gains.

Elsewhere we have actually had some good news for a change from the UK economy with GfK January consumer confidence coming in at an improved -26 against an expected -28, not quite a surge in optimism but at least ahead of expectations.

The euro has held good levels after mixed economic data with weak German retail sales and lower French Producer Prices countered by a fall in German unemployment.

In other news, the credit ratings agency S&P have noted that China amongst others may be spending too much after they ranked economies on their vulnerability to an investment led collapse.

China is accompanied by Brazil, Australia and South Africa who have invested heavily in recent years to supply China with natural resources.

Chinese inflation rates fall

China’s inflation rate has drop to 3.4% in April from 3.6% in the previous month and below the Chinese government target of 4%.Chinese inflation rates fallThis will reduce the headache for the government as rising consumer costs have been one of the biggest causes for concern in recent times reaching as high as 6.5% in July last year.

The drop in the oil price has certainly helped China’s progress alongside its bid to improve domestic demand to offset their fall in global demand for their exports.

Recent data suggests that Chinese consumption is struggling as imports grew only 0.3% last month compared to 5.3% in March.

Consequently investors will be keen to see how policy makers act within the next few months, perhaps leading to a cut in interest rates.

Back in Blighty, the NIESR National Institute for Social Economic Research (NIESR)’s reserach indicates that UK GDP grew by 0.1% over the quarter to April following the 0.2% drop in the previous 3 months.

Details of the report revealed that the negative output is expected to widen further as a result of the sluggish economy.

They expect the UK economy to remain broadly flat over the next 6 months according to the report.

These latest figures support the Bank of England’s case to maintain low interest rates in an attempt to boost growth.

As expected both the interest rate decision and the QE programme where left unchanged yesterday.

Sterling at new currency high against euro

Money markets were dealt a surprise as the Consumer Price Index (CPI) rose in the UK to 3.5% up from 3.4% in February according to the Office for National Statistics. Sterling at new currency high against euroThe ONS blamed higher food prices specifically soft drinks, bread, cereal, meat, fruit and vegetables coupled with rises in clothing & footwear.

However there was some good news as utility bills were lower than one year ago following energy companies reducing tariffs in February last year.

All eyes will know be on the Bank of England as this latest rise could reduce the likelihood of additional Quantitative Easing in next months MPC meeting but with stuttering growth the Bank of England may have no choice.

So far today in the UK we have seen the UK Jobless Claims figures fall for this first time since last spring.

Unemployment fell by 35,000 to 2.65m according the ONS leaving the overall rate at 8.3%.

Furthermore we saw voting in the Bank of England for interest rates and QE voting come in at 9-0 and 8-1 to keep rates on hold and maintain the contribution at £3.25bln.

Sterling has rallied as a result of these figures and currently sits at 1.2212 against the Euro the highest reading since September 2010. Cable has also risen against the US Dollar and is fast approaching the key psychological level of 1.60 currently trading at 1.5979.

In other financial news Warren Buffet has announced he has stage one prostate Cancer which will create further hype around the successor to his Berkshire Hathaway business.

As for the rest of this week we are pretty light on data with inflation data in New Zealand, Canada and the Germany of any real significance.

UK inflation still rocketing

UK inflation figures were published this morning showing that price rises are still rocketing.  UK inflation still rocketingThe CPI for September was up +0.6% and the year on year level up to 5.2%.RPI was also up +0.8% and 5.6% for year on year.

Normally, a strong inflation number indicates that interest rate increases could follow and thus we see a gain in the value of the currency.

However, we are not in normal market conditions and the uptick in inflation will not be reflective of future rate increases as the Bank of England expects inflation to fall back towards 2% in time.

The current weak growth that is threatening the UK’s recovery continues to overshadow inflation and with the risk of a double dip recession still lurking, the BoE has no choice but to keep interest rates low.

The fact that the number was higher than forecast is actually a negative for the pound and we have seen the pound dip against the US Dollar and slightly against the Euro since the numbers were released.

Late in yesterday’s trading, the Euro lost value as pessimistic comments from Angela Merkel dampened the positive mood that was building towards the October 23 summit.

Wise Money expects the euro and the US Dollar to be volatile ahead of the summit as the Eurozone leaders hammer out further bailout measures to support the single currency and some of its ailing economies.

UK inflation keeps rising

Data yesterday showed that UK inflation continued its upward march through August with the benchmark CPI figure rising to 4.5% over the past 12 months.UK inflation keeps risingSterling dropped immediately after the announcement, but the move was short lived against the Dollar as the Pound regained ground.

The Bank of England expects the rate to keep rising towards the five percent level, before peaking and then moving back towards the two percent target.

Whether you chose to believe the Bank given its recent forecasting record is a mute point.

On top of the shaky CPI estimates the forecast may be further derailed if we find out that further stimulus is back on the minds of the MPC when the minutes from the last meeting are released in a few weeks time.

Given that the recent quarterly inflation report presented the probability of further stimulus as quite low, the recent calls for another round of easing by the Bank could counteract the downward pressures to inflation that are currently expected.

Or we may see inflation stay stubbornly high and so contrary to BoE forecasts.

UK Jobless claims rose by slightly less than expected, pushing Sterling up slightly against the Dollar in early trading this morning.

The crisis in the Eurozone continues to morph quicker than policy makers can react to it.

French banks suffered huge swings in share prices yesterday as first fears over their ability to raise short-term Dollar funds sent prices down almost 10 per cent before statements denying the rumours caused a rebound of epic proportions.

BNP Paribas eventually closed up 7.2 per cent yesterday but there is no rest bite for the Gallic lenders this morning with Moody’s, the ratings agency, announcing a downgrade for SocGen and Credit Agricole with BNP Paribas placed on review.

Alongside this, we still have ongoing worry over the potential default of Greece.

German Chancellor Angela Merkel tried to reassure the markets after several of her political partners openly questioned if Greece was insolvent and/or should leave the Euro over the weekend as yields on 2 year Greek bonds fully departed reality and traded over 95% (remember when they were 35% and everyone was so worried?).

The ongoing problems have not stopped the Euro from retracing some of the move from Friday and Monday. The sheer size of the move means we may see the Euro strengthen slightly through the rest of the week.

Retail sales the key to wise money markets

Under the spot light this week are retail sales, inflation, industrial production and regional manufacturing surveys which will offer some direction to the Greenback and it is likely that the data over coming days will look less negative than in past weeks, giving the US Dollar some support. Retail sales the key to wise money marketsHaving breached above its 200 day moving average for the first time in a year the Dollar index is set to start the week on a positive foot and will look to extend its gains throughout the remaining trading sessions.

On the other hand, EUR/USD continues to struggle, falling below its 200 day moving average in spite of positive news from Germany (rejection of bills in the constitutional court) and China assisting the Italians with their bond programme yesterday.

The ECB did not help the EUR’s cause however, with the change in its stance to a more balanced assessment of risks from its more hawkish stance previously.

However, the real damage occurred as speculation of a Greek default intensified and ECB hawk Stark resigned from the ECB council, highlighting the divisions within the governing board.

This week attention will remain on Greece as negotiations between the Troika (ECB, EU and IMF) and Greek officials resume.

Ahead of the talks Greece approved a further EUR 2 billion in austerity measures over the weekend but nonetheless, despite denials by Greek officials speculation of a debt default will continue to hammer the EUR lower.

So far today we had CPI data which came in at 4.5% from 4.4% in July according to figures from the ONS.

This sits well above the Bank of England’s target rate of 2% which is expected to return back to target within two years.

The ONS blamed continued pressure in energy prices as well as clothing& footwear but accepted some relief in transport services and recreation in particular game consoles helped to offset further price rises.