Just 10% of brokers believe that the UK government is in control of the Brexit process, United Trust Bank’s broker sentiment poll suggest.
The survey of over 140 intermediaries working in the fields of property and asset finance, carried out by UTB in October, found almost two thirds (63%) of brokers felt that it was actually the European Commission who were in control whilst 24% thought that negotiations were evenly balanced. The remaining 3% didn’t know.
Harley Kagan, group managing director at United Trust Bank, said: “Since the EU referendum result was announced UTB has taken the view that Brexit would increase uncertainty and that we all needed to adapt to it.
“I’m pleased to say that that’s precisely what UTB and the vast majority of our customers have done.
This news follows a difficult period for the government following the recent departure of two cabinet ministers, Michael Fallon and Priti Patel and criticism of foreign secretary Boris Johnson.
Kagan added: “However, although Brexit hasn’t stopped UTB from having another successful year, there’s no denying that UK businesses and households would benefit from having a clearer picture of what life outside of the EU will look like after March 2019.
“At the moment, we appear to be making very little headway on very important issues such as trade and the free movement of labour, both of which could have a considerable impact on UK PLC.
“On the positive side, we’re not the only business which has grown despite the uncertainty. Figures from UK Finance show that mortgage lending for home purchases and remortgages has increased year on year.
“The FLA has reported strong growth in both asset finance lending and second charge loan volumes and bridging finance volumes have increased once again. Uncertainty appears to be the new normal and change will continue to happen.
“Whether you believe that Brexit, a slowing economy, cooling house prices or any other factor beyond our direct control will bring opportunity or failure, you’re probably right. At UTB, we choose opportunity every time.”
LONDON (Reuters) – British inflation unexpectedly held steady in October, wrong-footing the Bank of England and raising fresh questions about how fast the central bank will follow up on this month’s interest rate hike.
The annual rate of consumer price inflation was unchanged from September’s five-and-a-half-year high of 3.0 percent, official data showed.
When the Bank raised rates for the first time in a decade in early November, it said it expected inflation would hit 3.2 percent in October before starting to fall slowly towards its 2 percent target.
“Red faces all round as UK inflation fails to rise as widely expected, not least by the Bank of England,” said Chris Williamson, chief business economist at financial data company IHS Markit.
Sterling fell against the dollar and British government bond prices rose as markets lengthened the odds slightly on a new BoE rate hike in the foreseeable future.
Most economists polled by Reuters after the Nov. 2 rate rise said they did not expect the Bank to raise rates again until 2019. On Tuesday financial markets – which tend to take a more hawkish view – priced in no increase until late 2018. BOEWATCH
While inflation in many developed countries remains weak, in Britain it has surged from just 0.5 percent at the time of the June 2016 vote to leave the European Union as the fall in the pound pushed up the cost of imported goods.
October’s data showed that lower fuel price inflation was offset by the biggest rise in food prices since September 2013.
Many economists have said this month’s rate rise was unnecessary because of the slowing domestic economy, weak productivity and wage growth, and uncertainty about Britain’s future trade relationship with the EU.
Economists polled by Reuters expect wage data due on Wednesday to show pay growth stuck at just over 2 percent.
DATA DILEMMA
The Bank argues that leaving the EU will damage Britain’s ability to grow as fast as before without generating excess inflation, and that the lowest unemployment rate since 1975 makes labour shortages and a rebound in wage growth a risk.
This month’s rate rise was not aimed at directly curbing the recent surge in inflation but at ensuring above-target inflation does not become too entrenched in Britain, especially as the United States and euro zone begin to tighten monetary policy which could further weaken the pound.
The Bank has said it still expects inflation to be slightly above target in three years’ time. On Tuesday Carney reiterated that he was allowing inflation longer than normal to return to target due to the Brexit uncertainties.
Paul Diggle, a senior economist at Aberdeen Asset Management, said inflation would pick up again due to rising oil prices and residual effects of the weaker pound.
“The Bank of England is stuck between a rock and a hard place. On balance, we think (it) will have to hike interest rates at least once more next year.”
Retail price inflation, a measure used to calculate payments on government bonds and many commercial contracts, hit a near six-year high of 4.0 percent, bad news for Hammond who is due to announce a budget plan on Nov. 22.
But other data showed that underlying price pressures are easing. Costs of manufacturers’ raw materials rose at their slowest pace since July 2016, a month after the Brexit vote.
“Our baseline case is that CPI inflation has now topped out,” Investec economist Philip Shaw said.
LONDON (Reuters) – British employers expect to raise pay for their workers only a little despite strong demand for staff and already low unemployment, according to an industry survey that suggested no immediate respite for the country’s squeezed households.
The Chartered Institute for Personnel and Development said its gauge of pay intentions for the private and public sector rose 2 percent in the latest quarter from 1 percent previously.
CIPD said planned pay rises in the private sector were clustering around 2 percent, the median for the last five years.
Last week the Bank of England raised interest rates for the first time since 2007 and predicted wage growth will pick up next year to 3 percent, up from a range of 1.8 to 2.2 percent seen in recent months.
But CIPD said 38 percent of private sector firms faced no pressure at all to raise wages for the majority of their workforce, compared with only 24 percent that said they did.
The squeeze on household incomes from high inflation and weak wage growth was a big factor behind the slowdown in Britain’s economy in the first half of 2017.
A separate survey from payments company Visa on Monday showed British shoppers reined in their spending by the most in more than four years in October.
“Over time we might expect low unemployment levels to lead to increased pressure on pay, as the Bank of England has predicted,” Gerwyn Davies, CIPD senior labour market analyst, said.
“However, it’s the UK’s ongoing poor productivity growth that’s currently preventing employers from paying more, not their inability to find or retain staff.”
Last month, Britain’s official budget watchdog said it expects to “significantly” downgrade its forecasts for productivity growth in the next five years, something that could hurt the government’s finances.
There was better news for public sector workers. CIPD said 59 percent of public sector employers reported pressure to hike salaries for most staff, most of whom are subject to a long-standing pay cap for state workers that may soon be ditched.
Prime Minister Theresa May has eased seven years of public sector pay caps modestly and for police and prison guards.
Finance minister Philip Hammond is under pressure to relax pay constraints further in his annual budget on Nov. 22.
CIPD said its gauge of employment demand eased only slightly from the previous quarter and remained near record high levels.
Official labour market data due on Wednesday is expected to show the unemployment rate will stay at a four-decade low of 4.3 percent, but with no improvement in wage growth, according to a Reuters poll of economists.
CIPD’s survey was based on 2,007 employers and was conducted between Sept. 11 and Oct. 3.
The Bank of England (BoE) made the decision to hike interest rates on Thursday in the first upward adjustment since the Global Financial Crisis (GFC). Policymakers voted 7-2 to increase rates, with Deputy Governors Sir Jon Cunliffe and Sir Dave Ramsden both opting to keep rates on hold. Policymakers had been forced to cut rates last year after the Brexit referendum, to help the economy cope.
However, despite rates moving higher, the central bank removed its previous warnings that rates might rise quicker than forecast, instead hinting at only gradual and limited adjustments in the next few years. The minutes read: ‘The MPC [Monetary Policy Committee] now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target. All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent.’
Furthermore, BoE Governor Mark Carney held a press conference after the announcement and defended the decision to move rates higher despite households undergoing a squeeze. Carney said: ‘To be clear, even after today’s rate increase, monetary policy will provide significant support to jobs and activity. And the MPC continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.’ Carney also stated that Brexit was having a ‘noticeable’ effect on the economy.
The pound dropped against other currency majors yesterday, registering losses of around -2.0% versus the Aussie dollar at some points during trading. The Aussie also made advances against the US dollar (around +0.6%), the Japanese Yen (around +0.5%), the New Zealand dollar (around +0.2%), and the Japanese Yen (around +0.2%).
However, Friday brought with it news that Australian retail sales came in flat on the month. Retailers found shoppers subdued in September, with sales coming in at 0.0%, despite analysts expecting a rise to 0.4%. Annual retail sales are trailing along at 1.4% – the slowest pace of growth since the Global Financial Crisis (GFC).
Wetpac economists Matthew Hassan commented: ‘The picture from the report is an unambiguously bad one for retailers who are cutting prices but finding no tracton with volumes. The picture is not quite as bad for consumers who get some advantage from lower prices and do not look to be cutting back on consumption quite as sharply as feared.’
The pound to euro (GBP/EUR) exchange rate is currently trending in the region of 1.1201. The pound to Australian dollar (GBP/AUD) exchange rate resides around 1.7037.
LONDON (Reuters) – The Bank of England looks set to step into the unknown on Thursday, when it is expected to raise interest rates for the first time since 2007 at a time when growth appears weaker than before any other rate rise of the past 20 years.
Having cut rates to a record low 0.25 percent in August 2016 after Britons voted to leave the European Union, the Bank is now correcting course and falling in line with the U.S. Federal Reserve and the European Central Bank, which are either raising rates or scaling back stimulus.
Whereas the United States and the euro zone are enjoying robust growth, however, Britain’s economy has grown at its slowest pace in more than four years over the past 12 months.
Quarterly growth of 0.4 percent offers the weakest backdrop to any rate rise since the Bank became independent in 1997.
True, inflation is at a five-year high of 3.0 percent, a full percentage point above the Bank’s target, but that is mainly because the pound is an average 11 percent weaker against the currencies of Britain’s main trading partners since the Brexit vote.
The Bank has often overlooked past spikes in inflation if they were caused by currency fluctuations that were deemed to be temporary.
Inflation is set to fall this time too, but only slowly, as the Bank judges domestic inflation pressures are pending.
Partly due to stagnant productivity since the 2008 financial crisis – and partly due to concerns about the effect of Brexit on immigration, trade and investment – BoE Governor Mark Carney thinks the economy cannot grow as fast as it has in the past without generating excess inflation.
“We’re in a new paradigm,” says George Buckley, an economist at Nomura who was one of the first to sense a change at the central bank earlier this year, when most economists were saying they did not expect rates to rise until 2019.
Raising rates now would be the biggest call on monetary policy Carney has made as governor, and may shape his legacy.
Carney has faced criticism from economists who say his past guidance on monetary policy has been unhelpful, and from Brexit supporters who say he is too focused on the risks of leaving the EU. But until recently his broad approach to interest rates has been fairly uncontroversial.
For most BoE watchers, the likelihood of a rate rise only became clear in September, when minutes of the nine-member Monetary Policy Committee’s meeting that month showed underlying price pressures were no longer a minority concern.
Two policymakers voted for a rate rise, and a majority of the others said they expected to do so “over the coming months”.
RAISING RATES “MAD”
Almost all economists polled by Reuters last week expect the Bank to raise interest rates to 0.5 percent from 0.25 percent on Thursday. Most do not expect another one next year and 70 percent said even one rate rise would be a mistake. The latter view is common in markets, too.
“Personally, I think it would be mad,” Jim McCaughan, chief executive of Principal Global Investors, which manages $430 billion of assets, told Reuters earlier this month.
“You’d be tightening at a time of economic softness to defend against a weakness in sterling that you need (to boost exports).”
The Bank says its policy decisions are not driven by exchange rates. When Carney gives his news conference at 1230 GMT on Thursday, he is likely to focus on a 42-year low in unemployment and how it heralds more upward pressure on wages and inflation.
The Bank has been here before, however. Unemployment has repeatedly fallen further than the BoE forecast in recent years, while wage growth has remained stubbornly around 2 percent, half the 4 percent rate associated with pre-crisis rate rises.
Investors will be keen to glean what is meant in practise by the Bank’s long-standing stated expectation that it will only raise rates “at a gradual pace and to a limited extent”.
Markets have priced in an almost 90 percent chance of a rate rise on Thursday, but then expect the Bank to wait until late 2018 before raising again, Nomura’s Buckley said.
He said that was probably too long for the BoE’s tastes. On the other hand, however, Carney will not want to box himself in or lead the wider public to believe he plans to return rates to their pre-crisis level of around 5 percent.
Economists do not expect one or two rate rises will hurt growth much unless businesses or the public think many more will come and curb spending as a result.
BoE forecasts showing inflation is still expected to exceed its target even after three years might be the clearest sign that the Bank thinks faster rate rises are needed, Buckley said.
Either way, the stakes are high both for the Bank and its governor, who has said he will step down at the end of June 2019.
“If he presides over a tightening of monetary policy and it slows down the economy, that’s what he will be remembered for,” McCaughan said.
Markets have a tendency to panic when central banks threaten to raise interest rates. In 2014, the US Federal Reserve and its then boss, Ben Bernanke, senttraders across the world into a spin when he merely hinted that the era of almost zero rates might be ending.
It’s been a decade since the Bank of England last increased the cost of borrowing, so it is no surprise that this week’s vote by the monetary policy committee, which Threadneedle Street has sketched out as a good moment for a rise, is being closely watched.
Nine committee members hold the key to unlocking 10 years of ultra-low rates – with five drawn from the Bank’s payroll and four external members from industry and the City. The latter serve a three-year stint, which is often extended to six years.
Bank of England governor Mark Carney is among many on the MPC to have hinted that 2 November will be the day the Bank should at least reverse its emergency 0.25% set in August 2016, which was designed to ensure that the economy did not take a dive in the wake of the Brexit vote. And having listened to one carefully coded hint after another in recent months from what is clearly a majority of members, markets have judged that an increase is now almost nailed on – with a 90% probability.
However, the case for a rate rise, as Carney and his colleagues always stress, is finely balanced and could go either way once they have sieved through all the economic data. Here we consider the arguments for raising them versus the reasons to hold steady.
The case for higher rates
The Bank of England was set two targets when it was reconstituted by Gordon Brown in the late 1990s and granted the power to set interest rates independently: to maintain inflation at around 2% and to make sure that monetary policy kept the economy’s wheels turning.
In the past 10 years these have proved to be conflicting aims, because to raise rates has been seen as an almost certain way to kill off growth. That wouldn’t be the case in more normal times, but in the aftermath of the banking crash, with lenders initially strapped for funds and regulators concerned to keep the financial sector on a tight rein, low interest rates were seen as the only way to keep money flowing around the economy. And that is especially true when so much household spending is based on borrowed money.
So the second concern – to keep GDP expanding – has won out over the imperative to maintain inflation steady at 2%, and inflation has been allowed to soar to 5% – as it did in 2012, when the Bank sat firmly on its hands and did nothing.
Forecasts for inflation don’t show it going back to 2012 levels, but with a rate of 3% recorded in September and predictions of rises for at least the next couple of months, the Bank must consider increasing the cost of borrowing to reduce the demand for goods and services, and calm price rises.
Further price increases could already be in the pipeline, according to some MPC members, following the fall in unemployment to 4.3% in the three months to August. As Howard Archer, chief economic adviser to the EY Item Club, says, the joblessness rate is at its lowest since 1975 and well below the 4.5% equilibrium rate the Bank believes determines full employment and is the trigger for higher wages. With more money in their pockets, workers could be tempted to borrow and spend even more, adding to the pressure on prices.
It’s not just jobs: the economy has held up much better than most forecasters, including the Bank, predicted following the Brexit vote. It has grown throughout the year – when many thought it could fall into recession – after three previous years of growth. If the Bank won’t raise rates against this backdrop, then when?
Some economists also believe the bank should take the opportunity to raise rates now because it may need to cut them again the future. At 0.25%, the bank has no real leeway for a cut that would act as a stimulus. By raising rates – maybe once, maybe more – Threadneedle Street starts to rebuild its ammunition for use in a crisis.
And then there is the question of pride. This is a huge factor after months during which the Bank has prepared the ground for a rate rise. As Archer says: “If it fails again to follow through with a rate hike, it will risk losing credibility.”
It would also probably prompt a fall in the pound – which would stoke inflation even further.
Carney’s reputation as a modern-day Grand Old Duke of York is under particular scrutiny. He has used speeches and reports in the past to tell businesses and households that higher borrowing costs are imminent – only to retreat back down the mountain. It could be that his influence will wane should he refuse to make good on yet another threat.
The case for the status quo
The economy may have grown for almost four straight years, but the rate of growth has declined since its initial burst in late 2013 and is now the lowest of all major economies. Next year, the OECD says Italy and Japan, often derided as the zombie economies of the developed world, will grow faster than the UK.
Last week the Office for National Statistics said Britain grew by 0.4% in the third quarter of the year, compared with 0.3% in the first two quarters.
The MPC’s newest recruit, Sir David Ramsden, formerly the Treasury’s chief economic adviser, said in his confirmation hearing that given rates of growth almost half what they were in 2015, the economy was too weak to withstand higher borrowing costs.
With the government seeking to cut back on borrowing, and large corporations hoarding enough cash to avoid the need to borrow, driving up the cost of loans to consumers and small businesses could push the economy further towards zero growth.
Brexit is another reason to err on the side of caution and keep rates where they are. Consumers have already become more circumspect with their spending. High street surveys show consumers keeping their wallets shut unless there is a good reason to open them. The CBI’s latest figures showed the steepest fall in retail spending since the depths of the post-banking crisis recession in 2009. High street bellwethers John Lewis and Debenhams have both warned of challenging trading. Car sales have already plummeted, as have sales of furniture. According to the Halifax, confidence in the housing market is at a five-year low.
Chris Williamson of economics consultancy IHS Insight says the “slow erosion of growth” may continue. He points out that across all sectors of the economy, inflows of new business in September were at their lowest for 13 months, suggesting that demand for goods and services “has waned again”.
Business optimism is weak, he adds, which is another indication that businesses are about to suffer a further drop in activity and that the economy will slow “towards stagnation at best”.
Archer of the EY Item Club believes inflation is set to fall back markedly from around the turn of the year as the impact of past sharp falls in sterling fade. The weak pound has seen many businesses suffering a large rise in import costs, which a number have absorbed through lower profit margins and passed on to workers through sub-inflation wage rises. Nevertheless, prices have crept up. Without further falls in sterling, prices will stabilise on their own. An interest rate rise in this situation could make a bad situation worse.
It’s a danger Ramsden has been explicit about wanting to avoid. But pushing an already struggling economy, dogged by Brexit-related uncertainty, towards recession is not something any MPC member will want to be remembered for.
Bank of England Governor Mark Carney is now expected to vote for a rate rise. Photograph: Andy Rain/EPA
Where the MPC stands
Gertjan Vlieghe External member
A former hedge fund economist, Vlieghe, an external member of the MPC, said in August: “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late.” Last month he said the mood was changing: “The appropriate time for a rise in bank rate may be as early as in the coming months.” How hawkish? 8/10
Silvana Tenreyro External member
A former professor at the London School of Economics, Tenreyro is a new appointee. At her first public engagement last month, she said: “We are approaching a tipping point when we will need to reduce some of that stimulus.” She added that unemployment still needed to be lower: “A premature increase might be very contractionary, so a mistake there might be very costly.” How hawkish? 6
Michael Saunders External member
Former Citibank economist Saunders voted for a rise in September, to dampen looming price pressures. In August he said: “Our foot no longer needs to be quite so firmly on the accelerator in my view. A modest rise in rates would help ensure a sustainable return of inflation to target.” How hawkish? 10
Ian McCafferty External member
The former chief economic adviser at the CBI voted in July to raise the base rate from 0.25% to 0.5%. He has voted for a rise ever since, arguing that the “pick-up in inflation is not something we can just ignore”, especially when the “healthy performance of businesses in the past year shows the UK economy could cope with higher interest rates”. How hawkish? 10
Andrew Haldane Chief economist
Haldane was once a fervent supporter of low interest rates, but in the summer hinted that he was more inclined to start pushing them higher. In June, he said a partial withdrawal of the emergency post-Brexit package of an interest rate cutand an extra £60bn of quantitative easing “would be prudent relatively soon”. How hawkish? 6
David Ramsden Deputy governor
In charge of markets and banking, the former Treasury economist says slowing growth and declining real wages mean now is not the time for a rate rise. He said last month: “Despite continued robust growth in employment, there is no sign of second-round effects [demands for higher pay] on to wages from higher recent inflation.” How hawkish? 2
Jon Cunliffe Deputy governor
In charge of financial stability at the Bank, Cunliffe is one of the committee’s most risk- averse members. Last month he told the Western Mail that the UK economy had “clearly slowed”, and that any rate rises would be gradual. As he put it: “The exact timing of when that starts? Well, that for me is a more open question.” How hawkish? 4
Ben Broadbent Deputy governor
Responsible for monetary policy, Broadbent is a close confidant of Carney and keeps his cards close to his chest. In July he stressed the weakness of the economic outlook, saying: “It is a bit tricky at the moment to make a decision [to raise rates]. I am not ready to do it yet.” How hawkish? 6
Mark Carney Governor
Carney is expected to vote for a rise after saying in September that the “possibility has definitely increased”. To give a little more context to his decision, he said: “The majority of committee members, myself included, see that that balancing act is beginning to shift, and that … to return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates.” How hawkish? 6
IN A meeting room on a cold autumn day, the governor of the Bank of England settled into a witness chair to give evidence to a group of MPs. Worries were mounting about the economy. GDP growth was slowing and households were highly indebted. Nonetheless the Bank of England began raising interest rates. The governor told everyone to relax. Concerns about a “Christmas debt crisis” caused by higher rates were overblown, he said: “People have exaggerated the vulnerability of the economy to likely changes in policy.”
That was in 2003, when Mervyn King was the bank’s governor. For the first time since then, and under a different boss, Mark Carney, the bank is expected to start raising interest rates once again, after a long period of inactivity (see chart). Inflation is 3%, well above the bank’s 2% target. GDP grew by 0.4% in the third quarter, above expectations. As in the early 2000s, members of the bank’s monetary-policy committee (MPC) are coming round to the view that tighter monetary policy will have a benign effect on the economy. Are they right?
By raising or cutting the benchmark interest rate, the MPC influences the rate at which high-street banks can borrow—and, in turn, the borrowing costs faced by households and firms. In the post-war period it averaged around 6%. Yet during the crisis of 2008-09 the bank slashed it to stimulate the economy. It was cut again after last year’s Brexit referendum, to 0.25%, the lowest on record. Most economists believe that on November 2nd the MPC will change direction and raise it to 0.5%.
The reaction of the economy as a whole to tighter policy will be largely shaped by how households respond. Their spending accounts for some 60% of GDP. At first glance, Britain’s households look prepared for what is to come. True, the stock of household debt (mortgages plus consumer credit) is nearing 140% of income, which is high by historical standards. Higher interest rates would result in higher payments for those with debts. They would have less money left over for everyday expenses.
However, many Britons would also earn more interest on their savings, which are worth around 120% of income. That would give them more spending power. A rise of 0.25 percentage points in the base rate, passed on fully to savers and borrowers, would cost less than 0.1% of incomes. No big deal.
Yet such a calculation understates the probable impact of higher interest rates. For one thing, the circumstances are unusual. The bank’s “inflation-attitudes survey” suggests that when it has tightened monetary policy in the past, the public has inferred that further rises are on the way. The bank has tried before, and failed, to forestall such a reaction. The last time the MPC raised rates, it stressed that “no immediate judgment was being made about the future path of rates.” No matter: subsequently, a big majority of the population thought that further rises were likely.
The public’s reaction is especially hard to predict this time around. Interest rates used to go up and down frequently. Today, after a decade with no rate rise, many adults are familiar only with the Bank of England cutting the cost of borrowing. If people start to worry that their incomes will be squeezed more tightly still in the coming months, then consumer confidence and spending could fall by more than the MPC expects.
The effects of higher interest rates will also be unevenly felt across households. Some have plenty of savings, others have big debts. Few have both. Data on the distribution of assets and liabilities are poor. What evidence there is, however, makes for uncomfortable reading.
One worry concerns those who would benefit from higher interest on their savings. Income-bearing financial assets are unequally distributed. Such inequality also runs along generational lines. What will the wealthy do with the extra income from their savings? People with large pots are by definition squirrellers, not splurgers. Retirees have a recent additional incentive to save any windfall. The inheritance-tax regime is becoming increasingly generous: by 2020 a couple will be able to leave £1m ($1.3m) tax-free to their children, if it includes their house, up from £650,000 last year. All this suggests that the boost to savings from higher interest rates is unlikely to translate into much extra spending.
Owe dear
On the other side of the equation, households with heavy debts may struggle with higher rates. Britain’s pile of mortgage debt is concentrated among far fewer households than it was a decade ago. Prospective buyers have to stretch to get a foot on the housing ladder. Since 2012 the average mortgage for a first-time buyer has equalled 3.4 times their income, up from 2.6 times at the turn of the millennium.
Many have locked in low rates on these mortgages with fixed-rate products. Such deals typically last for between two and five years, however, not the 30 years that is common in America. And of all outstanding mortgages, roughly 40% are on variable rates. Our analysis suggests that, because mortgages have become so hefty, a given interest-rate rise would ultimately result in a bigger squeeze on recent homebuyers’ income than at any other time on record.
Poorer Britons could also suffer. Lately the rate of personal insolvencies has risen, in part because of tough welfare policy and falling real household incomes. Those whose incomes have been squeezed often rely on short-term loans to tide them over. If the cost of repayment rises, more might struggle. Indeed, a survey in the bank’s latest inflation report found that, after a hypothetical decline in real incomes, “households who would reduce real spending the most tended to have fewer savings and be more concerned about their debt.”
Whatever happens next week, rates will remain low, meaning that monetary policy will continue to favour borrowers over savers. But in shifting the balance, the bank must tread carefully. It has signalled that interest rates will rise only at a snail’s pace—perhaps 0.25 percentage points every year. A more rapid increase could prove to be an unwelcome jolt.
Friday’s boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.
The Pound rose strongly throughout the morning session Friday as October’s European Council summit looked set to conclude on a positive note.
Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.
“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”
Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.
PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.
“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”
Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.
The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.
Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.
The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.
Consumer and Credit Outlook Clouds Further
On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.
Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.
However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.
“UK household debt levels are high and still growing,” says Annabel Schaafsma, head of Moody‘s EMEA consumer surveillance team. “As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.”
Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.
“Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals,” says Schaafsma.
Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators.
However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.
“Moody’s expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.
Bank of England Credit Survey Points To Tighter Supply
Thursday’s Moody’s report came barely a week after Bank of Englanddata showed default rates on credit cards and other types of unsecured loans rose during the third quarter.
Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.
But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.
“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”
LONDON (Reuters) – Growth across Britain’s private sector cooled slightly in the three months to September, an industry survey showed on Sunday, although companies were mostly upbeat about their prospects for the next three months.
The Confederation of British Industry’s monthly indicator of output for manufacturers, retailers and services companies slipped to +11, down from +14 for the three months to August.
“Growth in the economy has held steady through the summer, although at a slightly slower pace than expected by many firms,” CBI chief economist Rain Newton-Smith said.
The expansion eased in factories and fizzled out in business and professional services firms, the CBI said. Distribution was the only sector to experience faster growth, following a strong performance from retailers.
Despite the mixed readings, overall output expectations for the next three months edged up to +18, up two points from August.
The CBI survey is unlikely to sway Bank of England rate-setters who have said interest rates are likely to rise soon, as long as the economy continues growing and prices keep rising.
Last week the Office for National Statistics said Britain’s economy expanded at its slowest annual pace since 2013 in the 12 months following last year’s Brexit vote.
A majority of economists polled by Reuters last week expect the BoE will hike rates in November, though most of them also thought it would be a mistake to increase them now from a record low 0.25 percent.
