Halo Financial are closed from 17:00 - 17:30.
We will be closing the office at 17:00 today, opening again at 08:30 on Friday morning. 
We use cookies on this site to improve your experience and help us provide you with a better website. An explanation of the cookies we use and their purpose can be found within our Cookie Policy. Your continued use of this site means you consent to the use of cookies.
Hide

August

Pound stutters despite UK interest rate increasing to 0.75%

Published: Thursday 02 August 2018

The Bank of England (BoE) has raised interest rates by 0.25% to 0.75%, initially sending the Pound rising against major currency partners before falling back.

Highest rate since March 2009

The increase announced today (Thursday 2nd August) was only the second since the global financial crash and is the highest rate since March 2009.

Rates set to rise gradually

BoE governor, Mark Carney, says that if the economy continues to perform as expected, rates are likely to rise gradually.

“If the economy continues to perform as we currently expect, it will probably be growing about as fast as it can without overheating."

“In that case, we think we would need to raise interest rates further, reducing the amount of support we are providing to the economy. But we expect those increases to be gradual. And interest rates will probably need to stay lower than the 4-5% they used to be for some time to come. That’s primarily because there have been some big structural shifts in the global economy that are likely to persist.”

Pound rises then falls

On the news, GBP rose from 1.307 to 1.311 against the US Dollar in typical mid-market rates, before falling to around 1.302. It was a similar pattern against the Euro, where it first rose to from 1.125 to 1.128 before dropping to 1.121.

Mixed results for Sterling so far...

Halo Financial’s Founding Director, David Johnson, says, “The rate hike was widely expected and although the initial decision was welcomed by the markets, it seems the talk of gradual rate rises over time has produced mixed results for Sterling so far.”

Unanimous decision

The unanimous decision by the Bank of England’s Monetary Policy Committee came despite increasing worries about the lack of progress over Brexit.

Stable inflation vital

The Bank of England aims to set interest rates that will influence the amount of spending in the economy so inflation returns to its 2% target.

“The reason we focus on low and stable inflation is that it is vital for a stable economy that supports growth and jobs.

“If we set interest rates too low, then the economy will run too hot, and inflation will stay above our target. But if we set interest rates too high or raise them too rapidly then the economy will be too weak, and inflation will fall below our target.”

Times are changing

During the financial crisis, people reined in their spending and many lost their jobs, the report explains.

“We had to cut interest rates to exceptionally low levels to support spending and jobs. Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis. But things have been changing.”

Last November, the Bank Rate rose from 0.25% to 0.5% and now it has been raised again.

Economy growing as fast as it can...in the circumstances?

The bank concludes, “A rise in interest rates might seem like a bad thing, especially if you have a lot of debt.  But it would be a sign of an economy growing about as fast as it can, and one that is able to support higher wages. And small increases in interest rates now can avoid the need for bigger ones later.”

The Bank of England believes the UK economy is probably growing about as fast as it can without overheating. That level is around 1.5%. The bank has predicted UK growth at 1.4% in 2018 and 1.8% in 2019.

Growth in Quarter 1 2018 was 0.2%, but it is estimated to have recovered to 0.4% in Quarter 2.

“A few years ago many people were out of work and looking for jobs. So there was scope for the economy to grow quite quickly as a lot of those people found work.

“Now, with a record number of people in work and businesses finding it hard to recruit people, there isn't much more economic growth that can come simply from unemployed people finding work.”

UK economy growing as fast as it can

The Bank of England believes the UK economy is probably growing about as fast as it can without overheating. That level is around 1.5%. The bank has predicted UK growth at 1.4% in 2018 and 1.8% in 2019.

Growth in Quarter 1 2018 was 0.2%, but it is estimated to have recovered to 0.4% in Quarter 2.

“A few years ago many people were out of work and looking for jobs. So there was scope for the economy to grow quite quickly as a lot of those people found work."

“Now, with a record number of people in work and businesses finding it hard to recruit people, there isn't much more economic growth that can come simply from unemployed people finding work.

Young man working in the furniture factory - Halo Financial

Inflation rise due to GBP weakness after Brexit

The rise in inflation has mainly been due to the big fall in the Pound following the Brexit vote, according to the Bank of England’s August inflation report.

“CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of Sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year."

“The lower Pound has meant that things businesses get from abroad cost more. Businesses have been passing those rising costs on to their customers. So that has meant higher prices in the shops. Most of the increase in prices due to the fall in the Pound has now happened though.”

Sterling down 2.5% in three months

In the last three months, Sterling’s Exchange Rate Index has dropped 2.5% lower and is 17% below its late-2015 peak.

“Market contacts suggest that Sterling has remained sensitive to shifts in perceptions of the UK’s future trading relationships following Brexit and their implications for the economy.”

Oil prices rising

The price of oil on world markets has also risen over the past year, pushing up prices for petrol at the pumps. That contribute to inflation picking up.

“Although spot oil prices are broadly unchanged in dollar terms since the May Report, they are around 55% higher than a year ago. That rise in prices largely reflects subdued oil supply, which has been broadly flat since 2016, despite continued oil demand growth. As a result, in 2018 Q1, oil inventories in the US fell to their lowest level since 2015. The rise in oil prices is projected to push up world export price inflation in the near term. “

Young man working in the furniture factory - Halo Financial

Pay rising faster than prices

Average UK wages have started rising faster than inflation, and that growth in disposable income eases the squeeze on people's living standards.

“That squeeze should ease further over the next few years. The share of people out of work is at its lowest level for more than 40 years and there are a lot of job vacancies. This means that companies need to compete hard with each other to recruit and retain workers. One way they do that is by offering higher pay." 

Higher pay and benefits carry a cost to the companies. “The pressure in the jobs market means we're expecting to see bigger, more widespread pay rises in coming years. That greater spending power should support growth in the economy.”

World economy growth relatively robust

Despite fears of trade wars, the world economy is also growing relatively robustly, although it slowed a bit at the beginning of the year, says the bank.

“Growth abroad benefits the UK by increasing demand for our exports . And it should encourage companies to invest to meet this extra demand."

“We thought the dip in UK growth earlier in the year was probably temporary, but we couldn’t be sure until we saw what happened next. The latest data suggest that growth has recovered since then and that the dip was mostly due to the bad weather,” added the Bank of England statement.

The report says, “Although growth in the US was stronger than expected, activity was somewhat weaker elsewhere. Indicators suggest that the outlook for global growth has moderated slightly, though remains relatively robust. There are signs of slowing in manufacturing and export-focused sectors. Consistent with that, growth in global trade and capital goods orders have also declined. Most indicators of activity, however, remain above past averages. Global demand growth is expected to remain at a little under three-quarters of one per cent on a UK trade-weighted basis in Q3, continuing to outstrip potential supply growth.”

Uncertainty over trade tariffs

Uncertainty around tariffs and the resulting impact on trade has led to falls in some equity indices, particularly in emerging markets. Some non-oil commodity prices have also fallen, particularly for metals, which market contacts report reflected concern around the effect of higher trade tariffs on demand. “However, that uncertainty has not yet been reflected in indicators of consumer and business confidence which, on the whole, have remained relatively robust in the euro area and US,” says the bank.

Tighter financial conditions may dampen growth

Tighter financial conditions are likely to dampen growth, as are greater barriers to trade. “The direct impact of the higher tariffs that have been implemented or proposed on bilateral trade between the US and China and any associated reciprocal measures, as well as wider aluminium and steel tariffs, will weigh somewhat on activity in those countries in coming quarters, and elsewhere to a modest extent. Moreover, the prospect of a further escalation in trade protectionism — particularly if business and consumer confidence and financial conditions were to deteriorate materially — could weigh further on the global outlook.”

Overall, global growth is expected to remain relatively robust over the next year, gradually pushing up inflation. That pace of growth, however, is a little slower than projected at the time of the May Report, reflecting slightly tighter financial conditions and some direct effects from higher trade tariffs.

Higher productivity needed

Instead, it will mostly need to come from higher productivity, it says. But productivity has barely risen over the past decade.

“The Monetary Policy Committee (MPC) continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.”

As well as the interest rate decision, the MPC also voted unanimously to maintain the stock of Sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. It also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

Get in touch to find out how the interest rate increase may affect you or your business.

Back to the Top
Keep up to date with currency markets