13:19 PM, 18th May 2012, About 12 years ago
“When is the Bank of England base rate going up?” is the most frequent question I am asked by property investors. Not this year or next is how I assess the latest figures from the May Bank of England inflation report.
Below are some of the key factors affecting the UK and Euro-zone along with a full copy of the Bank of England report.
CPI inflation still remains above target at 3.5% and is about 6 months behind predicted falls. This is because the devaluation of Sterling and commodity prices had a quicker effect on the domestic price of goods and services than at first thought.
However pay rate inflation, which is of more long term concern, remains low at less than 2% meaning the UK is being realistic about the current outlook.
Household consumption has fallen in the last 3 years compared to real incomes, this is a first for the UK economy as households increase their savings ratios and pay off debt decreasing potential domestic demand.
Therefore, there appears to be few long term concerns about inflationary pressure and no demand in the foreseeable future to increase interest rates.
Gross domestic product continues to remain static and predictions for next quarter results are likely to keep the UK in a double dip recession as we have no underlying growth and the extra bank holiday is likely to wipe 0.25% off productivity.
The next quarter will include an extra working day that should account for a 0.25% recovery against the previous quarter and extra spending already reported for the Olympics will account for an extra 0.5%. Therefore any result below 0.75% growth for this quarter should effectively be considered as an underlying fall of productivity. Be careful to take this into account when no doubt the popular press will report signs of recovery.
Recovery of GDP to pre-recessionary levels is still not predicted before 2014 as output remains 4% below its pre-crisis peak and this is assuming the Euro crisis is resolved with the current financial package.
With no sight to an end for the turmoil in Europe over the Greek crisis and the continuing lack of confidence over the economies in Spain, Italy and Portugal investors are increasingly placing funds into German 10 year Bonds at a return of 1.5%. This is in spite of the fact that overall EU inflation is 2.5% meaning a year on year decrease in buying power of 1% for these funds. Demand for 10 year UK Bonds at 2% is also still high.
This is seen as a flight to quality by investors who are more concerned about the security of their investment in troubled times than actually making a net return.
The current package of finance made available to Greece by the EU and IMF will not be enough to take into account the Greek government borrowing that was issued on typically shorter terms than the UK and Germany. There will be an extra 600 Billion Euros required by Greece over the coming years to repay these maturing loans and it must be only a matter of time before Germany decide they can no longer pay for a failing economy that cannot cover its loan commitments with productivity.
The good news is that if Greece did leave the EU, and was allowed to rebalance their economy with a new currency and exchange rate UK Banking is not directly over exposed. However, the repercussions for the wider Banking system could be a possible spread of contagion with banks less willing to lend to each other and credit crisis.
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