Bank of England Inflation report and what it means for Interest Rates

by Neil Patterson

11:41 AM, 15th November 2013
About 5 years ago

Bank of England Inflation report and what it means for Interest Rates

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Bank of England Inflation report and what it means for Interest Rates

dont panicUnlike the press DON’T PANIC, the economic news is good but not that good in the Bank of England Inflation report.

Reports of imminent Bank Base Rate rises next year are wildly exaggerated and unhelpful to the economy. We had one piece of good news on unemployment and the FTSE 100 took a tumble.

Let’s just start with the facts as CPI inflation is now down to 2.2% from 2.9% in June. This means we are much closer to the medium term targeted inflation than we have been since December 2009. The disclaimer in my previous article about the ONS CPI inflation data was that it did not include the recent energy price increases. However, I have since found out that these increases are actually smaller than at the same time last year so should have no effect on year on year figures.

If you strip out four of the big contributors to inflation: Education, Food, Fuels and Lubricants, Electricity, Gas and other Fuels     you will see that the Core underlying inflation is actually below target at about 1.4%. See table below

Bank of England inflation report

Unfortunately it has been a consumption lead recovery in the UK rather than production as we are sucking in exports from Europe quicker than we are able to expand our export trade to places like China. Hence we are running a trade deficit and not expecting a robust recovery like in the USA, because our increase in export trade has not been dynamic enough.

This can be seen in where the recovery is happening in house prices. London which is lead by the service industry and consumption has had house prices rising by 10% where the National average is 4.3%. The North where manufacturing industry has traditionally been based is seeing little or no increase in house prices dependent on the area.

The figures that got the press in a spin was the decrease in unemployment rates, because the Bank of England had indicated that it would only look at raising the interest rate if unemployment dropped below 7%. However even if it was below 7% now the recovery is not robust enough to even consider raising rates and it is expected that there will only be a 60% chance of unemployment dropping below 7% by the end of 2015. see chart to the right and below:

BofE unemploymet chart

The productivity gap where we were seeing an increase in private employment, but a much lower level of increase in output has now started to close which is good news, but to really see a long term sustainable robust recovery it is business investment that needs to increase so we can compete with emerging low cost markets.

The current figures do not show that corporate investment is increasing, but it does appear that this is changing and may be reflected in future data. Companies may be using their current reserves before seeking borrowing to invest in productivity

The GDP figures shown in the chart below are predicted to improve with growth at about 2 -2.5% per year, but this is within target for GDP without putting pressure on inflation levels or interest rates.

BofE GDP

Predicted future inflation rates inflation rates by  the Bank of England are pretty much spot on the targeted 2% level as seen below

BofE inflation

 

 

 

 

 

 

Overall the UK economy is in a much healthier position than it was a year ago, but stagnation in our main trading partners in Europe and lack of corporate investment and exports means we have little to worry about at the moment concerning an imminent boom and a need to increase interest rates before the end of 2015 or beyond on current projected figures.



Comments

Gary Nock

13:47 PM, 15th November 2013
About 5 years ago

Neil a very concise and reassuring piece from you here. I have to say the press seem hell bent on throwing us back into recession. What do people do if they know interest rates are going up? Tighten their belts, cut down on consumer spending, stop buying houses, cars etc. And then they report that growth has slowed, unemployment is up, recession is nigh. Do they not realise that in their rush to sell newspapers by sensationalising every headline that they are becoming part of a self fulfilling prophecy?

Jan Martin

14:14 PM, 15th November 2013
About 5 years ago

Sounds good to me thanks for that.

Mark Alexander

14:21 PM, 15th November 2013
About 5 years ago

Reply to the comment left by "Jan Martin" at "15/11/2013 - 14:14":

I will be happy to settle for a 0.5% base rate until 2015 too, especially if we also get some capital appreciation in the meantime. I hope the press are right about the Help to Buy scheme pushing up prices but I'm not sure the scheme will be as popular as some people think. My only worry about Help to Buy is that if it is popular the best tenants may become owner occupiers.

Adam Alexander

14:23 PM, 15th November 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "15/11/2013 - 14:21":

We also think Help to Buy could have an adverse effect on the pool of quality tenants. The answer to this will be quality referencing, improved marketing and underwriting of the risks of taking on bad payers. See our guide linked below.
.

Neil Patterson

14:30 PM, 15th November 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "15/11/2013 - 14:21":

Yes Help to Buy will have some influence on the housing market, but it is not an big percentage of total deals. It is also a short term manipulation that is interfering with real market forces and what we really need is Lenders entering with more products using their own finance to sustain long term growth.

Alan Loughlin

10:35 AM, 16th November 2013
About 5 years ago

Reply to the comment left by "Gary Nock" at "15/11/2013 - 13:47":

good point, this is why I stopped buying newspapers, suggest others do the same.

Alan Loughlin

10:40 AM, 16th November 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "15/11/2013 - 14:21":

the headlines make it look like house prices are rising fast and are at their highest levels ever, all untrue, they have not even got back to where they were before the recession, we need a sustained period of steady growth in house prices to return confidence to the market, and a very long period of ultra low interest rates to stimulate building, this we need not just for the houses, but for the economy in general

Alan Loughlin

10:43 AM, 16th November 2013
About 5 years ago

Reply to the comment left by "Gary Nock" at "15/11/2013 - 13:47":

well put Gary.

Neil Patterson

16:28 PM, 16th November 2013
About 5 years ago

Reply to the comment left by "Alan Loughlin" at "16/11/2013 - 10:40":

Hi Alan,

I totally agree on the assistance needed for the building industry.

The largest single contributing sector to the recession in terms of falling GDP was the construction industry.

This industry has seen a recent 1% growth but considering one year it fell by 19% I would not get too excited!

Neil Patterson

16:36 PM, 16th November 2013
About 5 years ago

Reply to the comment left by "Gary Nock" at "15/11/2013 - 13:47":

Thank you very much Gary,

It makes me so angry when I see articles in the press written by people with obviously no balanced understanding on the nature of how an economy works and with little to no research carried out.

No one factor is ever completely good or bad. The economy is like a living breathing eco system that balances out stimuli like ying and yang. If you change one thing it always effects many others.

Sorry rant over


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