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UK households face squeeze as Bank of England hikes inflation forecasts – business live UK households face squeeze as Bank of England hikes inflation forecasts – business live
(35 minutes later)
4.20pm GMT
16:20
The rise in the pound following the court ruling on Brexit and the Bank of England keeping interest rates on hold may not be the end of it, says Kathleen Brooks, research director at City Index.
Sterling is currently up 1.25% against the dollar at $1.2450, and incidently, is also stronger against the euro, up 1.24% at €1.1224. Brooks said:
Although global markets remain at the mercy of the outcome of the US election, if Hillary Clinton does manage to win next week, then the pound may continue to outperform the G10. The Court ruling on Article 50 opens the door to a delayed Brexit, which seems a good enough excuse for the foreign exchange market to extend this pound rally further. The increase in the Bank of England’s inflation forecast could also keep upward pressure on UK Gilt yields, which are the building blocks of a stronger pound, in our view.
Overall, US election fears weighing on the dollar, and Brexit fears temporarily receding, could trigger a break above 1.25 in the pound/dollar in the near term. If this happens then we could see the pound/dollar move towards the 1.25-1.30 range between now and the Fed meeting in December.
3.21pm GMT3.21pm GMT
15:2115:21
Back with the Bank of England and its forecast changes, Unicredit Research is now expecting UK interest rates to remain on hold next year.Back with the Bank of England and its forecast changes, Unicredit Research is now expecting UK interest rates to remain on hold next year.
Daniel Vernazza, its lead UK economist, said:Daniel Vernazza, its lead UK economist, said:
The tone of the Inflation Report, MPC minutes and the Governor’s press conference were notably “less dovish” than we had expected. In particular, the MPC said monetary policy could now move in “either direction” to changes to the economic outlook, cancelling its guidance from August that a cut was the most likely next move. As a result, we have now cancelled our expectation for a cut in the bank rate in February next year. We now expect the MPC to remain on hold throughout 2017. So, what’s changed in the last three months?The tone of the Inflation Report, MPC minutes and the Governor’s press conference were notably “less dovish” than we had expected. In particular, the MPC said monetary policy could now move in “either direction” to changes to the economic outlook, cancelling its guidance from August that a cut was the most likely next move. As a result, we have now cancelled our expectation for a cut in the bank rate in February next year. We now expect the MPC to remain on hold throughout 2017. So, what’s changed in the last three months?
First, economic activity has been much stronger than the BoE had expected...Second, the further depreciation of sterling since the beginning of October will push up inflation meaningfully over the forecast period.First, economic activity has been much stronger than the BoE had expected...Second, the further depreciation of sterling since the beginning of October will push up inflation meaningfully over the forecast period.
3.00pm GMT3.00pm GMT
15:0015:00
#ISM non-#manufacturing PMI falls to 54.8 in Oct. #Business activity, new #orders,#employment all cool but. Overall points to 2% #GDP growth pic.twitter.com/4c2uuxgNop#ISM non-#manufacturing PMI falls to 54.8 in Oct. #Business activity, new #orders,#employment all cool but. Overall points to 2% #GDP growth pic.twitter.com/4c2uuxgNop
2.52pm GMT2.52pm GMT
14:5214:52
Skipping across the Atlantic for a moment, and news of a slowdown in US service sector growth, partly due to caution about next week’s election.Skipping across the Atlantic for a moment, and news of a slowdown in US service sector growth, partly due to caution about next week’s election.
The ISM non-manufacturing index fell from 57.1 in September to 54.8 last month, below expectations of a level of 56.The ISM non-manufacturing index fell from 57.1 in September to 54.8 last month, below expectations of a level of 56.
Anthony Nieves, chair of the ISM non-manufacturing survey committee, said:Anthony Nieves, chair of the ISM non-manufacturing survey committee, said:
There has been a slight cooling-off in the non-manufacturing sector month-over-month, indicating that last month’s increases weren’t sustainable. Respondent’s comments remain mostly positive about business conditions and the overall economy. Several comments were made about the uncertainty on the impact of the upcoming U.S. presidential election.There has been a slight cooling-off in the non-manufacturing sector month-over-month, indicating that last month’s increases weren’t sustainable. Respondent’s comments remain mostly positive about business conditions and the overall economy. Several comments were made about the uncertainty on the impact of the upcoming U.S. presidential election.
Meanwhile orders for manufactured goods rose by 0.3% in September, up from 0.4% the previous month, the third straight month of increases.Meanwhile orders for manufactured goods rose by 0.3% in September, up from 0.4% the previous month, the third straight month of increases.
Following the figures the Dow Jones Industrial Average is up 37 points or 0.2%. The dollar is still down against the pound, with sterling at $1.2453, up 1.26% following the High Court Brexit decision and the Bank of England deciding not to cut interest rates again.Following the figures the Dow Jones Industrial Average is up 37 points or 0.2%. The dollar is still down against the pound, with sterling at $1.2453, up 1.26% following the High Court Brexit decision and the Bank of England deciding not to cut interest rates again.
2.37pm GMT2.37pm GMT
14:3714:37
Howard Archer, economist at IHS Markit, is now forecasting UK interest rates to stay at 0.25% for some time. He also expects growth to be slower than the Bank is predicting but inflation to be higher:Howard Archer, economist at IHS Markit, is now forecasting UK interest rates to stay at 0.25% for some time. He also expects growth to be slower than the Bank is predicting but inflation to be higher:
We are dropping our expectation that interest rates will be taken down to a low of 0.10%We are dropping our expectation that interest rates will be taken down to a low of 0.10%
We now believe that it is more likely than not interest rates will stay at 0.25% for a prolonged period (very possibly to 2020). Ahead of the November MPC meeting and Quarterly Inflation Report, we had considered it most likely that interest rates would be taken down to 0.10% but not until the second quarter of 2017 when we expected economic activity to be increasingly pressurised by Brexit uncertainty (following the anticipated triggering of Article 50) and diminishing fundamentals for consumers.We now believe that it is more likely than not interest rates will stay at 0.25% for a prolonged period (very possibly to 2020). Ahead of the November MPC meeting and Quarterly Inflation Report, we had considered it most likely that interest rates would be taken down to 0.10% but not until the second quarter of 2017 when we expected economic activity to be increasingly pressurised by Brexit uncertainty (following the anticipated triggering of Article 50) and diminishing fundamentals for consumers.
We are actually more pessimistic than the Bank of England on growth but see inflation higher. Specifically, we forecast GDP growth to slow from 2.1% in 2016 to 1.1% in 2017, then improve only gradually to 1.3% in 2018 and 1.5% in 2019. We see consumer price inflation moving above3% in late-2017 and peaking around 3.5% around spring 2018.We are actually more pessimistic than the Bank of England on growth but see inflation higher. Specifically, we forecast GDP growth to slow from 2.1% in 2016 to 1.1% in 2017, then improve only gradually to 1.3% in 2018 and 1.5% in 2019. We see consumer price inflation moving above3% in late-2017 and peaking around 3.5% around spring 2018.
It is also notable that Mr. Carney observed that the UK has an outstanding framework for monetary policy, which works well and does not need to be adjusted. This follows recent comments by politicians that could be construed to threaten the Bank of England’s independence as well as some attacks on Mr. Carney and the MPC – particularly on their stance on the risks from Brexit.It is also notable that Mr. Carney observed that the UK has an outstanding framework for monetary policy, which works well and does not need to be adjusted. This follows recent comments by politicians that could be construed to threaten the Bank of England’s independence as well as some attacks on Mr. Carney and the MPC – particularly on their stance on the risks from Brexit.
UpdatedUpdated
at 3.06pm GMTat 3.06pm GMT
2.34pm GMT2.34pm GMT
14:3414:34
The TUC is also worried that households face a severe wage squeeze next year, as the weaker pound drives up inflation.The TUC is also worried that households face a severe wage squeeze next year, as the weaker pound drives up inflation.
TUC General Secretary Frances O’Grady fears Britain can’t afford a second dose of falling real wages (as seems possible, if companies don’t provide inflation-busting pay rises).TUC General Secretary Frances O’Grady fears Britain can’t afford a second dose of falling real wages (as seems possible, if companies don’t provide inflation-busting pay rises).
O’Grady says:O’Grady says:
“The Bank’s warning must spur the government into action so that workers don’t pay the price of Brexit with a squeeze on wages.“The Bank’s warning must spur the government into action so that workers don’t pay the price of Brexit with a squeeze on wages.
“UK workers already suffered the largest fall in real wages after the financial crisis of any developed country except Greece – they can’t afford another hit to their pay packets.“UK workers already suffered the largest fall in real wages after the financial crisis of any developed country except Greece – they can’t afford another hit to their pay packets.
“The Chancellor should use the Autumn Statement to protect jobs and wages, with new investment in infrastructure like roads, rail, green energy and homes. And the national minimum wage must be increased to keep it well ahead of inflation.”“The Chancellor should use the Autumn Statement to protect jobs and wages, with new investment in infrastructure like roads, rail, green energy and homes. And the national minimum wage must be increased to keep it well ahead of inflation.”
And here’s a reminder of the BoE’s new ‘fan chart’, showing how it expects inflation to romp upwards in 2017 and 2018.And here’s a reminder of the BoE’s new ‘fan chart’, showing how it expects inflation to romp upwards in 2017 and 2018.
2.25pm GMT2.25pm GMT
14:2514:25
Ian Kernohan, Economist at Royal London Asset Management, agrees with Mark Carney that households are going to find life tougher next year, as Brexit uncertainty continues to swirl.Ian Kernohan, Economist at Royal London Asset Management, agrees with Mark Carney that households are going to find life tougher next year, as Brexit uncertainty continues to swirl.
He says:He says:
GDP growth is likely to slow next year, on the back of a squeeze in real household incomes and ongoing Brexit uncertainty.”GDP growth is likely to slow next year, on the back of a squeeze in real household incomes and ongoing Brexit uncertainty.”
2.22pm GMT2.22pm GMT
14:2214:22
If you’re just tuning in, here’s Katie Allen’s news story about how UK interest rates were left on hold today:If you’re just tuning in, here’s Katie Allen’s news story about how UK interest rates were left on hold today:
2.17pm GMT2.17pm GMT
14:1714:17
Mark Carney's press conference: six things we learnedMark Carney's press conference: six things we learned
As suspected, Mark Carney faced some robust questioning at today’s Quarterly Inflation report.As suspected, Mark Carney faced some robust questioning at today’s Quarterly Inflation report.
The governor found himself having to defend the Bank’s forecasting powers, after it almost doubled its forecast for 2017 growth (to 1.4%), just three months after slashing it drastically.The governor found himself having to defend the Bank’s forecasting powers, after it almost doubled its forecast for 2017 growth (to 1.4%), just three months after slashing it drastically.
He also repeatedly fended off questions about his own future, and whether he could possibly be lured to stay beyond June 2019. Personally I can’t believe he’d reject the chance for more meetings with the UK economics press pack.He also repeatedly fended off questions about his own future, and whether he could possibly be lured to stay beyond June 2019. Personally I can’t believe he’d reject the chance for more meetings with the UK economics press pack.
But what did we learn?But what did we learn?
1) Life is going to get tougher, especially for poorer families.1) Life is going to get tougher, especially for poorer families.
Carney warned that inflation will take a real bite out of earnings, saying:Carney warned that inflation will take a real bite out of earnings, saying:
We see very modest real income growth over the course of next year and into 2018.”We see very modest real income growth over the course of next year and into 2018.”
That’s because the CPI rate is expected to surge to 2.7% in 2017, and hit 2.8% in 2018 -- which is higher than wage growth today.That’s because the CPI rate is expected to surge to 2.7% in 2017, and hit 2.8% in 2018 -- which is higher than wage growth today.
And he said the Bank is facing a balancing act between allowing inflation to rise over target (driving down real wages) and higher unemployment (which would happen if the Bank tightened monetary policy).And he said the Bank is facing a balancing act between allowing inflation to rise over target (driving down real wages) and higher unemployment (which would happen if the Bank tightened monetary policy).
2) The economy is doing better than the Bank expected....2) The economy is doing better than the Bank expected....
Alongside death and taxes, you can be pretty certain that the Bank of England’s economic forecasts will be tweaked before long.Alongside death and taxes, you can be pretty certain that the Bank of England’s economic forecasts will be tweaked before long.
But still, today’s upward revisions to growth in 2016 and 2017 are quite significant - and show that the BoE was too gloomy about the immediate impact of voting to leave the EU.But still, today’s upward revisions to growth in 2016 and 2017 are quite significant - and show that the BoE was too gloomy about the immediate impact of voting to leave the EU.
Carney painted a picture of serene calm:Carney painted a picture of serene calm:
The MPC had expected consumption to continue to grow solidly throughout the remainder of 2016. But consumption has been even stronger, with households appearing to entirely look through Brexit-related uncertainties.The MPC had expected consumption to continue to grow solidly throughout the remainder of 2016. But consumption has been even stronger, with households appearing to entirely look through Brexit-related uncertainties.
For households, the signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at around the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid.For households, the signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at around the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid.
Indeed, he had to pour cold water on the suggestion that consumers are being stupid by still hitting the high street.Indeed, he had to pour cold water on the suggestion that consumers are being stupid by still hitting the high street.
3)....but there are signs that things are getting worse3)....but there are signs that things are getting worse
The Bank still sees signs that firms are cutting back, as they watch Brexit play out:The Bank still sees signs that firms are cutting back, as they watch Brexit play out:
That uncertainty does bear down on business investment,that effect builds with time, that lower business investment has consequences for employment.That uncertainty does bear down on business investment,that effect builds with time, that lower business investment has consequences for employment.
4) We should get used to Brexit uncertainty4) We should get used to Brexit uncertainty
The governor said that today’s court ruling that MPs must vote on article 50 is simply an example of the drama we should get used to, as Britain leaves the EU.The governor said that today’s court ruling that MPs must vote on article 50 is simply an example of the drama we should get used to, as Britain leaves the EU.
Obviously I am not qualified to comment on the court judgment or the prospects here, but it is an example of the uncertainty that will characterise this process. “The negotiations haven’t even yet begun, there will be uncertainty, there will be volatility around those negotiations as they proceed, and I would view this as one example of that uncertainty.”Obviously I am not qualified to comment on the court judgment or the prospects here, but it is an example of the uncertainty that will characterise this process. “The negotiations haven’t even yet begun, there will be uncertainty, there will be volatility around those negotiations as they proceed, and I would view this as one example of that uncertainty.”
5) The next interest rate move could be up.5) The next interest rate move could be up.
Britain’s primary schools are full of children who weren’t even born when the Bank last raised interest rates (it was July 2007, just before the credit crunch). And a few months ago, many City economists were convinced rates would fall to 0.1% soon.Britain’s primary schools are full of children who weren’t even born when the Bank last raised interest rates (it was July 2007, just before the credit crunch). And a few months ago, many City economists were convinced rates would fall to 0.1% soon.
Not any more, with the BoE dropping its guidance that the next move is probably down.Not any more, with the BoE dropping its guidance that the next move is probably down.
As Carney puts it:As Carney puts it:
You can envisage scenarios where it goes either way. We don’t have a bias in terms of direction of where the next move will be. Again, in a period of a fair bit of uncertainty you can envisage scenarios where either direction would be merited.You can envisage scenarios where it goes either way. We don’t have a bias in terms of direction of where the next move will be. Again, in a period of a fair bit of uncertainty you can envisage scenarios where either direction would be merited.
Make of that what you will....Make of that what you will....
Carney asked if next rate move more likely up or down: "you can envision scenarios where either direction is merited" "could go either way"Carney asked if next rate move more likely up or down: "you can envision scenarios where either direction is merited" "could go either way"
This is basically me deciding between Nandos and Wagamama https://t.co/Ls8WcF6ofCThis is basically me deciding between Nandos and Wagamama https://t.co/Ls8WcF6ofC
6) The Bank of England isn’t at war with Downing Street.6) The Bank of England isn’t at war with Downing Street.
Asked about Theresa May’s criticism of monetary policy, he argued:Asked about Theresa May’s criticism of monetary policy, he argued:
“We don’t feel under any pressure from the government,certainly none from the prime minister.“We don’t feel under any pressure from the government,certainly none from the prime minister.
I think the prime minister fully supports, and the government fully supports, the monetary policy framework we have in place and in that framework we take those decisions.”I think the prime minister fully supports, and the government fully supports, the monetary policy framework we have in place and in that framework we take those decisions.”
And he also indicated he accepted criticism from MPs, as part of the Bank’s accountability. He wouldn’t say whether some critics should take a vow of silence, alas.And he also indicated he accepted criticism from MPs, as part of the Bank’s accountability. He wouldn’t say whether some critics should take a vow of silence, alas.
UpdatedUpdated
at 2.40pm GMTat 2.40pm GMT
1.30pm GMT1.30pm GMT
13:3013:30
A final question.... is there an inflation level that would force the Bank to take action?A final question.... is there an inflation level that would force the Bank to take action?
Carney won’t be lured into setting a figure -- perhaps burned by his previous experience of forward guidance.Carney won’t be lured into setting a figure -- perhaps burned by his previous experience of forward guidance.
It all depends what is causing prices to rise over target, and what the best response is.It all depends what is causing prices to rise over target, and what the best response is.
Carney: Won't give a numerical limit we will tolerate on inflation. Any limit is a product of what's causing inflation overshoot.Carney: Won't give a numerical limit we will tolerate on inflation. Any limit is a product of what's causing inflation overshoot.
#Carney refuses to give a figure which is a beyond tolerable level of inflation; says it depends on what reasons behind the overshoot are#Carney refuses to give a figure which is a beyond tolerable level of inflation; says it depends on what reasons behind the overshoot are
1.26pm GMT1.26pm GMT
13:2613:26
Carney: Consumers aren't being stupidCarney: Consumers aren't being stupid
Q: Are consumers being short-sighted and stupid by still spending, and not realising how difficult things are going to get?Q: Are consumers being short-sighted and stupid by still spending, and not realising how difficult things are going to get?
Not at all - people still have jobs, and are behaving rationally, Mark Carney replies.Not at all - people still have jobs, and are behaving rationally, Mark Carney replies.
1.24pm GMT1.24pm GMT
13:2413:24
Carney: “We don’t feel under any political pressure from the govt. PM & govt fully support monetary policy framework we have in place.”Carney: “We don’t feel under any political pressure from the govt. PM & govt fully support monetary policy framework we have in place.”
1.21pm GMT1.21pm GMT
13:2113:21
Carney: I've got Theresa May's full supportCarney: I've got Theresa May's full support
Carney is then asked whether Theresa May’s recent criticism of the Bank’s monetary policy, at the Tory party conference, has undermined him.Carney is then asked whether Theresa May’s recent criticism of the Bank’s monetary policy, at the Tory party conference, has undermined him.
Q: Does he feel any political pressure to change the bank’s forecasts?Q: Does he feel any political pressure to change the bank’s forecasts?
Not at all, he replies.Not at all, he replies.
We don’t feel under any pressure from the government, and especially not from the prime minister.We don’t feel under any pressure from the government, and especially not from the prime minister.
The prime minister, and the government, fully support the monetary policy framework we have in place.The prime minister, and the government, fully support the monetary policy framework we have in place.
UpdatedUpdated
at 1.34pm GMTat 1.34pm GMT
1.16pm GMT1.16pm GMT
13:1613:16
Hugo Duncan of the Daily Mail tries to get some new forward guidance out of the governor.Hugo Duncan of the Daily Mail tries to get some new forward guidance out of the governor.
Q: Can you tell us whether the next move in interest rates is more likely to be up, or down?Q: Can you tell us whether the next move in interest rates is more likely to be up, or down?
You can see scenarios where it goes either way, we don’t have a bias, Mark Carney replies.You can see scenarios where it goes either way, we don’t have a bias, Mark Carney replies.
But the monetary policy committee currently unanimously believes that the present stance is right.But the monetary policy committee currently unanimously believes that the present stance is right.
UpdatedUpdated
at 1.20pm GMTat 1.20pm GMT