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For they surely will….

Inflation Report Recap.

  • August 2013 – Forward guidance would use several indicators, mainly based upon unemployment, labour market, working hours and surveys of ‘spare capacity’  in companies. The degree of spare capacity would reflect upon any increase in Bank Rate.

  • 18 additional indicators were added for degrees of space to the projections.

  • The last report (May 2014), a goal setting football analogy, indicated no early rises and there was a general consciousness towards it being after the General Election (2015), when rises would be up to 3% between 2015 and 2017.

The latest Report  states that it expects Interest Rates to rise in line with market expectations, with an emphasis on gradual rate rises. There are suggestions of a Rate Rise around the 0.75% mark during the 4th quarter, followed by increases to 1% by early 2015, with slower increments to reach about 2.5% -3% by 2017 (Mark Carney’s speech  at the Mansion House indicated there might be necessity for an earlier rise).

Supporting indicators of an Inflation Rate jump in June, from 1.5% to 1.9% (the target is 2%), Press giving out  business optimism as being high for economic growth, figures from the ONS showing growth, unemployment figures showing falls (although wages are slowing) blended with opaque measurements, leave the question hanging, “When will Rates start to rise?”

Anyone selling crystal balls might do well over the next few months.

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InflationReportAugust2014

He’d said, at the World Economic Forum“Once goal setting is done, the Central Bank needs to be more determined toward output and there must a better understanding with set goals and the tolerance level of banking operations” and being in a bad - but improving – place is, according to Mark Carney, Governor of the Bank of England, a good problem… but a problem.

Using, instead of the usual nautical associations for this island nation, Carney delivered a speech using the world cup as an analogy: there was no ‘even keel’,  instead the agenda was ‘goal setting’.

Falling unemployment has reached a five year low, but The Bank’s decision about when to raise interest rates from 0.5% will continue to depend on the amount of ‘spare capacity’.  The ‘slack’; those companies not running to full capacity, or people not working as much as they’d like, being the measurement.

So, who’s pitching the goals?

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The banking industry has seen a rise in consumer confidence for two years in a row, according to a new survey of 32,000 banking customers in 43 countries. The study around the world showed confidence increasing most in India, followed by Saudi Arabia, with confidence falling the most in Ireland and Spain.The survey showed 60% of respondents aren’t planning to close or move their accounts, which, according to Ernst & Young highlights that this isn’t necessarily because they are confident that they are with the right provider, with some respondents stating they a change would be too difficult or time consuming.

“Bank customers are not being actively retained; they simply remain with their current provider through inertia and are therefore vulnerable to competitors“.

According to another global study the Arts, Entertainment and Hobbies market sector was 60% more competitive January 2014 compared to January 2013 and Financial Services 60% more so, whilst Sports & Recreation was 121% less competitive in January 2014 compared to 2013 in relation to digital advertising

The three months to February saw a highest level since 1998, in the Confederation of British Industry (CBI) quarterly Service Sector Survey.   Optimism indices for consumer services (including hotels, bars, restaurants and leisure) rose to their highest level amongst 139 companies and at the quickest pace since 2005.

The ONS has confirmed the UK economy grew by 0.7% in the Quarter with business investment rising by 2.4% from the previous three-month period and rose 8.5% from a year earlier.

The BBA  (British Bankers Association) has said that mortgage lending was 38% higher in January than a year ago and ‘continues to rise compared to a year earlier’. It is widely expected that the Bank of England  will raise interest rates by the end of next year, with an inevitable knock-on effect on mortgage rates.

Finally, not certain if this is a record or not but Royal Bank of Scotland has lost all the money  invested in it by the taxpayer six years ago with total losses since its bailout now drawn level with the £46bn put in with 81% stake, in 2008 and The Co-op Group’s losses  for 2013 are expected to be greater than £2bn, by far the worst in its history.

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The latest Bank of England Inflation Report  has altered Bank of England Governor Mark Carney’s Interest Rate Policy since the first Report (August 2013).

Now, reflecting the falling unemployment and economic recovery, policy will be determined by a wider range of indicators other than the previous indicator of unemployment falling to 7% or below. The report says the ‘Bank Rate may need to remain at low levels for some time to come’ and considers ‘economic slack’ being ‘substantially reduced’, in taking a gradual approach to rate increases.  ‘When Bank Rate does begin to rise, the appropriate path so as to eliminate slack over the next two to three years and keep inflation close to the target is expected to be gradual’.  Sterling rose to an almost 3 year high  following the central banks forward guidance.

Although, with the ONS (Office of National Statistics) using some B of E Data, it will be interesting to see how they interpret the effects of the recent floods in their measurements: moving from Cornwall into the Thames Valley, M4 and M3 corridor. Mark Carney has said  although the floods would influence the short-term outlook, there was unlikely to be any effect on overall growth – currently forecast at 3.4 per cent this year.

Will the UK still be seen as being in a bad but improving place?

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With inflation falling to the Bank of England’s 2% target for the first time in four years and numbers from Bank of England Credit Conditions Survey (2013 Q4)  continuing an upward trend, the notion of  ‘positive’ outlook has (for some) been reinforced.

Could it be that Default Rates on lending to small businesses  being reported as ‘fallen significantly in Q4’,  with  medium-sized companies unchanged and large PNFC’s falling over the quarter,  was due to re-structuring of existing facilities being part of the reclassification for 2012?  Alongside a statement which shows spreads on corporate lending falling in Q4, with  ‘significant reductions’ for medium-sized companies and large PNFCs, and a slight reduction for small businesses’ it’s worthy to  question an attribution to re-structures into the figures behind the numbers.

Depending on the questions asked and the answers given some results are ‘not directly comparable’ therefore perhaps some statements are too narrow?  Maybe an insightful survey is one that focuses on the survey participants’ business attitude, their plans and strategy in achieving that objective. Would that offer a stronger perspective and wider field of vision into the UK economy or would it  tell us what’s happening in business rather than what’s happened?

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The month of predictions is here… so while we get down to business…. here’s a roundup of what’s being said…

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The Banking Reform Act, ring fencing retail and investment banking, and implementing recommendations of the Parliamentary Commission on Banking standard (including criminal offences for senior bankers misconduct), has become law.

As is said, this is just the beginning.

Although, ring-fenced banks will not be able to hold or own the capital of other non ring-fenced banks etc., it won’t be fully in force for another four years during which a new authorisation process for staff will be introduced and effectiveness reviewed.

And, a banking union plan has been agreed for managing Eurozone banks (UK plus 10 other countries are not part of the plan). The ECB (European Central Bank) has been put in charge of European Union regulation rules for banks in the Eurozone

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Currently ‘forward guidance’  has been given that, providing unemployment remains above 7%, interest rates will not go above the four year static 0.5%, which theoretically could mean interest rates staying at 0.5% for yet another couple of years, which has been a ‘norm’ for the past few years. Although low rates haven’t proven to assist stagnation in many areas of the economy, would the alternative of raising interest rates encourage growth any quicker…?

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