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Economic Overview – August 2018
Interest Rates and Inflation
The Bank of England Monetary Policy Committee (MPC) raised interest rates in August for only the second time in a decade, by a quarter of a percentage point from 0.5% to 0.75% (the highest level since March 2009).
At the time, Mark Carney, Governor of the Bank of England suggested there would be further “gradual” and “limited” rate rises to come. With the uncertainty surrounding Brexit continuing, Carney also suggested that the MPC would cut rates if needed, but that “in many (Brexit) scenarios, interest rates should be at least at these levels, and so the decision is consistent”.
Inflation however remained at 2.4%, meaning that wages remain above inflation despite pay growth slowing to 2.7%. Fuel prices rose by 2.7p per litre in just a four-week period in the summer, the highest average price increase since September 2014. Gas and electricity prices also rose, with clothing and computer games in particular seeing price falls, resulting in the balanced figure overall.
With UK growth at 0.2% in quarter 1, the Bank of England was confident that this would increase to 0.4% in quarter 2, and suggesting “modest” growth of 1.4% this year, and an increase to 1.8% next year. The Bank suggests the outlook for the global economy is gloomier, partly owing to the trade war between the US and China which has seen tariffs imposed on an increasing range of goods.
Whilst President Trump cuts a controversial figure on the world stage, internally the US economy grew at its fastest rate in nearly 4 years in the second quarter, at 4.1%. The gains were driven by strong consumer spending, business investment, and a surge in exports as firms rushed to beat the new trade tariffs.
With the unemployment rate already at its lowest level since 1975, the Bank of England is forecasting the rate to fall even further, suggesting wage growth is expected to pick up as the demand and supply of labour becomes imbalanced with demand exceeding supply in many geographical areas as well as skill sets. Brexit uncertainty has seen a significant reduction in EU immigration, however rest-of-the-world immigration has picked up.
With the increase in Bank Base Rate to 0.75% (see above), there is likely to be a negative impact on house prices as demand for property potentially reduces. Up until August, with the exception of London where mortgage completions are down 12% on 2016, the rest of the UK has been steady. But with 3.5 million residential mortgages on a variable or tracker rate, and with an increased annual cost of £224 on a £150,000 variable mortgage, there will inevitably be impacts on demand.