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Economic Overview – May 2018
Interest Rates and Inflation
The Bank of England in its May Monetary Policy Committee meeting, held Bank Base Rate at 0.5% despite hints earlier in the year that rates may start to edge up. It stated “the UK economy has hit a temporary soft patch” and cut its growth forecast to 1.4%, down from the forecast of 1.8% made in February, and citing bad weather in March as the primary reason (the “Beast from the East” which shut down construction sites, kept shoppers at home and caused transport chaos).
The Governor, Mark Carney, did however suggest that it is still likely that rates will rise this year, stating that the “underlying pace of growth remains more resilient than the headline data suggests”.
UK consumer price inflation fell in March to 2.5%, the lowest rate in a year (from 2.7% in February). The data appears to show that the squeeze on UK households may be coming to an end as wages rise. Wages rose at an annual rate of 2.9% in the three months to March.
The UK economy grew at its slowest rate since 2012 in the first quarter of the year. GDP growth was 0.1%, down from 0.4% in the previous quarter, driven by a sharp fall in construction output and a sluggish manufacturing sector.
The Office for National Statistics (ONS) said unemployment fell by 46,000 to 1.42 million, with the jobless rate falling to 4.2%, the lowest since 1975. The number of EU nationals working in the UK fell by 28,000 on the previous year’s figures to 2.29 million, and the first annual decrease since March 2010. Employers explain this by both uncertainty and some hostility. The reverse trend is shown by non-EU nationals in employment who increased in number by 20,000. This may be explained in part by employers making more use of the visa system when faced with skills shortages.
UK house prices saw the biggest monthly fall for nearly eight years during April according to the Halifax. The lender said prices fell by 3.1% between March and April. Housing demand softened in the early months of the year with both mortgage approvals and completed home sales edging down. On an annual basis, price growth slowed to 2.2% from March’s rate of 2.7%.
With unemployment continuing to fall and wage growth finally picking up, pressure should be eased on household finances, which should in turn see house price growth positive, albeit in the range of 0-3%.