|
Back to top |
INFLATION AT THREE-YEAR LOW |
Official statistics show that the rate of inflation in the UK has fallen to its lowest level in nearly three years, principally due to the impact of the energy price cap which has pushed down the cost of electricity and gas.
According to ONS data, the Consumer Prices Index (CPI) 12-month rate – which compares prices in the current month with the same period a year earlier – dropped to 1.5% in October. This was down from 1.7% in the previous month and means that prices are now increasing at their slowest pace since November 2016. ONS said this easing of inflationary pressures was largely driven by a fall in utility prices due to a lowering of the power regulator’s tariff cap. As a result, gas and electricity prices in October actually fell by 8.7% and 2.2%, respectively, compared to the previous month’s levels. A decline in motor fuel prices also helped to push down October’s overall rate of inflation. However, the downward pressure exerted by the fuel category was partially offset by a rise in the cost of clothing and footwear, with prices in this group increasing by 1.0% during October. While the latest figure did come in below the 1.6% consensus forecast in a Reuters poll of economists, price pressures have for some time been expected to ease and are forecast to continue doing so in the coming months. Indeed, BoE projections suggest that CPI inflation will fall to around 1.25% by the spring of 2020 due to the energy price cap and an anticipated reduction in water bills. If this prediction proves correct, then that would clearly leave the inflation rate well below the BoE’s 2% target level. |
Back to top |
|
||||||||||||||||||||||||||||||||
|
Back to top |
BANK SPLIT OVER RATES |
The probability of a reduction in interest rates has increased after two members of the Monetary Policy Committee (MPC) unexpectedly voted to lower the bank rate following its latest meeting.
Although the MPC did vote to maintain its existing monetary policy stance following its meeting on 7 November, two committee members did dissent, voting for a cut in rates from 0.75% to 0.5%. The two external expert members – Jonathan Haskel and Michael Saunders – argued that weakness in the economy warranted an immediate reduction and suggested there was little risk of the economy overheating if rates were cut now. While minutes from the meeting did explicitly state that monetary policy could still respond in either direction to changes in the economic outlook, they also implied greater openness to a nearterm rate reduction if an anticipated recovery requires reinforcing. In addition, they also revealed a softening in the language relating to the need for limited and gradual rate hikes in the medium term, with the text changed to ‘might’ rather than ‘would’ be necessary. Commenting on the MPC’s decision, Mark Carney said: “These are pretty big tectonic forces operating right now. If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth. But that’s not pre-committing to anything; it’s observing the balance of risks on the forecast.” The split decision did come as something of a surprise to economists who had been widely predicting a unanimous vote to keep rates unchanged. Indeed, the MPC’s softening policy stance has significantly increased market expectations that rates will now be cut by 0.25 percentage point at some point during the coming 12 months. |
Back to top |
BUDGET DEFICIT ON THE RISE |
The latest public sector finance statistics confirm government borrowing is on an upward trajectory even before any of the prospective election spending pledges announced by politicians have been implemented.
Figures released by ONS show that UK public sector net borrowing (the gap between the country’s overall income and expenditure) totalled £11.2 billion in October 2019. This was £2.3 billion more than in the same month last year and the highest October borrowing figure for five years. It was also higher than all forecasts in a Reuters poll of economists and left the fiscal year-to-date borrowing total at £46.3 billion. This was £4.3 billion more than the comparable period of the 2018–19 fiscal year, and the highest April-to-October borrowing figure for two years. The data confirms that government borrowing is now on the rise and represents a setback for the next Chancellor, whoever that may be. After almost a decade of austerity, current Chancellor Sajid Javid, previously announced the largest increase in day-to-day government spending in 15 years and both of the main political parties have committed to spending significant sums on health, schools, police and infrastructure, if they win the upcoming General Election. This has led independent think-tank the Resolution Foundation to warn that both parties’ pledges, if enacted, would see public spending rising to levels last witnessed in the 1970s. Research Director, James Smith, commented: “The 2019 public finances deterioration provides a sobering backdrop to manifesto launches. This deterioration should be a reminder to whoever wins the election that the state of the public finances will continue to be a constraint on plans for higher public service spending or tax cuts in the next parliament.“ |
Back to top |
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. |