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Archive for the ‘Inflation’ Category
Monday, June 27th, 2011
Bank for International Settlements says financial stability at risk without tighter monetary policy
Central banks around the world must raise interest rates soon to bring inflation under control, international regulators have warned.
The Bank for International Settlements (BIS) – the central bank for central bankers – said, in its annual report published on Sunday, that the era of loose monetary policy must end.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said, adding that rates may need to be raised more rapidly than after previous recessions.
It levied particular criticism at the Bank of England’s monetary policy committee (MPC), which has maintained UK interest rates at their current record low of 0.5% since March 2009.
“In the United Kingdom, CPI inflation had exceeded the Bank of England’s 2% target since December 2009, reaching a peak of 4.5% in April 2011 (in part due to a VAT increase). As yet, there has been no move by the MPC, but one wonders how long its current policy can be sustained,” the BIS said.
City economists increasingly believe the MPC will resist raising interest rates during 2011.
The BIS acknowledged that “policymakers and households have virtually no room for manoeuvre” because of the unsustainably high levels of debts run up by both countries and individuals.
However, it continued: “All financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage. But we must guard against policies that would slow the inevitable adjustment. The sooner that advanced economies abandon the leverage-led growth that precipitated the Great Recession, the sooner they will shed the destabilising debt accumulated during the last decade and return to sustainable growth. The time for public and private consolidation is now.
“The logical conclusion is that, at the global level, current monetary policy settings are inconsistent with price stability.”
The BIS is also clear that the overly indebted countries in the eurozone need to tackle their problems. It believes the boom also masked serious long-term fiscal vulnerabilities that, if left unchecked, could trigger the next crisis.
“We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy,” it said.
International banking regulators, also agreed over the weekend that the biggest banks in the world – probably including HSBC and Barclays – should be forced to hold more capital than those less likely to send a shock wave through the financial system in the event of their failure.
Those banks which are potentially too big to fail will be required to have a core tier one ratio – a measure of their assets against the risks they run – of 9.5% compared with the 7% minimum for systemically less important banks.
“The agreements reached will help address the negative externalities and moral hazard posed by global systemically important banks,” said Jean-Claude Trichet, the European Central Bank president, who is retiring. The Bank of England governor, Sir Mervyn King, will succeed him in the role of overseeing the supervisory group that sets bank capital.
The floor of 9.5% was announced at a meeting of international banking regulators in the Swiss city of Basel. If the biggest banks get even larger, then they may be forced to raise their capital cushions to 10.5%. Financial institutions have already begun to accumulate capital since the banking crisis, when banks such as Royal Bank of Scotland were running on water-thin capital ratios of 2%. For instance, Bob Diamond, chief executive of Barclays, recently set out a strategy for the bank on the basis that it would be able to operate on a 10% capital cushion – the level suggested by Sir John Vickers in his recent interim report into the UK banking sector.
Details of which banks are classed as “global systemically important financial institutions” will be released later this year.
Posted in Barclays, Bob Diamond, Borrowing & debt, Business, Credit crunch, Economics, European debt crisis, Financial crisis, Global recession, House News, HSBC, Inflation, Interest rates, Mervyn King, Money, Mortgage rates, News, Property, The Guardian, UK news | Comments Closed
Saturday, April 23rd, 2011
Skipton and Woolwich are among lenders cutting rates for first-time buyers and remortgages
A mortgage price war is heating up with lenders slashing rates on fixed-rate and tracker mortgages at the start of the spring property-buying season.
City fears of an imminent rise in the Bank of England base rate have dissipated and lenders are responding by cutting rates to attract homeowners looking to remortgage and first-time buyers with large enough deposits.
Woolwich, part of Barclays, has cut the rate on tracker and fixed-rate mortgages by up to 0.32 percentage points to encourage borrowers to switch rates, while Skipton has lowered its rate by up to 0.5 percentage points on its two-, three- and five-year fixed-rate products. Last week Halifax and Northern Rock cut the rates on buy-to-let mortgages by up to 0.4 percentage points.
Before March’s inflation figure, some economists were predicting a base rate rise. But the drop in the consumer prices index from 4.4% in February to 4% last month changed their outlook and most now believe a rise will not happen until August at the earliest.
Howard Archer, chief economist at IHS Global Insight, said: “We expect the Bank of England to delay raising interest rates from 0.5% to 0.75% until August, given the major uncertainties and concerns about the underlying strength of the UK economy and its ability to withstand the fiscal squeeze that really kicked in at the start of April. Also, most monetary policy committee members are still reluctant to hike interest rates due to concerns and uncertainties over the growth outlook.”
Even if interest rates do rise in the near term, Archer said it is likely they will move up relatively gradually and stay very low compared to past norms. “We see interest rates only rising to 2% by the end of 2012,” he said.
Skipton’s rate cuts could benefit first-time buyers as they include fixed-rate mortgages at 90% loan-to-value. The options include: a two-year fix at 5.09% (previously 5.49%); a three-year fix at 5.79% (was 6.09%); and a five-year fix at 5.99% (was 6.29%). Some require application or completion fees.
Kris Brewster, Skipton’s head of products, said: “We’re continuing to provide borrowers with competitive mortgages designed to help them achieve their home ownership aspirations despite continued economic and market challenges.
“These new products follow a number of innovations over the past year which have made Skipton one of the only providers offering low-deposit mortgages to first and next-time buyers.”
Woolwich’s lower rates apply only to those remortgaging or with larger deposits – the highest loan-to-value available is 80% on its two-year fixed mortgage at 4.09%. Andy Gray, head of mortgages for Barclays, said: “The cuts today are about jump-starting borrowers to take action as their mortgage payments will be impacted when the base rate starts to rise.” He predicts a base rate of 3% by June 2013.
Ray Boulger, senior technical manager at John Charcol, said the proportion of Charcol clients choosing a fixed rate more than doubled between September 2010 and February 2011 – but that trend reversed in March, when there was a 50/50 split between people choosing fixed and variable rates.
Boulger said: “There’s a strong chance we will see the cheapest five-year fixed-rate deals soon go below 4%, which we haven’t seen for months. The big rise in mortgage rates amid forecasts the base rate would go up quickly is now in reverse.”
According to the Bank of England’s latest report, released last week, mortgage loans for home purchases rose from 43,000 in February to 44,000 in March, still well below the 51,000 advanced in March 2010. But net lending by the major providers fell from £700m in March to £600m in February.
Boulger added: “With providers now more actively looking at ways to help borrowers with only a small deposit, both with schemes recently announced and others currently being worked on with a view to being launched later in the year, there are likely to be more opportunities to satisfy pent-up demand from first-time buyers later this year.”
But Andy Gray, head of mortgages for Barclays, said: “Many mortgage borrowers breathed easy this month when the base rate didn’t go up, so now they need to take action to start protecting themselves for at least the next two years.”
Posted in Banks and building societies, Business, First-time buyers, House News, Inflation, Interest rates, Money, Mortgage rates, Mortgages, News, Property, The Observer, UK news | Comments Closed
Tuesday, April 12th, 2011
• BRC-KPMG retail sales monitor shows biggest fall in total sales since survey began in 1995
• RICS figures show house prices outside London are continuing to fall
Britain’s retailers are enduring the toughest trading conditions for at least a decade and a half, as consumer spending wilts in the face of higher inflation and the first drop in personal spending power since the slump of the early 1980s.
Today’s monthly healthcheck from the British Retail Consortium (BRC) of activity in brick and mortar stores and on the internet found an across-the-board weakness in consumer spending that left takings down on a year earlier.
City analysts are braced for fresh evidence of upward pressure on the cost of living with the release of the latest Office for National Statistics data today. Financial markets are expecting the annual inflation rate as measured by the consumer prices index to nudge closer to 5%, adding to the Bank of England’s dilemma over whether to raise interest rates at a time when the economy is weak.
Stephen Robertson, director general of the BRC, said: “The next interest rate decision is a difficult balancing act for the Bank but, for now, supporting our weak economy must be the priority. Inflation is coming mainly from temporary and external price shocks – VAT, world commodity prices and the weak pound – not wage or consumer-driven increases. Increasing interest rates would do more harm than good.”
The BRC data comes in the wake of profit warnings from high street names ranging from Dixons to Mothercare, Carpetright, Halfords, HMV and the Argos owner Home Retail Group. The former Asda boss Andy Bond has warned that retailers are facing a two-year high street recession as consumer confidence and household incomes come under increasing pressure.
The BRC-KPMG retail sales monitor showed that the total value of retail sales last month was 1.9% lower than in March 2010, but down 3.5% when the data was adjusted for an increase in floor space over the past 12 months.
“This is the worst drop in total sales since we first collected these figures in 1995,” Robertson said. “Non-food retailers were particularly hard hit. This is strong evidence of the pressure customers and traders are under. This year’s later Easter is a factor but this fall goes way beyond anything explained by that alone.
“Uncomfortably high inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years. Mounting fuel and utility costs, falling house prices, higher VAT and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to. These pressures aren’t going away and the arrival of higher national insurance is likely to compound them in the immediate future.”
A sector-by-sector breakdown of trading conditions found that spending on clothing was down on a year earlier, food sales were flat, stores selling electrical goods had a “challenging” month, book sales were down and many computer games stores were disappointed by sales of the new Nintendo DSi 3D. The BRC said that online sales were also affected, with the growth rate in internet retailing halving to 7.5% between March 2010 and March 2011.
Helen Dickinson, head of retail at the accountancy firm KPMG, said: “We have seen an emergence of new, lower spending patterns since the middle of January, which are currently continuing to trend downwards. Many retailers will not be able to sustain this ongoing weakness in demand beyond the short term and are hoping for some good news around the extended bank holiday period and a feelgood factor driven by the royal wedding.
“However, as disposable income continues to fall, without reducing saving or increasing borrowing – which would oppose current trends – this will not be possible.”
A separate report today from Britain’s estate agents suggested little prospect of the traditional spring surge in the housing market. The Royal Institution of Chartered Surveyors (RICS) said that activity was flat, demand for new property had fallen and prices were continuing to edge downwards. Nationally, the number of firms reporting falling prices exceeded those registering price increases by a margin of 23 percentage points, slightly lower than the balance of +26% in February.
According to the RICS, the general fall in house prices over the past three months was in the range of 0-2%. London was the only part of the country to report a rise in prices, and also bucked the trend in terms of activity.
Ian Perry, RICS housing spokesman, said: “The rather negative outlook for property prices across the UK seems to better reflect the general economy than the microclimate of London. The low level of buyer interest in many parts of the UK continues to impact on the market, resulting in some downward pressure on prices. With the prospect of forthcoming interest rate rises and continued shortage of mortgage funding, it seems that overall recovery for the national housing market is still some way off.”
Posted in Business, Carpetright, Consumer spending, Dixons Retail, Economic growth (GDP), Economics, Halfords, HMV, Home Retail, House News, House prices, Inflation, Interest rates, Money, Mothercare, National insurance, News, Property, Retail industry, Tax, The Guardian | Comments Closed
Wednesday, March 23rd, 2011
Despite rise in inflation and borrowing, chancellor to court medium earners in ‘steady-as-she-goes’ financial package
George Osborne will seek to appeal to Britain’s “squeezed middle” when he announces help for first-time buyers, motorists and 25 million income tax payers in a budget designed to tighten the Treasury’s grip over public spending.
Despite disappointing news for the public finances, the chancellor is expected to say that he has scope to raise the income tax personal allowance by £600 next year, fund a £250m shared equity scheme for new homes and defer the above-inflation increase in petrol duty due next month.
But Osborne will balance tax giveaways with fresh tax-raising measures, a crackdown on tax avoidance and “special measures” for overspending Whitehall departments in what sources insisted would be a “steady-as-she-goes” package.
The chancellor will outline a range of measures – including a shake-up of planning laws, deregulation of employment laws affecting small businesses, and the long-awaited plans for a green investment bank as the coalition government seeks to shift the focus of the economy from deficit reduction to boosting growth.
Osborne will admit that the UK’s growth prospects for 2011 have worsened since last autumn, with the independent Office for Budget Responsibility likely to pencil in an increase of around 1.8% in gross domestic product this year against the 2.1% it forecast last November.
But the chancellor will signal his determination not to let the government’s deficit reduction plans slip, with fresh controls designed to intensify pressure on ministers to rein in spending.
Departments that fail to manage their budgets properly will be placed in special measures – akin to the Ofsted rating given to a failing school – with tough penalties. These could include fines for overspending or being forced to seek Treasury authorisation for larger spending decisions.
City hopes that public borrowing for 2010-11 would come in £10bn below the £148bn forecast received a dent with news that the deficit in February topped £10bn – the highest for the month since modern records began in 1993. Meanwhile, inflation according to the consumer price index rose from 4% to a 28-month high of 4.4% last month, pushing up government spending on state benefits.
Dearer food, fuel and clothing were the main factors behind last month’s jump in inflation, which is now more than double the government’s 2% target. The increase in the CPI measure of inflation was matched by a rise in the alternative yardstick of the cost of living, the retail prices index, which rose from 5.1% to 5.5% last month, its highest for 20 years.
In a move that will please the Liberal Democrat wing of the coalition, Osborne will say that the income tax personal allowance, due to go up to £7,475 next month, will be raised by more than inflation from next year.
The increase of around £600 – which comes on top of the £1,000 rise next month – will be worth an average of £45 a year for taxpayers earning up to £115,000 a year. The 550,000 taxpayers who earn more than £115,000 will lose £45 a year because they no longer have a personal allowance.
Osborne will announce a joint scheme with the construction industry to help some of the potential first-time buyers currently frozen out of the housing market. First-time buyers with a household income of less than £60,000 a year who can put down a 5% deposit on a new home will be eligible for an equity loan worth up to 20% of the value of the property jointly funded by the government and housebuilders. The loan will be interest-free for five years and only be repayable when the house is sold.
With most first-time buyers only able to secure mortgages worth 75% of a property’s value, Osborne is expected to say his scheme will give some young people the chance to meet the exacting loan standards demanded by lenders in the wake of the financial crisis, lead to the building of 10,000 new homes and protect 40,000 jobs in the construction industry.
The year long cabinet battle over Britain’s ability to invest in the next generation of green infrastructure will be resolved when a green investment bank is established with access to up to £3bn of funds, and an ability to borrow from April 2015. Green groups will be disappointed about the deferral of borrowing powers, but pleased at the higher than expected interim funding.
The battle over the bank was resolved on Sunday and the outcome reflects a wider political struggle to ensure plans in the budget to ease pressure on the squeezed middle, including freezing planned fuel duty rises, does not strip the coalition of its green credentials.
Ministers admit the deferral of the bank’s borrowing powers to 2015-16 reflects Treasury determination to ensure net debt as a percentage of GDP is falling by 2015-16. But they also argue that decisions on the next big wave of green investment projects, including offshore wind farms, do not need to be made until after 2015.
In a negotiating success for Chris Huhne, the energy secretary, the bank will be given access to £1bn of funds from 2012-13, as opposed to the earlier plan to wait until 2013-4.
The bank will also be given access from 2012-13 to £775m from the asset sales from HS1, the superfast rail track between London and the Channel tunnel. In addition the bank will have access to £1bn from the sales from 2013-14 from Urenco, the company that makes enriched uranium from nuclear power. The government owns a third of Urenco jointly with the Dutch government and German energy companies RWE and E.On.
The Treasury has given a guarantee that if the income from the sale of Urenco is not forthcoming, the green bank will have access to other funds.
Posted in Borrowing & debt, Budget, Budget 2011, Business, Conservatives, Editorial, Family finances, George Osborne, House News, Inflation, Money, Motoring, Politics, Property, Public finance, Public services policy, Society, Tax and spending, The Guardian, UK news | Comments Closed
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