The move by India was prompted by the country’s rapid adoption of digital coins, bringing it closer to regulating such investments following several warnings about the risks of terrorism and money laundering from the central bank. The move also follows China beginning CBDC trials in numerous cities, while the US Federal Reserve and the Bank of England are exploring possibilities for their economies.
On Tuesday, Finance Minister Nirmala Sitharaman said in her budget speech that income from the transfer of any digital assets will be taxed at 30%.
“There’s been a phenomenal increase in transactions in virtual digital assets,” Sitharaman said. “The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.”
Sitharaman also announced the launch of a central bank digital currency for the financial year beginning in April, to attract more efficient and more affordable currency management.
The Monetary Policy Committee (MPC) voted by a majority to act amid pressure from the International Monetary Fund (IMF) who warned it against further delays. The MPC also voted to maintain the amount of quantitative easing at £895 billion.
According to recent data from the Office for National Statistics (ONS), inflation in the UK rocketed to its highest level in over a decade in November, climbing to 5.1%. This is a figure that comes in significantly higher than the Bank of England’s 2% target and notably above its 4.5% prediction, largely due to the rising cost of fuel, clothing, and second-hand vehicles.
"Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices," the Bank of England said.
The 5.1% figure, reported on Wednesday, sparked intrigue as to whether the Bank of England would hike interest rates despite the rapid spread of Omicron through the country. However, inflation hit a rate not expected by the Bank until spring 2022, seemingly outweighing concerns around the new coronavirus variant.
Analysts have said the increase is expected to put further pressure on the Bank of England to raise interest rates at Thursday’s meeting. However, the spread of Omicron may deter policymakers from taking such action until the beginning of 2022.
According to the Office for National Statistics, price pressure from a broad range of goods and services, though primarily petrol, clothing, and footwear, were behind the rise.
While the news caused the pound sterling to briefly go up, by 07:35 GMT, there was little difference compared with its level before the data.
On Tuesday, the International Monetary Fund predicted that UK inflation would hit approximately 5.5% in the second quarter of 2022. This would be its highest level in 30 years.
Across the globe, inflation has risen much quicker than economists had predicted. This is due to higher energy prices as well as Covid-related supply-chain issues. In the UK, post-Brexit trade has also contributed to the problem.
Speaking at the Economic Affairs Committee in the Lords on Tuesday, Sir Jon Cunliffe, the BoE’s deputy governor for financial stability, said that the bank has made a “prudent assessment” of the 20% move. Cunliffe also said that banks could potentially lose a revenue stream from payments as a consequence of the move, adding that if banks are strong enough, they will be able to adjust to the change.
Cunliffe also said that there is a future in cash too, stating it would have an anchoring role in the financial stability of systems.
Since April this year, a potential digital pound has been on the horizon. In September, the BoE brought in representatives from big names such as Spotify, ASOS, and PayPal to consult on its CBDC Engagement and Technology forums.
However, despite the potential of a digital pound approaching, Cunliffe warned that several issues need to be addressed before any CBDC is introduced into the UK. He said that the BoE did not yet have visibility on predicted customer uptake as it is currently unaware of what a CBDC would mean for the country’s economy.
Central banks around the globe are exploring digital versions of their currencies to avoid leaving digital payments to the private sector amid a decline of cash use which has been partly accelerated by the pandemic.
There has currently been no decision on whether such a currency will be introduced in the UK. The consultation, scheduled for 2022, will make up part of a research and exploration phase that will help the Bank of England and the UK government develop plans over the coming years.
In a statement, the Bank of England said, “No decision has been made on whether to introduce a CBDC in the UK, which would be a major national infrastructure project. In April 2021, the Bank and HMT initiated the joint CBDC Taskforce to coordinate the exploration of a potential UK CBDC. The Bank also set up the Engagement and Technology forums, where relevant stakeholders from industry, civil society and academia provide strategic and technical input to the work on CBDC.”
The bank also said that the earliest date for the launch of a UK CBDC would be in the second half of the decade.
The National Institute of Economic and Social Research (NIESR) has said that, in early 2022, inflation in the UK is likely to jump to almost double the Bank of England’s target rate. NIESR predicts that inflation would then recede to 2% in 2023, following a bank interest rate hike. If the forecast is correct, this would be the highest rate of inflation seen since 2011. The UK’s growth forecast was also revised for 2022 by 1.1 percentage points up to 6.8%.
Only London and the West Midlands are predicted to have gross value added of more than 4% higher than pre-pandemic levels. Removing the pandemic from the equation, this is only half the expected growth.
NIESR’s deputy director Hande Kucuk said that the Bank of England should take a carefully communicated and steady approach to avoid tightening financial conditions that could impact the country’s financial recovery.
The Office for National Statistics said that the annual rate of inflation rose to 2.5% in June from 2.1% in May. June’s rate is the highest since August 2018, when inflation hit 2.7%. The jump has pushed inflation further above the Bank of England’s target of 2% and has provoked speculation that the UK’s central bank will need to respond soon to contain price pressures in the economy.
The UK is not alone in its increased rates of inflation. Several countries across the globe are currently experiencing steep increases in inflation as their economies recover from the coronavirus pandemic. On Tuesday, official figures revealed that the annual inflation in the US is running at its highest levels in 13 years. Around the world, central banks are hoping that the steep rise in inflation has been caused by temporary factors related to the pandemic, such as pent-up demand and supply pressures.[ymal]
The staggering year-on-year rise is mostly due to a locked-down housing market during the UK’s first lockdown back in spring 2020. In May 2020, mortgage approvals were at 9444. By contrast, and according to the Bank of England’s most recent figures, mortgage approvals in May 2021 were at 87,545. However, in November 2020, the figure reached 103,200. Net mortgage borrowing bounced back to £6.6 billion in May from £3 billion in April but had reached an impressive £11.4 billion in March.
Until 30 June, the threshold for stamp duty will remain at £500,000. These special rules, introduced to stimulate the housing market throughout the pandemic, were initially supposed to end back in March. Typically, stamp duty, a tax on property transactions in England and Northern Ireland, ranges from 2% to 12% of the property purchase price, depending on its value, the purchase date, and whether or not you already own a home.
Nationwide’s latest index shows that house prices are up 13.4% annually, with June seeing the third consecutive month-on-month rise of 0.7%.
Across England, yearly house price growth increased to 9.9%. Yorkshire and the Humber was the strongest performing part of the country. Prices were up 13% year-on-year, the strongest price growth for the region since 2005.
The Bank of England has launched a new round of stimulus into the UK’s lagging economy, dedicating £150 billion towards the buying of government bonds.
The Bank of England’s Monetary Policy Committee (MPC) voted to expand “quantitative easing”, its programme of buying government bonds on the secondary market, by a further £150 billion, the Bank announced on Thursday. It will maintain a stock of corporate bonds worth £20 billion.
The MPC also voted to maintain its interest rate at the record low level of 0.1%. Both decisions were made unanimously by the 9-person body.
With the latest expansion of quantitative easing, the size of the Bank’s asset purchase programme to £895 billion. The expansion also goes beyond analysts’ expectations, with most having predicted an increase of only £100 billion in the Bank’s asset purchase facility.
The decision comes immediately ahead of a second England-wide lockdown, which is set to begin on Thursday and last for a month. Pubs, restaurants and non-essential retailers will be closed during this period, which will likely have a widespread negative effect on the UK economy.
Though the Bank predicted 5.4% growth for the UK economy in Q4 in its August forecast, it now expects the economy to contract by 2%. Its forecast for annual growth has also been slashed; the MPC now expects GDP to fall b 11% for 2020 overall, a greater decline than the 9.5% contraction it predicted in August.
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In its release, the MPC said that it expected GDP to rebound by 7.25% in 2021. It added that it “stands ready to take whatever additional action is necessary” to increase inflation and shore up the economy.
On Thursday, the Bank of England’s Monetary Policy Committee (MPC) left interest rates at 0.1%, their lowest level in history, and maintained an outlook for the UK that was relatively unchanged from its August meeting.
However, analysts were intrigued by particular lines in the MPC meeting minutes which showed that the bank was looking more closely at policies for cutting interest rates below zero.
The minutes said that the MPC had “discussed its policy toolkit, and the effectiveness of negative policy rates in particular.” In addition, the minutes noted that the Bank of England intends to “explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.”
“The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4,” the MPC minutes continued.
Earlier this month, Andrew Bailey, Governor of the Bank of England, said that negative interest rates were counted “in the box of tools” but added that the bank had “no plans to use it imminently.” The apparent change of tack revealed in the minutes quickly gained the attention of economic analysts.
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“They just opened the door further to negative rates not just next year, but for an extended period, potentially triggered by any negative economic shock,” remarked Robert Wood, chief UK economist at Bank of America. The Bank of England appeared to be “more prepared to use negative rates than we thought,” he added.
The pound fell sharply following the bank’s announcement on Thursday, weakening 0.6% against the dollar on the day, falling below $1.29.
On Monday, HM Treasury named Nikhil Rathi, former chief executive of the London Stock Exchange, as the new head of the FCA.
Rathi will take over from interim chief executive Christopher Woolard, who entered the position after the last permanent CEO, Andrew Bailey, who led the regulator for over four years before stepping down in March to become governor of the Bank of England.
Chancellor Rishi Sunak said in a statement on the appointment: “Nikhil is the outstanding candidate for the position of chief executive of the Financial Conduct Authority, and I am delighted that he has agreed to take up the role.
“We have conducted a thorough, worldwide search for this crucial appointment and, through his wide-ranging experiences across financial services, I am confident that Nikhil will bring the ambitious vision and leadership this organisation demands.”
Rathi, who is ethnically British-Asian, will also be the first BAME head of the watchdog. He will be paid £455,000 a year with a 12% pension, though he will not be entitled to bonuses. His term will last for five years.
Commenting on his new appointment, Rathi said: “I am honoured to be appointed chief executive of the Financial Conduct Authority - I look forward to building on the strong legacy of Andrew Bailey and the exceptional leadership of Christopher Woolard and the FCA executive team during the crisis.
“In the years ahead, we will create together an even more diverse organisation, supporting the recovery with a special focus on vulnerable consumers, embracing new technology, playing our part in tackling climate change, enforcing high standards and ensuring the UK is a thought leader in international regulatory discussions.”
In its Monetary Policy Report for the month of May, the Bank of England presented scenarios for the UK economy, predicated on lockdown measures being eased from June to September.
These scenarios suggested that, though the economy contracted 2.9% in the first quarter of 2020, it could fall by an astonishing 25% in the second quarter, ultimately shrinking by 14% over the course of the year. If accurate, this would equate to the economy’s sharpest contraction since 1706, according to BoE’s figures.
Further projections in the report include a rise to 9% unemployment – greater than the 8% unemployment rate that was experienced during the last financial crisis.
Also on Thursday, BoE’s Monetary Policy Committee voted unanimously to keep interest rates at their record low of 0.1%, though a 7-2 majority voted against increasing the latest round of qualitative easing to £300 billion up from £200 billion.
Adrian Lowcock, head of personal finance at investment platform Willis Owen, commented on the report’s release: “The Bank's latest forecasts are the stuff of nightmares”.
“The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is "especially difficult to quantify.””
Bank of England governor Andrew Bailey expressed optimism when speaking with the BBC, emphasising that the economy would likely recover “much more rapidly than the pull back from the global financial crisis”.
