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Failure to start Brexit trade talks at the EU summit in December could lead to “a difficult choice between two opposite policy stances from the Bank of England”, warns the senior investment analyst at one of the world’s leading independent financial services organisations.

deVere Group’s International Investment Strategist, Tom Elliott, is speaking out after the Bank of England (BoE) raised interest rates last week for the first time since 2007, and as senior officials in Brussels say the EU is unlikely to agree to trade talks in December unless the UK offers more concessions.

Mr Elliott comments: “The uncertainty over the UK’s eventual trading relationship with the EU is blamed by some for the weaker economic growth seen since the spring. Investment spending is being deferred or abandoned, with the long term impact being weaker productivity gains and wage growth than would otherwise occur. Sterling may fall victim to this uncertainty, and become a ‘big short’ on foreign exchange markets in December if an EU heads of government summit decides that no progress has been made on the divorce bill.

“They can then refuse permission for the EU negotiators to move on to discuss the post-Brexit trading arrangements, and a possible transition agreement. The UK government needs to show progress on this area, soon, in order to assure British business that an eventual deal will be had.. The longer talks on the future trading relationship are postponed, the greater the risk of no deal being in place by March 2019 when the UK leaves the EU, and the greater the disruption to the U.K economy.”

He continues: “This will put the Bank of England in a difficult spot - should it cut the bank rate to support the economy but risk a further fall in sterling, or raise interest rates further to support the pound? Keeping the currency attractive is important when the UK Treasury has to sell billions of pounds worth of gilts each year in order to support a 3.6 per cent annual budget deficit.

“The BoE will be under intense pressure to ‘support Brexit’ from influential Eurosceptic politicians, who have openly called for the Governor, Mark Carney to be sacked on grounds of his warnings over Brexit, both before and since the referendum.

“This means keeping rates low to help support the economy through the Brexit shock. Politics therefore favours letting the pound take the strain, even though gilt yields may have to rise to attract foreign buyers, increasing the funding costs of the government deficit.

“The Treasury is increasingly seeing Brexit as an exercise in damage control, but has limited fiscal tools at its disposal to support demand should Brexit go badly. There is no money for tax cuts or spending increases. This adds pressure onto the Bank of England to go easy on interest rate hikes.”

Mr Elliott concludes: “The Bank of England has presumably balanced the risks of a rate hike with the overall aim of normalising monetary policy and curbing credit growth, and has concluded that a slight dampening of demand now -while the economy is at least still growing- is better than leaving rates at record low levels that encourage over-borrowing by consumers.

“Brexit complicates setting monetary policy.  And the BoE will be pulled in two different directions should the EU summit in December fail to make progress on the Brexit divorce settlement.”

(Source: deVere group)

Today reports indicate the FTSE closed on a record high yesterday, outperforming its already high record from Friday last week, following the Bank of England’s anticipated decision to raise interest rates from 0.25 to 0.5% last week.

The truth is, this changes a lot, from mortgages to bonds. Below Finance Monthly hears from many sources on Your Thoughts, how consumers should behave, how banking may evolve, how profits can change, what might happen to the pound in weeks to come and so forth.

Anthony Morrow, Co-Founder, evestor.co.uk:

In theory, the rise in the interest base rate should mean that consumers get higher interest rates on their savings. However, people shouldn’t get too excited about this. It often takes many months for the changes to be felt in savings accounts, and even then, the increases in savings rates can be marginal and may take years to build into noticeable rates of anything over 3%.

Consumers should also consider that the increase in base rate still means that their cash savings are playing catch-up. The past decade of interest-rate squeezes has meant that the value of cash savings have dropped instead of increasing in value.

The best course of action is for consumers to spread their savings and investments, and to look for alternatives to the traditional high street savings accounts and cash ISAs. It’s now easier than ever for consumers to invest money via the internet in stocks, shares and global investment funds that could generate average returns of between 5% - 7%. The key thing though is to ensure people get advice about what to do with their money before they part with their cash – this isn’t always readily available – and to check any charges that they’re likely to incur for making investments. In some cases, excessive fees can eat massively into the investment returns, sometimes by as much as half.

Gianluca Corradi, Head of Banking, Simon-Kucher:

Investors with shares in UK banks can cheer as the rate increase will boost the operating profits in the retail banking industry by £274 million over the next 12 months. This 3.1% increase in the operating profit of the banks will be positive news for the shareholders as the U.K. banks have had their profitability squeezed in a low rate environment despite numerous cost cuts and efficiency increase measures.

The gain for shareholders is expected to come as banks increase the lending rates immediately but deposit rates only gradually and by a lower amount. We can expect the banks to immediately increase the interest charged on new loans and those on variable rates by the full 25 basis points (bps), giving a boost of about £1.26 billion in their interest income for the coming year. Concurrently, the interest expense on deposits is likely to rise by just under £1 billion as the rates for savers rise over time.

Consumers can expect modest returns on their deposits as rates, though higher, will still be low in absolute terms. For instance, a saver who manages to get the entire 25bps increase on £10,000 of deposits, would stand to make an additional £25 over a year.

Paresh Raja, CEO, MFS:

In light of rising inflation and stagnating economic growth, the decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.

Angus Dent, CEO, ArchOver:

This rate rise of 0.25% is largely symbolic. At the same time, it’s also a year too late. Dropping the interest rate below 0.5% was the wrong decision in the first place. The Bank should have pushed rates up to 0.75% as a show of strength that would have driven inflation down as the pound rose.

Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy. For many, the move towards a higher interest rate will simply mean business as usual.

Following the financial crash, there is a hunger to make up for ten lost years and UK savers and investors are finally waking up to the realisation that they need to chase higher returns. With interest rates remaining below 1%, this means looking for opportunities to branch out beyond traditional vehicles and introduce greater diversity into portfolios to secure a higher yield.

Emmanuel Lumineau, CEO, BrickVest:

This announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.

Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.

Uma Rajah, CEO, CapitalRise:

The Bank of England’s decision to raise its base rate of interest from 0.25% to 0.5% might superficially look like good news for savers, who have had to live with near non-existent returns on their deposits for some time. But in reality it is highly unlikely that banks will actually pass on much — if any — of the rate rise to their customers. It’s more likely they will act to increase their margins, focusing on improving their own profitability rather than doing what’s best for customers. Savers should take note and look for alternative, more lucrative, ways to grow their pot with minimal additional risk. While the base rate will continue to rise over the next 12 to 18 months, it could be some time before banks pass on the benefits.

Meanwhile, the rate rise is bad news for property developers and borrowers that are using banks to finance their loans. Banks charge based on a margin to LIBOR, which will go up in line with the base rate rises. Combine this with other longstanding challenges in securing finance from banks for real estate projects in the current climate, and property borrowers will be much better off looking at more innovative sources that can deliver finance more quickly and offer better value — particularly if the rate continues to rise over the next 12 to 18 months.

James Bentley, Trader, Learn to Trade:

Following the Bank of England’s announcement that interest rates are rising by 0.25%, the British central bank will hike borrowing costs for the first time in more than 10 years due to the recent surge in inflation.

Many economists have warned that the time is not right for a hike as recent data has painted a subdued picture of the economy while uncertainty over how Britain's withdrawal from the European Union will play out remains. With Brexit negotiations still underway, British consumers should prepare themselves for further fluctuations to interest rates over the next year.

The pound has pushed higher against the dollar in early trade, while London's FTSE100 searched for direction ahead of the announcement. Although the announcement has created uncertainty, we expect inflation to drop to 2.2% by 2020 - where the rate will stagnate and hold for a period of time.

Paul Davies, Director, Menzies LLP:

Even though the rate rise was well signposted by Mark Carney, it will bring hardship for businesses that rely on consumer spending.

Consumers are always wary of a rise in interest rates and we may see the retail industry experiencing a bumpy ride as UK shoppers tighten their purse strings. Businesses can defend against the effects of turbulence by ensuring cash management is a top priority, managing creditor payments and adapting to changes across the supply chain.

Consumers and businesses will be hoping that after the announcement, any further interest rate rises will be staved off until well into the New Year.

Mihir Kapadia, CEO and Founder, Sun Global Investments:

The Bank of England has given in to the rising inflation, which has been above their 2% target and peaking at 3%, by raising interest rates for the first time in a decade. While the interest rate hike bodes well to support the pound, it also increases the borrowing costs for consumers and business. It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious loop, especially as Brexit woes continue to weigh down on the UK’s economy.

The last the time the Bank of England had increased the interest rates was in July 2007, when it pushed the cost of borrowing to 5.75% months before cutting them during the onset of the financial crash of 2008. This increase comes at a time when the economic framework has stabilised and careful credit scrutiny is in place to prevent another crash. The interest rate hike may well deter consumers from accessing cheap credit, which will bode well for the financial watchdogs.

The next interest rate hike may well take a while, until further clarity emerges on Brexit’s impact on the UK economy. Until then 0.5% is the only sword to battle 3% inflation, and curtail it from strengthening any further.

Frazer Fearnhead, Founder and CEO, The House Crowd:

I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors as they will have given to helping people maintain their mortgage repayments and loan agreements”. He added “For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers.

Gregg Davies, Company Director, IMA Financial Solutions:

We all talk about the winners and losers when Bank of England interest rates are mentioned. Of course, if you have savings on deposit in variable rate accounts, or a variable rate mortgage you could be affected directly.

Many are asking, will the rate rise make my mortgage more expensive? Most mortgage lenders offer fixed or variable rate mortgages, and many have already adjusted their fixed rate deals ahead of the speculation over an interest rate rise. Variable rates are either based on a lender’s own set variable rate or linked directly to the Bank of England – called trackers.

We have now had nearly eight years of unprecedently low rates - for a generation of first time buyers, low interest rates are all they have known.

Mortgage holders have taken the low rates on board, and today it is estimated that over 70% of mortgages are fixed rate deals – compared with a low of under 40% in 2001. On a day to day basis this is reflected in my own clients’ decisions.

Rob Douglas, VP of United Kingdom and Ireland, Adaptive Insights:

For many businesses across the UK, the rise in interest rates and subsequent fall of the pound will require action. Companies are operating in the midst of a volatile market, where the sterling went from being at its strongest since the Brexit vote, to taking an immediate tumble after the rise in interest rates was announced. This market instability can upend budgeting and forecasting, making it difficult for finance and management teams to devise an accurate financial plan and make business-critical decisions.

Economic and market volatility require businesses to be as agile and adaptable as possible to ensure their financial planning models reflect changing assumptions and conditions. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins. What’s more, businesses should prepare to be more responsive by running ‘what if’ scenarios in advance that will, for example, reveal the impact the rise in interest rates could have on their business, allowing them to make better, faster decisions.

Ultimately, it is the companies with sound financial planning processes in place that will have a better chance at success when volatility strikes.

Johan Rewilak, Economics Expert, Aston Business School:

Since the crisis of 2007, interest rates have been at record lows, and whilst this hike has only moved them back to pre-Brexit levels, the larger worry is about any future potential rises.

Since the decision has been made, Mark Carney and the MPC have already faced lengthy criticism about how the rate hike will impact the economy. There are those who believe recession is around the corner and that there was a desperate need to maintain interest rates at the 0.25% level to prevent this.

Those advocating the rise have done so by optimistically looking at data that shows unemployment has fallen to levels unseen since the 1970s and that the rate of underemployment (those working part-time who wish to work longer hours) has dropped. Nevertheless, wage growth (a metric of longer term inflation) has remained subdued.

My concern is and will be surrounding financial stability. Household indebtedness and mortgage to income ratios are at troublesome levels and any hikes in interest rates mean higher repayments. If the interest rate hikes lead to recession, this will only magnify these issues and have cataclysmic effects on the financial system as it did in 2007. Whilst, higher rates may put people off from future borrowing, there is a tricky trade-off surrounding those already highly indebted.

The upshot of this rate rise is that at least Mark Carney has two rolls of the dice if Brexit negotiations or the economy starts to sour before negative interest rates become a possibility. That being said, why would anyone raise interest rates that may create a recession just so they have the ability to lower interest rates and to try cure the problem

John William Gunn, Executive Chairman, SynerGIS Capital PLC:

This was widely anticipated by the wholesale markets following the language of the MPC’s September statement. The main question mark was over any Brexit-related outlook uncertainty. As the market had been positioned for this rise a failure to follow through could have caused the MPC credibility issues and sparked yet more speculation around Brexit headwinds to the economy.

For the general public, the good news is that more people are on fixed rate mortgages than ever so the effects for homeowners should be subdued. More people are renting and many households are lucky enough to be mortgage-free. As mentioned in the MPC statement, debt servicing costs paid by British households would remain "historically very low" despite this hike.

It’s not so great for first time homebuyers (many mortgage deals were withdrawn in anticipation of the BoE’s move) but attention now turns to whether the Chancellor can offer any stamp-duty concessions in the Budget on 22nd November.

It's good news for neglected savers and the retired. While still low, retirees shopping around for annuities should already be seeing improved rates. Not all high street banks will be passing this rate rise onto their savers. Some committed ahead of the decision but they were in the minority.

As with the FOMC (the Federal Open Market Committee = equivalent of the MPC) in the US, the first interest rise is psychologically important, as it reminds borrowers that base rates for the last 10 years are not at “normal” levels. It should not be forgotten that for the U.K this is just a reversal of the post-Brexit-result emergency cut in Aug 2016. Any pre-Christmas consumer sentiment change may affect spending at high street retailers who have had mixed trading results recently. As with the U.S central bank guidance, we expect any rate rises over the coming years to be on a slow and gradual basis.

Given the modest growth forecasts issued by the MPC and their expectation that inflation with peak at 3.2% in the October CPI release, we do not anticipate any further tightening from the MPC until Q3 2018. The Brexit influence is unlikely to go away soon, as noted by the MPC in their statement.

Duncan Donald, CEO and Head of Trading, London Academy of Trading:

Last week we saw the UK MPC and Mark Carney deliver a rate hike in the UK to 0.5%, the first hike since the financial crisis in 2007.

It came as little surprise, with the market pricing in a 90% probability of this action prior to the announcement on “Super Thursday”. The act of hiking rates is perceived as ‘Hawkish’ and would typically drive the currency higher, but the price action reflected this was all but priced in.

The other positive element of the meeting, was the split of the voting members of the committee. The result was 7-2, showing that 7 members of the committee were in favour of the hike, with just 2 members dissenting. Forecasters had thought the split may be tighter, with a 6-3 or 5-4 majority to hike. These being the first two factors announced to the market, saw the pound appreciate half a cent against the dollar from 1.3220 to 1.3270. This move was sharply unwound as the market plunged over 2 cents to 1.3040.

The driver was the announcement that Mark Carney and his committee anticipates just two subsequent hikes, and not in the next year but over the next 3 years. This signified that in the short term we are very much looking at the ‘one and done’ scenario. The fears of Brexit and the unknown have perhaps rightly got the committee apprehensive of doing too much too soon. This was further underlined at the weekend, with comments from Mark Carney regarding fears of inflationary pressures that could be caused if we were to leave the EU without a deal.

Market traders and investors still question Carney’s ability to actually deliver what he says he will, in this case to raise interest rates. This was the market opinion in the UK and in his previous position in Canada. He delivered on the interest rate hike, but as the markets reflect, it was done in the most dovish of manners.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

As expected, Mark Carney and the Bank of England have risen the UK interest rate for the first time in 10 years, stating that: “The time has come to ease our foot off the accelerator”.

The rate has risen from 0.25% to 0.5%, returning it to the same levels it was prior to a drop following the Brexit referendum result in June 2016, a move designed to stabilise the economy during a tumultuous market in the wake of the landmark vote.  The MPC (Monetary Policy Committee) voted by a score of 7-2 in favour of an increase, but has sought to curb any major fears of a quick rise and retain a level of cautiousness by stating in its report that, “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent”.

The rate rise has been expected to happen for some time and is seen by many as a direct response to protect British households from creeping inflation.  Mark Carney, Governor of the Bank of England, is tasked with keeping inflation at a target mark of 2%, however September saw it rise to 3%, its highest figure since 2012.

The rate increase was also announced in tandem with an upgrade on the growth forecast for this year, which has been raised from 1.3% to 1.5%.  The projections for 2018 have also been upgraded, and while this may sound promising for those who championed leaving the EU, the Bank of England has been very clear in asserting its position that Brexit is, and will remain, harmful to the UK economy.  The report states that Brexit is causing ‘noticeable impact on the economic outlook’, citing the ‘uncertainties associated with Brexit’ and ‘Brexit-related constraints’, as having a detrimental effect on the financial system.

For the average UK citizen, there are some concerns that the cost of borrowing will now increase and therefore negatively impact those applying for mortgages and loans.  The move is also expected to affect homeowners on interest only mortgages who have been enjoying low repayments with the potential to increase monthly payments.  With nearly 4 million homeowners currently on variable or base-rate trackers, an increase of up to £12 per month could be seen for those with the average repayment loan of around £90,000 on their mortgages.  There is also concern that many people who have never seen a rate-rise in their lives will be caught unexpected, and this could further squeeze a population where falling wages and consumer debt are prevalent.

The British pound fell sharply immediately after the announcement, but many analysts are still seeing this as a ‘one and done’ rise and do not expect to see any further changes emanating from the Bank of England until the terms of Britain’s Brexit is defined.

In light of new figures recently released by the British retail consortium which reveal that the popularity of contactless has soared ahead of cash, Ross Macmillan, head of research and intelligence at allpay Limited (the UK’s leading payment specialist) argues that cash is far from dead – especially when it comes to bill payments, which contactless can’t accommodate.

Ross told Finance Monthly: “With experts predicting the end of cash for the last five decades, it’s no surprise that with the increasing use of mobile payments and digital wallets, they’re at it again.

“However, for all the talk about cryptocurrencies and virtual accounts – the value of banknotes in circulation in the UK has actually increased threefold over the past 20 years, according to the Bank of England. As at end of July 2015, the total value of Bank of England notes in circulation stood at £62.6 billion. And with more than 18 billion cash payments made in 2014, according to Payments UK, which accounted for 48% of all payments made in the UK, you could argue cash is alive and far from dead.

“Consider some of the major household bills like rent, council tax, water, TV Licence, gas and electricity. Every year hundreds of millions of payments for household bills are made with coins or paper providing flexibility and convenience for the likes of the rurally isolated, unemployed, un/under-banked, digitally excluded, elderly or vulnerable. If they were unable to use cash, they’d incur arrears on their bills and fall into debt. In fact, according to industry data, in some of these sectors between 10% and 39% of payments are still made in cash and cheque. In energy and housing for example, there has been an increase in volume, albeit small, between 2014 and 15.”

With the UK economy having held up well and inflation now back above the 2% target, there is growing disquiet about whether the Bank of England should be keeping interest rates this low. Adam Chester, Head of Economics at Lloyds Bank Commercial Banking here provides Finance Monthly with expert analysis on the matter.

We know that one member of the rate-setting Monetary Policy Committee broke ranks and voted for an immediate quarter point rise of the UK Bank Rate at its March meeting, and the minutes showed it would not take much further ‘upside news’ for others to follow suit.

But latterly, fresh economic indicators have painted a softer picture, and market sentiment has blown hot and cold in response.

Industrial and construction output for February came in weaker than expected, dropping on the month by 0.7 per cent and 1.7 per cent, respectively.

The softening in the latest Purchasing Managers’ Indices for both these sectors points to little improvement in March, though the more important services PMI survey remained upbeat.

Meanwhile, recent reports have pointed to a slowing in consumer spending, although the March figures may have been affected by the later timing of Easter this year.

Overall, it seems that the economy has lost some momentum in the first quarter.  But after the strong fourth quarter, this is perhaps not particularly surprising.

So how likely is it that the Bank of England will raise interest rates before the end of the year?

Mixed messages

The case for doing so rests mainly on two arguments: the rise in inflation and the strength of the labour market.

At 2.3 per cent, inflation is now above the government’s two per cent target (and likely to remain so for some time). Meanwhile, the labour market is approaching full employment. At 4.7 per cent the unemployment rate is at its lowest for twelve years.

The international backdrop may also support the case for a modest rise in UK rates.

Global equity prices are close to all-time highs, the recovery in the euro area is picking up steam and the US has already started to raise interest rates – and where the US leads, the UK tends to follow.

That said, there are good reasons to believe the economy’s resilience could be sorely tested over the coming months. The negotiations for the UK to leave the EU risk sparking a renewed period of uncertainty, while the full effect of the drop in the pound has not yet fed through.

And while rising inflation and a strong labour market may prompt calls for higher wages, there is little sign of that at the moment. Instead, with the fall in the pound expected to drive inflation above three per cent by the end of the year, households are likely to increasingly feel the squeeze.

Key signals

So, the Bank is facing mixed messages. Ultimately, how this all breaks will depend on three key signals:

If all three of these signals begin to flash red, then we could be looking at an interest rate rise before the end of the year.

But if they all soften, it will only serve to confirm what the markets are expecting and provide further comfort to the doves on the Monetary Policy Committee, pushing the likelihood of a rate rise well into 2018, or even later.

Royal Bank of Scotland has failed the 2016 Bank of England banking stress test.

However the regulator said it has approved remedial action that RBS is already taking to improve its resilience to financial shocks.

In aggregate the Bank of England said the UK banking system is currently capitalised to support the UK in a severe economic scenario.

The 2016 test was the most severe test applied to banks yet. In many ways the scenarios tested are worse than conditions during the financial crisis; in particular the stress tests project UK house prices falling 31%.

The stress test is a worst case scenario, and the Bank of England’s main baseline projection is in fact for the capital positions of UK banks to improve in aggregate in 2017.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown commented:

‘RBS is still the weak link in the UK banking chain, almost a decade after the financial crisis came close to wiping the bank out.

On the face of it the bank currently has a high capital buffer, but the 2016 stress test reveals than under extremely severe economic conditions, that would quickly be eroded.

Unlike most of its peers, RBS doesn’t have the luxury of a dividend which it can cut to support its capital position. The bank is still in the process of restructuring its business, not to mention spinning off Williams & Glyn, as well as facing potentially hefty misconduct costs in the US, all of which serve to weaken its hand.

However RBS is in no immediate danger, barring a repeat of something akin to the financial crisis, and it’s important to bear in mind that the 2016 stress test uses an extremely severe economic scenario to challenge the resilience of the UK banks to financial shocks.

Indeed the point of these tests is to identify inadequacies which require remedial action, and to that end RBS has submitted a revised capital plan which has been accepted by the regulator.

The good news from the stress test is the regulator believes that as a whole the UK banking system is in a good position to weather a particularly nasty economic storm.’

(Source: Hargreaves Lansdown)

Future central bankers in the UK will have to deal with a compromised Bank of England following the government’s intervention in Mark Carney’s management of monetary policy, according to a leading critic of Bank of England policy.

Anthony Evans, an economist at ESCP Europe business School in London, says that the government has overstepped its remit in questioning Mr Carney’s decisions – with some members calling for his resignation.

“The government has effectively reminded Mr Carney that he answers to them – and that is a dangerous mistake. He has responded robustly, and it is unlikely that this will affect how he runs his office – but I believe that this has compromised the position for future central bankers in the UK, with the independence of the central bank being questioned so openly.”

“To call for his resignation is unwarranted – in making forecasts he was only doing his job. Personally, I think that his forecasts are overly gloomy, but he must have absolute independence to make calls as he sees them, or the future efficacy of the Bank of England as an independent body will be questionable. The whole point of the central bank as an independent voice is defeated if policy makers can influence it.”

(Source: ESCP)

by Ben Brettell, Senior Economist, Hargreaves Lansdown

The UK economy shook off Brexit-related uncertainty to post 0.5% growth in the third quarter. This is down from 0.7% in Q2, but far better than the 0.3% economists had feared.

The ONS said there was little evidence thus far of an output shock in the immediate aftermath of the vote.

Initial GDP estimates should always be taken with a pinch of salt, as they are based on less than half of the data which will ultimately be available, and are therefore subject to revision in the coming months. Nevertheless it’s difficult to interpret today’s figures as anything other than very good news for the UK economy.

Some will be concerned about the absence of any rebalancing of the economy away from the ever-dominant services sector, which grew 0.8% while everything else contracted. However, I don’t see this as a problem. In an increasingly global economy, individual countries need to specialise in industries where they have a comparative advantage. It’s clear to even the most casual onlooker that the UK has a comparative advantage in services, and therefore it shouldn’t come as a surprise that ever more resources are allocated to that sector of the economy.

The Bank of England may deserve some credit for acting swiftly to bolster the economy in the months after the referendum, though of course it’s impossible to predict what would have happened in the absence of any action. What today’s release does do is pour cold water on the chances of a further rate cut next month. In August the Bank said the majority of MPC members expected a further rate cut later this year, but at the time it was forecasting zero GDP growth. A stronger-than-expected Q3 performance is likely to mean the Bank leaves policy unchanged when it meets in November.

 

The Bank of England’s first polymer note – the New Fiver featuring Sir Winston Churchill – enters circulation today, Tuesday 13 September.
The New Fiver is cleaner, safer and stronger. The introduction of polymer banknotes allows for a new
generation of security features which make it even harder to counterfeit. The note is also resistant to dirt and moisture and so remains in better condition for longer. The strength of the polymer material means that The New Fiver is expected to last at least 2.5 times longer – around 5 years.
Commenting on the introduction of The New Fiver, the Governor said:

“The New Fiver commemorates one of the greatest statesmen of all time, Winston Churchill, who remarked that ‘a nation that forgets its past has no future’. Banknotes are repositories of the United Kingdom’s collective memory, and we will be reminded of Churchill’s enormous contributions as he once again becomes part of our daily lives as the New Fiver flows out into tills and pockets.
The New Fiver, made of polymer, will be cleaner, safer and stronger. Resistant to dirt and moisture, it will stay in good condition for longer. The new security features make it harder to counterfeit. While the use of polymer means it can better withstand being repeatedly folded into wallets or scrunched up inside pockets and can also survive a spin in the washing machine. We expect polymer notes to last at least two-and-a-half times longer than the current generation of fivers and therefore reduce future costs of production.”

Following the unveil of the note on 2 June at Blenheim Palace, Bank staff have travelled around the UK to show The New Fiver to the public and engage with retailers. Victoria Cleland, Chief Cashier of the Bank of England said: “The regional roadshows have been a fantastic way to share the new note with the public and retailers. The reaction has been overwhelming positive, and I have been struck by their enthusiasm to start using the notes.”

The Bank of England has printed 440 million New Fivers ready for issue and they will begin to be available from many cash machines and bank counters across the UK from today. Members of the public can expect to see a new note over the coming days and weeks.
Paper £5 notes will be gradually withdrawn from circulation as they are banked by retailers and businesses.
The public can continue to spend paper £5 notes as usual until 5 May 2017 after which they will cease to be legal tender. Following this, paper £5 notes will still be exchanged at the Bank of England. The new polymer £10 featuring Jane Austen will enter circulation in summer 2017 followed by the J.M.W. Turner £20 note by 2020.
Ms Cleland added: “The Bank has been working with the cash industry throughout this important and
exciting project and we’re grateful for their efforts in making the introduction of The New Fiver a success. We will continue to work with them throughout the transition and are looking forward to the introduction of the Jane Austen £10 note next summer.”
To help blind and vision impaired people distinguish between denominations the notes retain tiered sizing and include bold numerals and similar colour palettes to the current notes. In addition, polymer £10 and £20 notes will each have a tactile feature created by a series of raised dots, and the £5 note will be distinguishable by the absence of a feature.
Further details about The New Fiver can be found on www.thenewfiver.co.uk

(Source: Bank of England)

After a night of counting the votes, it was revealed at exactly 06:00 BST this morning that Britain had voted to leave the EU. Prime Minister David Cameron has announced that he is stepping down by October, saying:

“I fought this campaign in the only way I know how – which is to say directly and passionately what I think and feel- head, heart and soul. I held nothing back. I was absolutely clear about my belief that Britain is stronger, safer and better off inside the European Union. And I made clear that the Referendum was about this and this alone – not the future of any single politician, including myself. But the British people have made a very clear decision to take a different path. And as such, I think that the country requires fresh leadership to take it in this direction. “

The referendum has seen the highest turnout at a UK-wide vote since 1992 – 71.8% with more than 30 million people voting. 51.9 % of those voted to Leave by 48.1%. While England and Wales voted strongly for Britain to leave the EU, London, Scotland and Northern Ireland strongly disagreed with Brexit.

UKIP Leader Nigel Farage, who has been campaigning for Britain to leave the EU in the past two decades, said that today would “go down in history as our independence day”.

As the UK heads for Brexit, the pound has fallen dramatically hitting a 30-year low and plummeting to $1.3236 at one stage earlier this morning. In the opening minutes of trade, the FTSE 100 Index fell more than 500 points before regaining some ground.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments: ‘Global stock markets have taken a Brexit hit, with European markets actually falling more than the Footsie. Safe haven assets have soared as investors sought security, with gold rising 5% and UK bond yields plunging to historic lows.On the stock market, banks and housebuilders have been hit particularly hard this morning as markets try to factor in the Brexit effect on the UK economy.Sterling has fallen to its lowest level for over 30 years , which will mean holidaymakers heading abroad in the coming weeks will have to dig extra deep to buy foreign currency.Investors should carefully consider their plans and avoid a knee-jerk reaction. The coming days are likely to be choppy on the stock market as it digests the ramifications of Brexit, and further falls are possible.However markets will bounce back at some point, and investors who switch to cash risk buying back into the market at a higher level, and ending up in a worse position than if they had just stayed put.’

Bank of England governor Mark Carney said this morning that: "Some market and economic volatility can be expected as this process unfold. But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.

"The Bank will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward."

As the Article 50 two-year deadline approaches following the referendum results, David Cameron will be put under pressure to "steady the ship" over the coming weeks. Remain campaigners believe that it is possible that the Brexit could result in reverting to trading with the EU under World Trade Organization rules, which would involve exporters being hit by import taxes or tariffs.

After all 32 local authority areas in Scotland returned majorities for Remain, Scotland's First Minister Nicola Sturgeon has said that the referendum results make it “clear that the people of Scotland see their future as part of the European Union".

Germany's foreign minister Frank Walter Steinmeier commented that today is "a sad day for Europe and Great Britain".

The final design for the new Bank of England £5 note, which will enter circulation in September, will feature the image of Sir Winston Churchill. The new note will be made of plastic rather than cotton paper, which is believed to be cleaner, more durable and harder to counterfeit than the current cotton paper banknotes.

However, the use of new material might create difficulties since the notes may initially be prone to stick together. Although countries such as Scotland, Australia and Canada have been using the thin, see-through polymer, plastic banknotes are brand new to England.  The new polymer notes, which are 15 % smaller than the current ones, will be accompanied by advice to businesses about dealing with them.

The decision to feature Churchill was made three years ago. Churchill’s declaration "I have nothing to offer but blood, toil, tears and sweat", a view of Westminster and the Elizabeth Tower from the South Bank, the Great Clock and a background image of the Nobel Prize are all present in the artwork on the banknote. It will take a year for the new note to completely replace the current 329 million Elizabeth Fry £5 notes in circulation.

Plans for other notes include featuring Jane Austen on the new £10 note which will be issued in 2017, and JMW Turner who will appear on the next £20 banknote expected by 2020. New polymer banknotes are being issued in Scotland as well.

 

European Central Bank (ECB) headquarters

European Central Bank (ECB) headquarters

European Central Bank (ECB) and Bank of England (BoE) have announced measures to enhance financial stability in relation to centrally cleared markets in the EU.

The ECB and the BoE have agreed enhanced arrangements for information exchange and cooperation regarding UK Central Counterparties (CCPs) with significant euro-denominated business.

A CCP places itself between the original counterparties to a transaction, effectively guaranteeing that if one counterparty fails, the CCP will continue to perform on the transaction to the other party. A CCP protects itself by taking collateral (‘margin’) from each party and by collecting a ‘default fund’ from its members to meet losses that exceed the margin it holds.

The ECB and the BoE are also extending the scope of their standing swap line in order, should it be necessary and without pre-committing to the provision of liquidity, to facilitate the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and euro area respectively. CCP liquidity risk management remains first and foremost the responsibility of the CCPs themselves.

Davidson & Co

This announcement follows the judgement on 4 March 2015 by the General Court of the EU. In light of these agreements the ECB and UK government have agreed to a cessation of all legal actions covering the three legal cases raised by the UK government.

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