Interest rates rise again
In February, the Bank of England’s Monetary Policy Committee (MPC) announced
an increase in its main interest rate for the second meeting in a row as the
Bank continues to grapple with a rapid rise in the cost of living.
At its latest meeting held in early
February, the MPC sanctioned a quarter of a percentage point rate rise taking
Bank Rate to 0.5%. In what was a surprise split decision, however, four of the
nine-member committee voted for a larger hike, seeking to raise rates by half a
percentage point.
The decision to increase rates is
designed to contain the country’s spiralling rate of inflation, which the Bank
now expects to peak at around 7.25% in April. This would represent the fastest
rate of consumer price growth since 1991 and would leave inflation
significantly above the Bank’s 2% target level.
Data subsequently released by the Office
for National Statistics (ONS) showed that inflation, as measured by the
Consumer Prices Index, rose to 5.5% in the 12 months to January, putting the
cost of living at a near 30-year high. This figure was above most predictions
in a Reuters poll of economists, with the consensus suggesting the rate would
hold steady at the previous month’s level of 5.4%.
The latest inflation statistics appear to
have reinforced the chances of a third consecutive rate rise at the conclusion
of the MPC’s next meeting on 17 March. The minutes from February’s meeting
acknowledged that the Bank expects ‘further
modest tightening in monetary policy’ to be appropriate ‘in the coming months’ and, according to
a Reuters poll, most economists now predict a quarter percentage point rise in
March. Furthermore, almost half of respondents also forecast a similar hike at
May’s meeting.
Signs of economic resurgence
The latest gross domestic product (GDP)
statistics show the UK economy suffered a smaller than expected economic hit in
December while more recent survey evidence points to a sharp acceleration in
growth during February.
Data released last month by ONS revealed
that UK economic output fell by 0.2% in December as people increasingly worked
from home and avoided Christmas socialising due to the spread of the Omicron
variant. This contraction, however, was less severe than many had feared, with
a Reuters poll of economists having predicted a 0.6% monthly fall.
Despite December’s decline, GDP data
covering the whole of last year showed the UK economy experienced a sharp
rebound in 2021, following the dramatic pandemic-induced collapse in output
recorded during the previous year. In total, the economy grew by 7.5% across
2021, the UK’s largest annual rate of growth since 1941.
More recent survey data also suggests
there has been a swift rebound in economic activity following the disruption
caused by Omicron at the turn of the year. The preliminary headline reading of
the closely monitored IHS Markit/CIPS composite Purchasing Managers’ Index, for
instance, rose to 60.2 in February from 54.2 in January.
This represents the fastest pace of
growth in private sector output since last June, with a strong recovery in
consumer spending on travel, leisure and entertainment fuelling the pickup in
activity. IHS Markit’s Chief Business Economist Chris Williamson said the data
pointed to a “resurgent economy in February” as COVID containment measures were relaxed.
Mr Williamson
did though add a note of caution, saying
that “indications of a growing plight for
manufacturers” needed to be watched. He added, “Given the rising cost of
living, higher energy prices and increased uncertainty caused by the escalating
crisis in Ukraine, downside risks to the demand outlook have risen.”
Markets (Data
compiled by TOMD)
The Russian invasion of Ukraine has understandably
impacted global markets. Due
to the uncertain nature of the fast-evolving situation, global markets
initially reacted with many stocks moving into the red and the oil
price pushing beyond the $100 milestone as supply concerns intensified.
Markets reacted
accordingly on the last trading day of the month following news that Vladimir
Putin had placed the nuclear deterrent on high alert the previous day. A raft of
economic sanctions against Russia are being imposed, including a
move designed to cut off Moscow’s major financial institutions from Western
markets. Chancellor Rishi Sunak said the sanctions “demonstrate
our steadfast resolve in imposing the highest costs on Russia and to cut her
off from the international financial system so long as this conflict
persists.”
At the
end of February, major global markets largely closed in negative territory as
investors pensively monitored developments. In the UK, the FTSE 100 closed the
month down 0.08% on 7,458.25, the FTSE 250 and AIM also both lost ground to
close the month on 21,081.05 and 1,040.36, losses of 3.86% and 4.99%
respectively.
In Japan, the Nikkei 225 ended
the month on 26,526.82, down 1.76%, and the Euro Stoxx 50 closed February down
6.00% on 3,924.23. Stateside, the Dow Jones closed
February down 3.53%, while the NASDAQ closed down 3.43%.
On the foreign exchanges, sterling closed the month at $1.34 against the
US dollar. The euro closed at €1.19 against sterling and at $1.12 against the
US dollar.
The oil price moderated at month end with Brent Crude closing the month trading at around $98 a barrel, a gain of over 9%. Investors flocked to gold, which is currently trading at around $1,903 a troy ounce, a gain of over 6% on the month.
Pay levels fall in real terms
While the latest set of earnings statistics did report relatively
strong growth in nominal wage levels, the data also showed that pay growth is
now lagging the rapidly rising cost of living.
ONS figures released last month showed
that average weekly earnings, excluding bonuses, rose at an annual rate of 3.7%
in the final quarter of last year. This exceeded market expectations and was
also higher than Bank of England forecasts.
However, although the rate remains
relatively high in comparison to levels witnessed over the last decade, pay
growth is now failing to keep up with the spiralling rate of inflation. Indeed,
in real terms, regular earnings fell by 0.8% compared to Q4 2020.
In early February, after announcing the
latest interest rate rise, Bank of England Governor Andrew Bailey called on
workers to rein in pay demands or risk a wage-inflation spiral. The tight
labour market, however, means employers are increasingly having to offer higher
salaries to retain existing workers and attract new staff. Early ONS estimates
suggest these pressures are driving wage growth, with median earnings for
workers on payrolls in January 6.3% higher than the same month last year.
Government debt costs rising
The latest public sector finance statistics show borrowing remains
below forecast, although rising inflation is pushing up the cost of servicing government
debt.
January is typically a strong month for
public finances due to seasonal inflows of Income Tax and this year ONS data
revealed a £2.9bn surplus. While this was a distinct improvement on last year’s
£2.5bn deficit, it was below market expectations and £7bn less than January
2020’s pre-pandemic surplus.
While year-to-date borrowing remains
significantly ahead of Office for Budget Responsibility forecasts prepared for
the last Budget, higher inflation has started to push up interest payments via
its impact on index-linked debt. Economists expect this to limit the
Chancellor’s room for manoeuvre when he delivers a fiscal update on 23 March.
Isabel Stockton, a Research Economist at
the Institute for Fiscal Studies, commented, “Borrowing remains likely to
come in below that forecast in the Budget. This will doubtless be good news for
the Chancellor as he prepares for his Spring Statement. But borrowing still
remains high by historical standards and while he is currently meeting his
fiscal targets, Mr Sunak has left himself with very little wriggle room.”
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