Last month, the Bank
of England (BoE) sanctioned a further increase in its benchmark interest rate
as inflation continues to surge significantly ahead of the Bank’s target level.
Following
a meeting held in mid-March, the BoE’s nine-member Monetary Policy Committee
(MPC) voted by an 8-1 majority to raise Bank Rate from 0.5% to 0.75%. This was
the third meeting in a row that the MPC had signalled a tightening of monetary
policy, taking the Bank’s main interest rate back to its pre-pandemic level.
Policymakers
cited a strong labour market and continuing signs of ‘robust domestic cost
and price pressures’ as key reasons for the hike. Minutes to the meeting
also noted that Russia’s invasion of Ukraine had led to ‘further large
increases in energy and other commodity prices including food prices.’ As a
result, the BoE now expects inflation to reach ‘around 8% in April,’
almost a full percentage point higher than it forecast in February and four
times its 2% target figure.
While
the minutes did say that ‘some further modest tightening in monetary policy
may be appropriate in the coming months’ they also pointed to concerns
about the outlook for growth as households struggle with a squeeze on incomes.
Indeed, analysts noted a more dovish tone than was evident in the previous set
of minutes, with a distinct softening of the language on the need for future
rate hikes.
Data
subsequently released by the Office for National Statistics (ONS), however,
showed that price rises continue to exceed analysts’ expectations. In the 12
months to February, the rate of inflation as measured by the Consumer Prices
Index, surged to a 30-year high of 6.2%. This was significantly up on the
previous month’s rate of 5.5%, and 0.3% higher than the median forecast in a
Reuters poll of economists.
OBR
downgrades growth forecast
The
Office for Budget Responsibility (OBR) has downgraded its forecast for UK
economic growth over the next two years amid an unprecedented squeeze on
household finances.
Chancellor
Rishi Sunak unveiled the independent forecaster’s revised projections during
his Spring Statement, delivered to the House of Commons on 23 March. The new
forecast suggests the economy will expand by 3.8% in 2022, significantly down
on October’s 6.0% prediction. Next year is also expected to yield lower growth,
with the economy forecast to expand by 1.8% compared to a previous prediction
of 2.1%.
The
downgrades partly relate to Russia’s invasion of Ukraine which the OBR warned
would have ‘major repercussions for the global economy.’ In addition,
they reflect a sharp squeeze on living standards with real disposable household
incomes expected to fall by 2.2% in the coming financial year – this would
represent the biggest annual decline in UK living standards since records began
in 1956.
Ironically,
the latest gross domestic product statistics released by ONS showed the UK
economy grew by a faster than expected 0.8% in January. This was the strongest
monthly expansion since last June and beat all forecasts in a Reuters poll of
economists.
Survey
data also suggests the economy continued to expand at a robust pace during the
last two months. The preliminary reading of the S&P Global/CIPS Composite
Purchasing Managers’ Index (PMI), for instance, came in at 59.7 in March, only
marginally below February’s historically high figure of 59.9.
S&P
Global Chief Business Economist Chris Williamson said, “The further
reopening of the economy after COVID-19 containment measures helped offset
headwinds from the Ukraine war, Brexit and rising prices.” However, he also
noted that the PMI’s measure of business optimism slumped to a 17-month low in
March, adding, “Indicators point to potentially sharply slower growth in the
coming months.”
Markets
(Data compiled by TOMD)
The
ongoing conflict in Ukraine continues to impact global markets, as they closed out a turbulent quarter. The invasion is
exacerbating inflationary pressures, driving up the cost of everything from
fuels to food, leading to volatility across commodity markets in particular.
At the end of March, falling oil prices
and escalating inflation figures from the US weighed on investor sentiment. The oil price declined
after the
Organization of the Petroleum Exporting Countries and allies (OPEC+)
agreed to another modest monthly oil output boost, resisting pressure to pump
more oil, despite consumer calls for increases. Joe Biden later issued the release of
one million barrels a day from crude reserves in an effort to tame energy costs,
commencing in May.
Looking at major global
indices, in the UK, as the dust
settles on the Spring Statement and recent OBR estimates, the FTSE
100 closed the month up 0.77% on 7,515.68, while the FTSE 250 and AIM both
recorded marginal gains of 0.37% and 0.19% respectively. In
the
US, the Dow Jones closed March up 2.32%, while the NASDAQ finished 3.41% up. In Japan, the
Nikkei 225 ended the month on 27,821.43, up 4.88%, and the Euro Stoxx 50 closed
March down 0.55% on 3,902.52.
On
the foreign exchanges, sterling closed the month at $1.31 against the US
dollar. The euro closed at €1.18 against sterling and at $1.10 against the US
dollar.
Brent Crude closed the month trading at around $108 a barrel, a gain of over 10%. Gold is currently trading at around $1,924 a troy ounce, a gain of just over 1% on the month.
Unemployment
below pre-pandemic rate
The latest set of
labour market statistics published by ONS revealed a further fall in the rate of
unemployment, although real pay growth continues to lag the spiralling cost of living.
In the
three months to January, the unemployment rate fell to 3.9%, down from 4.1%
across the previous three-month period. This was the lowest level since the
three months to January 2020 and took the jobless rate back below its
pre-pandemic level.
The data
also showed another strong rise in the number of pay-rolled employees in
February and yet another record number of job vacancies. The number of people
out of work but not looking for a job also rose again, however, which meant the
total number of people in employment remains well below its equivalent
pre-pandemic figure.
In terms of
wage growth, the data showed average weekly earnings, excluding bonuses, rising
at an annual rate of 3.8% across the November–January period. Although this was
a slight increase from the previous three-month period, it did mean that pay
once again failed to keep up with the rapid rise in prices. Indeed, after
taking account of inflation, regular earnings fell by 1% compared to year
earlier levels.
Official retail sales
figures have revealed a drop in sales volumes during February while survey
evidence suggests sales remained disappointing in March.
ONS
data showed that total retail sales volumes unexpectedly declined by 0.3% in
February compared to the previous month. An ONS spokesperson said retailer
feedback linked some of the fall to stormy weather which had kept shoppers at
home, while the easing of COVID restrictions resulted in more people returning
to pubs and restaurants at the expense of grocery sales.
The
latest Distributive Trades Survey from the CBI suggests sales growth remained
relatively weak last month with its sales-for-the-time-of-year gauge falling
from +16 in February to -23 in March. Retailers also said they expect sales to
remain below seasonal norms this month, although to a lesser extent.
Commenting
on the findings, CBI Principal Economist Martin Sartorius said, “Retailers
had a mediocre March, with sales reported as being below seasonal norms. The
cost-of-living crisis is looming large across the sector, as households’
wallets are being hit by the fastest rate of inflation in decades. Further
action will be needed to galvanise consumer confidence, shore up incomes, and
support spending on UK high streets in the tough months to come.”
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