Tag Archives: inflation

UK base rates, inflation and unemployment – same old story but with worsening figures

Interest rates remain at 0.5% in the UK, but for how much longer as record monthly leaps in food and transport costs raised the consumer prices index (CPI) to 3.7% in December 2010, (up from 3.3% in November), according to the Office for National Statistics. Continued high level rises in food and fuel prices could send the inflation rate to 5% by the autumn, economists warned.

There is some suggestion that interest rates will have to rise to mitigate inflationary pressures however, pushing up interest rates may be a welcome relief for net savers but it is likely to have a greater adverse impact on those with mortgages and other borrowings.

The housing market is already falling back from the small gains during the last twelve months and, with an increasing level of job losses in 2011 possible, (currently at just under 2.5 million or 7.9%), any consumer confidence could be wiped out and the UK could slip into another economic downturn or consistent low growth period for the foreseeable future.

UK coalition emergency budget – All Pain and No Gain?

The much awaited “austerity budget” is due on 22nd June and both individuals and business communities await the various instruments of torture to be applied to direct and indirect taxation, benefits and spending cuts. There will be a lot of pain but how much can the electorate stand, noting that even if the election had provided another result the same impact would have resulted in the attempts to repair the damaged economy.

Key issues – repayment of UK debt whilst keeping inflation down, (currently around 3.5%), and interest rates as low as possible, (base rate at 0.5% for 15 months), and growing the economy. 

The backdrop to achieving target reductions are;-

Public Sector Pensions – in the past these have been self balancing within a few million £ but the current deficit is about £4 billion per annum with this rising to £10bn by 2015. The questions are; – why the situation has been allowed to get “out of control”, why should the private sector subsidise this and the whole population suffer cuts in public spending and tax increases. It is understood that private sector pensions have been dealing with deficits and surpluses for many years, but Government has never addressed the issue or even appeared concerned.

Unemployment – officially 2.5 million but with another 8.2 million, (over 20% of the working age population) unable to or not wanting to work – with the former being a significantly higher proportion!! Tax increases mooted in VAT, CGT and benefit reductions may provide a temporary boost in spending prior to their introduction, but then there is the re-stagnation of the economy with unemployment likely to rise even more. 

Interest Rates – at 0.5% for over a year and in theory great for those able to borrow, (albeit that rates are well over the base rate), and remaining at this level possibly into 2011, but a pittance for savers.

Inflation – even if it falls to the 2% target, (currently 3.5%), this is well over the ability of many people to maintain real income, with pitiful savings rates and many in employment already suffering wage cuts or freezes.

The above shows some of the pain but with so much uncertainty for the consumer, business, the economy in general and the ongoing Eurozone debt crisis posing threats to UK growth prospects, there is no real sign of when the gains will be seen by the private individual or business community.

Bank of England, Interest Rates and UK Debt forecasts

For those with mortgages or loans last weeks decision by the Bank of England to keep the UK base rate at 0.5% is good news, but for net savers it is now a year of exceptionally low returns with inflation more than cancelling out any interest earned. Indeed, it is also lucky that UK Plc’s debt mountain is only attracting low levels of interest, as the Bank for International Settlements, (BIS), has stated “Interest payments on the UK’s public debt will double from 5% of GDP, (Gross Domestic Product), to 10% within a decade under the bank’s “baseline scenario” before spiraling upwards to 27% by 2040 – by far the highest among the OECD club of developed countries.” With the political parties currently parading their manifestos, none have managed to look beyond the next five years, (the next term of government), but the austerity measures we all will face indicate that their policies will only half the current deficit at best if all the public spending cuts, tax increases and efficiency initiatives deliver. The recession is over………………..?

UK Interest Rates, GDP revision and Sterling takes a “pounding”

The Bank of England kept interest rates at a record low of 0.5% for the 12th consecutive month on Thursday, a decision widely expected as any rise in the cost of borrowing could damage the UK’s fragile economic recovery. The bank has not pumped any more money into the economy under its quantitative easing (QE) but may have to restart its asset-buying programme, (QE), if the economic outlook deteriorates, but many analysts are predicting monetary tightening later this year. It appears that the “tensions that underlay the build-up of large world imbalances have not been resolved” and the UK’s largest export market, the euro zone economy, has stalled.

Despite the upward revision to GDP in the fourth quarter of last year, to 0.3% from an estimate of 0.1%, the economy remains weak. Businesses are still under serious pressure and the threat of a double-dip recession is more serious in the near future than risks of higher inflation.

The pound took a pounding last week and suffered its biggest one-day fall for more than a year amid the prospect of a hung Parliament, after the election mooted to be in early May this year. There are fears that this will prevent swift and decisive action being taken over Britain’s public finances. Sterling fell to under $1.50 for the first time in ten months and today closed at $1.51. Against the Euro it is only €1.11 and has remained at this level for some time, despite debt issues in Greece and Portugal putting pressure on the Euro.