Economic News August 2016
On the 4th of August, the Bank of England Monetary Policy Committee unanimously agreed to cut the base interest rate to 0.25 per cent from its already record low level of 0.5 per cent, where it had remained since March 2009. The aim of the cut is to encourage households and businesses to borrow more and to encourage banks to create more money for loans and thereby keep money flowing into the economy. However, as rates are so low, the effect may be limited.
As the cut was announced, some major mortgage lenders, including HSBC, Santander and Nationwide agreed to pass on the cut. However, Tesco Bank raised rates on a dozen tracker loans for new customers and the Halifax has followed suit, increasing the interest rate on two-year trackers offered to borrowers with small deposits to 2.04 per cent.
At the same time as cutting the base rate, the Bank of England announced further measures to stimulate the economy, which included a new round of quantitative easing to the tune of £60 billion, as well as buying up to £10 billion of UK corporate bonds. It also set up a new £100 billion Funding for Lending-style scheme. The Bank stated that there was still scope to cut the interest rate further if the economy worsens.
The Bank’s quarterly inflation report, delivered alongside the rate decision, downgraded Britain’s future growth forecasts but maintained the 2 per cent forecast for 2016 following a better-than-expected 0.6 per cent GDP growth in the three months up to June, up from 0.4 per cent in the first quarter of the year. A further positive note was sounded when the Office for National Statistics reported that UK industrial output grew at the fastest rate for 17 years in the April to June quarter. The figures were 2.1 per cent up on the first quarter of the year.
Mixed views are being reported on the state of the housing market. According to a survey by the Royal Institute of Chartered Surveyors, the UK housing market is continuing to slow in the wake of the Brexit vote, with a significant slowdown in price rises in the three months to the end of July. The Halifax said house prices fell by 1.0 per cent in July compared to June but the Nationwide said prices rose by 0.5 per cent. On an annual basis, the Halifax said house prices had increased by 8.4 per cent, while the Nationwide said annual house price inflation was 5.2 per cent. However, the latest House Price Index published by the Office for National Statistics affirms that UK house prices in June had increased by one per cent over May and by 8.7 per cent over the previous year; the official July figures will be released in September.
The Office for National Statistics reported that UK construction output fell in June but stated that there was ‘little anecdotal evidence’ of a Brexit impact. This contrasts with the Markit/CIPS purchasing managers' index, which suggests output in July shrank at its fastest since June 2009.
New inflation figures were released in mid-August. The Consumer Prices Index rose from 0.5 per cent in June to 0.6 per cent in July. The main reason cited was an increase in fuel prices, which are priced in dollars and thus affected by the fall in the value of sterling. The Retail Prices Index measure of inflation also increased from 1.6 per cent in June to 1.9 per cent in July.
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