As the Fed Hikes Rates, How Far Behind is the BoE?
In the eight years since the Bank of England cut interest rates to a then record low of 0.5%, there has been regular speculation in the City that borrowing costs are heading back up. With rising inflation, a growing economy and one MPC member – Kristin Forbes – voting for a rise, the Bank did what was expected and stayed put.
The 8-1 vote was a surprise, as was the evidence that Forbes was not alone in her concerns. Minutes of the MPC meeting said that it wouldn’t take a lot more inflationary pressure for some members to join her in pressing for a renewed and deeper look at raising rates.
The City was happy, the pound as the financial markets contemplated interest rates being raised sooner than expected. Coming less than 24 hours after the Federal Reserve raised US rates, dealers started to question when the Bank of England would follow suit.
So, when could we expect a hike? The simple answer is still probably not this year. Firstly, it takes a majority to vote in a rise and 8-1 requires a major shift in thinking. The last time the MPC was close to a rise was 2011 when three voted in favour.
Despite corporate doom that our weekly shop is set to rocket there still isn’t much evidence that Britain is in the early stages of an upward inflationary spiral. Far from it. The cost of living is going up as a result of slightly higher oil prices and the fall in the value of the pound.
Conversely, wages are starting to increase. The MPC will only be justified in raising rates if dearer imports trigger higher wage deals to compensate workers for the erosion of their living standards. As yet, this isn’t happening. Coupled with the Brexit rollercoaster and renewed calls for independence within our own Union, we’re perhaps not as stable as the economic forecasts suggest.
The best answer, despite cries from belegured savers is to keep rates where they are, keep driving forward and keep some gunpowder dry in case of emergencies.
Toyota’s Investment Pre-Nup Deal Welcomed
Union’s and the automotive industry welcomed the announcement that Toyota would be investing £240m at the Burnaston plant. But, like Nissan, it comes with strings attached, essentially a pre-nup agreement that requires tariff free access to the EU. The fact they are upgrading the plant feels like a long-term commitment, but it also feels as though it’s handed Brussels another negotiating card.
Burnaston has been churning out cars since 1992 at a rate of 180,000 a year and is vital to the regional economy. Part of the deal see’s the government invest £21.3m of funding which is linked to its green paper of ‘next generation’ travel. Given Toyota specialises in hybrid electric-petrol technology there is a nice synergy, especially as diesel is now a dirty word.
The worry is if we can’t deliver on the EU deal and revert to WTO rules. Where does that leave the deal? Not only Toyota, but also Nissan who put pen-to-paper on their Sunderland plant investment a couple of month back.
Conversely a ‘hard Brexit’ seems to appeal Peugeot A “hard” Brexit would be good news for Vauxhall’s supply chain, the carmaker’s new owner has said as he sealed the long awaited £2bn purchase from ¬General Motors.
Carlos Tavares, chairman of PSA whose existing brands include Citroen and Peugeot, said that were the UK to leave the European Union without any form of deal, it would lead to opportunities to increase the manufacturer’s supply chain in the UK.
Contradictions like this seem to sum up the whole Brexit situation in that ‘nobody actually knows’ what is going to happen. So, as the economy motors forward and investment continues, it would be worth remembering to make sure you’ve a full-comp insurance policy to cover the odd pot-hole in the road.
Which Union? SNP’s Case For Independence Overshadows Troubled Scottish Economy
Everyone is clamouring for change. It can be captivating and exciting, but potentially misguided, as appears the economic argument for Scotland to stick with the current Union as opposed to forging a new one.
The Scottish First Minister, is adamant Scotland is a viable concern that can make a go of things without help or interference from Westminster. But, unfortunately for nationalists, the numbers don’t stack up.
With 60% of Scottish exports destined for English markets the first alarm bell rings. Scotland also has the worst trade deficit of any global developed nation at 10.1%. Japan lies in second place at 5.2% – that’s quite a gap.
Part of the problem is how Holyrood has worked out its budget. Oil has been priced in at $100 a barrel and stubbornly sits around the $50 mark despite OPEC cutting production. It’s going to take time to work through the glut of oil swilling around the world and any price rises will open the door to the US shale industry, so it’s hard to see prices move much higher in the short term. This leaves Nicola Sturgeon with a £1.7bn hole in her balance sheet.
It’s been calculated that the Scots have a £15bn gap between taxes (revenue in) versus it’s public services spend. To put that into further context, it has missed every single NHS target and dropped from 11th to 23rd in the PISA education tables for literacy and numeracy. With a GDP growth projections of just 0.7% compared to the UK’s wider 2.1%. They will also need to work out a new currency.
Scotland has some major opportunities. Notably in the renewable energy sector, tourism and drinks industry, but the SNP’s may be better served to see what sort of deal is negotiated before they band the referendum drum. At the moment, is seems foolhardy and a case of the heart ruling the head.