FTSE 100 Index steadies after warning from Bank of England
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Inflation will hit four percent this year while interest rates stay at a stubborn all-time low of 0.1 percent – disappointing news for long-suffering savers. The central bank has hinted that a slight increase in interest rates next year could be needed to prevent rising prices from spinning out of control. With most of the economy back open and businesses reporting a strong return, the central bank’s monetary policy committee (MPC) has predicted the economy would grow by a healthy eight percent in 2021 alone – a slight increase from their 7.25 percent prediction in May.
By this forecast, the economy would regain its pre-pandemic level of activity by the end of this year.
However, with inflation knocking at the door, mortgage repayments will likely soar as rampant demand keeps the property market strong.
Interest rates LIVE: BOE warns of surging inflation as mortgage repayments set to soar (Image: GETTY)
‘The property market is as strong as Thor’s hammer’ (Image: GETTY)
Imran Hussain, director of Nottingham-based independent mortgage broker, Harmony Financial Services, said: “The rate of price growth may be cooling but the property market is as strong as Thor’s hammer.
“First-time buyers, in particular, are itching to get onto the property ladder with savings made during the lockdowns of the past year and family assistance.
“As long as they are able to be approved for a mortgage, activity levels should remain strong until the end of the year.
“The key driver of property prices at the moment is weak supply and rampant demand.
“We’re still seeing an average 16 buyers for every home that comes to the market.”
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11:34 House prices cooling off
The UK’s housing market is slowing down now that Rishi Sunak’s stamp duty holiday has come to an end.
House prices were 7.6 percent higher than a year ago, down from 8.7% in June, according to Halifax’s latest index.
11:10 Bank of England graphics
The Bank of England has released graphics to illustrate their commitment to keeping interest rates low:
10:50 Live currency cross rates
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10:36 Annual inflation rate in the UK
The annual inflation rate in the UK has risen to 2.5 percent from 2.1 percent in May.
Many hoped that the Bank of England would announce a hike in rates yesterday in order to combat the rising inflation.
Britain will have to sit with rising prices for a little while longer as inflation is estimated to hit four percent by the end of this year.
10:25 Wages rise at fastest pace in 24 years
Wages are rising at their fastest rate in 24 years, fuelling inflation worries.
The rising salaries is largely fuelled by a shortage of job candidates to meet the booming demand of post-pandemic re-opening.
This shortage is exacerbated by Brexit which has meant there are less available workers.
10:10 Dollar hits week-high on euro and yen
The dollar crept higher today, lifted by a rise in U.S. inflation-adjusted bond yields to one-week highs and predictions of strong employment data.
At 8:30am GMT, against the euro, it stood at $1.1812, with the latter also pressured by weaker-than-expected German industrial orders data.
The dollar also hit a one-week high of 109.88 Japanese yen.
If a strong set of employment data was delivered, it could make a convincing case for faster U.S. policy tightening.
Forecasts for jobs created last month vary dramatically from 350,000 to 1.6million, and the consensus figure is around 870,000.
A number that size or larger could raise the dollar further, especially against the euro and the yen, which will not see any policy tightening for years to come.
Dollar hits week-high on euro and yen (Image: GETTY)
09:50 What do the strategists think?
In a client note, ING FX strategists wrote that the central bank‘s messaging “may be a small step for the BoE, but it is a giant leap compared to ECB communication,”
“With the BoE’s finger now on the trigger – any better UK data could start to see some outsize reaction in GBP as BoE tightening expectations are brought forward.”
Rate futures suggested investors were pricing in a first 15 basis-point rise to take the BoE’s benchmark Bank Rate to 0.25% around May next year. Before Thursday’s announcement by the central bank, rate futures pointed to a hike in August 2022.
09:39 Sterling holds near four-month high vs euro
The pound remains steady today, holding close to the four-month high it reached versus the euro yesterday after the Bank of England set out plans for how it would tighten monetary policy.
At 7:56am this morning it was little changed against the dollar at $1.3925, up 0.2 percent on the week as a whole.
Versus the euro, it was flat at 84.95 pence per euro, up around 0.5 percent on the week as a whole.
Earlier in the session, it nudged 84.90 pence per euro, which was the pound’s strongest level in four months.
The monetary policy committee voted seven versus one to maintain the pace of its government bond-buying.
This decision was made despite predictions that inflation to jump to four percent around the end of the year.
The pound has been doing well in recent weeks as COVID-19 cases have fallen and high vaccination rates have allowed the Government to lift social-distancing rules.
09:25 Are any members of the the Monetary Policy Committee concerned about inflation?
Andrew Haldane, the only Monetary Policy Committee member who voted to reduce the size of the Bank’s quantitative easing programme in the previous two meetings amid concerns over inflation.
However, Mr Haldane left his position last month, reducing the probability of a pivot in policy stance.
Despite this, MPC member Michael Saunders this month broke with consensus for the first time in over a year, voting to reduce the programme’s size by £45billion.
Whilst slightly below the £50billion reduction suggested by Haldane, this implies emerging concern from some corners of the Bank’s decision-making group about the level and persistence of the current spike in inflation.
09:11 When will the Bank of England shift strategy?
The Bank of England has set out a series of markers that they will wait for before changing course.
It said it would start reducing its stock of bonds when its policy rate reaches 0.5 percent by not reinvesting the proceeds of maturing debt.
Naturally, this redirection is not set in stone and would be re-assessed to make sure the move made sense for the economy at the time.
The BoE also said it would consider actively selling down gilt holdings when the rate reaches at least one percent.
In 2018 the Bank of England said it would not start to unwind bond purchases until Bank Rate was near 1.5 percent.
However, Governor Andrew Bailey stressed that much had changed in the past three years.
Mr Bailey said: “If we stuck with 1.5 percent, when you look at the market curve, that would be tantamount to saying that we would actually never reduce the … balance sheet as things stand today.”
Bank of England governor, Andrew Bailey (Image: GETTY)
08:53 Will unemployment rise?
With the furlough scheme coming to an end in September, many have expressed fears that the following months will be laden with redundancies.
However, Andrew Bailey has predicted that unemployment will not rise after Rishi Sunak’s scheme ends.
Mr Bailey has insisted that the key challenge facing Britain’s economy is getting people back into work as the coronavirus pandemic fades.
“The challenge of avoiding a steep rise in unemployment has been replaced by that of ensuring a flow of labour into jobs – I want to emphasise that this is a crucial challenge,” he said.
08:43 First time buyers propelling housing market
First time buyers desperate to fly the nest are the primary drivers of the strong housing market, according to Rhys Schofield, managing director at Derbyshire-based Peak Mortgages and Protection.
Mr Schofield said: “The market, like the weather, was incredibly hot in July and showed no signs of cooling down.
“The primary driver was huge demand from first-time buyers, who are savings rich following 18 months of no holidays and being cooped up at home desperate to flee the nest.
“The bank of mum and dad is also increasingly keen to chuck money into the pot to get rid of them.
“Transaction levels seems to be holding up, if not quite as frantic as before the first stamp duty deadline, with the only real bottleneck being lack of supply and not enough houses on the market, although historically this is always the case in the summer holidays.”
First time buyers desperate to fly the nest are the primary drivers of the strong housing market (Image: GETTY)
08:34 Andrew Bailey complaint ‘extraordinary’ said Lord
The Tory chairman of the committee which published the report into Andrew Bailey’s quantitative easing strategy has branded the Bank of England governor’s response “extraordinary”.
Lord Forsyth of Drumlean said: “This is a committee report, it is a unanimous report, it includes on it a number of very distinguished former Treasury ministers, a Treasury permanent secretary.
“It was very carefully considered and we expect a considered response from the Bank.”
08:11 Bank of England chief, Andrew Bailey, lashes out at criticism of quantitative easing
Andrew Bailey has snapped at the Lords committee who referred to his strategy of quantitative easing as an “addiction”.
The Lords committee had published a report last month titled “Quantitative easing [QE]: a dangerous addiction?”
A title Mr Bailey was extremely unimpressed with, insisting it was inappropriate language for parliamentarians to adopt in this context.
Appearing at a press conference yesterday Mr Bailey said: “I’m going to be very blunt.
“First of all, I think the House of Lords should not use the word ‘addicted’.
“That is a word that has a very damaging and very particular meaning to many people who are suffering. I think it is wrong to use that word loosely and frankly I think it was a very poor choice of language.”
Andrew Bailey has snapped at the Lords committee who referred to his strategy as an ‘addiction’ (Image: GETTY)