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More money to be ploughed into the economy

admin — Fri, 22 May 2009 09:09:22 +0000

After the recent Monetary Policy Committee meeting earlier this month the Bank of England announced that the base interest rate was to be left on hold at 0.5 percent.

This was a widely expected move, as many analysts and industry experts had predicted that the base rate would remain static given the fact that it had already fallen to the lowest level in the three hundred and fifteen year history of the Bank of England, and that it stood at just a tenth of the level that it was at seven months ago, when it was 5 percent.

However, whilst the base interest rate was kept on hold, the central bank also announced that it was ploughing a further £50 billion into the economy as part of its quantitative easing programme. The process involves the purchase of government and corporate bonds to increase the amount of money in circulation, and the hope is that this process will encourage lending and boost the economy.

Whilst the reactions are mixed some experts think that the government measures that have been put into place have started to take some effect, and have started to produce more positive results and data. However, others have said that there is still a very long way to go, and in the meantime the nation will remain in a deep recession. The decision to plough another £50 billion into the economy will bring the government spending on quantitative easing up to £125 billion total, although around £150 billion has been earmarked in total.

Some experts have said that the mortgage industry has started to show signs of improvement already, with mortgage lending increasing and with many lenders now starting to accept smaller deposits.

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Just how bad is the UK economy?

admin — Tue, 09 Sep 2008 14:06:24 +0000

There have been a number of different opinions and predictions from industry officials in relation to the UK’s economy of late. Most have been relatively gloomy and some have been downright worrying, with many officials expressing concern over how close the nation is of sliding into recession. According to a recent report the UK’s largest employer’s association, the CBI, has stated that the state of the economy is actually worse than most thought.

Officials from the CBI have said that the state of the economy in the UK is deteriorating at a rate that is faster than previously thought. The CBI director general Richard Lambert sent a stark warning in a letter to members, which stated that there was “no doubt that the mood has darkened in the last two or three months.”

He also said that both the CBI and other industry officials had previously been far too optimistic about the forecast for the UK economy.

Growing fears over possible recession in the months to come have been heightened as a result of slow growth and soaring inflation levels. Lambert said that the high rate of inflation, which has hit record highs of 4.4% for July, had taken people by surprise. He also described the global credit crunch, which has been wreaking havoc in the nation’s financial markets since last year, had been bigger and broader than most people had initially anticipated.

Lambert said: “A year ago it seemed reasonable to hope that the worst would be over by now. That has not turned out to be the case.”

Over recent weeks growth forecasts have been cut, economic activity has been slowing, house prices have been falling, business and consumer confidence has fallen, and consumer spending has been affected by tight credit conditions. The CBI has cut its growth forecasts for 2009 from 1% to 0.4%.

Mr Lambert stated: “This is why most analysts are now suggesting that the economy will at best only manage to stagnate in the coming few quarters, and that the growth prospects through 2009 and into 2010 look no better than anaemic.”

He also went on to state: “The CBI, along with most other forecasters, has been consistently over-optimistic about the economic outlook over the last 12 months.”

He added: “A sharp economic slowdown is a new experience for many people in government and in business.”

He did add that despite the doom and gloom of the situation there were still many businesses that were doing well despite economic conditions, but he said that the future did not look all that bright for many others.

In the meantime many industry groups such as the British Chambers of Commerce are continuing to urge the Bank of England to cut interest rates in order to restore consumer confidence and boost the flagging economy. However, with inflation at such high levels the Bank of England faces a very difficult time in terms of setting the base rate as a result of stagflation.

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What’s in store for the UK economy?

admin — Wed, 21 May 2008 08:01:13 +0000

Over recent months the Bank of England and the Monetary Policy Committee have faced a tough decision when it comes to setting interest rates. This is because on one hand the central bank needs to be very cautious about cutting the baste rate because of rising inflation, but on the other hand the bank needs to cut the base rate in order to boost the slowing economy.

Whilst the Bank of England has cut the base rate three times since December, taking the rate from 5.75% to 5%, it decided to leave the rate unchanged for May following the recent MPC meeting. However, this is a decision that has been attacked by various industry sectors, including the British Chambers of Commerce, which has predicted an extremely gloomy economic outlook for the nation over the coming eighteen months.

According to a report from the BCC the economy is set to suffer more than had been originally predicted over the coming eighteen months, and consumer spending levels are set to be affected as a result of rising costs and repayments, which has in turn resulted in the BCC cutting its annual growth forecasts for next year from 2% to 1.6%.

An official from the BCC said: “The longer the Monetary Policy Committee waits now, the bigger the danger that the situation would deteriorate and the policy choices would become more difficult and more unpleasant later in the year. Waiting unduly before easing further would pose unacceptable threats to growth.”

After the Bank of England announced that it was keeping the base rate unchanged the BCC said that the decision was a mistake, stating that a rate cut could have really helped to boost industry and consumer confidence, which in turn could have helped to boost the economy. However, officials from the BCC are now concerned that the economic outlook continues to get worse as a result of the base rate remaining static.

A recent report showed that manufacturing output fell by 0.5% in March, although the first three months of the year saw output increase slightly by 0.3% compared to the final quarter of last year. The drop in March is another indicator of the slowing economy according to officials, with one official stating: “Just as these are weaker compared to expectations, they were significantly stronger compared to expectations in January and February. Nonetheless, it is another soft economic reading for March and it suggests the slowing in the economy is gaining traction.”

One official commented on recent figures relating to retail sales, stating: “We continue to have our doubts about how accurate a picture of high street demand the official figures are giving. Just about every other indicator… has weakened much more sharply. And this more gloomy picture sits far more comfortably with the plummeting level of consumer confidence.”

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Is Recession Looming? The Queen May Think So

admin — Thu, 10 Apr 2008 13:04:47 +0000

Since the global credit crunch took a hold in the UK in the late summer of last year, there has been growing concerns over the state of the economy. Consumers were already facing financial difficulties as the result of five interest rate rises between August 2006 and July 2007, and consumer confidence levels had already fallen as a result of financial woes, which were affecting the economy. However, the global credit crunch brought with it a whole host of new problems, making it increasingly difficult for consumers to sort out their finances as a result of tighter credit conditions that lenders put in place.

The US Federal Reserve has already slashed its interest rates by a huge amount over the last six months, taking the base rate from 5.25% to 2.25% with rate cuts amounting to a massive 3% in order to try and stave off recession. The Bank of England has cut rates twice since December, and although another rate cut is expected in April the central bank has made it clear that it will not be taking the same radical steps as the US Federal Reserve. Whilst some industry experts state that the economy in the UK is nowhere near as bad as the state of the economy in the US, a recent move by the Queen could indicate that all is not well.

According to a recent report the Queen has cancelled a party that was to be thrown for her diamond wedding anniversary, stating that it would be in bad taste with the country on the brink of recession. Sources close to the Queen have said that she realised that throwing a lavish party would be insensitive in the current financial climate, even though the party was apparently going to be funded by friends of the Royal couple.

A friend of the Queen and Prince Philip was reported to have said: ‘It is a great shame, but the Queen does not want to be seen to be doing something so elaborate at a time of such economic gloom. The Queen decided to cancel the party because of the very real prospect that the country is about to go through a major recession. The Queen does not want to be seen to be accused of being extravagant when everyone else is worrying about their finances. There has been a lot of talk since December that everyone in Britain is tightening their belts. With that in mind, the Queen felt that it would be entirely inappropriate to throw a party on a day that wasn’t even her actual wedding anniversary.’

The Queen’s decision, and the remarks of the close source, has fuelled speculation that the country may be closer to recession than many had thought, although industry professionals still state that the situation is not on par with that in the United States, hence the decision of the Bank of England not to cut interest rates dramatically. However, the governor of the Bank of England has stated that an April cut is now more likely as a result of tighter credit conditions.

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Industry expert predicts 20% fall in house prices over two years

admin — Sat, 29 Mar 2008 10:00:48 +0000

A financial industry expert, who also worked as an advisor to the government, has predicted that house prices in the UK could plummet by 20% over the next couple of years, providing a gloomy outlook for homeowners. The average property price could plummet from £200,000 to just £160,000 if the predictions of Professor David Miles are correct, and homeowner that have recently purchased properties and paid the current high prices could soon find that their properties are worth far less than they paid for them.

David Miles stated that whilst the news was not good for homeowners it was not bad news for everyone, as first time buyers may be able to benefit from the falling house prices, providing them with increased affordability.

He said: ‘I am at the pessimistic end of the spectrum, but I don’t think it should be seen as the pessimistic end because there are as many gainers as losers.’

He also added that those on lower incomes could benefit from the house prices falls, as this group, as well as first time buyers have struggled to get onto the property ladder in the past few years. However, mortgage lenders have been making their criteria for first time buyers and those with poor credit much tighter to minimise risk to themselves, and this means that those wishing to get onto the property ladder may have to find a much larger deposit in order to qualify for the more affordable rates.

The prediction from Miles, who is Chief Economist at Morgan Stanley, is one of a line of recent predictions relating to house prices falls in the UK, which are expected to fall by a significant level over the course of this year and into next year.

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No change in interest rates for March

admin — Mon, 17 Mar 2008 07:25:19 +0000

Following the latest Monetary Policy Committee meeting last week the Bank of England has decided to keep interest rates on hold amidst concerns over rising inflation. Although there have been calls for the central bank to cut rates as a result of the flagging economy officials have also had to take into consideration the risks of rising inflation as well as a slowing economy.

Interest rates have already been cut twice since December, with two 0.25% cuts taking the base rate from 5.75% to 5.25%. Many economists had predicted a 50-50 chance of a further rate cut in March, but the decision to keep rates on hold came as no big surprise to most. However, with consumer confidence, house prices, and the economy all continuing to suffer it is thought that there will be at least one more rate cut before the summer.

One industry official stated: “We expect the next move to come in May, in line with the consensus view, and see Bank Rate falling to a low of 4.5 percent by the end of this year.”

Another industry official said that the news was good for savers but not for borrowers hoping to see a reduction in the cost of borrowing.

He said: “Despite interest rates being the same now as they were in January 2007, banks have shifted their prices considerably over that period. The real losers are customers who are not aware of how the market has changed. If you have a savings account that pays less than the base rate you should take your business elsewhere, and fast. Banks aren’t bothered about showing loyalty to their customers so don’t worry about showing loyalty to yours.”

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