UK households see fastest income growth in at least nine years – IHS Markit

LONDON (Reuters) – British households enjoyed the fastest growth in employment income in at least nine years in June, according to a survey that may give the Bank of England concern that underlying inflation pressures are rising.

Shoppers queue at Selfridges in London, Britain December 26, 2017. REUTERS/Mary Turner

The Household Finance Index (HFI) from data company IHS Markit, a survey watched by the central bank, showed household incomes increased this month at the sharpest rate since its survey began in 2009, during the depths of the financial crisis.

A separate survey from payment card company Visa on Monday showed overall inflation-adjusted consumer spending increased 0.9 percent in annual terms during May after a 2.0 percent fall in April — the first rise in nine months and chiming with strong retail sales data last week.

Despite the upturn, rising living costs prompted a sharper squeeze on household budgets overall this month. IHS Markit said households remained “relatively downbeat” about their financial outlook as a result.

“June data suggests that stubbornly high inflation is set to hold back consumer confidence this summer, with rising fuel costs a prominent reason that increased wages are having a limited impact on spending power,” Tim Moore, associate director at IHS Markit, said.

The BoE expects consumers to feel the benefit of a fall in inflation and rising wages after suffering a squeeze on their spending power last year when the impact of the 2016 Brexit vote pushed up prices sharply.

However, it held off from raising rates at its May meeting as it waited to be sure that Britain’s economy was recovering from its early 2018 slowdown.

The HFI survey showed weakening expectations that the Bank of England will raise interest rates before the end of this year.

Forty-five percent of respondents expected a rate hike by the end of 2018, down from 55 percent in May.

The BoE is expected to leave interest rates on hold when it announces its June policy decision on Thursday.

Reporting by Andy Bruce, editing by David Milliken

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Bank of England to keep rates steady as winter chill slow to lift

LONDON (Reuters) – The Bank of England will be looking to see if Britain’s economy has recovered from a severe winter chill as it weighs the prospects for a future interest rate rise this week.

Governor of Bank of England Mark Carney sits for the official photo of delegates during the the G7 Finance ministers summit in Whistler, British Columbia, Canada, June 1, 2018. REUTERS/Ben Nelms

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Patchy growth as the economy prepares to leave the European Union in March next year places BoE policy in sharp contrast to the United States, where the Federal Reserve plans to raise rates four times in 2018, and three times in 2019.

“The Monetary Policy Committee will be wary of providing any firm guidance over the likely timing of the next hike as it won’t want to tie its hands,” BNP Paribas economist Luigi Speranza said on Monday.

Goldman Sachs currency strategists said sterling – which is already near a 2018 low – continued to price in too high a chance of an August move.

BoE Governor Mark Carney has said first-quarter weakness looks temporary and expects to rates to rise gradually over the next couple of years, to prevent overheating at a time of above-target inflation and the lowest unemployment since 1975.

But he has been much vaguer about precise timing. A putative May rate rise was thrown off course by an unusually harsh winter – and a possible underlying slowdown – that led to the economy almost stagnating from January to March.

A record proportion of the public in a BoE survey last month had no idea what would happen to rates over the coming year – perhaps reflecting Brexit uncertainty as well as BoE indecision.

Trade concerns exist outside Britain too. The Bundesbank sharply cut its growth forecast for Germany on Friday, partly due to worries that U.S. President Donald Trump may spark a trade war with his tariffs on European and Japanese steel.

FILE PHOTO: The Bank of England is seen in London, Britain, April 9, 2018. REUTERS/Hannah McKay/File Photo

HEDGING BETS

If it wishes, the BoE will have ample chance to bring clarity on Thursday, when the MPC will publish a statement at 1100 GMT and Carney is due to give a major speech at 2015 GMT.

But many economists expect the central bank to keep hedging its bets. Since its last meeting, inflation has fallen to a one-year low of 2.4 percent and April industrial output and construction data were strikingly weak.

However, business surveys for May have perked up, pointing to second-quarter growth of 0.3-0.4 percent, according to IHS Markit, a financial data company. This is just about in line with the maximum rate the BoE thinks the economy can sustain without causing too much inflation.

Wage growth has been solid if unspectacular, and May retail sales were strong, reflecting sunny weather, a royal wedding and a partial easing of the inflation pressure that has squeezed British consumer demand since June 2016’s Brexit vote.

Two BoE policymakers – Ian McCafferty, whose term ends in August, and Michael Saunders – are expected to stick with their view, held since March, that rates need to go up now.

The rest of the MPC are likely to conclude that there is little cost in waiting until at least August before deciding whether to raise rates, economists say.

Even then, it could find further reason to delay. A change to the Office for National Statistics’ publication schedule means second-quarter GDP data will not be released until after the BoE’s August rate meeting.

“August would be too much of a gamble and (we) see November as the next best opportunity for a hike, assuming data strengthens more than we expect and that Brexit remains free of major disruption,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said.

Reporting by David Milliken; Editing by Alison Williams

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UK consumer spending continues to fall in April – Visa

LONDON (Reuters) – British consumers tightened their belts further last month, figures from payment card company Visa showed on Monday, adding to signs that the economy is struggling to recover from a weak first quarter.

Visa said inflation-adjusted spending on its credit and debit cards in April was 2 percent lower than last year – the same decline as in March and one of the steepest declines of the past five years.

Looking at the three months to April, the fall in spending gathered pace, dropping by 1.6 percent on a seasonally adjusted basis compared with the previous three months. In March, spending fell by 1.3 percent on a similar basis.

“Low confidence levels amongst shoppers and the gloomy outlook for the UK economy are likely to have contributed to this continued caution,” Visa’s chief commercial officer, Mark Antipof, said.

Discretionary spending on furniture, electrical appliances and recreation was worst hit, Visa said.

Last week the Bank of England said a first-quarter slowdown in economic growth to just 0.1 percent was probably a blip caused by unusually icy weather. But it did highlight weaker consumer spending and a softer housing market as possible warning signs of more persistent sluggishness.

Visa said the weak consumer spending was surprising given inflation was beginning to slow and wage growth was edging up.

“Retailers will be pinning their hopes on further improvements in household finances and warmer weather leading to a more upbeat few months heading into summer,” Antipof said.

Visa says its cards account for a third of British spending. The data is adjusted for changes in Visa’s market share, a long-term decline in cash usage, and to strip out transactions that do not count as consumer spending.

Shoppers browse in an Aldi store in London, Britain, February 15, 2018. REUTERS/Peter Summers

Reporting by David Milliken, editing by Andy Bruce

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UK employers plan to raise pay by more over coming year – CIPD

LONDON (Reuters) – British employers plan to offer bigger pay rises to staff over the next year than they expected three months ago, reflecting faster pay growth in the public sector as well as more general demand for staff, an industry survey showed on Monday.

The shadows of workers are seen in the City of London financial district, London, Britain, January 25, 2018. REUTERS/Toby Melville

The Chartered Institute of Personnel and Development (CIPD) said employers on average planned to raise basic pay for staff by 2.1 percent at their next annual pay settlement, compared with 1.8 percent three months ago.

The CIPD data fit with a broad pattern of labour shortages and gradually rising pay shown in other surveys and official data, which lie behind the Bank of England’s view that it will need to gradually raise interest rates over the coming years.

This positive employment picture contrasts with the economy as a whole in the first three months of 2018, which grew at its weakest annual rate in five years, prompting the BoE to defer a previously widely expected rate rise in May.

Gerwyn Davies, senior labour market analyst for the CIPD, said employer optimism about job prospects meant that those weak provisional GDP figures should not be put under “too pessimistic interpretation”.

Demand for labour continued to grow in the second quarter of 2018, and was not matched by supply, Davies added.

“This may explain why wage pressures are starting to increase following a prolonged period of relatively subdued pay growth. It could well be that employers are using higher starting salaries to attract the talent they need,” he said.

Median pay awards over the past 12 months were 2 percent, according to the CIPD’s data.

Last month pay data company XpertHR said average pay settlements in the first three months of 2018 rose to 2.5 percent, their joint highest since 2008.

Pay growth according to the CIPD’s measure – which covers existing staff, and does not capture the effect of promotions or staff moving to better paid jobs – is lower than official data that shows average weekly earnings rose by 2.8 percent year-on-year in the three months to February.

The unemployment rate fell to its lowest since 1975 over the same period, dropping to 4.2 percent.

Almost one in three employers surveyed by the CIPD said they were raising wages to tackle their recruitment struggles, and the proportion of public-sector employers expecting to raise pay by 2 percent or more rose to almost two in five.

In March, trade unions and public-sector employers agreed a 6.5 percent pay rise over three years for more than a million nurses and hospital staff.

The CIPD data was based on a survey of several hundred employers between March 9 and March 30.

Reporting by Ana de Liz, editing by David Milliken and Andy Bruce

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Nearly a third of homebuyers fail to get best mortgages, says watchdog

LONDON (Reuters) – Britain’s markets watchdog is proposing to make it easier for homebuyers to find the best mortgage after finding that nearly a third of borrowers fail to find the cheapest deal.

A home is advertised for sale in London, Britain August 4, 2016. REUTERS/Neil Hall –

The Financial Conduct Authority (FCA) on Friday published the interim findings of a review into Britain’s trillion-pound mortgage market, launched in December 2016 to determine whether customers could obtain better deals and if links between industry players limit choice.

“We found that there are limitations to the effectiveness of the tools available to help consumers choose a mortgage,” the interim report said. “This makes it difficult for a significant minority (we estimate around 30 percent) of customers to find the cheapest suitable deal.”

These consumers could have saved about 550 pounds ($ 750) a year if they had bought the cheapest product. Some borrowers who could save money by switching provider either do not or cannot, it added.

The high cost of buying a home in Britain, exacerbated by a housing shortage, has put ownership out of reach for many people, and the government is under pressure to address the problem.

“For many, the market is working well with high levels of consumer engagement,” Christopher Woolard, FCA executive director of strategy and competition, said in a statement.

“However, we believe that things could work better with more innovative tools to help consumers.”

There are about 30,000 “mortgage prisoners” who took out interest-only loans before the financial crisis, but are now unable to switch to cheaper deals because of tougher rules.

The FCA said it wants to resolve this “legacy” issue and will explore solutions with industry and consumers.

UK Finance, Britain’s main banking industry body, said the FCA showed that the market was working for the vast majority of borrowers.

“We note the FCA’s points regarding perceived areas of weaknesses within the market, particularly around customers who currently may be unable to switch products,” it said.

INHIBITING INNOVATION

The report found little evidence that current commercial arrangements between firms in the market, such as brokers that have agreements with estate agents or a housing developer, are harming customers.

The FCA recommends making it easier for customers to identify the right mortgages and best brokers at an early stage and said it would work with the sector to develop metrics to help consumers make comparisons.

“The proposed work to help consumers understand the relative strengths of brokers is innovative and could have wider application in other intermediated sectors,” said Andrew Strange, a financial services director at consultants PwC.

Helping existing customers finding the best deals as interest rates rise should be a top priority for firms, Strange said.

The interim findings do not propose any changes to the sector’s handbook but explain the watchdog’s thinking.

A final report will be published around the end of the year, with any recommendations for rule changes put out to public consultation.

“Mindful of the regulatory change that mortgage firms have experienced in recent years, we will not seek to make further changes to those interventions that appear to be working well,” the FCA said.

($ 1 = 0.7378 pounds)

Reporting by Huw Jones; Editing by David Goodman

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Explainer – Will the Bank of England raise rates in May after Carney dampened expectations?

LONDON (Reuters) – Bank of England Governor Mark Carney dampened widespread expectations for an interest rate hike in May, pointing out there were also “other meetings” this year.

FILE PHOTO: The Bank of England is seen in London, Britain, April 9, 2018. REUTERS/Hannah McKay/File Photo

WHAT CARNEY SAID:

“I don’t want to get too focused on the precise timing, it is more about the general path,” Carney told the BBC.

He said Britain should prepare for “a few interest rate rises over the next few years.”

“I am sure there will be some differences of view but it is a view we will take in early May (at the next meeting of the Bank’s Monetary Policy Committee), conscious that there are other meetings over the course of this year.”

WHY IS THERE DOUBT ABOUT A MAY HIKE?

Carney described recent economic data as “mixed”.

Figures this week showed the unemployment rate fell to its lowest level since the 1970s during the three months to February, but overall wage growth failed to pick up as expected and retail sales fell sharply due to snow last month.

Also, a measure of wage growth Carney cited a few months ago as evidence of firming inflation pressure has weakened lately.

In February he told lawmakers it was an “important point” that three-month annualized wage growth had been running above 3 percent for several months. But the latest data show this cooled to just 0.8 percent in February.

(For a graphic on ‘Has wage growth shifted Carney’s view?’ click reut.rs/2HeXArz)

WHAT THE MARKET SAYS:

British government bond prices jumped on Friday.

Expectations of a UK interest rate increase in May have shrunk to below 50 percent from 70 percent earlier in the week, according to estimates derived from the swap markets. BOEWATCH

Sterling took another leg down on Friday to $ 1.4030 after falling nearly 1 percent in the New York session. GBP=D3 [GBP/]

Finance minister Philip Hammond said on Friday it looked like financial markets had been “out of line” with Carney’s thinking, based on the reaction of sterling.

HOW IS THE MPC SPLIT?

In March, the Bank of England’s Monetary Policy Committee voted 7-2 to keep rates at 0.5 percent.

Ian McCafferty and Michael Saunders – who were the first officials to call for rates to rise in 2017 – said it was time for rates to increase again for only the second time since the 2008 financial crisis.

Saunders on Friday said the BoE no longer needed to keep its foot firmly on the accelerator at a time of rising domestic inflation pressure.

He reiterated the BoE’s joint position that “any further tightening is likely to be at a gradual pace and to a limited extent” but added that “a key point is that ‘gradual’ need not mean ‘glacial’.”

Saunders also said the range of views about interest rates among MPC members may be no wider than usual.

EXPECTATIONS

A firm majority of economists in a Reuters poll taken before Carney’s comments and published earlier this week said they expect the BoE will raise interest rates to a new post-financial crisis high of 0.75 percent in May.

WHAT THE ANALYSTS SAID

ANDREW SENTANCE, PWC SENIOR ECONOMIC ADVISER, EX-MPC MEMBER

“Quite likely that all 4 external MPC members will vote for a May rate rise. Can they get 1 or 2 internal votes to support them? If Carney is opposed, Broadbent and Haldane are main candidates to push through a rate rise – so watch their statements in the next week or so.”

ALLAN MONKS, JPMORGAN ECONOMIST:

“(Carney’s commentary) opens the possibility of the BoE passing on May and instead hiking later in the year as the data improve.

“The data have not been uniformly weak, especially at the start of the quarter, and it is hard to believe the BoE will delay a rate rise because of bad weather. Should the April surveys bounce decisively this would help reassure the BoE that growth is set to improve this quarter.”

BANK OF AMERICA MERRILL LYNCH ANALYSTS:

“Then last night Governor Mark Carney suggested delay. In a BBC interview he said the BoE was conscious of ‘other meetings over the course of the year’ when they could hike. As hints go, we think it’s as strong as we get. The data justify delay in our view. We have been skeptical of the need for a May hike.”

JORDAN ROCHESTER, FX STRATEGIST AT NOMURA:

“(Carney’s) interview last night has rocked the boat and introduced a much higher level of uncertainty (over) whether the BOE will decide to raise rates in May or not. We still expect a hike in May, structural reasons to be short front end remain.”

UNICREDIT ECONOMISTS

“His comments suggest the vote on whether to hike in May is now on a knife-edge, and next week’s 1Q18 GDP report (we expect growth of just 0.2 percent (quarter-on-quarter), in part due to a hit from adverse weather) could be decisive. A hike in May is still likely but, as we had previously warned, it is a much closer call than financial markets were expecting.”

MARC OSTWALD, MARKET STRATEGIST AT ADM INVESTOR SERVICES:

“Carney struck back against any doubters that he is still king of the ‘unreliable boyfriends’, with his comments casting a whole (load) of doubt that a further 25 bps rate hike is a slam dunk.”

Additional reporting by Jamie McGeever, Editing by Guy Faulconbridge and Toby Chopra

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