BoE's First Rate Cut Since 2020: Key Impacts Uncovered

The BoE (Bank of England) voted to cut interest rates for the first time since March 2020. Five members of the MPC (Monetary Policy Committee) including Governor Andrew Bailey, voted to reduce the Bank Rate by 0.25% while four, including chief economist Huw Pill, voted to hold interest rates at 5.25%.

The decision means interest rates now stand at 5%, having stood at a 16-year high of 5.25% since August 2023.?

Inflation has been at the 2% target level for the past two months, having come down from a peak of 11.1% in October 2022.

The BoE gave no guidance on the future path of rates and Bailey stressed that the BoE must be careful “not to cut interest rates too quickly or by too much”.

Nevertheless, the financial markets have already begun stepping up their anticipation of a further rate cut in November with the objective of reducing rates to 3.5% by 2027.

https://www.cityam.com/bank-of-england-cuts-interest-rates-for-first-time-since-march-2020/

Currency Exchange Rates Update

The Pound hit a 23-month high against the Euro on 17 July. It finished last week at a 10-week low, suffering a drop of 1.69% in the last 2-weeks.

Against the US Dollar, on 17 July the Pound hit a 12-month high. Last Friday it fell to a 4-week low, a drop of 2.6% before the US payroll data hit the Dollar amid rising concerns about a possible US recession.

What’s in the news?

UK

New Chancellor of the Exchequer, Rachel Reeves, unveiled pay-rise offers for public sector workers including a 22% increase for junior doctors but warned that a ￡22bn black hole in the UK's finances has been discovered and hinted that tax rises would be coming in the Autumn budget, set for 30 October in an effort to balance the books.

Jeremy Hunt, the shadow Chancellor, has rubbished the report, claiming it was “nonsense” and was merely a pretext for Labour to raise taxes. The ￡22bn figures reflects the projected overspend on departmental budgets this year.

Analysts at RBC said, “In reality the largest single item of ‘spending pressure’ in the current fiscal year was actually pay awards for public sector workers that the Chancellor had agreed to since taking office earlier this month”. Pay rises for the public sector cost the Chancellor ￡9.4bn but Departments were only given funding for a 2% pay rise at the last spending review in 2021. The second largest portion of the fiscal gap comes from ‘normal reserve’ claims. Reserve claims are essentially rainy-day funds set aside for unforeseen events.

Ben Zaranko, an economist at the IFS (Institute for Fiscal Studies), said the Treasury’s document “leaves us none the wiser”.

Asylum spending was the third largest contributor at ￡6.4bn. This resulted from the costs from the Conservative decision to stop processing asylum claimants while doing nothing to budget for the resulting costs. Whilst Reeves claimed that the last government “covered up the true extent of the crisis and its spending implications”, it is clear Labour did already know about some of the funding pressures as back in February Labour pointed to the “eye-watering overspend on asylum support”.

The remaining funding pressures come across a range of different policy areas, with ￡2.9bn needed to support the railways, ￡1.7bn in support for Ukraine and ￡1.5bn for pressures in the health services.

Britain’s pensioners will take the brunt of a raft of brutal cuts announced by Reeves to deal with a ￡22bn black hole in the country’s finances. To gasps in the House of Commons chamber, Reeves announced that she would be removing winter fuel allowance payments for pensioners from almost 10 million retirees that currently receive them. The move on the winter fuel allowance, a benefit that was first introduced by Tony Blair in 1997 is similar to a policy proposed by Theresa May in 2017 when the outcry over the proposal almost sank the Tory election campaign. The plan did not feature in the Labour election manifesto this year, and visibly came as a complete shock to MPs.

Analysts figures show that retirees could be well over ￡1,200 worse off every year before the next election comes around.

Reeves also cancelled the plan to introduce the Dilnot Commission recommendations on social care for the elderly in 2025 meaning that people will still have to sell their homes to pay for residential care.

There are also clear signals that Keir Starmer’s government is looking for a much closer relationship with the European Union on a wide range of issues such as trade and defence with his “Operation Reset”.

The economic data suggests that Starmer’s reasoning is purely political.

In the first quarter of 2024, GDP in the UK was 8.3% higher than in the second quarter of 2016, just before the EU Referendum vote in June of that year. In Germany, the increase was 5.8%, in France 9.6% and in Italy 7.7% over the same period.

It’s not difficult to conclude that the four largest economies in Western Europe have pretty much grown at the same pace since the 2016 vote.

The return of Big Government: Sir Keir Starmer ( cosmoscurrencyexchange.com )

Good news

The S&P Purchasing Managers index (PMI) came in at 52.7, a two year high. The survey, which measures economic activity in the private sector, is closely watched for signals about the performance of the economy. Anything above 50 indicates that the economy is growing.

Consultants EY upgraded their forecast for UK economy. EY now expects UK GDP (gross domestic product) to grow 1.1% this year, up from a previous estimate of 0.7%.

Barclays and Goldman Sachs also think the UK could grow by 1.1% in 2024 while Deutsche Bank forecasts growth of 1.2%. At the turn of the year, the consensus was for the UK to grow just 0.5% in 2024.

The Nationwide reported that UK house price growth rose by 0.3% month on month in July as buyer confidence picked up and mortgage rates fell ahead of the BoE interest rate cut with the annual growth rate rising to 2.1%, the fastest pace of growth since December 2022.

Lloyds Bank reported that business confidence in the UK has rebounded to an eight year high in July.

Not so good news

Reeves is preparing the nation for painful tax rises in her first Budget, set for 30 October with inheritance tax and capital gains in her sights.

City bosses have sounded the alarm on any rise to CGT (capital gains tax).

In its election manifesto, Labour committed to holding the rate of income tax, national insurance and VAT but failed to rule out a lift in the rate of CGT.

Such a move has triggered fears that entrepreneurs could be hammered and the flow of capital into British companies could be choked off.

Alasdair Haynes, the boss of Aquis Exchange said “If you push capital gains tax up, entrepreneurs will just say ‘well, why would I come to the country? Because I can go somewhere else where the tax is cheaper’. Entrepreneurs are losing and the government loses out on potential tax take. It’s not rocket science, so I can’t believe that she’d be stupid enough to actually raise it.”

Treasury officials have reportedly drawn up plans to bring the rate in line with income tax, the highest rate of which is 45%, a move that one report has suggested could bring in ￡16.7bn to the Treasury’s coffers.

Businesses currently pay a top rate of 20% when they sell shares, while individuals pay the same rate if they fall into the upper income tax bracket.

Tina McKenzie, policy chair at the Federation of Small Businesses said “No government at all serious about growth would hike CGT on entrepreneurs selling a small business. The commitment to work in partnership with business is something entrepreneurs have been glad to take on trust, and we fully hope and expect that is the path Labour will take in Government – anything else would be a betrayal of the promises made at the election”.

VAT is definitely being introduced on private-school education, and it’s being introduced from the start of 2025 (mid-academic year) with any fees paid from last week for the term starting in January 2025, subject to VAT so paying upfront to avoid future rises is not an option.

Business-rates relief is also being removed in England, at least. Whilst VAT is UK-wide, rates are reserved to national parliaments.

Deputy PM Angela Rayner has unveiled sweeping reforms to planning rules, including mandatory housing targets for councils with Conservative areas given six times bigger increase in housing targets than Labour regions.

Tory areas given six times bigger increase in housing targets than Labour ones ( telegraph.co.uk )

The Starmer government has also announced that it was scrapping some major infrastructure projects including the ￡1.7bn tunnel under Stonehenge and the A27 Arundel bypass.

The UK’s reliance on foreign energy supplies has hit a record high as oil and gas production on British shores is hammered by a crackdown on fossil fuels.

Ed Miliband is to add up to ￡1.5bn to energy bills as part of a record investment in Britain’s offshore wind industry.

The Energy Secretary is to boost the UK’s budget for renewable energy by ￡500m as he seeks to build an extra 3,000 to 4,000 giant turbines in Britain’s coastal waters by 2030.

The funding will include ￡1.1bn for offshore wind schemes in a bid to attract the industry again, after a disastrous auction for renewable energy contracts in September 2023 failed to garner any bids for offshore wind.

Significant sums will also be set aside for onshore wind, solar and tidal projects.

Record budget expected to boost offshore wind capacity, enhancing energy security - BusinessMole

Official data by the lobby group Make UK shows the UK has fallen out of the top 10 manufacturing nations for the first time since the industrial revolution, dropping to the 12th-biggest manufacturer in the world with an output of $259bn (￡200bn) per year. It is the first time on record that Britain is not at the top table. As recently as 2000, it was placed fifth.

USA

The Fed (Federal Reserve) voted unanimously to hold interest rates steady last week but signalled they are moving closer to lowering borrowing costs amid easing inflation and a cooling labour market. The benchmark federal funds rate has been set at a range of 5.25% to 5.5% since July 2023.

Global stock markets have plunged amid fears that the Fed has left it too late to begin cutting interest rates and risks damaging the world’s largest economy. The selloff was partly sparked by data that showed US unemployment claims hit an almost one-year high while manufacturing shrank. It’s the S&P 500 index worst decline since 2022.

The BLS (Bureau of Labor Statistics) reported that US payrolls rose by only 114,000 in July. This reading followed the 179,000-increase recorded in June and fell well short of the market expectation of 175,000.

The unemployment rate climbed from 4.1% in June to 4.3% for July.

The financial markets are now anticipating the Fed will cut interest rates five consecutive times starting in September, leaving the Fed funds rate at 4.00% – 4.25% by March 2025.

The EU

The Euro zone’s economy grew by 0.3% in the second quarter, above expectations with better-than-expected growth in France and Spain despite Germany, the euro zone’s biggest economy, unexpectedly posting a 0.1% contraction in the same period.

The annual inflation rate in the Euro zone unexpectedly accelerated to 2.6% in July, driven by higher energy prices.

The financial markets are pricing in another 0.25% interest rate cut by the ECB (European Central Bank) in September.

Others

In Canada, Justin Trudeau’s government is raising taxes on businesses to help fund Canada’s budget, adding further headwinds to an economy that’s already struggling to attract investment.

Dubai is set to welcome even more millionaires as wealthy individuals abandon the UK and is on track to be the world’s top wealth magnet for the third year running according to research by Swiss bank UBS. At the same time, the UK, already the source of many of Dubai’s expatriates is projected to see its millionaire population drop by 17% by 2028.

The Bank of Japan raised its benchmark interest rate to 0.25% and outlined plans to halve its monthly bond purchases in a decisive move to tighten monetary policy.

China’s ruling Communist Party pledged to make boosting consumer spending a greater policy focus, as weak domestic demand threatens the nation’s annual growth target. Officials vowed to roll out a batch of new measures to support the economy.

China took another step to obscure information about overseas funds going into and out of its sagging stock market with Beijing saying it will stop publishing daily flows data. The decision follows a move in May to end data on intraday flows through trading links with Hong Kong. Investors will lose the ability to calculate net flows at the end of each trading day from the 18th of August. This latest retreat from transparency follows attempts by Chinese policymakers to prop up faltering confidence among local investors, an effort that’s been battered by fleeing global funds. Overseas money managers offloaded about $4.1 billion of mainland shares in July.

Quote

Henry Ford, American industrialist and engineer best known for being the founder of the Ford Motor Company “When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”