A monthly poll of 50 economists conducted by Reuters has found that the Bank of England (BoE) will most likely maintain the base rate at its current seven year low of 0.5% until early 2017. According to the poll, the chance of the Bank increasing the base rate before the end of 2016 went down from 45% in March to 40% now. The results of the poll also suggest that over the next year, the UK economy will grow by what Reuters describe as “a relatively modest 0.5% per quarter” and with inflation at 0.3% (well below the 2% target), many market analysts expect the base rate to be raised only gradually over the next couple of years to reach 1.75% by 2018.
The UK economy appears to have slowed dramatically at the start of the year as the crisis engulfing British industry intensified. ONS official figures showed production in February was 0.5% lower than 12 months earlier which was its biggest fall since August 2013. The sharp contraction came as thousands of North Sea oil workers faced redundancy and the nation’s steel industry struggles to survive. Manufacturing was particularly hard-hit with output down 1.1% from January and 1.8% from a year earlier. This was its biggest annual fall since July 2013, when the world was still emerging from the financial crisis and the eurozone was locked in a debt spiral. A separate report, by the National Institute of Economic and Social Research (NESR), indicates that the whole economy grew by just 0.3% in the first three months of the year which was half the rate of growth achieved in the previous quarter. The UK recovery appears to have faltered as the global economy slows and financial markets fluctuate wildly amid worries over China and emerging markets.
Federal Reserve policymakers appear divided on the timing of the next interest rate rise. At their March meeting they debated whether an interest rate hike would be needed in April, with contrasting views, although a consensus emerged that risks from a global economic slowdown warranted a cautious approach. Many participants expressed a view that “the global economic and financial situation still posed appreciable downside risks,” according to the minutes from the Fed’s March policy meeting. Policymakers had signalled at the close of the meeting that they expect to raise interest rates twice in 2016 but the timing of the increases appear to be undecided. Policymakers had previously signalled in December that four interest rate increases were likely in 2016.
The EU and IMF met last week to try to find a way to encourage Greece to undertake more economic reforms linked to its bailout and so unlock more funds. The review has dragged on for months mainly due to differences among the parties over Greece’s fiscal shortfall by 2018, initially seen as 3.0% by the EU, 1.0% by Athens and 4.5% by the IMF. The review is expected to be completed this coming week and will pave the way for talks on debt relief with the EU and potentially unlock additional funds from the bailout, which is worth up to €86 billion ($98 billion) in total, spread over three years. Athens needs the money to repay €3.5 billion euros to the IMF and the European Central Bank (ECB) in July, as well as for unpaid domestic bills.
London city banks have suffered their worst start to a year since the immediate aftermath of the financial crisis as investors and companies worldwide shun markets and as the cost of regulation bites deeper into industry margins. Global investment banking fees totalled £11.4 billion in the first three months of the year, a decline of nearly 30% compared with the first quarter of last year. This is the worst start to a year since 2009. Barclays Bank is estimated by market analysts to have suffered a 34% drop in first-quarter fee income to £407 million, while HSBC’s investment banking revenues are estimated to have fallen by nearly 42% to £191 million.
Flagstone has not independently verified the information or data used in the Update which is based solely on publicly-available information. Neither Flagstone nor any of its advisers, representatives, officers or agents makes, or is authorised to make, any express or implied representation, warranty or undertaking as to the accuracy or completeness of the Update.