A split over interest rate policy has emerged at the Bank of England (BoE) for the first time in more than a year which analysts believe could signal an earlier rise than expected. Ms. Kristin Forbes, an external member of the monetary policy committee (MPC), voted this month for an immediate quarter-point increase in the bank rate to 0.5%. It was the first split vote since July last year.
Markets have been expecting the first bank rate rise to take place halfway through 2018 at the earliest with many economists forecasting policy to remain unchanged until 2019. Minutes of the MPC meeting show that Ms. Forbes believes that domestic factors are beginning to generate inflation and the expected post-referendum slowdown in the economy has not materialised. The minutes also show that the MPC also raised its forecast for growth in the first three months of the year from 0.5% to 0.6%.
Market focus on future interest rate movements has shifted to the BoE after the U.S. Federal Reserve raised the Fed Rate last week for the third time since the financial crisis began which suggests that the low interest rate era is possibly drawing to a close. Analysts predict two further rate rises in the U.S. this year.
In contract with the optimistic MPC growth forecast, a report from PricewaterhouseCoopers (PWC) predicts that UK consumers are likely to curb spending over the next two years as households adjust to the Brexit fallout. The report expects consumer spending growth to ease from 3.0% in 2016 to 2.0% this year and to 1.7% in 2018 after being responsible for powering the UK economy and for helping to defy forecasts of a marked slowdown after last June’s EU referendum decision. The report suggests that consumer spending was the single most important driver of economic growth and had expanded on average by 2.4% faster than inflation over the past four years. PWC believes that this was due to a number of factors including the robust housing market, rising employment levels, rock-bottom interest rates and higher borrowing.
This more pessimistic view is supported by the latest UK unemployment data for the three months to January. Although it showed a further fall in the unemployment rate it also indicated a sharp slowdown in wage growth. The Office for National Statistics (ONS) reported that the unemployment rate fell to 4.7% which is the lowest level since the summer of 1975. However, wage growth slowed to 2.3% (excluding bonuses) from 2.6% in the previous three-month period. Although wages are still rising above the rate of inflation (currently 1.8%) the gap has narrowed considerably. Following the March UK budget, the Institute for Fiscal Studies (IFS) has warned that wages are unlikely to be higher in the next five years. The latest data showed that wages are growing at the slowest rate since April of last year. Analysts advise that the weakness is broad-based with wage growth moderating in the financial and business services, distribution, construction and public sectors.
The Royal Bank of Scotland (RBS) is engaged in talks to try to avert a High Court showdown in less than two months that would involve shareholders accusing the taxpayer-backed lender of holding back key financial information in the run-up to its near collapse at the height of the global financial crisis. Lawyers for both parties are understood to have entered negotiations to end the £1.2bn lawsuit brought by 27,000 private investors and more than 100 institutional fund managers over the bank’s £12.0bn rights issue in 2008. RBS has settled four of the five shareholder claims against it and if it were able to reach a deal on the fifth it would end the embarrassing prospect of several of the lender’s former senior managers, including Fred Goodwin its disgraced former chief executive, being forced to give evidence in court. The trial is scheduled to begin in May and analysts believe that the talks have only a 50-50 chance of reaching a deal after the claimants rejected a share of an earlier £800 million settlement.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Movements over the Last Week|
|Date:||20th March 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||23.52||23.77||-1.1%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.26||2.23||+1.3%|
|Allied Irish Banks||59||62||-4.8%||5.15||5.10||+1.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.00||14.50||-3.4%|
|Aust and NZ Banking Group Ltd||54||56||-3.6%||31.58||31.95||-1.2%|
|Banco Bilbao Vizcaya Argentaria S.A.||115||115||0.0%||7.08||6.89||+2.8%|
|Parent: Barclays plc|
|Barclays Bank plc||70||69||+1.4%||2.30||2.32||-0.9%|
|BNP Paribas S.A.||83||87||-4.6%||60.28||61.86||-2.6%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||15.80||15.36||+2.9%|
|Credit Agricole S.A.||74||77||-3.9%||12.31||12.65||-2.7%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||106||108||-1.9%||15.48||15.58||-0.6%|
|Deutsche Bank AG||123||127||-3.1%||17.86||18.26||-2.2%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||58||59||-1.7%||6.59||6.67||-1.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||60||64||-6.3%||14.38||14.62||-1.6%|
|Intesa Sanpaolo S.p.A.||137||141||-2.8%||2.48||2.43||+2.1%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.99||5.95||+0.7%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||59||59||0.0%||0.69||0.69||0.0%|
|Metro Bank plc||n/a||n/a||n/a||33.03||34.52||-4.3%|
|Nordea Bank AB||46||46||0.0%||102||109||-6.4%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||84||86||-2.3%||2.44||2.45||-0.4%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||77||77||0.0%||5.65||5.49||+2.9%|
|Shawbrook Group plc||n/a||n/a||n/a||2.99||3.10||-3.5%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||77||80||-3.8%||7.30||7.41||-1.5%|
|Svenska Handelsbanken AB||41||43||-4.7%||125||127||-1.6%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4287||4319||-0.7%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||85||87||-2.3%||n/a||n/a||n/a|