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Interest Rate Debate - Global Economics Weekly

Interest Rate Debate!

Global Economics Weekly Brief



UK `s Mayor of London Boris Johnson once joked that his policy on cake eating was simple. He is both pro having it and pro eating it. UK borrowers may not be so fortunate. Minutes from the Bank of England’s Monetary Policy Committee highlighted that in order for interest rates to rise gradually, they may have to start rising earlier. That’s the trade-off.



If UK interest rates start to change immediately, there will be trouble for most borrowers instantly! House buyers would stop buying and repossessions would be an heavy toll!


Old habits die slowly. The second estimate of Q1 GDP - in which growth was confirmed as 0.8% q/q (very, very minimal) - provides a bit more flesh-on-the-bones of the state of the UK economy. Household spending made the biggest contribution to growth, rising by 0.8%q/q (heavy borrowing of money). But encouragingly, business investment also rose and has been expanding for five quarters. Signs of the much sought after rebalancing of the economy? But before we get carried away, household spending is now even more important for the UK economy than it was pre-crisis. And export growth has yet to ignite. Rebalancing is a tough nut to crack. UK government debt rising rapidly also, domestic debt is so high it is very worrying!

Dedicated followers of fashion. True to form, there was no holding back the UK consumer in April as retail sales surged to their fastest pace of growth in more than a decade. Excluding fuel, retail sales were up 7.7%y/y, easily outstripping the average 4.5%y/y growth achieved in the first three months of the year (heavy borrowing to fuel disaster in the future). All the main retail categories shared in the spoils (e.g., food, household goods etc.) as we splashed out £28 billion over the four week reporting period, equivalent to £11,500 per second. The UK people are spending again with mostly borrowed money! Who will be paying for these borrowing in the future at increased interest rates?

Scorpio rising. The Bank of England Minutes contained a sting in the tail. Although the Committee re-iterated its intention to raise rates gradually, it suggested that the more gradual the rise in interest rates “the earlier it might be necessary to start tightening policy". Could this be an attempt to signal that rates might rise somewhat sooner than expected? I think so. Markets now expect the Monetary Policy Committee to raise Bank Rate in the first half of 2015. People still have not learned their lesson from 2008! Banks are lending too much money to the wrong people again!

Every penny counts. A buoyant economy failed to boost government finances in April. Government net borrowing, excluding effects such as the privatisation of Royal Mail, was £11.5 billion in April 2014, £1.9bn higher than April 2013.While tax and spend figures are notoriously volatile, it’s sobering that interest payments on government debt could pass the £1bn a week mile-stone this year. So the boost from stamp duty on shares and properties, up almost a third to £1.1bn, will be welcomed in Whitehall. The UK government need to learn how to work within side a budget and cash flow, if the UK were in business that would go bust! Whoops, the UK are in business AND THEY ARE BUST!

National Debt Up as UK Sinks deeper in to the Red! The UK government borrowed nearly £14 million `every hour` last month plunging Britain ever deeper into the red. The UK national debt hit £1.25 trillion or 74% of national income and around £50,000 for every household in the country. The national debt is rapidly increasing month-on-month, when will it stop? The future for the UK is not rosy!

April showers. March was celebrated as the month where UK wage growth finally outpaced inflation. But April’s figures could rain on that parade. Annual inflation in April rose to 1.8% (up from 1.6% in March) hinting real wages could slip back again. It was planes, trains and automobiles that pushed prices up in April. But the effect of higher transport costs will fall away next month. And for once the British Spring weather was praised for bringing better growing conditions, particularly for vegetables, pushing down the cost of a wide range of food prices. Look out for higher fuel and food costs over the next few months!

All bar one. Business surveys suggest the Eurozone’s economic recovery remains on track. The Eurozone Purchasing Managers’ Index (PMI) reading for May was 53.9. That’s a small drop on April but comfortably above the 50-mark that signals economic expansion. The good news was shared across nations, except for France, where business activity shrank in May. However, the figures also contain cause for concern. Companies continued to cut margins and lower prices to boost sales. With `deflationary` pressures continuing to weigh on the Eurozone, this provides further support for those calling for the European Central Bank to start asset purchases to bolster the recovery. More unemployment on its way again!

A spring in its step. US manufacturing output grew at its fastest pace in more than three years in May according to the Purchasing Managers’ Index. The survey also reported stronger growth in new orders and jobs. In contrast, inflation remains muted. It’s a pattern the Fed’s rate-setters expected at their April meeting. Superficially it also sounds a little like the Eurozone’s economy. But that’s an illusion. Crucially, both expectations and prospects for the US are significantly greater than those for the single currency area. As so often in life, everything’s relative. The US still owe $17 trillion and still borrowing at the fastest pace ever!


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Interest Rate Debate - Global Economics Weekly

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