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How top CFOs plan to get through Brexit

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Deloitte’s Q3 survey hints at strategies for battling Brexit woes

Yesterday Deloitte published their Q3 survey of 124 Chief Financial Officers in the UK, and the results point to strategies to shore up against potential Brexit-related issues.

The majority of firms are planning to cut back on capital expenditure and hiring. The top priorities mentioned are reducing costs (47%) and increasing cash flow (42%).

There are still some more comfortable with risk – 18% of CFOs still believed that now is a good time for more balance sheet risk, at the time the survey was conducted in mid-September. And 19% are planning M&A activity.

While 51% expect employment to decline, 40% see flat jobs growth and 9% predict job gains.

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Stay calm, say investment strategists after sterling nosedive

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The pound is pounded but investors urged to avoid knee-jerk reactions

The pound might have been taking a pounding in recent days, but investors should avoid knee-jerk responses, warns a leading analyst at one of the world’s largest independent financial advisory organisations.

tom-elliott-hi-res-webTom Elliott, International Investment Strategist at deVere Group, is speaking out following sterling’s nosedive of 6 per cent in two minutes in an overnight ‘flash crash’ late last week.  On Friday morning, at its nadir, the pound was being traded at $1.1841, which is its lowest since 1985.

Mr Elliott observes: “Currency markets are reacting to three things.

“First, the realisation that British Prime Minister, Theresa May, has opted for a risky ‘hard’ Brexit strategy.

“Speeches at the Conservative Party conference last week suggested that the UK government will be willing to sacrifice membership of the single market, and possibly the E.U’s free trade area, in order to ‘take back control’ of immigration and end ‘meddling from Brussels’ on a range of issues.

“A hard Brexit carries a much greater risk of economic dislocation as investment plans are put on hold by UK businesses, and by foreign ones considering investment in the UK, as they wait to see what tariffs and conditions will apply to UK/EU trade once the Brexit negotiations are completed. Consumer confidence may weaken, with purchases of big-ticket items put off if consumers fear a slowing economy and a rise in unemployment. A weaker economy usually is bad news for a currency.

He continues: “Second, the UK runs the largest current account deficit in the developed world.

“The UK current account deficit (which is the total of these) is -5.4% of GDP (£162bn). It is-2.6% for the U.S, and +3.2% for the eurozone. This means the UK relies on foreigners to buy their debt, equity, buildings, factories and so on to the tune of £162bn each year in order for the books to balance. There is a real risk that with slower growth and Brexit uncertainty increased, these inflows shrink. Then sterling must fall in order to bring the current account deficit and matching inflows into balance.”

He goes on to say: “And third, there is the possibility of higher U.S. interest rates and possibly lower ones in Britain.

“Interest rate trends currently favour the dollar over other currencies, as the Federal Reserve is clearly itching to raise rates. Slower growth in the UK as a result of a hard Brexit may lead to the Bank of England cutting interest rates again, down to zero.   A widening interest rate differential against the dollar will lead to a weaker pound, everything else being equal.”

Mr Elliott concludes: “What should investors do? For the moment: Sit still and avoid knee-jerk responses. Recent economic data from the UK has been stronger than had been expected in the wake of the 23 June referendum. Doom and gloom forecasters may continue to be proved wrong as a hard Brexit is negotiated.”

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Are we facing a sterling crisis?

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Volatile, falling and unstable, sterling evokes prior UK and emerging FX crises
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LONDON, Oct 7 (Reuters) – Sterling’s slump to its lowest in more than 30 years against the dollar this week in increasingly volatile trading has raised fears Britain’s exit from the European Union could yet trigger a currency crisis like those of 1967, 1976 or 1992.

By some measures, such as the speed of the losses and volatility of its market trading, the pound is showing crisis-like symptoms. Most market observers expect it to fall further on the foreign exchanges before it stabilises.

But for a classic ‘currency crisis’ to unfold, sterling losses would have to choke off the foreign portfolio investments critical to balancing the economy’s massive external payments deficit. That risks a spiral of selling of UK bonds and stocks, sinking the currency further, stoking inflation and complicating the central bank’s ability to ease credit more if needed to support the real economy.

For investors fearing such a vicious circle there were worrying signs on Friday that overseas holders of UK assets may be losing their nerve. The last three days have seen UK government bonds and domestically-exposed mid-sized stocks fall in tandem with the pound for the first time since the immediate aftermath of the Brexit referendum.

The selling has not yet turned into a rout, however. Few observers are flagging a match with prior sterling crises just yet, even if the economic, political and financial uncertainty unleashed by Brexit is likely to cast a dark cloud over the currency for some time.

The crisis in 1967 saw sterling come off the gold standard and devalue; in 1976 Britain was forced to seek a multi-billion dollar aid package from the International Monetary Fund; and in 1992 billionaire investor George Soros famously “broke the Bank of England” when Britain was ejected from the Exchange Rate Mechanism, the pre-cursor to the euro.

Market veterans reckon for the current turmoil to turn into a crisis, there would have to be clear evidence foreign funds and central banks were losing faith in the UK economy and policy framework, and offloading their UK assets accordingly.

Britain has the biggest current account deficit in the developed world at nearly 6 percent of its annual economic output. In the words of Bank of England governor Mark Carney, it relies on the “kindness of strangers” to fund the gap.

If that flow of capital from abroad dries up, Britain has a problem. This has been the root cause of most emerging market currency crises in recent decades, notably in Mexico in 1995, Thailand in 1997 and Brazil in 1998.

“This is not a sterling a crisis, but it has the potential to become one,” said Nick Parsons, global co-head of FX strategy at National Australia Bank, and a 30-year veteran of the currency market.

David Bloom, global head of FX strategy at HSBC, agreed, noting that overseas investors have not called time on UK Plc.

“Foreign holders of UK assets will not be worried, at least not yet. This is an adjustment. Nobody should be surprised. Adjustments can be smooth or they can be rocky,” he said. “But policymakers will be concerned.”

Sterling plunged to a fresh 31-year low of $1.14 from $1.26 early on Friday before quickly recovering most of that ground. The Bank of England said it is investigating the cause of the short-lived fall.

WORST IN THE WORLD

The volatility comes at the end of a tumultuous week, kicked off by Prime Minister Theresa May saying said she would trigger the process to leave the EU by the end of March. Markets took fright, interpreting this to mean there will be a “hard” Brexit with Britain having less access to the European Single Market.

Investors were also taken aback when May criticized the “bad side effects” of the BoE’s low interest rates and bond-buying. Aides said she was not trying to influence Carney but some saw the comments as a warning to the Canadian who is in the process of deciding whether to extend his governorship of the BoE beyond his scheduled departure in 2018.

The yield on benchmark 10-year British government bonds shot up above 1 percent from 0.70 percent a week ago, still low by historical levels but reflecting investors’ fears that the weak exchange rate will fuel an inflation boom.

Inflation expectations as measured by the so-called five-year, five-year forwards jumped to 4.5 percent, the highest since the June 23 Brexit referendum.

Alan Clarke, an economist with Scotiabank in London, said sterling’s post-referendum fall was set to add up to 2 percentage points to consumer price inflation, which he now thought would peak at 2.6 percent in November 2017. Inflation was 0.6 percent in August.

The pound is one of the worst-performing currencies in the world this year. Since the referendum, it has fallen 17 percent against the dollar and euro. On a trade-weighted basis, it is down 18 percent this year, putting it on course for its second biggest annual fall since the 1970s.

So far, the BoE has sat on the sidelines and allowed sterling to find its own level. Many argue that the Bank’s post-referendum interest rate cut and revival of its quantitative easing bond-buying programme has turbo-charged the pound’s fall.

UK finance minister Philip Hammond said on Friday that the pound’s fall this week reflected investors’ realisation that Brexit is a cold, hard reality. He expects more “ups and downs”.

“A crisis is when there is a sense that the falls in sterling reflect a lack of confidence about the UK’s economic prospects and/or the economic policy framework, rather just a benign – i.e. stabilising – response to shocks,” said Charlie Bean, former chief economist at the Bank of England.

It’s hard to imagine the Bank intervening directly in the FX market now to prop up the pound like it did in 1992. Then, it blew billions of its FX reserves in its ultimately futile battle against Soros and the market.

BoE deputy governor Broadbent said this week that the Bank could, “in principle”, reverse its ultra-loose policy and raise rates if sterling’s fall was sufficiently steep and rapid. But few analysts believe that is on the cards.

Sterling’s all-time low against the dollar is around $1.05, struck in 1984. That’s around 15 percent from current levels and as the last three months show, it’s not out of reach. Parity against the dollar or euro would certainly ring alarm bells for the government and the Bank of England.

“When the pound is worth less than a dollar or less than a euro, there’s no doubt that is a sterling crisis,” Parsons at NAB said.

(Reporting by Jamie McGeever; Additional reporting by William Schomberg; editing by Mike Dolan and Peter Graff)

Copyright(c) Thomson Reuters 2016.

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Strategic approach to regulation could boost exports

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Government standards and regulations can help or hinder SMEs’ export prospects

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Governments have a massive opportunity to boost national trade if they think strategically about how standards and regulations help or hinder SMEs to export, the Geneva-based International Trade Centre (ITC) said in a report published on Thursday.

“If you want to maximise your chances of getting your share of international trade, you need to be very strategic about where is the potential that you are not tapping into,” the ITC’s Executive Director Arancha Gonzalez told Reuters.

“The government has a possibility to open the door for businesses to follow, rather than the government following the regulatory framework of businesses that are trying to swim in this current by themselves.”

The ITC, a joint agency of the United Nations and the World Trade Organization that helps SMEs to trade, says its 300-page report, “Meeting the standard for trade”, offers a guide for small businesses and an action plan for governments.

Standards and regulations are key to competitiveness and one of the defining elements of trade in the 21st century, Gonzalez said, as consumers become more and more savvy and picky about where products come from and what they contain.

“Consumers are asking for more sophisticated standards. This is a huge challenge for SMEs, for governments, and for institutions. The option of no standards or lower standards is not an option,” Gonzalez said.

Standards are diverse. They determine whether a plug fits into a socket, whether a medicine can be sold, and whether we can understand foreign traffic signs. Regulations can mean safety rules for food or cars, or privacy rules for data storage. In all cases governments need to back the rules up with testing and certification.

The report identifies areas where countries are underperforming their export potential, which standards and regulations they should target to meet that potential, and what investments are needed.

There is an opportunity for trade in processed and fresh food within the Middle East and North Africa, for example, where the number of technical regulations for fresh food imports is four times higher than in other regions, Gonzalez said.

“There is no internal trade because the manner in which they are regulating is hugely burdensome. So they don’t trade with each other, they only trade with the rest of the world.”

Countries in the region could increase food exports to each other by $7.6 billion and to developing countries in Asia by $16.5 billion, the report said.

The Asia-Pacific region could export $400 billion more in IT and consumer electronics, and $1.7 trillion more overall, and had strong potential to diversify into chemicals exports, the report said.

Meeting standards can open markets and raise prices, but Gonzalez said governments should “craft” regulation with SMEs in mind, since smaller firms make up 98 percent of businesses and their ability to trade suffers disproportionately from red tape.

“A 10 percent increase in the regulatory burden means 1.6 percent less trade for large companies but 3.2 percent less trade for SMEs,” she said.

(Reporting by Tom Miles; Editing by Toby Chopra)

Copyright(c) Thomson Reuters 2016.

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Weaker pound may not lead to higher food prices, Sainsbury’s says

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CEO says commodity price falls may offset sterling drop, as underlying sales fall for second straight quarter

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LONDON, Sept 28 (Reuters) – Sterling’s fall since Britain’s vote to leave the European Union will not necessarily lead to higher grocery prices, as it could be offset by lower commodities prices and stiff competition, the country’s No.2 supermarket group Sainsbury’s said on Wednesday.

Britain’s grocery sector has seen more than two years of falling prices as German discounters Aldi and Lidl have led a price war, forcing a fight back from the “big four” players – market leader Tesco, Sainsbury’s, Asda and Morrisons. Deflation in commodities has also been a major factor driving prices lower.

Most analysts and economists believe grocery prices are set to rise after a 10 percent drop in sterling following the “Brexit” vote, which makes importing goods more expensive.

A return to food price inflation, in moderation, would be welcomed by investors in grocery stocks as it boosts sales and profit margins. But Sainsbury’s Chief Executive Mike Coupe said the situation was not clear cut.

“You could argue there are some inflationary pressures as a result of currency changes but equally there are some deflationary pressures because of commodity price movements,” he told reporters after Sainsbury’s reported a drop in underlying sales for the second straight quarter.

“If you look at the northern hemisphere harvests this year, they’ve been good again and that is probably going to put some deflationary pressures in the market,” he said.

“It’s still too early to tell how they will play out.”

Coupe also said the market was the most competitive he had known in his 30-plus years in the sector with rivals continuing to push through tactical price reductions.

He said Sainsbury’s’ prices “have never been sharper” versus the discounters.

On Monday, Aldi said it would continue to cut prices to ensure it was the cheapest player.

SALES DECLINE

Sainsbury’s, which this month completed a 1.4 billion pounds ($1.8 billion) takeover of Argos-owner Home Retail, said sales at stores open over a year fell 1.1 percent, excluding fuel, in the 16 weeks to Sept. 24, its fiscal second quarter – slightly better than analysts’ average forecast of down 1.2 percent but worse than a first quarter fall of 0.8 percent.

The decline was driven by deflation of about 1 percent as the firm cut prices on targeted products, such as a 33 percent reduction to 2.50 pounds for an own-label pack of 46 nappies.

However, Sainsbury’s highlighted like-for-like transaction growth across all sales channels – supermarkets, convenience stores and online – and volume growth. It said it remained confident it would continue to outperform major rivals.

Shares in the firm, already down 9 percent over the last six months, fell as much as 3.5 percent on the cautious outlook.

Sainsbury’s has both lowered and simplified its prices, reducing the number of promotions and removing most “multi-buy” deals. It has also worked to improve the quality and range of its own-brand food and general merchandise products, while investing in the growth areas of online and convenience stores.

While the firm has proved more resilient to the discounters than others, it has still reported two straight years of profit decline and analysts forecast a third for the 2016-17 year.

“We see the gradual recovery of Tesco UK as a cause for real concern for Sainsbury’s in terms of the scope for greater direct competitor attrition,” said Shore Capital analyst Clive Black, who put his “hold” rating on the firm’s shares under review.

Other analysts believe Sainsbury’s is vulnerable to a possible major step-up in price cuts from Asda and could be distracted by the integration of general merchandise chain Argos.

In its second quarter to Aug. 27, Argos achieved total sales growth of 3.0 percent and like-for-like growth of 2.3 percent.

($1 = 0.7682 pounds)

(Editing by Paul Sandle and Mark Potter)

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Thomas Cook sticks to annual guidance after strong demand for summer holidays

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Strong demand for summer holidays to destinations other than Turkey helped offset pressure on the travel group

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LONDON, Sept 27 (Reuters) – British travel company Thomas Cook stuck to its annual profit guidance on Tuesday, after strong demand for summer holidays to destinations other than Turkey helped offset pressure on the group.

Thomas Cook was forced to lower its guidance in July after the failed coup in Turkey, formerly the company’s fourth most important market, prompted holidaymakers to change their plans. Customers changing their plans to travel to Spanish destinations rather than Turkey had forced Thomas Cook to lower its profit guidance range by 3-10 percent in July, adding to difficulties after the group warned about delayed bookings in March on worries over security.

For the twelve months ended Sept. 30, Thomas Cook is expecting to post operating profit of 300 million pounds ($389.4 million), an outlook it reconfirmed on Tuesday, with bookings excluding Turkey up 8 percent this summer.

Including Turkey, group bookings for the summer, when Thomas Cook makes all its profit, were down 4 percent, with customers opting for holidays in the Balearic and Canary Islands and the United States.

Summer bookings from the UK were higher than last year despite concerns that the devaluation of the pound after the Brexit vote in June would lower British appetite to travel abroad.

Bookings for this winter were broadly in line with last year, Thomas Cook added.

($1 = 0.7704 pounds)

(Reporting by Sarah Young; editing by Kate Holton)

Copyright(c) Thomson Reuters 2016.

 

 

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Scotland threatens to push for another referendum if there is a “hard Brexit”

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Scottish minister worries hard Brexit imminent after negotiation meetings

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PARIS, Sept 26 (Reuters) – Britain appears to be heading for a “hard Brexit” under which links to the European Union would be reduced to little more than trade agreements, Scotland’s external affairs minister Fiona Hyslop said on Monday, citing “mood music” from recent talks.

Pro-EU Scotland’s Brexit representative, Michael Russell, has had the first of a series of meetings with British Brexit minister David Davis, Hyslop told Reuters.

The talks are part of efforts to establish a common United Kingdom position for divorce discussions with the country’s European Union partners, as British Prime Minister Theresa May has promised.

Russell will be lobbying for a “soft” exit “that looks as much like remaining in the EU as possible,” ideally including continued free movement of capital and labour, she said.

“They’ve met within the last 10 days. The process for those internal negotiations is currently being established,” Hyslop told Reuters in Paris after a meeting with France’s European Affairs Minister Harlem Desir.

“I’m worried just now that the UK looks as if it’s heading to a hard Brexit. However those internal discussions with Scotland, Wales and Northern Ireland have only just started, so we will try and shift that position,” she said.

“That’s the mood music,” she added, “but (British Prime Minister) Theresa May is keeping everything very close to her chest and is very much determining the UK position,” Hyslop said.

Some 62 percent of Scottish voters opted to remain in the EU in the June 23 referendum, in which 52 percent of Britons overall voted to leave.

Russell and his fellow representatives from Wales and Northern Ireland have no power of veto in their talks with Davis, Britain’s Secretary of State for Exiting the European Union.

However, Scotland has threatened to push for a referendum on independence if the Brexit terms are not to its liking.

A ‘hard Brexit’ would be entirely unacceptable, Hyslop added.

“We’re looking to either influence the UK position or have a position that recognises the differences within the UK, including Scotland. But we have also said that if required we are prepared to look at a referendum on independence again.

That’s not our starting point, but it’s there should it be needed.”

Britain’s vote to quit the EU has sent shockwaves through the country and the EU, where it is one of the three main economies. Economists are concerned the divorce will hurt economic growth and pro-EU politicians fear it will weaken the union.

May has repeatedly said that Article 50 will not be triggered before the end of the year, and that Britain will not get a bad deal.

Although Scots had decided in a 2014 referendum on independence to remain in the United Kingdon, Scottish First Minister Nicola Sturgeon has said the Brexit vote meant that the country was now being taken out of the EU against its will and this could justify a second referendum.

(Reporting by Andrew Callus; editing by Michel Rose)

Copyright(c) Thomson Reuters 2016.

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Online retailer reports more than doubling of profits

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British online fashion retailer Boohoo.com celebrates strong revenue growth

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LONDON, Sept 27 (Reuters) – British online fashion retailer Boohoo.com on Tuesday upgraded its sales guidance for the third time in three months as it reported a more than doubling of first-half profit on the back of strong revenue growth driven by new customers.

The firm, which designs, sources and sells own-brand clothing, shoes and accessories online to a core market of 16-24 year-olds in Britain and globally, said on Tuesday it now expected revenue growth for the full year of 30-35 percent.

In August the group had upgraded its forecast to 28-33 percent.

Boohoo floated at 50 pence a share in 2014 but the stock was hammered after a profit warning in January last year. Its shares have since recovered strongly, closing Monday at 97.8 pence, valuing the business at 1.1 billion pounds.

For the six months to Aug. 31 Boohoo made core earnings of 16.5 million pounds ($21.4 million), up 117 percent, on revenue up 40 percent to 127.3 million pounds, reflecting a 28 percent rise in active customers to 4.5 million.

Gross margin fell 480 basis points to 55.3 percent, mainly reflecting planned price cuts and promotions.

Boohoo said comparative sales numbers for the second half are tougher than for the first. Significant investment in marketing and in IT is also planned for the second half.

It forecast a core earnings margin for the full year of about 11 percent.

($1 = 0.7696 pounds)

(Reporting by James Davey, Editing by Paul Sandle)

Copyright(c) Thomson Reuters 2016.

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Four British power firms call for carbon tax extension

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Power generators call on government to maintain carbon tax until 2025

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LONDON, Sept 26 (Reuters) – Four British power generators have called on the government to maintain the country’s carbon tax until at least 2025, according to a letter seen by Reuters, putting them at odds with industrial groups who want it scrapped.

The carbon tax is paid by power generators for each tonne of carbon dioxide (CO2) they emit, and was frozen in 2014 at 18 pounds per tonne until 2021.

British chancellor Philip Hammond is expected to provide details on what will happen to the tax after 2021 in his autumn statement on Nov. 23.

Most British power companies support the carbon tax. Its cost is passed on to consumers through higher electricity bills, meaning companies with low-carbon generation such as nuclear or renewables can then benefit from the higher electricity prices.

“We are calling on the UK government … to maintain the carbon price floor beyond 2021, by keeping the carbon price support rate at least at its current level until 2025 to maintain secure and reliable energy supplies,” a spokesman for power generator SSE, one of the letter’s signatories said in an email on Monday.

The other signatories were Drax, Vitol owned VPI Immingham and Calon Energy.

Industrial groups have called for the government to abandon the tax, saying it has made electricity prices in Britain uncompetitive.

“The UK has some of the highest electricity wholesale prices in the EU and this is in large part due to the carbon price floor,” Richard Warren, senior energy and environment policy adviser at Britain’s manufacturers’ organization EEF, said in an email.

EEF estimates the carbon tax adds around 8-10 pounds per megawatt hour (MWh) to British wholesale power prices, which currently trade at around 40 pounds/MWh.

The power firms said the carbon tax encourages them to invest in low-carbon power generation and said it is central to the country’s efforts to meet its climate change goals.

But EEF’s Warren said the government already helps low-carbon investment though other schemes, such as its contracts-for-difference which provides a guaranteed price for electricity production.

Power generators pay the carbon tax on top of their obligations under the EU’s Emissions Trading System, which forces companies to surrender one carbon permit for every tonne of carbon dioxide (CO2) they emit.

Benchmark prices in the EU ETS have plummeted from around 30 euros a tonne in 2008 to below 5 euros, rendering them too cheap to encourage investment, the power firms said.

Britain has a legally binding target to cut its emissions by 80 percent on 1990 levels by 2050 and has embarked on electricity market reforms aimed at spurring investment in low-carbon nuclear and renewable power.

Britain also plans to phase out coal-fired power generation by 2025.

(Editing by Susan Fenton)

Copyright(c) Thomson Reuters 2016.

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Mortgage approvals hit 19-month low

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British banks approved 36,997 mortgages for house purchases last month, down from 37,672 in July

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LONDON, Sept 26 (Reuters) – Britain’s housing market showed signs of slowing in August with the number of mortgages approved by banks falling to its lowest level since January 2015 and analysts said they expected further weakness ahead as Brexit uncertainty dampens demand next year. British banks approved 36,997 mortgages for house purchases last month, down from 37,672 in July and 21 percent lower than in August 2015, the British Bankers’ Association said on Monday. The figures extended a slowdown which began at the start of this year ahead of the introduction of a new tax on homes bought by landlords in April and Britain’s referendum decision to leave the European Union in June. “The outlook for stagnation in households’ real incomes next year, as inflation picks up and hiring slows sharply, points to a prolonged period of weakness in mortgage lending ahead,” Samuel Tombs, an economist at Pantheon Macroeconomics, said. A rise of 1.5 percent in the average mortgage value in August pointed to a slowdown in house price growth over coming months, Tombs said. Howard Archer, an economist at IHS Global Insight, said house prices would likely be flat until the end of 2016 and fall by 3 percent in 2017 as the start of talks over Britain’s exit from the EU exacerbated uncertainty about the economic outlook. The BBA said growth in net credit card lending slowed in August, rising by 136 million pounds compared with an increase of 290 million pounds in July. But consumer borrowing overall remained strong with personal loans and overdrafts rising by a net 343 million pounds, the biggest increase since May, underscoring how consumers appear to have taken the Brexit vote in their stride. The data was collected after the Bank of England cut interest rates to a new record low of 0.25 percent on Aug. 4. The BBA figures do not include lending by mutually owned building societies, which accounts for around third of mortgages. The next release of the more comprehensive Bank of England lending data is due on Thursday.

(Reporting by Peter Hobson; editing by William Schomberg)

Copyright(c) Thomson Reuters 2016.