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Government borrowing fell in November

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UK government borrowing dropped to £8.7 billion last month, down £0.2 billion, predominantly due to higher income tax receipts.

To date, the total borrowing figure for 2017 is £48.1 billion, which is the lowest recorded at this time of year for a decade.

The Office for National Statistics (ONS) figures showed that revenues from income and capital gains tax were up 6.2% in November from a year ago and 3.4% higher for the year to date.

In its latest review of the UK economy, the International Monetary Fund (IMF) downgraded its British growth forecast from 1.7% to 1.6% and told the Chancellor of the Exchequer, Philip Hammond, to control public borrowing more in case of a slow-down in the economy going forward.

Total public sector net debt, not including public sector banks, was at £1.73 trillion at the end of November, according to the ONS. This figure is down by £65.5 billion from the previous month due to a change in housing associations being recategorised from public to private sector.

UK inflation rises to six-year high of 3.1%

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The six-year high was an unexpected leap and will force the Bank of England Governor, Mark Carney, to explain to Chancellor of the Exchequer, Philip Hammond, why the increase has occurred.

The Office for National Statistics (ONS) numbers show the figure has risen to 3.1% from October’s 3%, the highest it’s been since March 2012.

The government has set a consumer price index target of 2% with the promise that the Bank of England must contact Philip Hammond if inflation exceeds 3% or falls short of 1%. This will examine further the bank’s interest-rate setting Monetary Policy Committee (MPC).

Highlights are the rise in computer game prices and the fall in airway fares (from 13.4% to 10.4%) from the same period last year.

Food and non-alcoholic drinks picked up to 0.6% from 0.5% in the same period last year.

Consumers were also met with higher fuel costs this November with petrol rising 1.8 pence a litre month-on-month to 119,1 pence and diesel rising by 2.3 pence a litre to 122.8 pence.

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Britain ‘weary’ of austerity, says Hammond in Mansion House speech

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British voters have tired of austerity and the health of the UK’s economy depends on the outcome of Brexit negotiations, UK chancellor of the exchequer Philip Hammond said in his Mansion House speech on Tuesday.

The annual event, delayed due to last week’s Greenfell Tower disaster, saw the chancellor lean towards a ‘soft’ Brexit with economic matters to the fore.

“Britain is weary after seven years of hard slog repairing the damage of the great recession,” said Hammond. “Funding for public services can only be delivered in one of three ways: higher taxes; higher borrowing; or stronger economic growth. And only one of those three choices is a long-term sustainable solution for this country in the face of the inexorable pressure of an ageing population.”

Hammond addressed Brexit in milder terms than he did on the BBC’s Andrew Marr Show in which he said “no deal would be a very, very bad outcome for Britain” on Sunday.

“The future of our economy is inexorably linked to the kind of Brexit deal that we reach with the EU,” he said yesterday.

“Our departure from the EU is underway. But ensuring that it happens via a smooth pathway to a deep and special future partnership with our EU neighbours, one that protects jobs, prosperity, and living standards in Britain, will require every ounce of skill and diplomacy that we can muster.

“Yesterday was a positive start. It will get tougher. But we are ready for the challenge,” he said.

Brexit negotiations, led by Brexit secretary David Davis and EU negotiator Michel Barnier, opened in Luxembourg on Monday.

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‘Third parliament of austerity’ on horizon – IFS

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Austerity will last until into the 2020s, with economic growth and pay-rise levels remaining stagnant, according to the Institute for Fiscal Studies’ budget commentary.
The think-tank’s response to yesterday’s budget delivered by Chancellor of the Exchequer Philip Hammond pulled few punches on the state of the UK economy.
“On the public finances the OBR made by far its biggest ever revision to forecasts between Autumn and Spring for the current financial year,” said IFS director Paul Johnson. “In November it thought we would be borrowing £68 billion this year. It now thinks we will be borrowing just £52 billion. Yet it has barely changed its forecasts for future years. We remain on course to be borrowing about £20 billion in 2020 – that’s £30 billion more than intended a year ago. That leaves a lot of work to do in the next parliament to get to the planned budget balance. It looks like being, I’m afraid, a third parliament of austerity.”
Johnson also argued that the UK has had what amounts to “a decade without growth”, with GDP per capita rising by only 2% since 2008.

“Income and earnings growth over the next few years still look like being weak,” he said. “On current forecasts average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented.”

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IFS predicts more spending cuts and low growth

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The Institute for Fiscal Studies has announced its Green Budget, with predictions and analysis highly critical of the UK economy.

The London-based think tank predicts that sharp spending cuts are due to arrive before the next election, with tax rising to a greater proportion of national income than has been seen since the mid-1980s: the IFS says that spending cuts and tax rises will continue into the 2020s.

The report was compiled with analysis from Oxford Economics, which expects a “relatively disappointing” 1.6% GDP growth this year, and 1.3% growth in 2018, with wages almost static.

“For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne,” explained IFS director Paul Johnson. “Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise. Even so, the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”

Andrew Goodwin, Oxford Economics’ lead UK economist, said that the UK economy has thus-far achieved solid growth – but that it has been almost entirely reliant on the consumer. “With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share. Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.”

“If the government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021. However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU. Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”

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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.

Is Bank of England governor planning to step down?

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Canadian Mark Carney to announce before year end whether he will step down or extend his stay

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LONDON, Sept 23 (Reuters) – Mark Carney has been taking the big decisions for Britain’s economy for the past three years, but his next one will be much more personal.

The Canadian has said he intends to say before the end of this year whether he will stick to his original plan to step down as Bank of England governor in less than two years’ time, or extend his stay until 2021.

Above all, he will have to decide whether he wants to stay for the task of steering Britain’s economy through what is likely to be a period of upheaval as it leaves the European Union and begins life outside the bloc.

Some think that is the kind of job that Carney – who was hailed by the man who hired him, former British finance minister George Osborne, as the “outstanding central banker of his generation” – would relish.

When his move from the Bank of Canada to the BoE was announced in 2012, Caney said he was “going to where the challenges are greatest” at a time when Britain was still suffering from the hangover of the global financial crisis.

Richard Barwell, a former BoE economist, said the even bigger challenge of Brexit would appeal to Carney’s sense of ambition. “He wants to be in the spotlight and on the world stage,” Barwell, who now works at BNP Paribas, said.

Even if he privately has doubts about staying, Carney might find it hard to leave London after five years, given the expected Brexit shock to the economy. “Walking away at time of crisis might not be seen as the done thing,” Barwell said.

When Carney agreed to come to London, he secured an agreement from Osborne that he would run the BoE between 2013 and 2018, with an option to serve out a full eight-year term if he wanted to take it up.

Carney, the father of four school-age children, said then that he had personal and professional reasons for staying for five years rather than eight.

He quickly began an overhaul of the 322 year-old BoE, making its monetary policy and bank supervision work more closely, addressing one of the key lessons of the financial crisis.

But in January, Carney left the door open to a longer term, saying he would decide by the end of this year whether he would seek to stay until 2021.

Commentators were quick to link the change in tone to the diminished prospects of a switch into politics for Carney in his native Canada, where Justin Trudeau had just been elected as the country’s new, young prime minister.

Under the terms of his appointment, Carney can choose to serve out the full eight years without the approval of Britain’s new finance minister Philip Hammond who, in any case, has said spoken highly of the BoE’s smooth response to the Brexit shock and said Carney was doing “an excellent job.”

Chris Philp, a Conservative lawmaker who sits on the Treasury Committee in parliament, which oversees the work of the BoE, said he wanted to see Carney stay until 2021.

“He has done a good job at the Bank since his appointment, and the relatively smooth passage – so far – post-Brexit vote is in part attributable to him. I would like to see him stay longer,” Philp said.

BREXIT BLUES?

The lack of an obvious next move for Carney could be a factor that persuades him to stay longer in London.

In fact, one suitably big job – running the International Monetary Fund – is due to become available only in 2021, which would coincide with the end of a full eight-year term for Carney at the BoE.

However, some observers think that June’s Brexit vote has made it more likely that he will decide to leave the BoE in June 2018, as originally planned.

Before the referendum, Carney made it clear he thought leaving the EU would be bad for Britain’s economy, angering some Brexit campaigners, and last week he described the day after the “Leave” victory as his toughest.

Former finance minister Nigel Lawson kept up the attacks on Thursday, saying Carney’s involvement in the debate had been “disgraceful” and he should quit. But most of his critics have toned down their attacks since the vote.

With the economy now expected to slow sharply in the next few years because of the uncertainty caused by Britain’s planned departure from the EU, the BoE is facing the prospect of a potentially long exercise in damage control.

At the same time, the ability of the BoE to come up with a lot more stimulus for the economy looks limited.

Interest rates stand at nearly zero and Carney has repeatedly said he does not favour cutting them into negative territory although it does have the option of ramping up its 435 billion-pound bond-buying programme even further.

In another potential disappointment for Carney, Brexit will also diminish Britain’s influence over EU rule-making in the financial services industry, a subject close to his heart.

“Does he really want to preside over an additional three years of decline? Probably not,” an observer of Carney said.

(By William Schomberg. Additional reporting by William James; Editing by Jeremy Gaunt)

Copyright(c) Thomson Reuters 2016.