Following on from my blog post a few months ago I want to firstly apologise for potentially* being so widely of the mark with my initial prediction as to when a rate hike would occur in the UK. I say potentially because the markets can shift on the drop of a penny and 3 months is a long time in finance. However I’m growing more pessimistic as I count down the 89 days until my initial March 2015 prediction of a 0.25% hike in the BOE base rate. You would be glad to know that I have now that I have now sensibly revised my predictions to … Q1 2016, January to be more specific. Let me explain why
People may think I’m mad considering the fact that we are firmly in the recovery stage of the economic cycle and that wage growth, a factor which Mark Carney cares so much about, recently outpaced Consumer Price Inflation. This however was driven by the recent fall in oil prices which caused shockwaves throughout the global financial markets. Wage growth combined with a sustained unemployment rate of around 6% can only bode well for the country as it looks to ramp up its steady economic growth into the new year and beyond.
UK Unemployment Rate
The signs look good right?Well – what’s that saying? Show me your friends and I’ll tell you the type of person you are? Lets apply this to economics. The UK’s dear ‘friends’ in this case are their counterparts which form the European Union. The Eurozone is in a dark place at the moment. Investor confidence is waning, as it was mentioned that markets have now priced a 40% probability of recession as the unemployment rate of major players Italy and France continue to shoot up, pushing the average up for the bloc to over 11%. Another major economy Germany saw their GDP contract in the 2nd quarter of this year. These factors alongside a worse than expected manufacturing PMI figures (Act 50.1 vs Exp 50.4) caused the IMF to revise their year on year growth predictions for the area to a disappointing 0.8%. This is what caused the ECB to cut their refinancing rate aimed at providing banks with access to cheaper secured funding, but let me not digress toooo much.
What impact will this have on the UK? In short a big one. Since joining the European community the UK trade in goods and services with fellow EU members has experienced consistent growth. Over half of both imports and exports from the UK are with members of the EU. Lets take Germany to buttress this point. Germany is the main EU country to trade with the UK with a combined 8bn worth of trade from that relationship. With the German counterparts suffering declines in GDP growth and worse off PMI figures month on month this can significantly strain their ties in the nearest future, hindering UK growth as a result.
The property story is also starting to cool off now. Banks are now offering lower than ever fixed rate loans as they do not expect a hike anytime soon also. HSBC recently unveiled a five-year fixed rate at 2.48 per cent with a £999 fee.UK house prices increased by 0.3% in October but the annual pace of growth has slowed to 9% according to the Nationwide Building Society.It is the third month in a row when annual growth had moderated and looks like this will be the story into the new year as demand over the festive period is usually weaker. Mortgage approvals are also around 20% lower primarily down to more stringent scenario testing making it even more difficult for potential homeowners to obtain a mortgage. It will be interesting to see what happens next year in this sector but it may be very unlikely to have another boom in prices like we have seen over the last few years after the introduction of various government backed schemes assisting first time buyers to purchase new build properties.
Overall, these are my reasons as to why I believe a rate hike will come in 2016, lets hope I fare better with this prediction!