Chambers of commerce say interest rate rise would derail recovery
BCC says signs of weakness in the second quarter suggest that UK firms not yet ready for rate rise
British businesses are calling on the Bank of England not to rush into an interest rate rise, warning that the recovery is not yet secure as a closely watched report on Tuesday shows a slowdown in exports.
The British Chambers of Commerce (BCC) says its latest quarterly poll of thousands of companies shows their performance slipped on key measures such as overseas sales and investment during the last three months when compared with a strong start to 2014.
The business group said its findings still pointed to a solid pace of growth for the UK, but were a reminder that the recovery was not entrenched and rebalancing the economy still had a way to run.
It warned against an early move to raise borrowing costs after recent comments from Bank of England policymakers have raised expectations that a hike could come before the end of the year.
"These results reinforce the case against the Bank of England making any hasty decisions on raising interest rates in the very short-term," said BCC director general John Longworth.
"By driving up the cost of credit for fast-growing firms, many of whom do not sit on the same healthy cash piles as their more established counterparts, early rate rises may mean more limited growth ambitions among the very firms we are counting on to drive the recovery.
"We must nurture the business confidence we are seeing at present by giving firms the security of working in a low interest rate environment for the foreseeable future – with eventual rises both moderate and predictable."
The survey of around 7,000 companies across manufacturing and services found that on the whole businesses reported conditions above long-run trends. Its balances, which represent the number of firms reporting an improvement from those reporting a deterioration in a particular area such as orders or hiring, were mostly stronger than their 2007 pre-recession levels.
But after an unusually strong first quarter, all the export and investment balances fell in the second quarter.
There was a mixed picture for jobs, with the balance deteriorating somewhat for manufacturing although still showing employment rising in the sector. The employment expectations balance also dropped.
For the much larger services sector, the jobs balance for the past three months rose but the employment expectations balance slipped back slightly.
The BCC said all the survey's confidence balances remained "relatively strong" but intentions to raise prices eased and concerns around interest rate rises rose.
Interest rates have been at a record low 0.5% for more than five years and while no economists expect any action at this week's meeting of the monetary policy committee (MPC), Bank governor Mark Carney has said the decision about when to tighten policy is "becoming more balanced".
Pound Erases Decline as Bulls Disregard Output Slump
The pound erased a decline versus the euro as investors bet an unexpected slump in U.K. manufacturing won’t derail Britain’s economic recovery.
Sterling was within 0.4 percent of its strongest level in almost two years against the 18-nation shared currency before the National Institute of Economic and Social Research publishes U.K. growth estimates later today. Britain’s government bonds advanced as the Debt Management Office held its first auction in more than two years of securities due in 2060.
“It’s an unfortunate blip,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said of the production data. “I would be surprised if it’s a definitive trend change. We will see a continued trend lower in euro-sterling as we head through the year.”
The pound was little changed at 79.40 pence per euro at 12:55 p.m. London time after weakening as much as 0.2 percent. It touched 79.15 pence yesterday, the strongest level since September 2012. The U.K. currency was at $1.7120 after climbing to $1.7180 on July 4, the highest since 2008.
Sterling earlier declined as much as 0.3 percent versus the dollar after a report showed factory output fell 1.3 percent in May from the previous month, the biggest drop since January 2013. The median forecast of 25 economists in a Bloomberg News survey was for a 0.4 percent increase.
U.K. Economy Expands 0.9% In Q2: NIESR
The U.K. economy is estimated to expand at a faster pace in the second quarter, the National Institute of Economic and Social Research said late Tuesday.
Gross domestic product is estimated to expand 0.9 percent in the second quarter, faster than the 0.8 percent growth seen in the first quarter. The institute projected 2.9 percent growth in 2014 and 2.4 percent in 2015.
The think tank said the month-on-month fall in industrial production would weigh only marginally on the wider economy. Moreover, it expects manufacturing to rebound in June.
The Office for National Statistics is slated to publish preliminary GDP data for the second quarter on July 25.
Halifax U.K. HPI falls 0.6% in June
House prices in the U.K. unexpectedly declined in June, fuelling concerns over the health of the housing market, industry data showed on Wednesday.
In a report, the Halifax Bank of Scotland said its House Price Index dropped by a seasonally adjusted 0.6% last month, compared to expectations for a 0.2% increase.
U.K. house prices rose by 4.0% in May, whose figure was revised up from a previously reported gain of 3.9%.
House prices in the three months to December were 8.8% higher than in the same three months a year earlier, below forecasts for an 8.9% increase.
Following the release of that data, the pound was little changed against the U.S. dollar, with GBP/USD easing down 0.01% to trade at 1.7129.
Meanwhile, European stock markets were mixed after the open. London’s FTSE 100 dipped 0.2%, the DJ Euro Stoxx 50 added 0.3%, France’s CAC 40 tacked on 0.3%, while Germany's DAX inched up 0.2%.
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U.K. trade in goods deficit widens more than seen
The U.K.'s trade in goods deficit widened in May due to unusually high levels of import activity of aircraft, and serving as a reminder more work is need to rebalance the economy away from consumer spending.
The Office for National Statistics said Thursday that the U.K.'s global goods deficit widened to GBP9.2 billion in May from April's GBP8.8 billion deficit.
The increase was steeper than expected as economists had forecast a goods deficit of GBP8.9 billion.
The rise also highlights the fact that the U.K.'s manufacturing and export sectors still require further support and development in order to rebalance the economy and help to ensure long-term growth which is currently heavily reliant on consumption.
That remains a goal for both the Government and the Bank of England, with BOE Governor Mark Carney in particular often raising the topic in speeches and presentations on the U.K.'s long-term health.
The ONS said the bigger-than-expected increase in the goods deficit was due mainly to aircraft imports, which is a highly erratic item. Figures show GBP1.2 billion worth of aircraft was imported into the country in May, up from GBP800 million in April.
Other figures published by the ONS showed that total trade in goods and services widened to a deficit of GBP2.4 billion in May from GBP2.1 in April. Trade in goods with non-European Union countries, meanwhile, also widened to GBP4.0 billion from GBP3.9 billion a month earlier.
BOE leaves benchmark rate unchanged amid criticism
The Bank of England left the U.K.'s benchmark interest rate unchanged Thursday amid criticism that officials are sending confusing signals on when borrowing costs will eventually start to rise.
The central bank said its nine-member Monetary Policy Committee agreed to leave the BOE's main interest rate at a low of 0.5% and the size of its bond portfolio at 375 billion pounds ($637 billion) after officials' two-day meeting.
Rapid economic growth in the U.K. has fueled speculation that Britain's central bank will be the first among its peers to call time on crisis-era policies and begin lifting borrowing costs. The Federal Reserve isn't expected to raise short-term rates in the U.S. until mid-2015. The European Central Bank, faced with sluggish growth and weak inflation, cut rates in June in the 18-nation euro zone.
Investors expect the BOE to move in early 2015, according to contracts that allow traders to bet on future changes in short-term interest rates. Some analysts think the BOE could raise rates even sooner, perhaps in November, if the economy continues to perform well.
BOE Gov. Mark Carney was likened to an "unreliable boyfriend" by British lawmaker Pat McFadden in testimony to parliament June 24, for apparently sending mixed messages to households and businesses on interest rates. Officials have twice overhauled their "forward guidance" on rates after a quicker-than-expected fall in unemployment.
Mr. Carney defended the central bank's communications, saying they helped fuel Britain's recent economic revival. Officials have signaled that benchmark borrowing costs are unlikely to rise above 2.5% to 3% for several years, which they say should help borrowers plan for the future.
The International Monetary Fund expects the U.K. to be the fastest-growing economy in the Group of Seven leading industrialized nations this year. The BOE will publish a new set of economic forecasts Aug. 13.
July's policy meeting was the first for MPC member Ben Broadbent as deputy governor for monetary policy, a role he took over on Charles Bean's retirement at the end of June. It was also the first meeting for Kristin Forbes, a U.S. academic who took over Mr. Broadbent's former slot as one of four MPC members drawn from outside the central bank's ranks.
Andrew Haldane, formerly the BOE's financial stability director, joined the council as chief economist in June. Another slot on the panel will be filled next month when Nemat Shafik, a former IMF official, joins as deputy governor for markets and banking, a new role created in a shake-up of the BOE spearheaded by Mr. Carney.
GBP/USD falls on upbeat U.S. jobless claims report
The dollar firmed against the pound on Thursday after data revealed fewer sought first-time jobless benefits in the U.S. last week than markets were expecting.
In U.S. trading on Thursday, GBP/USD was trading down 0.22% at 1.7121, up from a session low of 1.7105 and off a high of 1.7168.
Cable was likely to find support at 1.7086, Wednesday's low, and resistance at 1.7180, last Friday's high.
Elsewhere, sterling was down against the euro, with EUR/GBP up 0.08% at 0.7950, and down against the yen, with GBP/JPY down 0.34% at 173.87.
The U.S. Department of Labor reported earlier that the number of individuals filing for initial jobless benefits in the week ending July 5 declined by 11,000 to 304,000. Analysts had expected jobless claims to hold steady at 315,000 last week.
The numbers fueled demand for the greenback on Thursday, a day after the Federal Reserve released the minutes of its June policy meeting that forecast an end to stimulus program coming in October.
Meanwhile across the Atlantic, the Bank of England left rates on hold at 0.5% and kept the size of its asset purchase program unchanged at £375 billion.
The pound weakened against the dollar after official data showed that the U.K. trade deficit widened unexpectedly in May.
The Office for National Statistics reported that the U.K. trade deficit widened to £9.2 billion in May from a deficit of £8.81 billion in April. Economists had expected a deficit of £8.75 billion.
Elsewhere, sterling was up against the euro, with EUR/GBP down 0.09% at 0.7944, and down against the yen, with GBP/JPY down 0.55% at 173.43.
U.K. Construction Unexpectedly Falls as New Public Work Slides
U.K. construction unexpectedly fell in May as demand for new work and repair and maintenance weakened, suggesting the economy may have lost some momentum in the second quarter.
Output declined 1.1 percent from April, when it rose 1.2 percent, the Office for National Statistics said today in London. The median estimate of 10 economists in a Bloomberg survey was for an increase of 0.9 percent. From a year earlier, construction grew 3.5 percent, the weakest since November 2013.
The data follows a report earlier this week which showed industrial production slumped 0.7 percent in May. While the two indicators suggest a slowing in activity, other data have remained strong. Unemployment slid to the lowest level in more than five years in April and the National Institute of Economic and Social Research estimates gross domestic product grew 0.9 percent in the second quarter, the fastest since 2010.
New work and repair and maintenance both slid 1.1 percent in May from April. Within the new work category, public work excluding infrastructure, which includes schools and hospitals, slumped 4.2 percent and private commercial work fell 3.6 percent. In repair and maintenance, housing slipped 2.3 percent.
In the latest three months, compared with the period ending in February, construction fell 0.8 percent, the weakest since October 2012.
The construction sector accounts for 6.3 percent of the economy. The ONS will release preliminary estimates for second quarter gross domestic product on July 25.
Other reports suggest the construction sector is continuing to expand. Markit Economics said earlier this month that its index of construction showed an acceleration in growth in June. The Purchasing Managers’ Index increased to 62.6 from 60 in May.
BOE officials kept their benchmark rate at a record-low 0.5 percent yesterday.
Bank of England says may be case for extra leverage ratio for banks
The Bank of England said on Friday that big British banks and lenders might need to set aside more capital than planned under global rules being drawn up to prevent a repeat of the financial crisis.
Launching a public consultation on a new so-called leverage ratio, the BoE said many financial institutions may have to comply with a requirement to set aside funds on top of a proposed minimum of 3 percent of their capital.
"There may be a case to introduce a supplementary leverage ratio component to a subset of firms (e.g. ring-fenced banks and/or systemically important institutions) whose failure would be most destabilizing for the financial system," the BoE said in a consultation paper.
Such a supplement would effectively cover the bulk of Britain's banks.
British lawmakers want a leverage ratio of 4 percent or above, higher than the proposed global rule for 3 percent, saying tougher measures are needed to ensure taxpayers are not asked to bail out banks as they were in the financial crisis.
British banks have been required to meet the 3 percent target by Jan. 1, 2014, forcing some to raise more capital.
BoE Governor Mark Carney has previously said that 3 percent might not be high enough.
The U.S. Federal Reserve has insisted on a leverage ratio of 5 percent and above for U.S. banks.
The BoE consultation paper did not propose any specific figures for what the leverage ratio, including any supplements, should be.
Global regulators are not due to agree on the level of a leverage ratio for the industry worldwide until 2015 or later, given the disagreements between countries.
The discussions have become increasingly charged as many regulators no longer fully trust the way banks calculate their main core capital buffers. They are based only risk-weighted assets, the value of which is open to debate.
The leverage ratio is based on total assets held by a bank and is therefore seen as less open to interpretation.
The BoE said in its consultation paper that any supplementary leverage ratio would have to be made up of top-quality capital.
The consultation is due to run until Au