BBC News - UK interest rates held as economy shows signs of picking up

The Bank of England has held interest rates at 0.75% amid early signs of a pick-up in the UK and global economies.

In Mark Carney's final interest rate meeting as governor, the Bank's Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged.

Recent weak economic data had led to speculation rates could be cut, but Mr Carney said "the most recent signs are that global growth has stabilised".

But the MPC said it was poised to cut interest rates if necessary.

Fewer companies in the UK are worried about Brexit, Mr Carney told a news conference following the rate decision. He added that survey data suggested UK growth will improve.

But he said: "To be clear these are still early days and it's less of a case of so far so good than so far good enough," he said, again referring to the UK economy.

"Although the global economy looks to be recovering, caution is warranted," he said. "Evidence of a pick-up in growth is not yet widespread."

He said the coronavirus outbreak was a "reminder of the need to be vigilant" when it comes to bumps in economic growth around the world.

Ready to cut

The nine MPC members have been split on rates since November.

Lower interest rates are good news for borrowers and bad news for savers because High Street banks use the Bank of England base rate as a reference point for many mortgages and savings accounts.

In a closely-watched decision, policymakers said they would monitor whether a recent improvement in business sentiment would lead to stronger economic growth.

The MPC said it stood ready to cut rates if there were signs that growth would remain subdued.

"Policy might need to reinforce the expected recovery in UK GDP growth, should the more positive signals from recent indicators of global and domestic activity not be sustained," the MPC said.

Two members, Jonathan Haskel and Michael Saunders, argued that past business surveys of economic growth had not been reliable.

They continued to call for an immediate interest rate cut to 0.5%.

Weak UK growth

The Bank's latest economic estimates suggest the economy did not grow at all in the final three months of last year.

Weaker growth at the turn of the year is also expected to drag overall economic growth down to just 0.75% in 2020. This is down from a projection of 1.25% last November.

The UK economy is expected to expand by 0.2% in the first three months of this year.

The Bank said a trade deal between the US and China that lowers some tariffs would provide a boost to the global economy.

An expected rise in spending by the government in the March Budget could provide a further boost to growth, policymakers said.

Ruth Gregory, senior UK economist at Capital Economics, said she also expected stronger growth ahead.

"Admittedly, the MPC left the door open to a rate cut in the coming months, but with the economy turning a corner and a big fiscal stimulus approaching, we suspect the next move in interest rates will be up not down, albeit not until next year."

Brexit drag

The Bank said Brexit-related uncertainty had "weighed on investment" over the past few years.

Policymakers said companies' Brexit plans had diverted money towards preparing for the UK's departure from the EU that would otherwise be invested elsewhere.

This has reduced the UK's long-term growth prospects by limiting the space in which the economy can grow without the risk of overheating.

This would force the Bank to raise interest rates, which would in turn slow the UK economy.

Policymakers now believe the UK's potential growth has been reduced to 1.1%. This is down from 2.9% before the financial crisis and 1.6% over most of the past decade.

Reuters News - U.S. economy misses Trump's 3% growth target in 2019

WASHINGTON (Reuters) - The U.S. economy missed the Trump administration’s 3% growth target for a second straight year, posting its slowest annual growth in three years in 2019 as the slump in business investment deepened amid damaging trade tensions.

The economy grew 2.3% last year, the Commerce Department said on Thursday. That was the slowest since 2016 and followed the 2.9% notched in 2018. The 3% growth target has remained elusive despite the White House and Republicans’ $1.5 trillion tax cut package, which President Donald Trump had predicted would lift growth persistently above that target.

The department’s snapshot of gross domestic product, however, showed the economy maintaining a moderate pace of growth in the fourth quarter, thanks to a smaller import bill. The report suggested the Federal Reserve’s three interest rate cuts in 2019 helped to keep the longest expansion in history, now in its 11th year, on track and avert a downturn.

It followed on the heels of the Fed deciding to keep rates unchanged. Fed Chair Jerome Powell told reporters on Wednesday the U.S. central bank expected “moderate economic growth to continue” but also nodded to some risks, including the recent coronavirus outbreak in China.

The Trump administration’s 18-month-long trade war with China last year fueled fears of a recession. Though the economic outlook has improved with this month’s signing of a Phase 1 deal with Beijing, economists do not see a boost to the economy as U.S. tariffs remained in effect on $360 billion of Chinese imports, about two-thirds of the total.

Gross domestic product increased at a 2.1% annualized rate in the fourth quarter, matching the third-quarter pace, as lower borrowing costs encouraged purchases of motor vehicles, houses and other big-ticket items. Growth was also lifted by increased government spending. That helped to offset the drag from a slower pace of inventory accumulation.

Economists polled by Reuters had forecast GDP rising at a 2.1% rate in the fourth quarter. Excluding trade, inventories and government spending, the economy grew at a 1.4% rate in the fourth quarter, the slowest in four years. This measure of domestic demand rose at a 2.3% pace in the third quarter.

Economists estimate the speed at which the economy can grow over a long period without igniting inflation at around 1.8%.

The White House claimed that slashing the corporate tax rate to 21% from 35%, as well as shrinking the trade deficit would boost annual GDP growth to 3.0% on an sustainable basis. Economists have long disagreed, pointing to structural issues like low productivity and population growth. Some also argued that there was historically not a very strong relationship between corporate tax rates and business investment.

Business investment fell at 1.5% rate in the fourth quarter. It was the third straight quarterly decline and the longest such stretch since 2009. There were decreases last quarter in spending on nonresidential structures and business equipment.

Trade tensions have eroded business confidence and weighed on capital expenditure. With confidence among chief executive officers remaining low in the fourth quarter after dropping to a 10-year low in the prior quarter, a rebound is unlikely soon.

Business investment is also seen pressured by Boeing’s suspension this month of the production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes. Boeing on Wednesday reported its first annual loss since 1997.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8% pace after rising at a brisk 3.2% rate in the third quarter.

A decrease in imports in the fourth quarter, in part because of U.S. tariffs on Chinese goods, compressed the trade deficit. Trade added 1.48 percentage points to fourth-quarter GDP growth. But the decline in imports in the fourth quarter resulted in businesses almost depleting inventories in warehouses. A 40-day strike at General Motors also weighed on motor vehicle inventories.

Inventories rose at a $6.5 billion rate in the fourth quarter, the smallest gain since the second quarter of 2018, after increasing at a $69.4 billion pace in the July-September quarter. Inventory investment chopped 1.09 percentage points from GDP growth last quarter.

Reporting by Lucia Mutikani; Editing by Dan Burns and Andrea Ricci

Our Standards:The Thomson Reuters Trust Principles.

BBC News - Will the Bank of England cut interest rates?

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The Bank of England is set to announce whether or not it will change or hold interest rates on Thursday.

The Bank's "base rate" is used by High Street banks and other lenders who set borrowing costs.

Some investors think the first cut to the rate since 2016 could be on the cards, although others say it is too close to call.

The rate, which is currently 0.75%, affects everything from mortgages to business loans and has a big impact on people's and companies' finances.

So why could a cut be coming up? And how could that affect consumers' bank balances?

Why a cut could take place

Inflation, the rate at which prices for goods and services increase, is one key factor the Bank of England considers when setting the base rate.

Inflation dropped to 1.3% in December, down from 1.5% in November, partly due to a fall in the price of women's clothing and hotel rooms.

If the Bank thinks inflation is likely to stay below its target of 2%, it may cut interest rates to lower the cost of borrowing and therefore encourage spending.

Other recent sets of data might suggest that the UK economy could do with a boost from its central bank.

Retail sales fell in December as Christmas shoppers bought less food and goods in the run-up to the festive period.

In the three months to December, the quantity bought in retail sales fell by 1% when compared with the previous three months.

Overall, the UK economy grew by just 0.1% in the three months to November.

Initial estimates suggest that the economy shrank by 0.3% that month. That was largely down to a decline in both services and production.

Economists at Bank of America expect the Bank of England's Monetary Policy Committee (MPC) to cut the base rate to 0.5% on Thursday.

"We had thought that the MPC might wait until a few months after the general election, or the chancellor's first Budget, to make a decision on interest rates," said Robert Wood, chief UK economist at Bank of America.

"But it seems as though they might want to offer a helping hand to the economy a bit sooner than expected."

Too close to call?

Earlier in January, markets put the likelihood of a rate cut as high as 70% - although this is now back down at about 50%. And even Mr Wood believes Thursday's decision is "finely balanced".

As other figures have noted, there are brighter spots in the UK economy.

For example, the UK employment rate stands at a record high of 76.3%, according to the latest release from the Office for National Statistics.

Some surveys have also shown a more positive outlook for business after voters went to the polls in December.

UK manufacturing and services saw their best month for more than a year in January, according to the composite purchasing managers' index (PMI).

IHS Markit, which compiled the survey, said demand was growing after the election.

James Smith, an economist at ING, said the Bank's decision would be a "close call" and questioned whether businesses would remain optimistic.

"The key conundrum for policymakers is whether or not this [optimism] will last."

He added that the MPC committee, headed up by the outgoing governor Mark Carney, could wait to see "how better survey data translates into real economic activity, before deciding whether to act at future meetings".

"We aren't expecting a rate cut this week," he said.

What would a cut mean for consumers?

Whether the base rate is held or falls, High Street banks often pass on the costs to their customers, by raising or cutting the rates offered on loans or savings accounts.

So a cut to the base rate could make it less rewarding to save.

After the Bank of England last cut interest rates in 2016, the average savings rate for an "easy access" bank account fell by 0.14% in the three months after, according to financial information service Moneyfacts.

Savings accounts rates have been cut by some banks more recently.

Santander announced a cut to the interest paid on balances up to £20,000 in its 123 current account from 1.5% to 1%.

Image copyrightGETTY IMAGES

Image captionFrom 5 May, the interest paid on balances up to £20,000 in Santander's 123 account will be cut

However, a rate cut could be good news for borrowers, as the rate of interest they repay is likely to be lower.

Those on a variable-rate mortgage, or a "tracker" mortgage, could see changes in their bills.

But if you're on a fixed-rate mortgage and the Bank of England's base rate is cut, you won't benefit from reduced repayments.

BBC News - Coronavirus: Could it damage the global economy?

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China is struggling with a new virus that has already killed more than 20 people.

It is a serious health issue. The World Health Organization has called it an emergency for China, though not for the world, not so far at least.

Inevitably, it will have economic consequences. But how severe and how far will they spread?

Economists are very wary about putting any figures on it at this early stage.

But it is possible to identify what form the impact will take and to look at the economic damage done by previous similar episodes, notably the outbreak of severe acute respiratory syndrome - better known as Sars - in 2002-3, which also began in China.

It is within China that there already is some economic damage. Travel restrictions have been imposed in parts of the country at a time [the Chinese New Year] when many people travel. So the tourism business is already being hit.

Transport hub

Consumer spending on entertainment and gifts will also be affected. For entertainment, many will be reluctant to take part in activities outside the home that could lead to exposure to the virus. Many people are sure to have cancelled plans of their own volition to avoid risks of exposure to the disease.

The impact is magnified by the fact that Wuhan, the city where it began, is an important transport hub.

Travel restrictions are also a problem for any business that needs to move goods or people around. Industrial supply chains will be affected. Some deliveries may be disrupted and some will become more expensive.

There will be lost economic activity as a result of people not being able or willing to travel to work.

Recovery rate

There will also be a direct financial cost from treating patients borne by health insurers (public and private) and by patients.

Outside China, much will depend on the spread of the disease. If there are outbreaks elsewhere some of the same effects may be apparent, although almost certainly on a much smaller scale.

The extent of these effects will depend to a large degree on how easily transmissible the virus proves to be and the death rate among those infected. Encouragingly many people so far have made full recoveries, though there have been tragic exceptions.

It is often the case that economic problems are quickly reflected by financial markets, where traders' views about what assets are worth are affected by their expectations about future developments.

Vaccine chance

On this occasion that have been some negative consequences for stock markets, particular in China. But they have not been large. Even the Shanghai Composite Index is higher than it was six months ago.

There are some businesses who could gain, such as drugs makers. What is immediately available is symptom relief. In the longer term there might be profitable opportunity in developing a vaccine against the virus.

Paul Stoffels, chief scientific officer at Johnson & Johnson told the BBC that his teams had already done the "basic work" on a vaccine. He thought it could be available in about a year.

There has also been a surge in demand for surgical masks and gloves to protect against becoming infected. Shares in Chinese companies that make these items - drugs and protective equipment - have seen some sharp price rises.

Quick recovery?

The best historical example to give guidance is probably the Sars outbreak.

One estimate suggested a cost to the global economy of $40bn (£30.5bn).

Jennifer McKeown of Capital Economics, a London based consultancy, suggests that global growth was a full percentage point weaker in the second quarter of 2003 than it would have been without Sars. That is quite a substantial hit, but she also says it made up the ground quite quickly afterwards.

She says the picture is complicated by other factors that affected global growth at the time but she concludes "it is very hard to pick out any lasting damage to global GDP (economic activity) from Sars, which was an unusually severe and widespread virus".

Reuters News - Trump's 'massive' U.S.-UK trade deal faces big hurdles

WASHINGTON (Reuters) - Britain is the United States’ closest ally but their long friendship may be sorely tested as the two countries try to forge a new trade agreement after Britain’s exit from the European Union.

U.S. Treasury Secretary Steven Mnuchin said on Saturday in London that he was optimistic that a bilateral deal with Britain could be reached as soon as this year.

But Mnuchin gave up no ground after a second meeting with his UK counterpart, Sajid Javid. Javid has insisted that Britain will proceed with a unilateral digital services tax, despite a U.S. threat to levy retaliatory tariffs on British-made autos.

Mnuchin told reporters after Saturday’s meeting that such taxes would discriminate against big U.S. tech companies like Alphabet Inc’s (GOOG.O) Google, Apple Inc (AAPL.O), Facebook Inc (FB.O) and Amazon.com (AMZN.O).

The UK Treasury declined to comment on the private meeting.

The divide highlights the challenges ahead as the Trump administration seeks a new bilateral agreement with Britain, part of a broader push to rebalance relations with nearly all its major trading partners.

The stakes are high - British Prime Minister Boris Johnson has pegged the trade deal with United States as a way to ease the pain of breaking with Europe, Britain’s largest trade partner. U.S. President Donald Trump, has promised a “massive” trade deal to support Brexit, the product of a populist movement similar to his “America First” agenda.

The goodwill and special relationship the two countries have enjoyed for decades may not count for much, experts say.

“Trump is not going to be doing Johnson any favors,” said Amanda Sloat, a senior fellow with the Brookings Institution in Washington. “He’s not going to give him a trade deal without major concessions.”

Even before the digital tax issue arose, the Trump administration threatened to tax foreign car imports, which could hit British-made Jaguar, Land Rover (TAMO.NS), Mini (BMWG.DE), and Honda Civic hatchback (7267.T) cars.

Stiff U.S. trade demands include increased access for U.S. farm goods, concessions that will be difficult for Britain’s entrenched natural food culture to swallow.

The United States also wants Britain to change the way its National Health Service prices drugs and allow in more U.S. pharmaceuticals, which could prove politically unpopular for Johnson’s government.

Washington’s demand that London block Chinese telecoms equipment maker Huawei Technologies Co Ltd for national security reasons could also cloud talks.

Reaching a meaningful deal will be “exceedingly difficult,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “There are very deep-rooted issues on which the United States and the UK are diametrically opposed.”

Differences over those and other issues meant three years of U.S.-European Union trade negotiations ran aground during the Obama administration.

CAR TARIFF THREAT

Tensions boiled over at the World Economic Forum in Davos, Switzerland.

Mnuchin raised the threat of car tariffs after Javid’s pledge to proceed with the digital services tax. If officials “just arbitrarily put taxes on our digital companies, we’ll consider arbitrarily putting taxes on car companies,” Mnuchin said.

British officials struck back.

“Let me be absolutely clear, UK tax policy is a matter for the UK chancellor, it’s not a matter for the U.S., it’s not a matter for the EU, it’s not a matter for anybody else,” Trade Minister Liz Truss said.

Britain exported $11 billion in passenger cars, engines, tires and other automotive components to the United States in 2018, the largest sector in a total of $127 billion in exports.

Eliminating the existing 2.5% U.S. car tariff and averting future auto tariffs will be a high priority for Britain in the talks.

Britain will also seek greater access to U.S. state and local public procurement contracts, and services such as U.S. coastal shipping. But those are areas governed by U.S. laws, and a trade agreement may not apply.

CHLORINE CHICKEN

The U.S. negotiating objectives published here last year by the U.S. Trade Representative's (USTR) office seek to grow U.S. farm exports to Britain.

That includes the removal of non-tariff barriers, such as restrictions on chlorine-treated chicken, genetically modified crops and hormone-treated meat. Such products are common in the United States but shunned in Britain.

The United States is also pressing for full market access for U.S. pharmaceutical products and medical devices. That would require changes to Britain’s NHS pricing restrictions, and could increase the cost of drugs in Britain.

In comments here to the USTR last year, a U.S. pharmaceutical trade group argued that the NHS' cost controls for pricing "innovative" drugs did not "recognize their value to patients and society."

That is not likely to sway British officials. “The NHS is a religion in the UK. That’s where the real red line is,” said Sam Lowe, a senior research fellow at the Centre for European Reform in London. “If the U.S. is saying: ‘Pay more for medicine,’ that’s quite difficult to get past the Treasury and the taxpayers.”

Some analysts say Washington’s best bet is a limited “Phase 1” deal with Britain, as was recently signed with China. Such an agreement would not likely require approval by the U.S. Congress.

That would provide short-term political victories for both Britain’s Johnson and Trump, said Lowe. Trump is seeking re-election in November.

A mini-deal could focus on financial services and convergence on some product and services regulations. It would fall far short of a deal that provides an alternative to Britain’s unfettered access to the European Union that both Trump and Johnson have promised.

Reporting by David Lawder; Additional reporting by William Schomberg and Andrea Shalal; Editing by Heather Timmons and Peter Cooney

Our Standards:The Thomson Reuters Trust Principles.