NEWS WRAP - Interest Rate Debate - Trust in Growth or Manage Risk?
The latest Purchasing Managers Index (PMI) survey describes widespread growth across the UK economy, with notable upturns in the services and manufacturing sectors.
The PMI records and aggregates the strength of various sectors of the economy and is often used to predict likely changes to interest rates. The fact that data for January indicated the most significant growth in 16 months, led many pundits to speculate on the unlikelihood of an interest rate cut by the Bank of England. And they were right.
The picture of growth was supported by numerous data channels. For example, figures from Rightmove revealed a 2.3 per cent month-on-month upturn on UK house prices in January, the largest ever recorded for the month, and this assisted the annual house price rise figure to 2.7%, the largest increase since 2017.*
Employment data from the Office for National Statistics further underlined the positive mood, with the UK unemployment rate unchanged at 3.8 per cent. The figures showed the employment rate at an all-time high of 76.3 per cent, thanks to a 208,000 increase in the number of people in employment during the quarter.**
Interest rates may be approaching an all-time low but, given the overall economic picture, many argued that it was hard to see how the Bank of England's Monetary Policy Committee (MPC) could justify interest rate cuts at a time of such unfettered growth.
However, others speculated that an interest rate cut would be a sound strategy to manage economic risks in the short to medium term, rather than delaying a rate cut until the economic picture had deteriorated. Furthermore, as the deadline neared for the Bank of England's decision, other factors came into play, not least the economic impact of the coronavirus outbreak in China as well as the situation at telecommunications giant BT, which saw a 3% drop in revenues in the last quarter, and a 4% fall in core profits which they largely attribute to the impact of the Huawei ruling.***
Furthermore, it was also reported that the number of personal insolvencies in the UK reached its highest level since 2010, with the Insolvency Service reporting 122,181 personal insolvencies in 2019 – up 6% on 2018.
In the end Mark Carney, in his last major act as governor of the Bank of England, announced the MPC's decision to opt against an interest rate cut but, as many news outlets reported, it had been a knife-edge decision.
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