Bank of England in no rush to raise rates as unemployment plunges

British unemployment plunged to within a whisker of the Bank of England's level for considering an increase in interest rates, data showed on Wednesday, but the central bank stressed it would be in no rush to act.
The unemployment rate dropped to 7.1 percent in the three months to November, a fraction above the 7 percent level which the bank has said is its threshold for thinking about raising interest rates from their current all-time low of 0.5 percent.

Sterling hit a one-year high against the euro and British government bond spreads over German debt widened to an eight-year high as investors bet that the Bank of England will raise interest rates sooner than it has been signalling.

Citi's chief UK economist Michael Saunders brought forward his estimate by six months to the fourth quarter of this year. "We expect the MPC (Monetary Policy Committee) will lift the policy rate to 2 percent ... by late-2015, still leaving policy supportive of growth," he said.

The rate of 7.1 percent was below any forecast by economists in a Reuters poll and the lowest in nearly five years. It was down from a previous level of 7.4 percent, the Office for National Statistics said on Wednesday.

The number of people in work grew by a record amount, a further sign of the economy's rapid turnaround.

BoE policymakers stressed, however, they would not be hurried into raising rates. Their case has been helped by a fall in inflation to the Bank's target for the first time in more than four years.

"Members therefore saw no immediate need to raise Bank Rate even if the 7 percent unemployment threshold were to be reached in the near future," they said in minutes of their January policy meeting, released at the same time as the jobs data.

The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and low inflation means moves will be gradual.

The BoE is expected to use the publication of its Quarterly Inflation Report next month to give an update on its guidance, possibly by lowering the threshold unemployment rate below 7 percent or by underscoring how the threshold is not a trigger.

Policymakers said via the minutes they now expect unemployment to hit 7 percent "materially earlier than previously expected" and that the equilibrium employment "might be lower than previously thought".

The BoE has previously said that although Britain's long-run equilibrium unemployment rate is around 5 percent, inflation pressures could start to build around 6.5 percent.

THRESHOLD APPROACHING

The jobless rate was the lowest since the first quarter of 2009. The ONS said the number of people claiming jobless benefits fell by 24,000 in December, compared with a forecast for a fall of 35,000 in the Reuters poll.

It said the number of people in work rose by 280,000 in the three months to November, an all-time record.

Wage pressures remained low. Average weekly earnings rose by 0.9 percent on the year, half the rate of inflation.

The BoE put unemployment at the heart of its monetary policy last August when it said it would not think about raising borrowing costs - which have been at the record low since 2009 - until the rate fell to 7 percent.

Since then, Britain's recovery has picked up more speed than the Bank expected and unemployment has fallen fast. The International Monetary Fund on Tuesday sharply raised its forecasts for British economic growth this year.

The IMF also urged central banks around the world to avoid raising interest rates too soon to avoid choking off the recovery in their economies.

To quell speculation that the BoE might be hurried into raising interest rates, Governor Mark Carney has repeatedly stressed that unemployment falling to 7 percent would not be an automatic trigger for a rate hike.

The details of this month's BoE policy discussion strengthened that message, making clear the Bank does not intend to raise rates soon, even if unemployment hits 7 percent soon.

Despite its rapid recovery, the British economy remains 2 percent smaller than before the financial crisis.

As more long-term unemployed people have found jobs recently, the medium-term equilibrium rate could be a bit below 6.5 percent. This caused some traders to see a greater chance that the BoE could lower its 7 percent guidance threshold as soon as its February meeting. BoE official have previously floated the possibility of a lower unemployment threshold.

Any such decision is likely to be complex given the uncertainties around the labour market. The BoE said productivity was not picking up as expected.

That could push up longer-term inflation pressures and possibly strengthen the argument for not further delaying consideration of higher interest rates.

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UK jobless falling faster than thought, to hit target early - Reuters poll

British unemployment is falling faster than previously thought and will reach the Bank of England's 7 percent threshold for considering a rate hike well before the central bank envisages, a Reuters poll found.

The poll of 50 economists, taken this week, suggests it will fall steadily in the coming quarters and reach 7 percent early next year. A December poll had pointed to this happening in the second quarter of 2015 and a November poll even later.

"Recent sharp falls in unemployment will probably continue over the next few months. It will still take a year or so to reach 7 percent but growth in the workforce should remain strong," said Samuel Tombs at Capital Economics.

The BoE has pledged not to discuss hiking interest rates from their record low of 0.5 percent until the goal is met.

Britain's economic recovery picked up pace last year and some economists say the Bank will lower its target and hold borrowing costs low until the country's turnaround broadens out.

The bank's actions will also be closely watched by the country's politicians, who are beginning to gear up for an election in May 2015 which could hinge on the economy.

Thirteen of 35 economists in the poll expect a lowering of the threshold, probably to 6.5 percent, a similar proportion to that in a Reuters poll taken earlier this month ahead of the Bank's January policy meeting when it left policy unchanged.

"The BoE needs to review whether the 7 percent unemployment threshold is appropriate for the use of forward guidance, especially as the unemployment rate is quickly approaching 7 percent," said Azad Zangana at Schroders.

"Hitting the threshold will give the impression that the BoE will then consider raising interest rates, which we think it has no intention of doing in the near term."

Some pressure on the Bank has eased - data on Tuesday showed inflation had fallen to its 2.0 percent target for the first time in four years during December, but may nudge up again as utility and transport price rises are factored in.

With growth picking up and unemployment falling, economists are now narrowly predicting a rate hike in the second quarter of 2015, albeit one of only 25 basis points. The is the first time in nearly two years that the Reuters poll has signalled a tightening of monetary policy.

Britain's economy is still 2 percent smaller than before the financial crisis began but its growth rate is far outstripping the neighbouring euro zone, its main trading partner.

The economy is expected to grow 0.6 percent per quarter through to the middle of next year, the end of the forecast horizon and the highest forecasts to date, compared to just 0.2-0.4 percent in the common currency bloc.

Recovery in the now 18-member union remains fragile, with unemployment running at a record high and an increasing threat of deflation.

"There are still significant risks from any renewed flare-up in the euro zone crisis," said John Hawksworth, chief UK economist at PwC.

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UK interest rates to stay at 0.5% in 2014 - economists

Interest rates in the UK are unlikely to rise this year, according to a snapshot of views of the UK's top economists from the BBC.

An overwhelming majority, 93% of the 28 economists polled, think rates will still be 0.5% at the end of 2014, with more than half predicting the first rise in the second half of 2015.

More than 40% believe unemployment will fall to 7% in 2014, from 7.4% now.

Two-thirds also think wage increases will overtake inflation this year.

Some observers have suggested recent rises in house prices could force the Bank of England to raise rates sometime in 2014, but the majority of economists used by the Treasury and polled by the BBC rejected this view.

Almost 80% think rates will begin to rise in 2015, with 15% saying they will not increase until 2016. Only 7% of those polled think rates will rise in 2014.

The unemployment rate of 7% is significant because this is the level the Bank has said needs to be breached before it considers raising interest rates.

The snapshot suggests there is less certainty in the City about unemployment levels than there is about interest rates.

Although more than 40% think the jobless rate will hit 7% this year, exactly half think that will not be until 2015. Just 8% think it will not be until 2016.

Three respondents actually believe rates will rise before unemployment falls to 7%, which would mean the Bank abandoning its forward guidance on interest rates.

But some economists warn about getting too fixated on the 7% unemployment rate. Kate Barker, a former member of the Monetary Policy Committee, says unemployment could fall and wages could rise, without raising concern over inflation.

"The real question for the economy this year is not just about interest rates. It's actually about what is going to happen to productivity, if we see productivity start to recover we could see wages pick up quite a bit without any damage to inflation - so there are more things to look at other than employment," she said.

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Inflation slows again in November to four-year low

British inflation edged down in November to its lowest level in four years, giving the Bank of England plenty of breathing space to keep interest rates at a record low even as the economy picks up speed.

Consumer prices rose 2.1 percent on the year in November, the slowest increase since November 2009, as the impact of higher gas and electricity prices had yet to be felt, the Office for national Statistics said. Economists taking part in a Reuters poll had expected inflation to stay at 2.2 percent, its rate in October.

Compared with the previous month, the consumer price index in November was up 0.1 percent, the ONS said. Separately, house prices in Britain rose at their fastest pace in October in just over three years. Annual inflation has exceeded the Bank of England's 2 percent target every month since December 2009, steadily eating into the pay of British workers and making living standards a big political issue ahead of the 2015 elections.

Despite above-target inflation, the BoE's focus remains on nurturing an economy which is growing more quickly than most other industrialized countries but remains smaller than before the financial crisis.

The BoE has said it will only think about raising record-low interest rates once unemployment falls to 7 percent, unless inflation expectations threaten to get out of control.

Figures due on Wednesday are expected to show unemployment stayed at 7.6 percent in the three months to October.

The ONS said on Tuesday that the slowdown in November's inflation figure was partly due to fruit and vegetable prices as well as the later introduction this year of hikes in power tariffs.

An ONS official said last year's increases in utility prices affected inflation in November but were only expected to impact the CPI in December this year.

An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 1.8 percent in November compared with the same month last year.

Data also released by the ONS on Tuesday showed that factory gate prices rose by 0.8 percent in annual terms, slower than economists' predictions of a 0.9 percent increase.

Some economists expect inflation pressure to grow in the coming months when the impact of the recently announced prices rises for household heating will be felt.

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UK manufacturing growth remains strong

The UK's manufacturing sector continued to see strong growth last month, according to a closely watched survey.

The latest Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) recorded a level of 57.3 for December.

While this was down slightly from November's near three-year high of 58.1, it was still well above the 50 mark that indicates expansion.

Markit said that the latest figure suggested the manufacturing recovery remained "on track".

"UK manufacturing's strong upsurge continued at the end of 2013, with rates of growth in production and new orders still among the highest in the 22-year PMI survey history," said Rob Dobson, senior economist at Markit.

"On its current track, the sector should achieve output growth of over 1% in the final quarter while filling around 10-15 thousand jobs, continuing its positive contributions to both the broader economic and labour market recoveries."

Recent official data and survey results have indicated that the UK economy is continuing to strengthen.

Last month, the latest unemployment figures showed that the jobless rate had fallen to 7.4%, the lowest rate since 2009.

Price pressures

Markit said that growth in manufacturing output and new orders remained "robust", helped by the strengthening UK economy and an increase in new export orders.

The research firm said manufacturers had seen increasing demand from Brazil, China, Ireland, Russia and the US.

The latest survey also showed signs of inflationary pressures building within the sector, with both average input costs and output charges rising at faster rates last month.

"With headline CPI inflation softening for a variety of reasons, this trend in manufacturing price pressures is not likely imminently to trouble the Bank of England," said David Tinsley, UK economist at BNP Paribas.

"But it does underline that inflation is not dead in the UK, and the economy is likely to sustain a materially higher inflation rate than its peers in 2014."

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UK unemployment rate at lowest since 2009

The UK unemployment rate has fallen to its lowest level since 2009, official figures show.

At 7.4%, this is the lowest rate since the February-to-April period in 2009, the Office for National Statistics (ONS) said.

The number of people out of work fell by 99,000 to 2.39 million in the three months to October, the ONS said.

Prime Minister David Cameron told MPs the figures showed that "the plan is working".

Mr Cameron said: "There should not be one ounce of complacency because we have still got work to do to get our country back to work and everyone back in work means greater stability for them, greater ability to plan for their future, greater help for their families.

But the plan is working, let's stick at it, and get unemployment down even further."

But Labour leader Ed Miliband, while welcoming the news, said more people are working part-time because they could not get the hours they need.

This 7.4% rate compares with a figure of 7.6% for the three months to September, and is below the rate analysts had expected.

The number of people claiming Jobseeker's Allowance in November fell by 36,700 to 1.27 million.

In Northern Ireland the unemployment rate was slightly higher at 7.5%, while Scotland's figure was 7.1.%. England and Wales matched the national figure of 7.4%.

The North East of England had the highest unemployment rate, at 10.1%, while the lowest rate was 5.6% in the East of England.

The North East also had the highest claimant count rate at 6.1%, compared with the South East, which had the lowest, at 2.3%.

Earnings pressure

Average weekly earnings growth, including bonuses, picked up by 0.9% in the three months to October compared with a year earlier, the ONS said, a slight improvement on the three months to September.

Excluding bonuses, pay grew by 0.8%.

But this is still well below the level of inflation - currently running at 2.1% - meaning that people's earnings are still falling in real terms.

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The ONS data also showed that the number of people aged 16 and over who are in work was at a record high of 30.09 million, up 250,000 compared with the May-to-July period.

The percentage of the workforce in the public sector - 18.8% of those in employment, or 5.7 million people - fell to its lowest rate since the current data series began in 1999.

'Spectacular strength'

Economists welcomed the latest jobs figures.

David Tinsley, UK economist at BNP Paribas said the UK labour market was "showing spectacular strength".

David Kern, chief economist at the British Chambers of Commerce, said: "These are very strong labour market figures, which back our recent forecast of increased growth in the fourth quarter of this year."

And Chris Williamson, chief economist at Markit, said: "The official data are now confirming the upbeat signals from business surveys, which have shown the fastest rates of job creation since the late 1990s in recent months, as firms respond to a marked pick up in demand."

The Bank of England has said it will not consider raising interest rates from their record low of 0.5% until the unemployment rate falls to 7%.

But even then, governor Mark Carney has said an interest rate increase is not guaranteed.

The pound jumped against both the dollar and euro after the release of the jobs figures, as expectations rose that UK rates could rise sooner than forecast

The Bank's nine-member Monetary Policy Committee (MPC) was unanimous in voting to keep interest rates on hold, minutes from its December meeting revealed, and to leave the central bank's £375bn programme of quantitative easing unchanged.

The MPC believes inflation could fall to its target level of 2% early in 2014, the minutes show, but it is concerned that sterling's recent 2% rise against other currencies could jeopardise the UK's economic recovery.

The UK grew by 0.8% in the third quarter of 2013, and the Bank is forecasting growth of 2.8% next year.

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Economic recovery is based on repeating the sins of the past

Pick-up in the economy is not the result of sticking to austerity as chancellor claims – it's what you get when you keep interest rates low

The growth numbers were revised higher. Public borrowing figures look less atrocious than they did at the time of the March Budget. Hard-pressed households will welcome having a pound a week knocked off their domestic energy bills as winter sets in.

For George Osborne, it was a blessed relief to be able to upgrade his forecasts, something he has not been able to do since moving in to the Treasury in 2010. But he was pushing his luck when he claimed that the pick-up in the economy was the reward for sticking to austerity.

For a start, the government has not stuck to the plan but has eased the squeeze in response to an under-performing economy. Nor is it the case that growth has resulted from virtue, a very Germanic view in which economics is a branch of moral philosophy in which countries that behave in an upright fashion get their just deserts.

Britain's recovery, by contrast, relies on repeating the sins of the past. Growth is not the result of the government's belt-tightening; rather, it is what you get if you keep interest rates at 0.5% for five years, then top things up with incentives for banks to lend for property purchase and state-backed incentives for people to take out home loans. Austerity ensured this bog-standard UK economic recovery was delayed and is weaker than it normally would have been. The chancellor was keen to point out that net borrowing was lower than forecast in March 2013, but forgot to mention that at £111bn it will be a lot higher than the £60bn estimate made in June 2010.

Osborne also skated over the lop-sided nature of the recovery. The main reason the independent Office for Budget Responsibility is now expecting national output to grow by 1.4% in 2013 rather than the 0.6% predicted in the Budget is that consumers are spending more. Projections for business investment and exports – the two sectors that were supposed to lead to a rebalancing of the economy – have been cut since the spring.

This pattern of growth can be sustained in the short term. With the pound at its highest level in five years, imports become cheaper and inflation falls. That means that household budgets stretch a bit further and the Bank of England is under no immediate pressure to raise the cost of borrowing. The housing market will be cooking with gas from now until the general election in 2015.

There has, though, been no underlying improvement in the economy. Growth has been brought forward from future years, helping to cut borrowing in the short-term but leaving the structural budget deficit – the bit unaffected by the ups and downs of the economic cycle – unchanged. Balancing the books will take until 2019, four years later than Osborne promised in 2015. Austerity will continue deep into the next parliament.

Osborne sketched out the message the government will be delivering week in week out between now and the election: don't be tempted to hand control of the economy back to the people who made such a mess of things in the first place. The chancellor's narrative is potentially a powerful one given that opinion polls suggest the public believes that the deep recession of 2008-09 was caused by Labour profligacy.

But it only works if three conditions are met. The first is that consumers keep spending at a reasonable lick despite the fact that prices will continue to rise faster than wages deep into 2014. Lower inflation should help but there is a risk that consumers will be more cautious than the OBR expects.

The second condition is that business investment kicks in to give the recovery a second wind. The OBR says companies will increase spending on new plant and machinery by 5% in 2014 and 9% in each of the three subsequent years. This looks like an heroic assumption. Likewise, the UK's share of world trade fell steadily even when exports were boosted by a fall in the value of the pound. Sterling's rise spells bad news for the balance of payments and for growth.

Finally, there's the assumption that at some point in the next year or so, rising living standards will boost Government popularity. At some point in 2014, earnings should start to rise more quickly than prices but probably not until the second half of the year. But voters may be slow to show any gratitude. In 2010, Osborne said it would take until 2013 for real wages to return to their pre-recession 2008 levels. He now says it will take until 2018. Truly a lost decade for living standards.

George Osborne kicked off his statement by boasting that Britain is the fastest growing major economy in the world. This lasted less than two hours. No sooner had the chancellor sat down than Washington announced that revisions to America's output data meant that Uncle Sam led the way in the third quarter of 2013.

The chancellor will be hoping that the rest of his package stands the test of time a little better. It may not.

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Consumer borrowing grows at fastest rate since 2008 crash

Bank of England corrects figure on net unsecured lending, with jump adding to fears UK is relying on debt-fuelled recovery

The Bank of England has admitted to an error in its data and said consumer borrowing has been growing at its fastest rate since before the financial crisis five years ago.

The Bank said on Thursday that net unsecured lending to consumers – overdrafts, personal loans and credit cards – rose by £864m last month, the biggest increase since December and more than double the £411m figure it first reported.

The jump meant unsecured lending in the three months to September increased by 5.8% on an annual basis, the strongest growth since April 2008.

The surge in borrowing will raise concerns that Britain is relying on a debt-fuelled recovery at a time when policymakers have repeatedly stressed the need to rebalance the UK economy away from spending and towards manufacturing and exports.

Ross Walker, UK economist at Royal Bank of Scotland, said: "There is an amber warning light here – not an immediate risk but a medium-term financial stability concern. The notion that we have gone through a full deleveraging cycle is abject nonsense."

On Thursday, new data showed UK consumer confidence has risen to its highest level for six years despite the ongoing squeeze on disposable incomes. While levels of confidence lag those reported in Germany, Australia and the US, and a degree of pessimism remains, confidence has grown at a faster rate in the UK than in most European countries, according to figures from the market research firm Nielsen.

Its survey of more than 30,000 online consumers in 60 countries found those in the UK rated their confidence at 87 in the three months to the end of September, with levels above 100 indicating optimism and below pessimism. German confidence stands at 92 and the US at 98, France stands at 61 and Portugal and Spain at 55 and 56 respectively.

Chris Morley, managing director of Nielsen in the UK and Ireland, said British consumers had coped with rising household costs and falling real-term wages by shopping carefully and hunting bargains.

He added: "Throughout this period, British consumer confidence remained stubbornly weak, but in recent months it has finally taken an upward turn as the green shoots of economic recovery start to show."

Positive news on the UK housing market has boosted sentiment. But Nielsen also revealed a growing perception that the economic downturn in Britain is over.

With a move towards optimism, the proportion saying they were willing to spend crept up five percentage points to 39%.

Utility bills are now by far the biggest concern for people living in the UK. Energy and water bills were highlighted as a top concern by 31% of those questioned, compared with 27% a year ago as several of the major gas and electricity providers have raised prices in recent weeks.

Article Source : http://www.guardian.co.uk
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Bank of England holds interest rates and quantitative easing

Governor Mark Carney believes much of the current 2.7% inflation rate can be blamed on one-off shocks

The Bank of England has rejected calls for a rise in interest rates despite a strong run of surveys showing the economy is recovering at its fastest pace since 2010.

In a widely expected decision, the central bank's interest rate setters kept the base rate at 0.5% and the level of its monetary stimulus to the economy, known as quantitative easing, at £375bn.

Some analysts have called for a rise in interest rates in response to the improving economic picture and a recent jump in housing market activity.

However, the bank's monetary policy committee has agreed to maintain its current policy stance until the unemployment rate falls to 7%. It expects to reach this milestone in 2016 after 750,000 jobs have been created.

Governor Mark Carney believes the economy remains weak and much of the current 2.7% inflation rate can be blamed on one-off shocks.

The bank is known to be extremely concerned at the level of business investment, which has continued to fall this year despite the pace of recovery picking up since the spring and many commentators describing it as a well-advanced and sustainable expansion of economic activity. Without a return to healthy rates of business investment, senior Bank staff fear the economy will be forced to rely on consumer spending to maintain growth.

Philip Shaw, UK economist at Investec, said the positive momentum of the economy made more QE unlikely.

"The key question surrounds the possible timing of the first interest rate hike. This is some way off and the likelihood is that the UK faces a long period of steady policy. Nonetheless markets and ourselves are sceptical that this move will occur as far in the future as the second half of 2016, as the Bank of England's guidance implies," he said, adding that the debt markets expect a rise in early 2015.

Peter Dixon, UK economist at Commerzbank, said: "As far as the immediate future is concerned, the BoE is expected to remain on the sidelines.

"Although the economy can be expected to lose momentum relative to recent trends, we look for a self-sustaining recovery with GDP growth in the region of 2% next year. This is not an environment in which additional policy activism is required, implying no more QE as well as no rate moves."

Howard Archer, chief UK economist at IHS Global Insight, said: "The already limited likelihood of any further QE appears to have waned further as the good news on the UK economy has been largely sustained – notwithstanding a few blips such as the surprise marked drop in industrial production in August. Meanwhile, any change in interest rates is clearly a long way off whether or not unemployment ends up falling more rapidly than the Bank of England currently expects."

Article Source : http://www.guardian.co.uk

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Petrol prices push inflation to highest since April 2012

Consumer price inflation 2.9% higher than the same month last year, with upward pressure from fuel and clothing prices

Inflation in the UK has risen to its highest level for more than a year, putting a further squeeze on workers struggling with stagnant wages.

The rise in headline inflation to 2.9% will also pose a challenge for new Bank of England governor Mark Carney and his fellow policymakers as they look for ways to boost Britain's fragile recovery while keeping a lid on living costs. Still, the rate was not as high as the 3% forecast by economists and was well below the 3.1% level that would have forced Carney to write an explanatory open letter to chancellor George Osborne.

Economists warned persistently high inflation would dampen optimism about Britain's economic prospects following some recent upbeat news.

"There are growing signs of the UK recovery gaining momentum, with the economy set for strong growth in the second quarter and companies reporting the brightest outlook for the year ahead since the financial crisis struck, but inflation clearly remains the UK's bugbear and calls into question just how long this strong growth can persist for," said Chris Williamson, chief economist at data specialists Markit.

"High prices look set to continue to erode spending power, curbing the overall pace of economic growth."

The Office for National Statistics said its consumer prices measure, based on a basket of goods and services, slipped 0.2% in June from May. But compared with a year ago they were up 2.9%, the highest annual inflation since April 2012. The biggest upward pressure came from petrol and diesel prices, which both rose by around a penny this June but fell in June 2012. There was also upward pressure from clothing prices after summer sales this year did not bring as many discounts as in 2012.

The retail price index measure of inflation, used as the benchmark for many pay deals, rose to 3.3% from 3.1% in May.

Both rates of inflation markedly outstrip average UK pay growth of 1.3%, meaning real wages continue to fall.

But the Treasury welcomed the fact consumer price inflation has eased from the high hit in September 2008.

A spokesman said: "Inflation is down significantly from its peak of 5.2%. At the same time, to help families with the cost of living, the government has: increased the tax-free personal allowance to £10,000, which will take 2.4 million people out of income tax altogether and save a typical basic rate taxpayer almost £600; and frozen fuel duty which has kept petrol prices 13 pence per litre lower than they would otherwise have been."

But Labour's shadow Treasury minister Catherine McKinnell argued that after inflation, wages are down by an average of more than £1,300 since the coalition came to power.

"With prices now rising much faster than wages the cost of living crisis is getting worse. Despite all the complacent claims from ministers about the economy, these figures show that for ordinary people life is getting harder under David Cameron's government," she said.

The ONS published separate data alongside the inflation showing factory gate inflation was higher than expected in June. The prices charged by manufacturers were up 2% on the year compared with forecasts for 1.9% and ewith 1.2% in May. That came as their costs, or input prices, rose an annual 4.2%, the biggest increase for more than a year.

Economists said those numbers and a rise in the core rate of consumer price inflation, which excludes erratic items such as fuel, would raise concerns among BoE policymakers about the potential for inflation to rise further still. Bank policymakers have made it clear, however, that they will take a flexible approach to inflation targeting if the broader economic picture requires it. That potentially paves the way for more quantitative easing – pumping cash into the economy by buying bonds from financial institutions – despite above-target inflation.

Article Source : http://www.guardian.co.uk

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UK economy 'buoyant' as services sector grows at fastest rate in two years

Surging service sector workloads prompt biggest increase in new staff hires since before the financial crisis hit in 2007

Hopes of an economic recovery are growing as the UK's dominant services sector expanded at its fastest rate in more than two years, according to monthly data.

Service sector firms, which account for three-quarters of the economy, reported surging workloads in June, prompting the biggest increase in new staff hires since before the financial crisis hit in August 2007.

The purchasing managers' index soared to 56.9 in June, up from 54.9, its highest level for 27 months. A figure above 50 means growth, according to Markit, which compiles the survey.

The services sector is leading the UK economy out of recession, says the British Chambers of CommerceThe strong demand for services comes as Mark Carney, the new Bank of England governor, starts his first monetary policy committee meeting buoyed by a slew of positive economic data. This week saw confirmation that British manufacturers enjoyed their strongest growth for two years in June, while the construction sector grew for the second consecutive month.

The figures confirm that the UK continues to outperform the eurozone, where combined manufacturing and services output continues to fall. "The buoyant picture for June means the economy is on course to expand by at least 0.5% in the second quarter, with more growth to come," said Chris Williamson, Markit's chief economist.

"New orders and job creation across all sectors are now rising at the fastest rates for almost six years, led by the vast services economy, boding well for robust growth momentum to be sustained as we move into the second half of the year."

David Kern, chief economist at the British Chambers of Commerce, said the figures confirmed that services were leading the UK out of recession.

"I don't believe that the economy is booming, but the figures confirm the recovery is under way," he said. The recovery is widely spread, he added, although the service sector is performing better than other parts of the economy.

"It would be wrong to say we can relax now," he said, warning of risks from renewed problems in the eurozone, the fallout from the US Federal Reserve's decision to wind down financial stimulus, and in the UK, rising inflation and tight access to credit. "Many small firms are still finding it difficult in getting finance on acceptable terms; there is a bottleneck."

The surging demand for services has dampened expectations that the Bank of England will opt for more financial stimulus when it concludes a two-day monetary policy meeting on Thursday.

The data reinforces the view that the Bank will sit tight on quantitative easing, said Howard Archer, chief economist at IHS Global Insight. But he predicted the bank would not give up on QE and forecast an injection of £25bn into the economy in August. "This reflects our belief that Mark Carney is likely to be keen to build up escape velocity from extended economic weakness."

Article Source : http://www.guardian.co.uk

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UK construction sector grows for second consecutive month

Markit/CIPS construction PMI hits highest level since May 2012, fuelling hopes for faster economic growth

The UK's construction sector grew for a second month in June, boosted by a rise in house building and supporting expectations that economic growth accelerated in the second quarter.

Growth in output and new orders pushed the Markit/CIPS construction purchasing managers' index (PMI) to 51 from 50.8 in May, where anything above 50 indicates expansion. It was the highest level since May 2012.

Companies reported rising levels of client demand and larger volumes of new work.

Economists said the positive data raised the chances of stronger second-quarter growth than the 0.3% in the first three months of the year.

The positive news will be welcomed by the Bank of England's new governor, Mark Carney, who will oversee his first monetary policy committee decision on Thursday.

"June's construction data is one of the final pieces in the puzzle when it comes to survey evidence for second-quarter UK economic performance, and the sector's upturn adds to the upbeat news flow ahead of Mark Carney's first policy meeting at the Bank of England later this week," said Tim Moore, senior economist at Markit.

Construction sector employment rose for the first time since FebruaryHousing construction grew at the strongest rate in June according to the PMI, helped by the government's incentive schemes, although growth slowed to 51.5 from 54.4 on the index.

Commercial and civil engineering activity hit 50.1 and 50 respectively, improving after several months of contraction.

Employment in the sector rose for the first time since February and at the fastest rate since September, driven by the rising levels of new work and an improved outlook.

Howard Archer, chief UK economist at IHS Global Insight, said that although the positive survey reinforced the likelihood that the MPC will not announce additional stimulus this week, more quantitative easing was possible in August.

"This reflects our belief that Mark Carney is likely to be keen to build up escape velocity from extended economic weakness," he said.

Article Source : http://www.guardian.co.uk

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