Bank of England holds cards close to chest on guidance options

 The Bank of England kept investors guessing on Thursday as to whether it might be considering a change to its pledge to keep interest rates on hold as Britain's economic recovery picks up.

It also did not take the unusual step - but one which some investors had considered possible - of issuing a statement to address the speed at which Britain's unemployment rate is falling towards its threshold for considering a rate hike.

"No guidance on guidance yet," Investec economist Philip Shaw said in a note to clients. He said details of discussions among the BoE's policymakers on their options for changing guidance were likely to appear when minutes of this week's meeting are published on January 22.

Britain moved from being a laggard to a leader in terms of growth among the world's biggest economies last year.

Its economy is expanding by more than 3 percent in annualised terms although there are concerns the recovery could prove unsustainable, especially as wage growth remains weak.

The BoE said in August it will not think about raising rates until unemployment falls to 7 percent. Since then unemployment has come down much faster than the Bank expected, raising questions about how long it can hold off on raising rates.

But inflation has also fallen to within a whisker of its 2 percent target, reducing the pressure on the BoE.

After its two-day meeting, the Bank's Monetary Policy Committee kept interest rates at 0.5 percent, as expected by all the economists who took part in a Reuters poll.

It also left its bond-buying programme unchanged at 375 billion pounds.

The turnaround in Britain's economy contrasts with the situation in the euro zone, its main trading partner, where the European Central Bank is expected to use a news conference on Thursday to remind investors it could ease policy further.

The pace of Britain's recovery has helped the pound to strengthen by 5 percent against the euro and 10 percent against the dollar since the middle of last year.

Sterling strengthened briefly against the dollar after the MPC's announcement of no change in policy. British government bond prices rose slightly.

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UK inflation dips as rise in cost of fuel and clothing eases

CPI inflation fell to 2.7% in August as prices for petrol, diesel and clothes rose by less than they did in August a year ago

nflation eased down to 2.7% in August thanks to smaller price rises for petrol and new autumn fashion ranges but the cost of living continued to outstrip pay rises.

The UK's headline consumer price measure of inflation (CPI) has now been above the 2.0% government-set target for 45 months. Economists expect it to continue on a downward path but have warned there could be a short-term spikes upwards along the way because of volatile oil prices.

In August, the fall to 2.7% marked the second month inflation had eased and was in line with the consensus forecast in the City. CPI was 2.8% in July.

The fall came as prices for petrol, diesel and clothes rose by less than they did in August a year ago, the Office for National Statistics said. That was partially offset by upward pressure on prices from furniture, household appliance, toys and food.

Economists said the slowdown in inflation would bring relief to Bank of England policymakers. They have said they will keep rates low until unemployment falls further unless certain "knockouts" are triggered, including a rise in inflation 2.5% or above in 18 to 24 months' time.

Samuel Tombs at Capital Economics commented: "We continue to think that CPI inflation is likely to fall back to the 2% target within the next few months – a development that would help to ease the squeeze on households' real earnings and cool fears in the markets that one of the inflation knockouts to the MPC's forward guidance is likely to be breached."

But Howard Archer, an economist at Global Insight, said inflation could rise again. "Looking ahead, consumer price inflation is likely to hover close to 3.0% in the near term, and there remains a risk that it could yet reach 3.0% if oil prices spike up anew," he said.

The news on the other closely watched measure of inflation was slightly less reassuring. The retail price index (RPI) rate, which includes housing costs and is used for many pay negotiations, rose to 3.3% from 3.1% in July and was slightly ahead of forecasts for 3.2%.

Both cost of living measures outstrip average pay growth of 1.0%, meaning that many workers' incomes contiunue to fall in real terms.

The Treasury said that CPI inflation was now nearly half its peak of 5.2%, but said it was aware of the continuing strain on households.

"The economy is turning a corner, but the recovery is in its early stages and risks remain," a spokesperson said.

"The government knows that times are tough and that is why we have taken action to help with the cost of living including increasing the tax-free personal allowance, introducing tax-free childcare and freezing fuel duty and council tax."

But the debt charity StepChange said the basic cost of living is becoming increasingly difficult to meet for millions of British households.

"The fall in inflation is welcome, but while wage growth remains anaemic family budgets will be increasingly stretched by spiralling living costs, leaving many vulnerable to debt," said the charity's head of policy, Peter Tutton.

He added that the impact of low wage growth and rising costs is reflected in the growing numbers of StepChange debt charity clients with arrears on essential household bills. Between 2011 and 2012 the number of its clients with arrears on at least one household bill rose from 27% to 35%, while the average arrears on household bills rose from £2,134 to £2,258 over the same period.

Economists highlighted the strain on consumer spending as the wage squeeze continues.

"Weekly earnings are up only 1.1% year-on-year and have been undershooting inflation for much of the past five years meaning that households have been financing real-term increases in spending through borrowing and the running down of savings," said James Knightley at ING Financial Markets.

"Nonetheless, we are hopeful that the ongoing increases in employment and the strengthening economic environment will result in a gradual increase in wages and with inflation trending lower we can start to see positive real wage growth next year. This would give us greater confidence in the UK economic rebound continuing."

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

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HS2 high-speed rail project is grand folly, say business leaders

Institute of Directors claims there is no business case for the line linking London with Birmingham, Manchester and Leeds

The Institute of Directors (IoD) has urged ministers to abandon the "grand folly" of the £50bn HS2 high-speed rail project, saying little more than a quarter of its members believe it will prove value for money.

The IoD's head, Simon Walker, said the business case for the line linking London with Birmingham, Manchester and Leeds over the next 20 years "simply is not there".

The call comes amid increasing unease among MPs about the scheme, which the thinktank the Institute of Economic Affairs has warned could see costs spiral to £80bn.

Labour has made it clear that the bill for the line and rolling stock should rise no further, while the other main business organisation, the CBI, said in June that investors and taxpayers needed confidence the business case was watertight and costs would be controlled.

Walker, publishing a survey of more than 1,300 business leaders, argued that the money could be better spent elsewhere. "Station upgrades, inter-city improvements, tunnels, electrification and capacity improvements should all be considered alternatives. It is time for the government to look at a thousand smaller projects instead of falling for one grand folly," he said.

IoD members have growing concerns that the line will benefit London more than the regions for which HS2 supporters claim it offers a lifeline. Even when the costs of the scheme were said to be just over £30bn, at the start of the year, the organisation was warning that businesses needed convincing of its economic value.

Although Labour leaders still support the scheme, former grandees Lord Mandelson and Alistair Darling have said it should be scrapped. Ed Balls, the shadow chancellor, said on Friday that there would be no "blank cheque" from a Labour Treasury.

However, Lord Adonis, the former Labour transport secretary who was architect of the scheme and is now head of a review on economic growth, has said any move by Labour to drop the scheme would be "an act of self-mutilation". He has consistently argued that upgrading existing lines would be hugely expensive and disruptive, providing far less additional capacity than building new lines.

Coalition ministers plan to introduce legislation to clear the way for phase one of HS2, to Birmingham, this year – with construction beginning in 2017 – after the appeal court dismissed arguments from local councils, residents' associations and other objectors along the first part of the line that proper environmental assessments had not been made. However, the protesters still believe a successful appeal to the supreme court could stop HS2 or delay it for years.

According to the government timetable the West Midlands part of the line would be ready in 2026, with the full Y-shaped route to Manchester and Leeds completed by 2032-33.

The survey of IoD members found only 27% felt HS2 represented good value for money and 70% thought it would have no impact on the productivity of their business. The IoD said in a statement that the government assumption that time spent on a train was unproductive for business was "wildly inaccurate" as only 6% of directors said they never worked on a train. By contrast, 48% of members claimed they spent at least half the journey working, 26% worked for between a quarter and half the time, and 21% up to a quarter of the journey.

Walker said: "Some of the specific claims that the government has used to support its economic case for the project have been challenged by our members, who by and large do not feel that their business will benefit."

He concluded that the IoD could not support the government's economic case for HS2 "when so many of our members are doubtful of the benefits" and warned that for all the advantages of infrastructure investment, "the business case for HS2 simply is not there".

A Department for Transport spokeswoman said: "We need to build HS2 to free up valuable space for passengers and freight because without it, our existing rail network will be full by the mid-2020s at a cost to passengers and businesses up and down country.

"The scheme is forecast to generate more than £50bn of benefits for the economy but we know we must maximise every economic benefit HS2 has to offer."

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

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