At its meeting ending on 1 August 2018, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to increase Bank Rate by 0.25 percentage points, to 0.75% in an attempt to meet its 2% inflation target whilst sustaining economic growth and high levels of employment.
Since the last Inflation Report in May, the MPC felt that the near-term economic outlook had evolved broadly in line with the MPC’s expectations with GDP expected to grow by around 1¾% per year on average over the forecast period. Global demand appears to be growing above its estimated potential rate and financial conditions remain, as the MPC describe it, accommodative.
Unemployment is low and is projected to fall a little further with CPI inflation at 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The MPC don’t expect to hit their target of 2% for another three years. The MPC also continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal or Brexit as it is more commonly known.
It’s clear that this is not the last base rate rise as the MPC suggests, were the economy to continue to develop broadly in line with its Inflation Report projections, that an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. They have re-iterated that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.
Nonetheless, annual house price growth remains within the fairly narrow range of between 2-3% which has prevailed over the past 12 months, suggesting little change in the balance between demand and supply in the market. Looking further ahead, house price growth will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates.
The Society observed that the subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low. Overall, they continue to expect house prices to rise by around 1% over the course of 2018.
Providing the economy does not weaken further, the impact of the small rise in interest rates on UK households is likely to be modest partly because only a relatively small proportion of borrowers will be directly impacted by the change. Most lending on personal loans and credit cards is fixed or tends to be unaffected by movements in the Bank Rate. Similarly, in recent years, the vast majority of new mortgages have been extended on fixed interest rates.
Indeed, the share of outstanding mortgages on variable interest rates (and which are therefore likely to see an increase in payments if Bank Rate is increased) according to the Nationwide has fallen to its lowest level on record, at c35%, down from a peak of 70% in 2001. For example, on the average mortgage, an interest rate increase of 0.25% would increase monthly payments by £16 to £700 (equivalent to c£190 extra per year).
Text or talk?
Ofcom has given us an insight into the communications market in 2018 in their latest research into our changing habits. Interestingly in the UK 5.2% of households’ spend was on communications services (£124.62 per month), with 70% of this on telecoms services. People claimed to spend a total of one day a week online (24 hours), more than twice as much as in 2011 with the the most popular smartphone activities for commuters are sending and receiving messages (43%) and using social media (32%).
Most adults acknowledged the value of being connected, with three-quarters agreeing that being online helps them maintain personal relationships. But they also acknowledge its drawbacks, such as interrupting face-to-face communications with others. 78% of UK adults use a smartphone with 58% of households owning a tablet and 44% having a games console although these numbers have plateaued in the last three years. Smart TVs were in 42% of households in 2017, up from 5% in 2012 and now one in five households (20%) wear tech such as smart watches and fitness trackers.
Nine in ten people watched TV every week in 2017, for an average of 3 hours 23 minutes a day. This is nine minutes less than in 2016, down across all age groups under the age of 65 and those aged 55plus accounted for more than half of all viewing in the UK. More than half (50.9%) of all radio listening is now digital, mainly due to growth in listening through DAB. 13% of UK households used a smart speaker in 2018; three-quarters of these were Amazon devices.
Nine in ten people now have access to the internet in the home in 2018 however the majority (62%) of time spent on the internet was on mobile devices and interestingly BBC website visitor numbers overtook those of Amazon in the UK in 2018. The BBC had the third-highest number of users after Google and Facebook.
No more than a month
The latest bulletin from the Office of National Statistics highlights the changes in the wealth of the UK population. 12% of respondents to their survey in the period July 2016 to December 2017 reported that they always or most of the time ran out of money at the end of the week or month, or needed a credit card or overdraft to get by in the past year; this was unchanged from the period July 2014 to June 2016.
44% of respondents reported that they would not be able to make ends meet for longer than three months if they lost the main source of income coming into their household; this fell slightly from 46% in July 2014 to June 2016. Worryingly the percentage of 16 to 24 years age group reporting that they would not be able to make ends meet for longer than one month if they lost the main source of income coming into their household was 48%; this was compared with 26% of all respondents.
Almost 1 in 10 (8%) of respondents in the period July 2016 to December 2017 reported that they would be unable to meet an unexpected major expense equivalent to or greater than a month’s income and 44% of employees in the period July 2016 to December 2017 thought employer pensions were the safest way to save for retirement. This is compared to 42% of the self-employed in the period July 2016 to December 2017 who thought investing in property was the safest way to save for retirement.
In the period July 2016 to December 2017, 17% of those aged 16 to 24 years felt that they knew enough about pensions to make decisions about saving for retirement; this was compared with 42% of all non-retired respondents. 63% of eligible employees were aware that they had been automatically enrolled into a workplace pension. Of all eligible employees who reported that they had not been automatically enrolled into a workplace pension, 91% were already enrolled into a pension scheme.