Still low for long - Economics weekly

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Still low for long - Economics weekly

Until last August, the Monetary Policy Committee (MPC) showed its hand on Bank Rate one month at a time. Then it introduced forward guidance, setting out its longer-term intentions.

Economic Analysis

27 January 2014

The Bank of England and Royal Exchange

Its purpose was to convince you that rates would stay low for a long time. Not wanting to risk inflation taking-off, this wasn't a promise. So, the MPC said it would hold Bank Rate at 0.5% at least until unemployment fell to 7.0%, reckoning that would happen in late 2016. Well, unemployment is 7.1% and falling. So, whatʼs a Governor to do? In his Davos speech, Mark Carney was clear: “the attainment of the 7% threshold will not be associated with any immediate need to raise Bank Rate.” And even when rises come, “any such move would be gradual.”

MPC in no hurry to hike

The labour market was front and centre in the MPC's deliberations in January. It noted that the unemployment rate would reach the 7% threshold "materially earlier than previously expected" - and that was before we had the November data (see below). But it played down the significance of this development, because it thinks the so-called "equilibrium" rate of unemployment might have fallen, which would imply more downward pressure on pay growth (and, therefore, inflation) for any given rate of unemployment. As Mark Carney confirmed later in the week, these developments mean forward guidance will evolve, starting with the Bankʼs Inflation Report next month.

Jobs up, pay under pressure

The labour market continued its good run with unemployment falling to 7.1% in the three months to November, the lowest rate since early 2009. Employment increased by 280,000q/q. Job vacancies were up 4.0%q/q/ and 15.2%y/y. However, wage growth remained muted. Average weekly earnings increased by 0.9%y/y, well behind inflation. Only in manufacturing and in retailing, wholesaling and hospitality are wages rising faster than prices.

Good news all round

The latest Bank of England (BoE) Agents' Survey of Business Conditions reads like a feel-good page turner. Profits - up; sales - up; employment intentions - up; credit availability - up. As a result, spare capacity fell to what the BoE called normal levels. However, firms say that they would prefer to increase employment to meet rising demand rather than invest. That was reflected in the Trends in Lending survey, which reported that lending to business fell in November, albeit at a slower pace. This happened despite increased competition to provide loans and lower costs of credit. And lest we forget households, the news here was that housing market activity continued to strengthen, reflected by a 19% rise in mortgage approvals in the year to November.

Balancing act

Despite the largest number of mortgage approvals in six years, the value of outstanding mortgages fell 0.1%y/y in December, as the drive to repay continued apace. The impact of Help to Buy was evident in the gross lending figures, up 37%y/y, the fastest rate of increase during 2013. Credit card spending was more popular, rising 4.2%y/y while personal loans and overdrafts fell 3.5%y/y. A mixed bag for household lending, likely part of the reason the latest MPC minutes referred to "the mixed signal from different indicators" of the housing market.

Receipts up, spending down

Public sector net borrowing was £96.1bn in the financial year to December, down £4.8bn y/y. Public sector debt, net of its assets, was 75.7% of GDP, up from 74.4% at the end of 2012. Current receipts were £1.4bn higher in December and current spending was £1.5bn less. The reasons? Higher receipts in particular of VAT and corporation tax on the one hand and lower interest payments on the other. All of the savings in December itself came from central government, with local government and public corporations borrowing slightly more than in December 2012.

A good start to the year for the euro zone

Private sector activity grew for the seventh consecutive month in January according to the Purchasing Managers Index (PMI). The pace of growth accelerated to its fastest rate since early 2011 with the PMI reaching 53.2. Manufacturing led the way as domestic and international new orders rose robustly, sending that index to 53.9, from 52.7 in December. Services continued to expand, too, but a more moderate pace, rising to 51.9 from 51.0. National differences persisted. Germany remains top of the table while output in France continues to contract, albeit at a slower pace, and activity in the periphery is picking up.

Taper trouble

Emerging markets started to feel the pain of the US Fedʼs decision to taper quantitative easing. Argentinaʼs currency fell 18% against the US dollar over the week, with Turkeyʼs lira down 4%. Exiting extraordinary monetary policy is tricky at home for central banks but, as we saw in 1994 when the Fed raised rates, it can have much wider effects.


This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Groupʼs Group Economics Department, as of this date and are subject to change without notice.

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