Bank of England: No need to raise interest rate as low wages are slowing down inflation

Interest rates do not need to rise despite surging inflation, the Bank of England says.

A study by the Bank published today suggests that rates can be safely held at 0.5 per cent in order to prevent growth from stalling.

It shows that while energy and food costs are soaring, there is little evidence that short-term price rises are feeding through to wages or long-term price setting by big companies.

This eases fears that consumer price inflation will continue to run at more than twice the Treasury’s 2 per cent target. There is widespread concern that Britain is heading for a period of ‘stagflation’ – when prices rise as the economy stagnates.

But the Bank says today in its influential Quarterly Bulletin that ‘long term inflationary expectations remain anchored by the monetary framework’, which is sure to be a relief to Chancellor George Osborne. 

There has been widespread concern in Whitehall that rising inflation, as a result of the boom in commodity and oil prices, could throw Mr Osborne’s austere economic policy off course.

Sir Mervyn King, the Bank’s newly-knighted governor, has repeatedly promised to keep rates low to allow public spending to be cut without destroying the recovery. If the Bank were to start raising interest rates at this stage in the recovery it could put a further brake on lacklustre consumer spending and investment by industry. 

Individual and corporate spending are seen as key to keeping the economy expanding at a time when the cuts – taking £80billion out of the public sector over the next four years – are just taking hold.

Figures released by the National Institute for Social and Economic Research last week suggest that the economy grew 0.4 per cent in the three months to the end of May. 

In today’s report, the Bank says ‘there are few signs that inflationary expectations have affected price or wage setting behaviour’ because the firms, individuals and markets that it examined all seemed sure that inflation will start to return to the 2 per cent target level, from the current 4.5 per cent, by early in 2012.

Over the past three years inflation, as measured by the consumer prices index (CPI), has frequently been one percentage point above the 2 per cent target. 

Despite this longer term interest rates – the market cost of borrowing for British mortgage lenders, banks and corporations – have actually been falling. 

This is in sharp contrast to what has been happening in troubled Euro-zone countries.

‘In the UK this largely reflected a decline in inflation towards the end of the period,’ the Bank’s experts say.

The Bank has found little evidence that recent rises in the CPI have any impact on wage settlements. 

It reports that ‘current wage growth remains around 2 per cent, some way below its pre-recession average rate’. 

With wages frozen in the public sector and unemployment stubborn in the private sector, the Bank argues that ‘there are few signs that households are pushing for higher pay

Home owners offered 5 yr fixed rate mortgages below 4pc

Home owners are being offering five year fixed rate mortgages below 4 per cent – levels last seen before the credit crisis.

It comes amid growing expectations that the Bank of England will not raise interest rates until next year, much later than anticipated.

At the beginning of this year, interest rates were expected to rise from their current level of just 0.5 per cent in May. But this has been pushed back to earlier next year amid concerns about the fragile economy.

Yorkshire building society has announced a five year fixed rate mortgage at 3.99 per cent for those with a 25 per cent deposit.

Chelsea building society, owned by the Yorkshire, is also offering a five year fixed rate deal at 3.99 per cent, but it has a £1,995 arrangement fee.

Melanie Bien, of mortgage brokers Private Finance, said: “With interest rates looking increasingly unlikely to rise before next year, lenders are offering cut-price fixed rates to drum up business.

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“With five-year fixes now starting with a '3', pricing has breached an important psychological barrier which will make such deals attractive to borrowers looking for security.

“However, trackers remain cheaper still so those borrowers who do think it will be a while before interest rates start rising may be tempted to go for a variable option, which will be cheaper at least initially

Up to 20 million Britons cutting back on spending as confidence slumps

The full extent of the squeeze on living standards in Britain has been revealed in a new report estimating that 20 million Britons tightened their belts in the first few months of 2011.

Registering a sharp drop in consumer confidence over the past year across eight different demographic groups, a survey by the financial firm Axa found people cutting back on going out, car usage, food shopping and holidays.

A poll of almost 2,000 people conducted by YouGov found a sharp drop in financial confidence over the 12 months to March, a period that coincided with a slowdown in the economy, rising taxes, higher inflation and the announcement of the coalition government's austerity plan.

Spending restraint was particularly evident among those the survey calls "the stretched" – people in their 20s and 30s on low incomes with few financial assets – and among young professionals of a similar age with no children hoping to move out of rented accommodation into their own homes.

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"A striking 40% of consumers (up to 20 million people) chose to go out less between January and March this year, a five percentage point increase on the previous quarter," Axa said. "Half (48%) of those in the most pessimistic group, young professionals, cut back on going out. The proportion among the stretched was even higher at 56%."

The survey found that while millions of consumers were making economies in order to pay off their credit card debts, one in four of those quizzed said they were dipping into their savings to fund everyday expenditure.

A fifth of the population said they now regretted some of the financial decisions they had taken before the deep recession of 2008-09. Axa said that "nest builders" – people in their 30s and 40s with young families and large mortgages – and the stretched tended to be the most regretful.

Axa UK's chief investment officer, Eric Lhomond, said: "These figures reveal a concerted effort by British consumers to claw back some financial security in the face of a significant drop in optimism that we found across all demographic groups. The result is that we are busy paying off debts, reining in unnecessary spending and clinging on to financial products to protect or grow our assets."

More than half of those polled said they expected to have to pay for treatments on the NHS within the next three years, with only one in five consumers confident that the coalition's original health plans would make the NHS better. More than half said they wanted the 50% income tax bracket – introduced as an emergency measure by Alistair Darling during the last parliament – to become permanent.

Hidden green tax in fuel bills: How £200 stealth charge is slipped on to your gas and electricity bill

Hidden green taxes now make up a fifth of every household’s gas and electricity bills, energy campaigners warned last night.

Cash strapped families pay an average of £200 a year in stealth levies to subsidise Britain's massive expansion of wind farms, solar panels and 'environmentally friendly' heating schemes.

Yesterday outraged campaigners called for an end to the secret subsidies and demanded power companies reveal how much their customers are paying for climate change policies .

Hidden green taxes make up a fifth of households' gas and electricity bills, energy campaigners warned

The call came as the former head of the civil service, Lord Turnbull, demanded that politicians ‘stop frightening us and our children’ about the threat of global warming.

He demanded that Whitehall and ministers consider the damaging economic impact of blindly following the ‘climate change agenda’.

The attack on green taxes also came as one of Britain’s biggest power companies unveiled a round of price rises that will add nearly £200 to the average family bill. 

Scottish Power blamed soaring wholesale prices for the 19 per cent increase in gas prices, and a 10 per cent rise in the cost of electricity.

But Dr Benny Peiser, director of the Global Warming Policy Foundation, said the soaring price of fuel was also the result of Britain’s ‘stubborn but wrong headed commitment to renewable energy’.

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The typical UK household spends £608 a year on gas and another £424 on electricity. Dr Peiser says green stealth taxes make up between £154 and £206 of that bill. For couples with large families - and large fuel demands - the figure is far higher.

He said: ‘So called green stealth taxes are already adding 15 to 20 per cent to the average domestic power bill and even more to business users’.

‘And yet, despite the growing cost of these taxes, you won’t find any mention of them at all on your gas and electricity bills,’ he said.

‘That, of course, suits the Government down to the ground. If it raised the huge sums required to encourage renewable energy and limit carbon emission through general taxation it would make the Government itself very unpopular.

‘But by doing it through electricity and gas bills, the Government has cleverly ensure that it’s the power companies that take the blame.’

Under the Climate Change Act, the Government is legally bound to cut Britain’s C02 emissions by 34 per cent by 2020 and 50 per cent by 2025.

To meet its targets – the toughest in the world – the Government is encouraging the building of 10,000 wind turbines. It also wants power companies to install £7billion worth of smart meters in homes.

The meters record precisely how much gas and electricity a household is using and show how much it is costing, hopefully encouraging households to use less energy.

The meters send this information back to the utility firm, making estimated bills unnecessary.

The drive for wind turbines is being subsidised by the Renewable Obligation – a scheme that forces power companies to buy a proportion of their energy from renewable sources such as wind.

The scheme artificially inflates the cost of coal, oil and gas power, and subsidises green power, making investment in costly wind farms profitable. The cost is passed on in fuel bills.

A second scheme, the European Emission Trading Scheme, forces energy companies and heavy industry to offset greenhouse gas emissions with ‘carbon credits’ – permits that allow them to generate a certain amount of carbon dioxide.

The scheme has been hit by scandals including tax fraud, the re-sale of used carbon credits and the theft of millions of emission permits.

Once industries have used up their free allocation of credits, they must buy them on the open market – inflating the cost of energy even more.

Bills are pushed up further by the Carbon Emissions Reduction Target – which forces suppliers to subsidise home insulation and new boilers.

Bills are also inflated by the Feed In Tariffs – a scheme that encourages homes and small businesses to install wind turbines and solar panels by guaranteeing a fixed, high price for electricity they sell to the National Grid.

Dr Peiser said: ‘The Government has to come clean and force the power companies to make their bills fully transparent.

‘Only then will it be possible to see if a power company has been raising its prices unfairly and change supplier. And only then will the true cost of the Government’s mad rush towards renewable energy become clear.’

Fixed mortgage rates fall to six-month low

The average cost of a two-year fixed rate loan has fallen to 4.41pc, down from 4.5pc in May and the lowest level since the beginning of the year, while the interest charged on a five-year deal has dropped to 5.41pc from 5.6pc, according to financial information group Moneyfacts.

The group said the reduction in mortgage rates was being driven by a fall in swap rates, upon which the deals are partially based, as the Bank of England's Monetary Policy Committee is expected to put off raising the base rate until the final quarter of this year.

But despite the imminent threat of an interest rate hike receding, many homeowners are still keen to fix their borrowing costs, and rising demand for fixed rate deals has helped to increase competition in the sector.

A flurry of lenders have slashed interest on their fixed rate mortgages during the past few days, including big names, such as Halifax, Nationwide, Lloyds TSB and NatWest.

There has also been a further improvement in the number of mortgages available to people with only small deposits, with 31 different loans now available for people with 5pc to put down, up from 24 at the start of the year and the highest level since December 2008.

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Choice for people with deposits of 10pc has also risen to 244 from 199 during the same period, while there are now 545 mortgages available for those borrowing 85pc of their home's value, compared with 480 at the start of the year.

Half of UK not saving enough for retirement,

Nearly half the working population are not saving enough for retirement, and one fifth are failing to save anything at all, according to a major study on pensions.

People want, on average, an annual retirement income of £24,300 to live comfortably, down from the pre-recession figure of £27,900. Although three-quarters of those questioned understand the need to take personal responsibility for their future, only 51% save adequately for their old age. This drops to around 25% when those with a final salary pension are excluded.

The seventh annual Scottish Widows UK pension report, based on interviews with 5,200 adults, shows there is "widespread and ingrained inertia" across the country, with savings levels remaining broadly consistent during the past five years, regardless of the economic downturn.

The Scottish Widows average savings ratio – which tracks the percentage of income being saved for retirement by UK workers not expecting to get their main retirement income from a final salary pension – remains at just over 9%. This is a 3% shortfall on the 12% the insurer believes people should be saving to achieve a comfortable retirement.

Despite recent moves to abolish the default retirement age (the minimum age at which employers could force staff to retire) and raise the state pension age, the average age people would like to retire at remains the same as last year at 61 years and eight months. Only one in five said they would be happy to carry on working until the age of 70.

Ian Naismith of Scottish Widows said: "Put simply, people need to save an extra £58 per month on average to prepare adequately for retirement and make up the shortfall we are seeing currently. That is roughly the cost of a cup of coffee every day.

                                                                                           

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"Even though for many this is realistic, and is in under the average £97.10 per month people say they can afford, we appreciate the difficulty in setting aside extra money. It's about breaking through that inertia. And for some the amount that needs to be saved will be higher but it's about taking small steps, getting on to the savings ladder and, more importantly, staying on it. Much higher saving levels are needed to get towards the average £24,300 a year people aspire to. The message is that everyone should be putting aside as much as they can afford for their retirement."

Tom McPhail, pension expert with independent financial adviserHargreaves Lansdown said that according to Office for National Statistics figures, the average pension savings of people retiring between the ages of 50 to 64 last year was £91,900, enough to produce an annual income of about £3,500 to £4,000 depending on your sex and the type of annuity you buy.

"To produce an income of about £24,000, you would need a pension pot of about £400,000 once the state pension has been taken into account," he said. "People today face a very simple choice: to save more, retire later, or live on less in retirement."

More bad news for homeowners as house prices tumble 4.2% in a year

House prices fell at their fastest annual rate for 19 months during May, as buyers continued to shun the market, figures showed today.

Homes lost 4.2 per cent of their value during the last 12 months, based on average prices during the three months to the end of May, compared with the same three-month period the previous year, according to Halifax.

It was the biggest annual drop recorded since October 2009 and left the average home costing £160,519.

Prices also continued to drift lower on a quarter-on-quarter basis, which is generally seen as a smoother indicator of market trends, with homes losing 1.2 per cent of their value on this measure, unchanged from the drop recorded for the three months to the end of April.

The typical home now costs 1.4 per cent less than it did at the start of the year, although prices edged ahead by 0.1 per cent during May itself, following a steep 1.4 per cent drop in April.

 

Martin Ellis, Halifax housing economist, said: 'Low earnings growth, higher taxes and relatively high inflation are all putting pressure on household finances.

'Confidence is also weak as a result of uncertainty about the economic and employment outlook. These factors are probably constraining housing demand and applying some downward pressure on prices.'

But he said the group expected a 'moderate improvement' in the economy during the rest of the year, and this, combined with ongoing low interest rates, should help to support housing demand.

He said: 'This should prevent a further marked fall in prices and help to stabilise property values later in the year.'

The monthly change was broadly in line with the figure reported by Nationwide for the same period, with the building society saying house prices edged ahead by 0.3 per cent during May, but it recorded a more modest annual decline of 1.2 per cent.

April was a difficult month for the housing market, as the long bank holiday weekends caused people to put their moving plans on hold.

The Bank of England reported a 4 per cent drop in the number of mortgages approved for house purchase during the month, and this fall in activity will have had a knock-on effect on completed sales during May.

Howard Archer, chief UK and European economist at IHS Global Insight, said: 'The fact that Halifax reported that house prices could only rise fractionally in May after a particularly sharp drop in April reinforces our view that further weakness lies ahead in the face of ongoing muted housing activity and difficult economic fundamentals.

'We maintain the view that house prices are likely to end up declining by some 10 per cent overall by mid-2012 from their 2010 highs.

'This implies that they will fall by around 5 per cent to 8 per cent from current levels depending on which measure you take.'

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We are committed to offering our customers the highest possible 

standards of service

We recognise that both we and our customers have everything to gain if we look after your best interests and treat you fairly in all aspects of our dealings with you

Only recommend a mortgage or financial services product that we consider suitable for you and that you can afford – Our lenders charge the lowest fees of all - and always the most suitable from the available options."