INVESTMENTS & PENSIONS
As the dark days of winter recede and Spring is sprung , central bankers have been scurrying out of their burrows to share the good news that the time of high interest rates is nearing its end . And , waiting just over the horizon is a warm glow of interest rate cuts . One after another , the US Federal Reserve ’ s Jay Powell , the ECB ’ s Christine Lagarde and the Bank of England ’ s Andrew Bailey , have opened up on how the Fed “ is not far ” from cutting rates , ECB officials back a June rate cut but are “ keeping the door open for April ,” and UK investor ’ s bets on rate cuts this year are “ not unreasonable . 123 ” All welcome news . For the moment , however , we will focus our attention , at home , on the UK .
On 14 February , Valentine ’ s Day in the UK , the Office for National Statistics reported that the Consumer Price Index ( CPI ) rose by 4.0 % in the 12 months to January 2024 , holding steady at the same rate as in December 2023 . That rate , 4.0 %, is still above the BoE ’ s target , 2 %, but it ’ s a dramatic improvement on the 10.1 % rate of a year ago . Even before that data was published Governor Bailey speaking in February , shortly after a BoE meeting , said “ inflation could ease to its 2 % target within a few months .” It ’ s a view we share . It could arrive as soon as April , and potentially fall below 2 %.
Supporting that prognosis , we ’ d cite a number of forthcoming events . From 1 April 2024 ( to 30 June ) OFGEM ’ s price cap will fall 12 %; the price for energy a typical household , who use electricity and gas and pays by Direct Debit , will go down to £ 1,690 per year . This is £ 238 per year lower than the price cap set between 1 January to 31 March 2024 (£ 1,928 ) 4 . A similar fall is not out of the question in July . Staying with energy , the 6 March Budget saw the Chancellor freeze fuel duty again for another 12 months5 . Duty is charged at 52.95p a litre , an amount that was cut by 5p in 2022 by the then chancellor , Rishi Sunak , after prices spiked following Russia ’ s invasion of Ukraine .
TAKING THE TEMPERATURE WITH BUSINESS HEADS
Hot on the heels of the Budget , the BoE released its Decision Maker Panel survey of Chief Financial Officers from small , medium and large UK businesses ( firms across the whole economy , not just consumer-facing ), on 7 March6 . A temperature check taken between 2 and 16 February , the 2,373 influential heads of business respondents , said they expected their output price inflation to decline by 1.1 percentage points over the next 12 months ( based on three-month averages ).
Annual wage growth was put at 6.7 % in the three months to February , down 0.1 percentage point from the three months to January . More importantly though , the firms surveyed said they expected their wage growth to decline by 1.5 percentage points over the next 12 months ( based on three-month averages ). A slight fly in the ointment was the expected year-ahead wage growth figure to still be unchanged at 5.2 % ( on a three-month-moving-average basis ) something the BoE is tracking but the direction of travel thereafter should be down . Before the COVID-19 pandemic , when inflation was close to the BoE ' s 2 % target , annual growth in basic pay was around 3 %.
Annual employment growth of 2.3 % was reported in the three months to February , down on the 2.4 % reported in the three months to January . Expected year-ahead employment growth was 1.6 % in the three months to February , down 0.1 percentage points from the three months to January . The survey results align with other signs that Britain ' s job market is cooling , a development which should broadly ease pressure on wage growth and provide some comfort to BoE policymakers .
A FEW STICKY ISSUES
There are some exceptions . A rise in the National Living Wage ( NLW ) by 9.8 %, in April , serves as a stimulus and in the battle to retain retail staff a slew of supermarkets including Tesco , Co Op , Sainsbury ' s , Asda , Aldi , Lidl , M & S and Waitrose , have all announced salary increases of above the NLW level789 . The impact of these large , low-wage employers could push CPI inflation back to above 2.0 % towards the end of the year but ahead of then inflation should drop .
The heavily trailed 2p cut in national insurance could have been viewed as inflationary also but with a number of small tax increases on items such as vaping , tobacco and holiday home lets amongst other things , the overall impact can be broadly assessed as neutral10 .
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