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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

BoE leans further towards rate cuts

The latest news on wages points towards further lacklustre economic growth in the UK, reinforcing the BoE’s dovish stance.

Bank of England
Source: Bloomberg

The recent wage growth figures hammer another nail into the coffin of the ‘higher interest rates’ thesis for the UK. While the headline numbers showed growth, as average weekly earnings rose 2.9% excluding bonuses in nominal terms and up 0.4% excluding bonuses in real terms (i.e. adjusted for inflation), compared to a year earlier they were unchanged.

Any investor needs to understand the difference between nominal and real returns, and on this basis UK workers are not seeing rate increases. An annual rate of 2.3% for pay growth (in nominal terms) is also not something to crow about, since UK inflation is 2.5% for consumer price index (CPI) and 3.3% for the retail price index (RPI). In fact, wage growth continues to decline, from 3.1% to 2.8%, and then 2.6% to 2.3% over the past few months.

The Bank of England (BoE) opted last week to leave rates unchanged, a move that was well-telegraphed but stands in opposition to their stated aims of engaging in ‘modest tightening’ of monetary policy. In February of this year they argue that tightening might need to occur earlier than expected during the November meeting of the Monetary Policy Committee (MPC).

Bank of England meeting

What effect does the BoE’s announcement have on the UK economy,
and what does it mean for traders?


The logic for the decision to leave rates unchanged was that the weather had hit growth, although monetary policymakers are supposed to look through this kind of thing. Instead, the BoE appears to have focused on the temporary at the expense of what is supposed to be a ‘resilient’ overall trend in growth.

If the British economy fails to stage a decent recovery in the latter half of the year, the Bank will likely be forced into cutting rates once again, or even increasing the quantity of quantitative easing (QE) purchases. Having cut rates in a flash after the Brexit vote, it is clear that a dovish tendency continues to exist on the MPC, and a sustained period of weaker growth would certainly give them the cover needed to cut rates.

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