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December 2007 - Norwich Union Reattribution

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May 2008 - Abacus Advice Newsletter issue 1

Abacus Advice releases newsletter. Get your copy here - Insight

May 2008 - Mortgage Blues

Prospects of cheaper loans hit as inflation forecast sends Libor soaring

If your fixed rate is coming to an end go here: Remortgage

May 2008 - Sterling and the economy

Economic Background

Although recent survey evidence suggesting that the economy was coming close to a standstill had put the question of further interest rate cuts more firmly on the agenda, a back-to-back move in May was always seen as unlikely. Therefore the Bank of England's decision to hold rates at 5.0% came as no surprise and the market is now focusing on whether recent worse-than-expected inflation news will preclude a cut in June.

The trade-off between the upside risk to the inflation target and the threat of an excessive weakening of the economy appears to have deteriorated. As the minutes of last month's Monetary Policy Committee (MPC) meeting noted, "there had been a further deterioration in the outlook for the supply of credit by banks, which would tend to contain spending, increasing spare capacity in the economy and hence bearing down on inflation in the medium term". But the MPC was also concerned that the depreciation of sterling and higher fuel costs would add to the upward pressure on consumer price inflation in the near term and risk dislodging inflation expectations.

UK economic growth slowed to a below-trend annualised rate of 1.6% in the first quarter of the year and survey evidence suggests a further slackening during the spring. According to the closely-watched CIPS survey, service sector activity outside of retailing is barely growing - the lowest response since 2003 - with similar weakness being reported in the manufacturing sector and outright declines in construction. Official retail sales data have held up relatively well, but margins are coming under increasing pressure and trading updates from retailers suggest that a sharper slowdown lies ahead.

Profitability was strong as the corporate sector entered the current downswing, but margins are being squeezed by sharply higher costs for fuel and agricultural products. Although the depreciation of sterling - primarily against the euro - will help some exporters, deteriorating world economic conditions make trading prospects more uncertain. Greater caution about the trading outlook combined with a tightening of credit conditions suggests a slower pace of business investment.

Consumer price inflation rose unexpectedly sharply to 3% in April, leaving the Governor of the Bank of England within a hair's breadth of writing an open letter to the Chancellor explaining the overshoot of the Treasury's 2% target. But subdued wage pressures increase the chance that inflation will fall back towards the target over the course of 2009. There are no signs that higher living costs are putting pressure on pay awards, with settlements holding around 3%. Weaker bonus payments this year are also likely to help keep overall earnings growth running at less than 4%. With real wages taking some of the strain, this would limit the impact of rising energy costs on corporate profit margins. Employment conditions have so far remained strong, despite the slowdown in the economy, and firms are likely to face less need to cut payroll costs if wage pressures are contained.

Although recent survey evidence suggests that the near-term outlook for economic growth has deteriorated, financial markets have become more cautious about the prospect for lower interest rates. This probably reflects the continuing deterioration in the near-term inflation outlook, which complicates the monetary policy judgement as it increases the risk that inflation expectations will ratchet up.

The competitive gain from a weaker pound will also eventually provide a degree of support to economic activity, acting as a substitute for lower interest rates. With the near-term inflation outlook deteriorating further, commentators have become less inclined to look for a quarter point cut next month.

The extended rally of the euro has suffered a setback as market sentiment swung against the single currency. Traders sensed that weaker eurozone economic data might eventually encourage the European Central Bank (ECB) to take a less hawkish stance on interest rates, although there remained little prospect of a near-term cut. This provided some respite for the dollar - which rose to a two month high against the euro - after signs that the Federal Reserve might pause after cutting interest rates aggressively since the credit market upheavals struck last summer.

As more evidence emerged to suggest that the UK economy was suffering as the backwash from financial market turbulence spread more widely, the pound remained generally weak. Although sterling has edged higher against the euro in recent weeks, it has fallen to around $1.95. The pound has held broadly stable over the past month in overall trade-weighted exchange rate terms, but it has still fallen by 12% since late July 2007.

Prepared: 13 May 2008

Please note: This bulletin and the commentary within it is provided by Abacus Advice Limited PLC and is intended to be used as information only. Whilst Abacus Advice Limited and its employees take every care to ensure that the content is accurate, Abacus Advice Limited will accept no responsibility or liability in respect of any errors, inaccuracies and losses which may arise from its use.

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