Late June 2018, and The Bank of England was in the spotlight as its Monetary Policy Committee (MPC) met to set interest rates. While borrowing costs probably won’t change, the City as always looks for hints. Hints that the long-awaited hike could come in August.The key issue is whether the Bank still believes the recent weakness in UK economic growth is temporary. UK borrowing was the big factor, and the hope was it had continued to fall.
That slowdown scared the MPC away from raising interest rates last month. Investors were forced to rethink their expectations about how fast borrowing costs will rise. On the plus side, UK government borrowing fell last month. The long, slow process of fixing the public finances continues. Many will have suffered from such “fixes”.
Britain borrowed £5bn to balance the books in May, the Office for National Statistic reported recently. That’s down from around £7bn in May 2017 and is the lowest borrowing for any May since 2005. In April and May combined, Britain has borrowed £11.8bn. That’s £4.1bn less than a year ago, and the best start to a financial year since 2007 (before the financial crisis).
In the latest financial year-to-date, central government received £112.9 billion in income, including £82.6 billion in taxes. This was around 3% more than in the same period in 2017. Over the same period, central government spent £123.6 billion. This amount is roughly equal to that spent in the same period in 2017. Of this amount, just below two-thirds was spent by central government departments (such as health, education and defence), around one-third on social benefits (such as pensions, unemployment payments, Child Benefit and Maternity Pay), with the remaining being spent on capital investment and interest on government’s outstanding debt.
As news came out last week however, the Treasury heaved a sigh of relief. News emerged of the lowest net borrowing since financial year ending March 2007.The improvement in the UK public finances suggests there is room to boost spending on key public services. The Bank seems determined to deliver one more hike in the second half of the year. They would justify this by a tight labour market and an economy now working close to potential.
However, there are several reasons to err on the side of caution. In particular, recent hard data on industrial production and surveys on economic activity. These suggest that the prospects of a significant rebound in economic performance are uncertain following a weak Q1. Moreover, risks of a disruptive Brexit event down the road are still high.
Negotiations have stalled in recent months reflecting unresolved divisions within the UK Cabinet. The upcoming EU council at the end of June is unlikely to deliver any progress, as other issues (not least international trade tensions) are now topping the EU leaders’ agenda.