UK Market Update

The Bank of England (BOE) base rate has remained at 0.5% for almost four years and looks unlikely to rise in the near future. In fact, the BOE were discussing the possibility of negative interest rates earlier in the month. This hair-brained idea suggests that the BOE have little regard for savers. In fact, this statement together with earlier indications that the BOE is planning to ditch its inflation targets suggests that there is a significant risk that the UK will suffer from increasing inflation over the next few years as the bank is unlikely to meet its target of 2% in 2013.

Rising inflation will continue to erode the spending power of income and capital. Contractors with spare cash in the bank should beware as the interest on bank deposits is unlikely to keep up with inflation. The growing concern over inflation has led to increased attraction of high yielding equities as evidenced by the surge in the stockmarket over recent months with the FTSE trading at close to all time highs.

There is speculation that the new BOE governor Mark Carney might increase Quantitative Easing (QE) in an effort to boost growth in the flagging UK economy. This coupled with uncertainty over Britain’s future in the EU, combined with the recent downgrade of the AAA credit rating, lead many to believe that this will contribute to a weakening of Sterling against other major currencies.

However, on a more positive note, George Osborne’s new Help to Buy Scheme appears to be stimulating the UK housing market by providing assistance to potential homeowners. There has been a noticeable increase in activity in the London housing market in May. This is welcome news for contractors in the construction industry and for individuals looking to purchase a property in the UK.

Yen Drops to Breach Y100 to the US Dollar

The effects of Japanese monetary easing continue to devalue the Yen. Last week the US Dollar breached the Y100 mark. May fear that this could be the beginning of currency wars as nations such as Japan aim to boost the competitiveness of their exporters.

Meanwhile, the recession in the Eurozone continues. The ECB recently announced that it would reduce interest rates to 0.5%. The ECB lowered its growth forecast for 2013 to -0.4%, down from 0%.

The stockmarket appears oblivious to the global recession with the S&P500 and FTSE100 continuing to rise to record highs.

Help To Buy Scheme Leads To Rise In House Prices

The governments Help to Buy Scheme creates momentum in the struggling UK economy. Halifax bank reported that house prices in London increased by 1.1%. The new government scheme offers significant benefits to qualifying homebuyers.

In the meantime, credit rating agencies downgraded the Co-operative bank after citing concerns over its weak balance sheet and the possibility that the bank may require a bailout.