Investment planning update: NS&I; and Inflation

Investment planning update: NS&I; and Inflation

 

• NS&I stays the execution
• March Inflation numbers
• £180bn to be raised from Gilt sales over the next three months

 

NS&I stays the execution

(AF4, FA7, LP2, RO2)

Back on 17 February 2020 BC (Before Coronavirus), well ahead of the Bank of England base rate cuts, National Savings & Investments (NS&I) announced cuts to rates on its fixed rate products (for reinvestment) and many of its variable rate products, other than the Direct ISA and JISA. The rate changes were generally due to take effect from 1 May.

On Friday 17 April, NSI revealed a change of mind “To support savers at this difficult time”. The changes to variable rate products will not now go ahead, although those for fixed rate products will be implemented.

As a reminder, the current variable rates are:

Product	Current rate
Direct Saver	1.00% gross/AER
Income Bonds	1.15% gross/1.16% AER
Investment A/C	0.80% gross/AER
Direct ISA	0.90% gross/AER
Junior ISA	3.25% gross/AER
Premium Bonds	1.40% 24,500:1 monthly odds

There are three possible reasons for NS&I’s change of heart: 

• When the Government is seemingly in hand out mode to much of the working age population, it would not look good to cut savers’ rates.

• The Government will be borrowing £273bn in 2020/21 on the reference scenario set out by the Office for Budget Responsibility (OBR) last week, so more funds from NS&I will not go amiss even if, as we have remarked before, it is much cheaper for the Treasury to sell gilts.

• The 0.65% of cuts in base rate by the Old Lady have neither worked their way through to the money markets nor the more competitive deposit takers (Goldman Sachs Marcus account has just cut its rate again, by 0.1% to 1.2%). As happened during the financial crisis, 3m LIBOR and the Bank of England base rate have drifted apart, pointing to stress in the money markets (and bad news for borrowers with LIBOR-tracking debt).

The NS&I moves leave Income Bonds almost at the top of the charts for instant access money. They also make premiums bonds a relatively more interesting option, particularly for higher rate taxpayers (albeit the maximum investment is £50,000 per person).  

March Inflation numbers

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)

The CPI for March showed an annual rate of 1.5%, down 0.2% from February, in line with market expectations, according to Reuters. Across February to March prices were flat, whereas they rose by 0.2% over the same two months a year ago.

The CPI/RPI gap was widened to 1.1%, with the RPI annual rate rising to 2.6%. Over the month, the RPI was up 0.2%.

The Office for National Statistics (ONS)’s favoured CPIH index was also down 0.2% for the month to 1.5%. The ONS highlights the following as the more significant of the moves across the month:

Downward

Clothing and footwear: This category made the largest contribution to the drop in inflation as prices fell by 0.3% between February and March 2020, compared with a rise of 1.0% between the same two months a year ago. The ONS notes that prices usually rise between February and March, but this year fell for the first time since 2015 and only the second since 1988. The fall in prices reflects an increase in the proportion of items on sale between February and March 2020, compared with a fall between the same two months a year ago.

Transport: This category contributed almost as much as clothing and footwear to the inflation drop. There was a 0.6% fall in prices between February and March 2020, compared with a smaller fall of 0.1% a year ago. The downward effect came almost entirely from motor fuels, with the largest monthly fall in petrol prices since December 2018 and diesel prices since August 2015. There was some offset from higher air fares – prices were collected before cancellations kicked in.

Restaurants and hotels: Overall, accommodation prices fell by 0.3% between February and March 2020, compared with a 1.2% rise between the same two months a year ago. This downward contribution reversed the rise seen between January and February 2020.

Upward

Alcohol and tobacco: The sector produced a small upward effect with the price of tobacco rising by more than a year ago. Duty rates for tobacco products increased from 11 March 2020 as announced in the Budget.

In six of the twelve broad CPI groups, annual inflation decreased, while five categories posted an increase and the remaining one was unchanged. The category with the highest inflation rate remains in the Communications category, which rose 0.5% to 5.0%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell 0.1% to 1.6%. Goods inflation fell 0.4% to 0.6%, while services inflation was unchanged at 2.5%.

Producer Price Inflation was 0.3% on an annual basis, down 0.2% on the output (factory gate) measure. Input price inflation decreased to -2.9% year-on-year, a 2.7% drop from February. The main driver here was crude oil prices. 

Inflation is probably the last thing on the Bank of England’s mind at present. With demand crumbling and oil prices in free fall, in the short term the only (minor) issue for the Bank might be that it undershoots its 2.0%±1% target.

Alongside the Budget, the Government and the UK Statistics Authority (UKSA) launched the consultation, promised previously, on the UKSA’s proposal to address the ‘shortcomings’ of the RPI measure of inflation. A letter from the Chancellor to the Chair of the UK Statistics Authority on 16 April announced that the consultation period has been extended from 22 April  to 21 August 2020 (subject to coronavirus-related developments). The Government and UKSA will now respond to the consultation in the autumn.

Sources: ONS 22/04/2020

HM Treasury Correspondence: A letter from Rishi Sunak to Sir David Norgrove on the Retail Prices. Index consultation – dated 16 April 2020

£180bn to be raised from Gilt sales over the next three months

(AF4, FA7, LP2, RO2)

We have commented earlier that the Budget Day projected borrowing figure of £55bn for 2020/21 had rapidly fallen victim to COVID-19. In late March the Debt Management Office (DMO) – the funding arm of the Government - announced that in April it would raise £45bn from Government bond sales, about three times its previously scheduled amount.

On 23 April the Treasury and DMO announced a new ‘financing remit’ for May to July together with details of revised gilt issuance. The DMO is now tasked with raising £180bn from gilt sales over the next three months, a rate of borrowing which it says, “is not expected to continue across the remainder of the financial year”. Given that by the end of July the DMO would have raised £225bn if all goes well, then keeping up such a pace for the remainder of the year looks unlikely, if not unsustainable.

The 2019/20 finances have also had a tail end hit from the pandemic. The latest data on public sector finances showed that the initial estimate for 2019/20 public sector net borrowing was £48.7bn, £1.3bn more than the Office for Budget Responsibility (OBR) had projected at the time of the Budget. However, the Office for National Statistics (ONS) notes:

• “The full effects of COVID-19 on the public finances will become clearer in the coming months.” As a result “…some of the statistics included in [the latest] release will be prone to larger revisions than normal, once more data become available”.

• Its figures are calculated on an accruals basis rather than pure cashflow and thus do not give as useful a picture when the Government is offering tax deferrals (e.g. for VAT and the July self-assessment payment on account).

The latter point was underlined by a problem which the DMO had to deal with. The Government’s 2019/20 year end net cash requirement was £13.4bn higher than forecast at Budget time, the result of a drop in HMRC cash receipts of 12% in March 2020 compared with the previous year and a 6% rise in Government net cash spending over the same period. The DMO had to finance the Government’s cash shortfall by itself going into deficit to the tune of £17.9bn at the end of March, when it normally runs a small surplus. The DMO says “This shortfall will be re-financed in 2020/21”.

The Treasury and DMO announcements underline how rapidly and deeply the Government’s finances have been hit. It seems as well that there is – so far – sufficient appetite for the flood of gilt sales. However, by July the DMO will have issued £25bn more gilts than the Bank of England has said it would buy in the secondary market under its latest iteration of quantitative easing (QE).  

Sources: Treasury, DMO 23/4/20