Jeremy Hunt, the chancellor of the Exchequer and Prime Minister, Rishi Sunak are finalizing the preparations for the Budget that Hunt will present to Parliament in a couple of weeks time.

Considering that there will only be one more chance to provide the giveaway Budget, that often precedes a General Election, Hunt is unlikely to provide backbench Conservative MPs who fear for their seats in the Election with anything that lifts their confidence.

Rishi Sunak has been extremely workmanlike since he took over as Prime Minister, reaching an agreement over the treatment of Northern Ireland as part of the overall Brexit solution and will announce fresh legislation to deal with the constant flow of arrival of refugees crossing the English Channel.

However, one the the major planks of the Conservative manifesto from 2019 is the levelling up agenda. This was the idea that less emphasis would be placed on the South East of England, with investment being delivered to the North and other regions.

The centrepiece of this process was set to be HS2, the high speed rail link that is intended to cut journey times between London and the major cities of Birmingham, Manchester and Leeds.

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The makeup of the UK economy is such that when the Bank of England is faced by the need to change its monetary policy to either stimulate, or restrict activity, the property market is normally the first sector to be affected.

The reason for this is the knock on effect of the decision to either move or stay put, has on the rest of the economy. What starts with a decision to upgrade the family home leads to increased activity in several different areas.

The services sector is stimulated with estate agents, banks, insurance companies and the legal profession all seeing an increase in activity as well as more artisanal areas like movers, decorators and landscapers.

This activity generally begins with existing home sales but quickly spreads to new builds, where first time buyers often denude their savings to provide a deposit. This reduction in the savings rate also stimulates economic activity.

While a cut in interest rates stimulates the economy, the opposite is true for a scenario where rates are rising. It starts with a decision to maybe stay put as mortgage rates rise and householders see an increase in their monthly payments. This is also true of making any alterations to an existing property, and knocks-on all through the economy.

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Andrew Bailey, the Governor of the Bank of England spoke yesterday of the possible need for the Bank to continue to raise interest rates although nothing is decided in advance of the next Monetary Policy Committee meeting.

While he is relieved to see the cost of living crisis begin to ease, there is still work to be done to ensure that inflation does not become ingrained in the economy as it has in the past.

There has been a significant improvement in economic activity since the turn of the year but the rise in wages is a concern although he can understand that workers, especially in the public sector, want to see their salaries keep up with the cost of living. Making demands for inflation busting increases will create a wages/prices spiral which will not benefit anyone.

There is no easy way to bring down inflation and the bank of England is cooperating with the treasury to ease the burden of sky high inflation. The Bank Of England will continue to raise interest rates as long as it deems it necessary to do so, although it is forecast that it will fall naturally this year as the global economy develops.

Bailey was at pains to suggest that nothing is cast in stone and the Central Bank is driven by the incoming data although it is in no one's interests to make policy decisions based upon a single month’s data but rather studying the trend.

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The Bank of England’s Chief Economist Huw Pill spoke yesterday of his belief that the Central Bank may consider slowing the pace of rate hikes in the coming months. He fears that there is a risk of the MPC having an adverse effect on the economy if it continues to hike rates at its current rate.

The Bank’s goal is to slow demand sufficiently to lower inflation without going so far that it leads to a contraction in growth. Given that short term interest rates are a blunt instrument with which to try to bring an element of control over the economy, the size of any hike becomes more important the closer rates come to the neutral point at which they are neither accommodative nor restrictive.

Having raised rates at every meeting since December 2021, the MPC as a whole are cognisant of the fact that rates are now at, or close to, the neutral point.

One of the independent members of the MPC, Catherine Mann also commented yesterday on the state of the economy. She believes that the fall in energy prices may have the effect of stoking inflation, as households will have more disposable income than they had when energy prices were soaring last summer.

As households become more comfortable with the level of their energy bills, the temptation is for them to spend on less basic items. There, is however, a fine line due to the fact that households don’t spend their windfall and instead replenish savings, which will also be bad for economic growth.

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Rishi Sunak met with EU Commission President Ursula von der Leyen yesterday to finalize the agreement on how trade between the UK and Northern Ireland would be treated.

Finally, this was the final piece in the Brexit jigsaw that was in danger of dragging on indefinitely. The Northern Ireland protocol, which had governed the movement of goods across the Irish Sea, has now been replaced with the permanent Windsor Framework.

The main change will be in the customs treatment of goods either bound for Northern Ireland or bound for the Republic of Ireland. A new green lane will be created which will allow goods remaining in the North to flow through without any customs checks while goods in transit to the South will face less stringent checks than are seen now.

While the Framework is unlikely to be acceptable to everyone, Labour have already confirmed that they will vote in favour in Parliament, so even if there is a wholesale rebellion by backbench conservative MPs the bill will pass through the House of Commons with little difficulty.

The other interested group who may dissent are the Unionist Party, the DUP in Belfast. There has been a sweetener included in the deal named the Stormont Brake, that will allow the Northern Ireland Assembly to veto, under certain conditions, any laws put in place by the EU that they disagree with.

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There is a growing level of anticipation that Chancellor Jeremy Hunt will be able to be significantly more expansive in the budget that he will present to Parliament on 15th March.

He will have far more wiggle room and will now have several choices to make, where recently he was expected to have little choice to do anything other than stave off the country’s likely fall into recession.

The sum of money that Hunt will have at his disposal following the almost miraculous recovery since the start of the year is reported as being ten billion pounds, although there are some in the press who put the figure at twenty-five billion.

It will be a major bonus for Hunt to have choices when he sets out the fiscal policy for the next year. Having already committed to retaining the triple lock on state pensions which means that they will rise by the highest of inflation, average wages, and 2.5%.

Following the significant rise in inflation, pensioners will receive a 10% increase in their pension in April.

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The turnaround in the UK economy in the first two months of the New Year has been nothing short of miraculous. Both manufacturing and services output have returned to expansion, while the Government has found some spare cash with which it can do some good.

There is speculation that Rishi Sunak intervened personally to offer salary increases of 3.5% to millions of public sector workers. He remains adamant that any increase of above 5% would drive further inflation, but 3.5% is doable.

The Royal College of Nursing has called off its latest industrial action, which was due to take place next week and last for 48 hours. While this is positive, there is no guarantee that the latest offer, that has already been rejected by the union representing ambulance crews, will be accepted.

From the release of GDP data for the fourth quarter to the PSBR and encouraging output data, there is a genuine feeling that the country is finally on the right track.

While a threatened return to the political front line for Boris Johnson in the summer is being predicted, if confidence is growing in Rishi Sunak’s performance any comeback will be that much more difficult, no matter the level of support he enjoys from the Conservative back benches.

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There is a distinct and significant difference of opinion beginning to emerge about the strength, or otherwise, of the British economy going forward, economists rarely agree about the future direction of an economy but to see such fundamental differences is unusual.

Given that the Government is so far behind the opposition in opinion polls, some feel that the change of direction that an election would bring is just the shot in the arm the country needs, while others believe that and election victory for a Labour Party that is so clearly devoid of fresh ideas would simply bring more of the same.

For example, there has been no clear indication about how a Labour Government would deal with the wave of industrial unrest that threatens to engulf the incumbent Government. Past Labour leaders would have supported low paid public sector employees in their quest to receive what the Left considers to be a fair living wage.

However, as the Labour Party leader continues to purge hard core left wing members from the Party, the latest example of which is the confirmation that former leader, Jeremy Corby, will not be allowed to stand at the next General Election as an official Labour Party candidate.

It appears that the identity crisis that has grown in the ranks of opposition MPs means that the old-fashioned ideals of socialism, if retained, mean that the Labour Party has become unelectable. Trying to regain the middle ground that was so successfully nurtured by Tony Blair twenty years ago will bring a socialist lite form of Government that will retain several of the more moderate policies of the current Government.

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At some point in the not-too-distant future, the Bank of England will bring to a close its programme of interest rates increases. At that time, the financial market will need to decide on the underlying strength of the economy, and whether that is sufficient to allow it to support the currency.

There is a growing concern that there are very few reasons to buy sterling outside the continued tightening of monetary policy. When that crutch is withdrawn, the pound could see a significant tumble.

Although the Federal Reserve is also possibly close to ending its own tightening, the ECB is still considered to have at least one hundred points of rate increases still up its sleeve, and this could see the pound test at least the 1.10 level versus the single currency.

In financial market terms, it has been a considerable time since the pound has found itself stripped of any support outside the basic economic fundamentals.

The Central bank has not exactly covered itself with glory over the past fifteen months or so as it has continued to perform a series of dovish hikes, where the Governor’s press conference following the announcement of yet another rate rise has had an almost apologetic air.

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The Bank of England is facing criticism from small business owners, who see plenty of support being offered to individuals to help them cope with rising interest rates and the cost of living crisis but little being done to support their businesses that are suffering from significantly higher operating costs.

Having watched the Central Bank hike interest rates consistently since the end of 2021, Small and Medium Enterprises have had to deal with not just the effects on their markets of Brexit, but a cost of living crisis that hits them equally hard as individual households.

They made representations to Downing Street to ask the Prime Minister to intervene on their behalf when the Budget is delivered next month to provide some well needed support.

The January inflation report was published yesterday, and it showed despite the stabilization of energy costs, headline inflation only fell marginally from 10.5% to 10.1% while core inflation fell from 6.3% to 5.8%. The price of staple food stuffs like low fat milk, eggs and pasta rose significantly, while the cost of olive oil alone rose by 40% compared with a year ago.

Despite headline inflation only falling by 0.4% year-on-year, the financial markets believe that it was sufficient to cause the Bank of England to slow or even bring a halt to the current cycle of interest rate rises.

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