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BoE Unanimous In Keeping Interest Rates Unchanged

As was widely expected the rate-setters for the BoE have voted unanimously to keep the base rate on hold at 0.75%. It’s not surprising the bank have decided to remain in wait-and-see mode given the major political uncertainty at present, and don’t expect anything drastic from them until there’s greater clarity on Brexit.

The market reaction has been pretty quiet with the GBP/USD rate remaining near its lowest level of the day at $1.32.

UK retail sales add to recent strong data streak

Given the calamitous state of UK politics with it now being over 1000 days since the Brexit referendum and we’re still none the wiser as to what our exit from the EU will look like – let alone the relationship going forward – it is truly remarkable how solid, the economic data remains.

The latest figures reveal a pleasing strength in consumer confidence, as retail sales numbers topped estimates with the 3.7% increase for the 3 months to February representing the largest year-on-year rise since January 2017.

Economic surprise indices for the UK are about as positive as they’ve been for a couple of years, but for the foreseeable future Brexit remains the only game in town as far as currency traders are concerned and the uncertainty is weighing on sterling.

Dovish Fed weighs on USD but stocks fail to rally

The US central bank confirmed their policy U-turn with the announcement last night that rate-setters see no interest rate hikes this year, and only a token 1 in 2020. The market has been expecting this for a while since Chair Powell’s speech at the start of the year, with no 2019 hikes already priced-in before the latest meeting, but the Fedwent above and beyond what most expected by also announcing a slowing of its balance sheet reduction – also known as Quantitative Tightening (QT) beginning in May.

This dovish move caused an immediate drop in the buck, which depreciated across the board while stock and treasuries rallied.

No Powell Put?

What’s important to note is the reaction function of different markets to this change in tack, with equities already seemingly heavily discounting the move, whereas FX markets have been slower to price it in.

For instance, the large gains seen for US stock markets this year have been arguably driven by this shift in Fed policy more than any other factor, while the US dollar still remains higher than it did at the start of the year (according to a trade-weighted index of the buck.) Why this is crucial to note is what it means going forward, with the scope for a sustained move lower in the US dollar now seemingly far greater than a sustained rally in stocks – if we look purely based on Fed policy.

Indeed after an initial move higher as the news broke, US stocks gave up most of the gains, with both the S&P 500 and Dow Jones Industrial Average ending the day in the red.

A failure to extend the year-to-date rally on what is essentially good news could prove ominous and those who still believe in a “Powell Put” should be aware that the S&P500 has only managed to post a gain on 1 of the 9 days of a Fed rate decision since his tenure began.

By David Cheetham

Source: Investing

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Bank to ‘sit tight’ on interest rates amid Brexit ‘fog’

The Bank of England is expected to hold interest rates at 0.75% once more on Thursday as Brexit uncertainties reach their peak.

With still no clear sight of the Brexit outcome just over a week before the planned March 29 EU exit date, members of the Bank’s nine-strong Monetary Policy Committee (MPC) are set to vote unanimously to leave rates unchanged.

Experts believe policymakers will remain firmly in wait-and-see mode for some time until there is greater clarity.

There looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected

Howard Archer, EY Item Club

But the decision comes after a better-than-expected set of employment and wages data on Tuesday, which some economists have said bolsters the case for a rate rise later in the year, should there be a lengthy Brexit delay or if a deal is eventually struck.

Yet with inflation still below target at 1.9% in February and economic growth set to remain weak in the first quarter of 2019, there is little chance the Bank will look to make any moves until some of the damaging uncertainty over Brexit is lifted.

Or, as Bank Governor Mark Carney recently put it, the “fog” of Brexit, which is weighing heavily on growth.

Howard Archer, chief economic adviser to the EY Item Club, said: “Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

“With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.”

Bank of England
Bank of England Governor Mark Carney has said the ‘fog’ of Brexit is hurting the economy (Kirsty O’Connor/PA)

The rates outlook would alter dramatically should there be a no-deal scenario, with most economists expecting a cut despite the Bank’s repeated warnings that policy could move in “either direction”.

Recent data has pointed to economic growth stalling at 0.2% in the first quarter, unchanged on the previous three months as Brexit uncertainty has seen sharp falls in business investment.

The recent official data revealed a 0.5% month-on-month rise in January in a rebound after a 0.4% fall in December, but growth edged just 0.2% higher overall in the three months to January.

Closely-watched purchasing managers’ index surveys have also signalled growth easing back to just 0.1% between January and March, while the latest manufacturing poll from the CBI on Wednesday showed the weakest activity since last May.

It also showed that a quarter of manufacturers were actively stock-building in preparation for a possible no-deal.

If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer

James Knightley, ING

The Bank and independent forecasters at the Office for Budget Responsibility have both downgraded the growth outlook to the weakest for a decade in 2019, at 1.2% this year.

There is some hope of a marginal bounce-back should a Brexit deal be struck and business investment recovers, but Mr Carney and many other economists have been quick to warn that uncertainty will remain for some time yet even if an agreement is secured.

James Knightley, an economist at ING, is less gloomy on the prospects.

He said the better-than-expected 222,000 rise in employment in the recent data, the 3.4% rise in wage growth, and the fact that the UK’s jobless rate has fallen below 4% for the first time since 1975 cannot be ignored.

He said: “The UK labour data looks astonishingly strong for an economy that is supposedly slowing on most other measures.

“If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer.”

Source: Shropshire Star

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Brexit more important for interest rates than inflation

The Bank of England is hedging its bets about the direction of UK interest rates this year and Brexit will be the most important factor on the horizon, according to Ben Brettell, senior economist at Hargreaves Lansdown.

Mr Brettell said the Brexit outcome was more important than the inflation rate, which was released this morning (March 20) and had risen modestly to 1.9 per cent in February, up from the 1.8 per cent in January.

February marked the first month in which inflation has risen since the summer of 2018 but the rise was in line with expectation.

In its report, the Office for National Statistics, which compiles the data, cited higher food and alcohol prices during the month as the reason inflation rose slightly.

Mr Brettell said the market had been “unmoved” by the news, as the outcome of the Brexit was more relevant. Sterling returned to the rate it was on Monday following the announcement.

He said: “The Bank of England has been setting a neutral tone as Brexit approaches, with policymakers hamstrung by political uncertainty and a deteriorating global growth outlook.

“The Bank has said it thinks higher interest rates will be appropriate in the coming months, as it aims to keep inflation close to its long-term 2 per cent target.

“News from the labour market yesterday suggests companies at least are carrying on regardless, hiring workers at the fastest pace for three years. A tight labour market would normally lead to calls for higher rates, but these are far from normal times.

“If Theresa May can somehow find a way to break the political deadlock in Westminster and Brexit happens in a relatively orderly fashion, we could see rates gently nudge up later this year.

“If we leave with no deal, however, all bets are off. I’d expect inflation to spike as sterling weakens, but the Bank has shown willingness in the past to look through this type of inflation and keep interest rates low to support the economy. I’d expect them to do the same here.”

Inflation comes in two forms, demand side, and supply side. Demand side inflation happens when demand for goods and services in an economy rises and is generally positive for economic growth.

Mr Brettell’s view is that if there is a Brexit with a deal, then demand side inflation would rise, and the Bank of England is likely to lift interest rates.

Supply side inflation, is caused by an increase in the cost of getting goods to market. In a no-deal Brexit scenario, Mr Brettell expects the value of sterling to fall, and this increases the cost to producers of getting goods to market, as oil and other commodities are priced in dollars, so weaker sterling makes the cost of those inputs rise.

Mr Brettell noted that when sterling fell in the immediate aftermath of the EU referendum in 2016, it was supply side factors which caused inflation to rise above the 2 per cent target, but the Bank of England ignored this because it viewed currency driven inflation as temporary.

Mr Brettell said he would expect the same to happen in a no-deal Brexit, with the currency falling and inflation rising but the bank declining to put rates up.

Kate Smith, head of pensions at Aegon, said: “Whilst inflation remains low, individuals should look to save any additional income where they can, particularly given that auto-enrolment pension contributions are about to increase and there is continued uncertainty around what impact Brexit may have on people’s spending power.”

By David Thorpe

Source: FT Adviser

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Pound falls as parliament bans another vote on same Brexit deal

Sterling dropped below $1.32 on Monday after the speaker of Britain’s parliament said Prime Minister Theresa May’s Brexit deal could not be voted on again unless a different proposal was submitted.

The move by parliamentary speaker, John Bercow, saw the pound shed half a percent with investors saying it had hurt May’s chances of getting her EU withdrawal agreement approved before Britain’s departure on March 29.

“Now the government will have to come back with substantial changes (which is literally impossible) in relation to the deal otherwise it means a prolonged Brexit delay,” said Naeem Aslam, chief market analyst at retail broker Think Forex.

“The chances of the UK crashing out of the EU have increased once again because the EU needs a clear plan and a strategy before they grant an extension,” he added.

Other analysts, however, said the pound could enjoy gains this week.

“This move by parliament could simply increase the chances of a substantial delay to Brexit and if that happens the risks of a second referendum or general election go up substantially,” said Ulrich Leuchtmann, a currency strategist at Commerzbank.

May is still trying to salvage her Brexit deal by winning over doubtful lawmakers including the Northern Ireland’s Democratic Unionist party.

Her spokesman said on Monday that Bercow did not forewarn the government about his statement.

May’s Brexit deal was defeated last week for a second time in a rebellion helped by Eurosceptic lawmakers in her own Conservative party.

After Bercow spoke, the pound hit the day’s low of $1.3183, and was down nearly one percent. It also weakened against the euro to a three-day low of 85.93 pence.

Prospects are worsening for May and she suffered a further setback on Monday when Boris Johnson, the pro-Brexit former foreign secretary, refused to back her agreement unless she secured changes to the Irish backstop — designed to prevent a hard border on the island of Ireland.

“It should no doubt have a moderately positive effect on the British currency,” he added.

Sterling traders are bracing for further volatility as May tries to convince lawmakers to back her deal so that she can attend a European Summit on Thursday and offer leaders something in return for more time.

The Bank of England is expected to leave its interest rate outlook unchanged at a policy meeting on Thursday due to the deep uncertainty over Brexit.

Money markets currently price in around a 40 percent chance of a rate rise in December.

Last week the currency swung wildly, trading between $1.2945 and $1.3380.

This week it has struggled to hold onto gains as traders contemplate the array of Brexit possibilities that have opened up including a second referendum or general election.

Options markets show implied sterling volatility — a gauge of expected swings in a currency — still elevated, with one-week vols near multi-month highs. Sterling vol is higher than G10 as well as many emerging currency peers.

By Tom Finn

Source: UK Reuters

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BOE Set to Hold Rates as Officials Face Longer Brexit Paralysis

BOE Set to Hold Rates as Officials Face Longer Brexit Paralysis More (Bloomberg) — Any hope Bank of England officials may have had of escaping from Brexit limbo this month has been dashed.

The Monetary Policy Committee’s next interest-rate decision will be announced on Thursday, just a week before the U.K.’s planned March 29 exit date from the European Union.

While any kind of delay — which would still need to be approved by the European Union — would help avoid the worst-case scenario of a no-deal exit, it’s unlikely to lift the “fog of Brexit” that Governor Mark Carney spoke of last month.

Against that backdrop, all 20 economists surveyed by Bloomberg say the nine-member MPC will vote unanimously to keep interest rates unchanged at 0.75 percent on March 21.

That chimes with the views of markets, who don’t see another move until beyond May 2020. The MPC’s central view remains that a gradual series of interest-rate hikes will be needed in coming years.

However, a number of officials, including the hawkish Michael Saunders, have indicated they’re prepared to wait and see how Brexit turns out before making another move. That may now take longer than previously anticipated.

Parliament voted this week to seek a delay to the U.K.’s exit date, buying Prime Minister Theresa May time to try to get her deal through on the third try.

If she manages to win that vote — which could come before the BOE decision — then it’s likely that a short delay will be requested. Lose it, and there could be a far more a lengthy postponement.

By David Goodman

Source: Gooruf

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Bank of England more likely to cut interest rates after no-deal Brexit, policymaker says

The Bank of England’s monetary policy committee would be more likely to cut interest rates in the event of a no-deal Brexit, according to rate-setter Silvana Tenreyro.

Tenreyro’s comments adds further clues as to the direction of travel for interest rates if Britain leaves the EU without a deal.

Speaking in Glasgow, she said negative demand would outweigh the impact on supply and the exchange rate.

She said: “In my judgment, a situation where the negative demand effects outweigh those other effects is more likely, which would necessitate a loosening in policy,” she said in a speech in Glasgow.”

She added that a smooth Brexit outcome would not automatically lead her to voting for a hike.

Last month fellow rate-setter Gertjan Vlieghe also said a no-deal Brexit would most likely lead to an easing of monetary policy.

But the Bank’s official position has long been that the monetary policy response to Brexit would not be automatic and could be in either direction.

Governor Mark Carney, and deputy governor Sir Dave Ramsden have indicated the potential need for rate hikes if Britain leaves the EU without a deal.

Michael Saunders exercised caution last week and said there was no need to rush interest rate hikes until the implications of Brexit were fully realised.

The typically hawkish rate-setter said: “The possibility that monetary tightening might be needed in the future does not necessarily mean we need to tighten now.

“A range of alternative Brexit outcomes are possible, and these may have very different implications for the economy and monetary policy.”

Tenreyro echoed those sentiments, advocating the “wait and see” approach post-Brexit.

She said: “While I still envisage that in the event of a smooth Brexit we will need a small amount of tightening over the next three years, before voting for any rate rises I would want to be confident that demand was growing faster than supply.”

By Callum Keown

Source: City AM

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Ten years of rock bottom interest rates has cost savers £188bn

Tomorrow marks the 10-year anniversary of the Bank of England cutting interest rates to 0.5%.

And during that time, savers have collectively missed out on at least £188bn – the equivalent of £7,101 per household, according to investment platform Hargreaves Lansdown.

Sarah Coles, personal finance analyst at the firm, said: “We’ve lived through a miserable decade for savers. The Bank of England slashed rates from 4.5% to 0.5% between November 2008 and March 2009, and followed this up by offering enormous quantities of cheap money to the banks. As a result, banks lost interest in competing for savings, and savings rates collapsed.

“Over this lost decade for savers, when you compare rates before the cuts to the rates we saw throughout, we’ve missed out on at least £188bn.”

Making matters worse, money in non-interest bearing accounts has shot up from £47bn in September 2008 to £165.9bn today.

But luckily there are simple steps that savers can take to make sure they get a better rate of interest from their savings.

“While interest rates remain historically low, newer banks and building societies are competing for your cash. It means that by switching you could get a much better deal,” explained Coles.

“You can switch easy access funds earning just 0.25% and make 1.5% – six times the interest. The advent of online savings marketplaces also makes switching far easier, as you can move between accounts with different banks in just a few clicks,” she added.

Coles notes that savers can get more than six times their current interest rate in three easy steps:

1) Split your savings

The first step is to split your savings into different pots. Three to six months’ worth of expenses should be put aside in a competitive easy access account to use as an emergency savings safety net, with the rest freed up to work harder.

2) Fix

It is then a case of dividing out the money that isn’t required immediately into different pots, depending on when you’re likely to need the cash.

Each of the pots should then be fixed for various periods – between six months and five years – depending on what suits you best. If the money is not required for five to 10 years or more, Coles suggests considering stock market investments, which should offer superior growth over the long term as well as the prospect of outpacing inflation.

3) Shift

Coles acknowledges that this final step is the most challenging, which helps to explain why half of all savers haven’t shifted their money over the past five years.

The Financial Conduct Authority, the regulator, found that savings accounts that had been held for five years or longer paid an average of 0.82% lower rate than those opened in the previous two years. With this in mind, Coles says it is worth considering an online savings marketplace, which will make it easier to spot better interest rates available.

The outlook for interest rates

One of the biggest challenges that savers have faced has been the expectation that interest rates would return to more normal levels sooner. For example, at the end of 2009, markets expected interest rates to be back to 4% by the end of 2012.

However since the European Union referendum, expectations for interest rate hikes have been much less upbeat

Looking ahead, markets are forecasting that interest rates will be a little over 1% in three years’ time, with a 51.7% chance of an interest rate rise this year.

Source: Your Money

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UK finance sector will have just 15 months to adapt to new post-Brexit rules

The financial services industry has been forewarned: if there’s a messy no-deal Brexit in March, they’ll have 15 months to get their act together and fully comply with new rules laid out by the country’s financial regulators.

The Bank of England (BoE) and the Financial Conduct Authority (FCA) published a “near final” version of the UK rules that would come into effect if Britain leaves the European Union on 29 March without a transition deal.

Banks, asset managers, insurers and brokers would be covered by these updated rules and could face penalties if they don’t comply in time.

The final version of the rulebook is expected to be published on 28 March, a day before Brexit, if the the UK and EU do not ratify a divorce deal.

However, if there is a Brexit transition deal, financial firms would continue operating under EU rules until the end of 2020 when the UK wants new trading terms with the bloc to begin.

The FCA’s executive director of international operations, Nausicaa Delfas, said Thursday’s announcement marked a significant milestone in the financial sector’s preparations for a no-deal Brexit.

“They ensure that there is a functioning regulatory regime from day one, and that firms are clear as to the requirements they need to meet by end March 2019 and beyond, so they can continue to meet the needs of their customers,” Delfas said.

The BoE regulates banks across the country, including Royal Bank of Scotland (RBS.L) and Barclays (BARC.L). It’s also in charge of setting interest rates, maintaining financial stability and issuing new bank notes.

The FCA also regulates Britain’s financial services industry and works to protect consumers and promote healthy competition in the sector. It has oversight over 58,000 firms.

Source: Yahoo Finance UK

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Carney predicts interest rate cut in no-deal Brexit

Bank of England governor Mark Carney has told members of the Treasury select committee that interest rates would “more likely than not” be cut in the events of a no-deal Brexit.

Mr Carney said the job of the central bank in the event of the UK leaving the EU without a deal and without a transition period would be to support economic growth while also maintaining inflation close to the 2 per cent target.

Those objectives can be mutually exclusive. For example, if a no-deal Brexit leads to a sharp decline in the value of sterling relative to other currencies, that would lead to higher inflation.

To put inflation back down towards the target level the central bank could put rates up.

But higher interest rates are generally negative for economic growth as they incentivise saving rather than spending and push borrowing costs up, denting the amount of cash available to consumers and businesses.

Lower interest rates would be supportive of economic growth, but would also act to make the currency fall further in value, as the market treats the decision to cut rates as a sign the economy is in trouble. This further fall in the value of the currency would lead to yet higher inflation.

Mr Carney said: “The challenge with actually doing that [supporting the economy] is that a no-deal, no-transition Brexit will be inflationary.”

He said the central bank would provide “what support it can” for the economy, but that economic growth would be very much lower than it has forecast to date if the UK exits without a deal.

If the interest rate cut simply leads to more inflation and not more growth, that would itself lead to weaker growth.

He added that the central bank would try to stimulate economic growth in another way, by making cheap money available to banks in exchange for collateral from those banks.

This method was used in the immediate aftermath of the global financial crisis and the initial Brexit vote.

The idea is that if banks can access cash cheaply and easily, they are more likely to lend to the wider economy, stimulating economic growth.

Edward Park, deputy chief investment officer at Brooks Macdonald, said the direction of sterling had a material impact on the FTSE 100, and that whenever sterling rises, the FTSE 100 tends to fall.

This was because the majority of the earnings of companies in the FTSE 100 are generated in other currencies, and the value of those earnings rise as sterling falls.

Source: FT Adviser

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Bank of England Stands Pat on Interest Rate Outlook, Focus on Brexit Reaction

The Bank of England reiterated its stance that interest rates could move in either direction depending on the outcome of negotiations for the U.K.’s withdrawal from the European Union.

In the Inflation Report hearings delivered to the U.K. Treasury Select Committee, BoE governor Mark Carney repeated his view that Brexit was causing tension for British consumers and businesses but promised that the central bank would “provide all stimulus possible” in the event of a no-deal outcome.

Gertjan Vlieghe, a member of the BoE’s Monetary Policy Committee, told the committee that, in the event of a shock to consumer confidence from a ‘no-deal’ Brexit, the central bank would likely hold policy steady or cut interest rates.

However, that risk appeared to have shrunk considerably Tuesday, after both the U.K.’s major parties appeared to shift their policy stances on Brexit. Prime Minister Theresa May is set to propose to her cabinet that the government rule out the possibility of leaving the EU without a transitional agreement in place. The opposition Labour Party, meanwhile, has said it will back a second referendum on Brexit if there is no majority in parliament for a withdrawal agreement.

Carney, however, noted that if the economy performed as currently forecast a gradual increase in rates would be warranted.

The hearings come after the Bank slashed its growth forecasts earlier this month. It now sees the British economy growing only 1.2%, the slowest pace since the financial crisis, amid uncertainty surrounding the U.K.’s departure from the EU and the broader economic slowdown worldwide.

“The fog of Brexit is causing short term volatility in economic data, and more fundamentally is creating a series of tensions in the economy,” Carney said at the Feb. 7 press conference following the BoE’s decision to hold interest rates steady.

“Although many companies are stepping up their contingency planning, the economy as a whole is still not yet prepared for a no deal, no transition exit,” he warned.

The BoE left the possibility of rate hikes “at a gradual pace and to a limited extent” on the table at that meeting.

Source: Investing