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Bank of England deputy governor flags concerns over ‘low for long’ interest rates

Economic downturns are at risk of becoming more severe as a result of prolonged low interest rates, the deputy governor of the Bank of England has warned.

The current environment of ‘low for long’ interest rates will make “demand management of the economy more difficult in downturns”, according to Jon Cunliffe.

The Threadneedle Street official flagged a series of challenges for financial stability in the wake of recent monetary policy shifts.

Cunliffe said that a “slow or an unwilling adjustment” to weaker returns from lower interest rates could lead to both greater risk taking and less resilience among companies in the financial sector.

“In short, the adjustment to a low for long world is likely to lead to upward pressure on financial sector risk taking and downward pressure on resilience. We have started to see evidence of these effects in some sectors. One would expect such pressures to continue,” Cunliffe said in a speech to the Society of Professional Economists in London.

He added: “A low for long world is likely to be a more challenging environment for financial stability. The first and, in my view, most important policy conclusion to draw from this is the need for active and powerful macro-prudential institutions and policy.”

European economies have been adjusting to a downward push in interest rates, as central bankers attempt to rejuvenate markets that have been slowing down in the last 12 months.

Last month the European Central Bank (ECB) embarked on fresh stimulus measures to boost the eurozone, including cutting a key interest rate.

Cunliffe, who is among the contenders to replace Mark Carney as the next BoE governor, did not address Brexit or the BoE’s near-term policy plans in his speech.

However, he added that “releasing buffers can have a powerful effect in a downturn by reducing the pressure on banks to cut back on lending and so avoid a credit crunch amplifying the macro-economic shock.”

“The question perhaps is whether that buffer needs to be made more powerful in a low for long world given the greater risk of severe downturns.”

By Sebastian McCarthy

Source: City AM

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Brexit deal hopes push pound to highest in over three months

Sterling surged on Friday as investors rushed to reprice the prospect of a last-minute Brexit deal, after the European Union gave its chief negotiator the go-ahead to re-open negotiations with London.

The pound has rallied more than 3% since Thursday, its biggest two-day gain since mid-June 2016, before the British public voted to leave the EU. On Friday, it surged by more than 2% to a three-and-a-half-month high.

Many investors were positioned for another Brexit delay as the most likely outcome, believing that the chances of an agreement before the end of October were virtually zero. The surprising news that talks were back on squeezed those betting against the pound, exaggerating the move higher, traders said.

EU Brexit negotiator Michel Barnier said on Friday that he’d had a “constructive” meeting with his British counterpart, Stephen Barclay, and the 27 countries in the EU gave him the go-ahead to try and agree withdrawal arrangements before the Oct. 31 deadline.

Barnier told member states that Britain has changed its position and now accepts that there cannot be the customs border on the island of Ireland, two EU sources said.

That followed a meeting on Thursday between the Irish and British prime ministers, who released a joint statement saying they could see “a pathway to a possible deal”.

The pound jumped 2% to $1.2708, its highest since late June at GBP=D3, in late London trading. It gained as much as 1.6% to 87.03 pence against the euro EURGBP=D3.

British stocks also rallied, gilt yields rose and money markets no longer fully priced in a 25-basis-point cut in interest rates by the Bank of England before December 2020.

Derivatives traders also regained confidence in the pound, with bullish bets exceeding bearish views on Friday for the first time since January 2018, according to the currency derivatives market, suggesting further gains for sterling.

Traders scrambled to cover positions amid the newfound optimism that a Brexit deal would be reached, said Kenneth Broux, FX strategist at Societe Generale.

“I think it’s very important to specify that sterling liquidity is very thin so volatility is high,” Broux said.

But he added that given the broadly bearish positions in sterling markets, “the obvious conclusion is that we’ll see a squeeze higher”.

Frederik Ducrozet, a strategist at Pictet Wealth Management echoed these sentiments. Irish officials have raised expectations for a deal, he said, and “if you get a path to a deal, there could be a massive squeeze in rates going higher and a re-steepening of yield curve.

“If that’s the case, then what we’ve seen today could just be the beginning of a bigger move,” Ducrozet said. “But we have been here before, so expectations may be a bit more limited.”

`TIME IS PRACTICALLY UP’
Despite the flurry of activity, it remains uncertain on what terms the UK will leave, when, and even whether it will do so at all.

Sounding a more cautious tone, top EU official Donald Tusk said “time is practically up” for Britain to reach a Brexit deal. That hurt the pound temporarily.

One dealer in London attributed price swings to “algos” – or computer-generated trading algorithms – in a headline-driven market.

Hopes are that a meeting between British and EU negotiators will pave the way for a Brexit transition deal at an Oct. 17-18 summit.. But some doubt Johnson will get the agreement past Britain’s parliament.

Deutsche Bank’s forex strategist George Saravelos said he was “turning more optimistic on Brexit” and no longer negative on the pound, while JPMorgan said the Anglo-Irish statement may have “changed everything”.

(For a graphic on ‘Sterling holds onto Thursday’s gains’ click tmsnrt.rs/2Mt66aq)

The sterling rally undermined UK’s export-heavy FTSE 100 .FTSE stocks index, but domestically focused UK retailers, banks and housebuilders benefited, rising 4% to 6%.

Irish stocks also rallied. Irish government bond yields fell .ISEQ IE10YT=RR.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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UK economy starts to show cracks under Brexit and global strains

UK economy is increasingly showing signs of strain as the Brexit crisis and the global slowdown intensify, with the loss of momentum appearing to spread to areas which have hitherto been sources of growth.

Confidence among businesses has ebbed to its lowest levels since the global financial crisis.

The labour market, which has long been a silver lining for the economy, is also starting to show signs of slowing, raising questions about the strength of consumer spending.

The different Brexit scenarios for the world’s fifth-largest economy make it hard to gauge the outlook for the year ahead, not least for the Bank of England, and some investors fear Britain is already flirting with recession.

Economists polled by Reuters last month put the probability of a recession within a year at 35%.

Below are some indicators of the British economy and how they have changed since the June 2016 Brexit vote.

BUSINESSES STRUGGLE
Pessimism among businesses has reached the highest levels in years.

The gauges of future activity in the Lloyds Business Barometer, CBI Growth Indicator and IHS Markit/CIPS surveys have all turned weakened recently.

The closely watched IHS Markit/CIPS survey last week showed Britain’s dominant services sector contracted unexpectedly in September — and marked the worst reading in a major developed economy.

HOUSEHOLDS STILL SPENDING

Household spending has supported Britain’s economy since the Brexit vote, although there are signs that households have spent more on non-discretionary goods such as food, while spending in restaurants and hotels has weakened.

As of the second quarter, spending on the latter was about 1.5% lower than in mid-2016, but nearly 7% higher for food and non-alcoholic drinks, according to official data.

Figures from the British Retail Consortium and payment card company Barclaycard published on Monday showed shop chains had their worst September since records started in 1995, although spending on entertainment increased.

LABOUR MARKET

The labour market is the strong point of Britain’s economy but some cracks have appeared recently. Employment fell in annualised terms in the six months to July 2019 to the greatest extent since early 2012.

Wage growth is at a decade-high although the BoE has said it may have peaked and there has been no pickup in productivity.

A measure that BoE policymakers like to look at — the three-month annualised growth rate of private sector earnings, excluding bonuses — slowed in July from an almost five-year high of 5.9% in June.

INVESTMENT

Although the Office for National Statistics has revised up the level of business investment in Britain’s economy lately, the figures still show capital expenditure has stagnated since the Brexit vote.

Business investment is running about 5 billion pounds lower than it would have been had it followed its pre-Brexit vote trend since the financial crisis, according to the latest data.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters

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Rates will rise in Brexit deal scenario

Homeowners should be ready for the Bank of England to increase interest rates in the face of a deal being struck on Brexit, economist Andrew Sentance has warned.

Speaking to podcast the LM Experience Sentance said there “aren’t enough hawks on the MPC who are trying to think about things from a different perspective.”

He was an external member of the Monetary Policy Committee of the Bank of England from October 2006 to May 2011

Sentance said: “I hope that if we get a deal it will remove the uncertainty around Brexit and create space for Bank of England to raise interest rates – not in a dramatic way.”

MPC warns of Brexit rate cut
Sentance said: “I hope that if we get a deal it will remove the uncertainty around Brexit and create space for Bank of England to raise interest rates – not in a dramatic way.”

However should there be a no deal scenario Sentance believes rates will stay the same.

He said: “I find it very hard to believe that the Bank would really jack up interest rates if the no deal predictions turn out to be correct.

“I think the difference in scenarios between deal and no deal is that there is space for rates to increase. That is not the case in a no deal scenario.”

However he added: “It does seem if there is ever an argument for keeping rates low it holds sway with the MPC.”

And earlier this week Bank of England (BoE) policymaker Michael Saunders has said the Bank of England is considering cutting interest rates, even if the UK avoids a no-deal Brexit.

Rates have stood at 0.75% since August 2018.

By Ryan Fowler

Source: Mortgage Introducer

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UK can take advantage of low interest rates to invest in infrastructure – Javid

British finance minister Sajid Javid said on Monday the country could take advantage of record low interest rates to borrow to invest in infrastructure.

Javid will later use his speech at the governing Conservative Party’s annual conference to set out an investment package to improve Britain’s roads, broadband coverage and bus services.

“Record low interest rates – you can take advantage of that as a government when you can borrow at negative interest rates for 30 years and put it into economic infrastructure,” Javid told Sky News when asked about where the money was coming from.

Reporting by William James

Source: UK Reuters

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Bank of England could cut interest rates if Brexit uncertainty persists, says MPC member

The Bank of England may need to cut interest rates even if a no-deal Brexit is avoided, according to a member of the monetary policy committee (MPC), which sets the rates.

Michael Saunders has said that the Bank may have to cut rates if the “slow puncture” effect on the economy from Brexit uncertainty persists.

It comes just a week after an MPC meeting in which there was no indication that borrowing costs could be cut.

“The economy could follow very different paths depending on Brexit developments,” Saunders said at a business event in Barnsley.

“But in my view, even assuming that the UK avoids a no-deal Brexit, persistently high Brexit uncertainties seem likely to continue to depress UK growth below potential for some time, especially if global growth remains disappointing.

“In such a scenario – not a no-deal Brexit, but persistently high uncertainty – it probably will be appropriate to maintain an expansionary monetary policy stance and perhaps to loosen further.

“Of course, the monetary policy response to Brexit developments will also take into account other factors including, in particular, changes in the exchange rate and fiscal policy.”

Following his remarks, the sterling has fallen by 0.3 per cent against the dollar to 1.229, although it has recovered slightly from its initial dip to 1.227.

Saunders said that Brexit had meant uncertainty for around 50 per cent of businesses and that while it had only had a modest effect on UK growth in 2017 and 2018, this year there was evidence of weaker growth.

The rate-setter also acknowledged that the appropriate policy response to a no-deal Brexit could go up or down, dependent on how supply, demand and exchange rates are affected.

Similarly, if the UK avoids a no-deal Brexit, he said: “Monetary policy also could go either way and I think it is quite plausible that the next move in Bank rate would be down rather than up.

“One scenario is that Brexit uncertainty falls significantly and global growth recovers a bit. In this case, some further monetary tightening is likely to be needed over time.

“Another scenario, and this is perhaps more likely to me, is of prolonged high Brexit uncertainty,” he said.

Saunders concluded that: “In steering through these uncertainties, the MPC will of course be guided by our remit and the aim of ensuring a sustainable return of inflation to the 2 per cent target in a way that supports output and jobs.”

Bank barking up wrong tree

Chief analyst at Markets.com, Neil Wilson, says the comments show the Bank are “barking up the wrong tree”.

“In making the case for a cut now it conforms to the belief in many in the market that the Bank is barking up the wrong tree with its slight tightening bias in its forward guidance,” he said.

“The comments from Saunders are clearly an added weight on the pound.”

By Michael Searles

Source: City AM

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Bank of England warns Brexit limbo damaging as interest rates unchanged

The Bank of England has held interests rates unchanged at 0.75%, as it warned that “entrenched uncertainty” around Brexit could drag on the UK economy.

The bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates on hold and to maintain stockpile of government bonds.

Economists had forecast no changes, arguing that the continued uncertainty of Brexit left governor Mark Carney with little room to manoeuvre.

The MPC said on Thursday that “Brexit-related developments are making UK economic data more volatile.” UK growth appears to be slowing but remains slightly positive, suggesting the bank thinks the UK will avoid a recession. The Bank downgraded its forecast for GDP growth in the third quarter from 0.3% to 0.2%.

However, the MPC warned that “political events could lead to a further period of entrenched uncertainty” that could drag on UK economy. It represents the Bank’s first warning that being stuck in continued Brexit limbo — rather than a deal, no deal, or no Brexit — could be damaging. The MPC didn’t quantify how big the effects might be or what it would do in this scenario.

The warning comes in the wake of a law passed by parliament at the start of the month forcing prime minister Boris Johnson to seek a Brexit extension if he doesn’t reach a deal by 19 October. EU leaders have warned in recent days that a deal looks unlikely.

The Bank of England’s decision to do nothing comes despite central banks around the world cutting rates in recent weeks in response to gathering storm clouds for the global economy. Global growth is being hit by the continued US-China trade war and the US yield curve has inverted several times, suggesting a US recession could be imminent.

The US Federal Reserve on Thursday announced a 25 basis point interest rate cut to a range of 1.75% to 2%, citing continued global growth concerns and weakening US fundamentals.

Last week the ECB also cut rates for the first time since 2016 as part of a wide-ranging stimulus package designed to boost the faltering eurozone economy.

In the summary of its decision, the MPC said that “the outlook for global growth has weakened” since its last meeting and blamed the intensifying trade war.

The MPC repeated its warning that a no-deal Brexit would hit the pound and cause the UK economy to slow. It stressed that the Bank’s response “would not be automatic and could be in either direction,” wording that it has repeatedly used to the incredulity of many economists.

The Bank of England signalled its next move could be to raise rates rather than cut them. The MPC said that if the UK has a smooth Brexit and global growth recovers, the Bank could raise rates “at a gradual pace and to a limited extent,” reusing terminology it used its previous bulletins.

By Oscar Williams-Grut

Source: Yahoo Finance UK

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Bank of England set to keep rates unchanged before Brexit deadline

The Monetary Policy Committee (MPC) who are the policymakers at the Bank of England (BoE) are set to keep interest rates on hold at 0.75% this week.

The MPC are to give their decision officially at noon on Thursday, they are also set to provide positive news as the UK economy figures show gross domestic product (GDP) grew by 0.3% month-on-month in July.

Howard Archer, chief economic adviser to the EY Item Club said, “We expect interest rates to be kept at 0.75% with the MPC firmly in ‘wait and see’ mode.

“Current heightened domestic UK political uncertainties reinforce the case for the Bank of England maintaining a watching brief.”

Inflation has moved up slightly from 2% in June to 2.1% in July.

George Brown, at Investec Economics, said the BoE will have “plenty of domestic political developments to chew over.”

Adding, “It now seems a question of not if but when a snap general election will be held, with both sides of the House of Commons indicating a desire to go back to the electorate.

“Though the MPC will steer well clear of commenting on such sensitive matters, it will need to grapple with the implications of a possible change of government and with it a shift in Brexit policy.”

Source: London Loves Business

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The only way is down for UK interest rates, say City economists

The UK economy is in contraction mode, but the Bank of England isn’t greatly worried. GDP fell by 0.2 per cent by the second quarter of the year as Brexit uncertainty and a global slowdown held growth back.

Policymakers at the BoE are reluctant to fiddle with interest rates as the Brexit date of 31 October looms. New Prime Minister Boris Johnson has made it abundantly clear that Britain could be crashing out of European Union without a deal.

Noises from the British economy last week will have comforted bosses at the Bank and cemented their “wait and see” position. Inflation was shown to have picked up to 2.1 per cent, wages grew at their fastest pace in 11 years, and July retail sales delivered a pleasant surprise.

It looks, then, like only the shock of a no-deal Brexit would cause Threadneedle Street to tamper with rates, which currently sit at 0.75 per cent. Yet the BoE has repeatedly said that in such an event rates could move “in either direction”.

City economists are not convinced by this argument from Mark Carney and co, however. Peter Dixon, economist at Commerzbank, says: “There would appear to be no good arguments in favour of a hike”.

The Bank’s logic is that a tumbling pound could push up the cost of imports and drive up prices. But Dixon says the effects would only be felt “over a six to 12 month horizon”.

Eventually, he says, the BoE will have “to weigh up” the risks to inflation versus the risks to growth. “But that will not be a calculation they have to make anytime soon”.

Oliver Blackbourn, portfolio manager on the multi-asset team at Janus Henderson, concurs. “In the higher-inflation, lower-growth environment expected,” he says, “the Bank of England will choose to primarily worry about the latter”.

He says lower availability of goods, services and workers for industry as well as consumers worrying about their incomes will weigh on economic growth. “This is likely to be the Bank’s main focus in its decision making.”

Turning the taps back on

Institute of Directors chief economist Tej Parikh says: “The precise shape of a no-deal Brexit and the scale of the government contingencies will play into the Bank’s final decision.”

Sajiv Vaid portfolio manager at Fidelity International takes a similar view, saying that in the event of a no deal, “the lesson to learn is that you cannot rule anything out”.

The shock could be so severe that policymakers might turn to the bazooka of stimulus bond-buying, or quantitative easing (QE), rather than the pistol of interest rate cuts. In even the relatively benign scenario modelled by the International Monetary Fund (IMF), Britain would enter a recession in 2020 and unemployment would rise by 1.5 percentage points.

Dixon says: “The BoE can always resume asset purchases. After all, the BoE balance sheet is only around 28 per cent of GDP – a full 10 percentage points lower than [European Central Bank] levels”

Government help

Craig Erlam, senior market analyst at foreign exchange firm Oanda, says a no-deal Brexit would force “at least one rate cut and perhaps additional quantitative easing”. He says the Bank will be hoping that “unlike in the aftermath of the crisis, the government also plays a role in providing an economic buffer”.

Vaid agrees. “I think this time will be different and expect fiscal policy to play its part,” he says. Blackbourn also says he thinks rates would be lowered, “likely alongside a large fiscal easing from the government”.

Almost all economists disbelieve the Bank when it says interest rates could move either way if a no-deal Brexit comes around. Blackbourn says: “Despite the inflation-targeting mandate, the Bank’s first reaction will be to support growth and later worry about inflation.”

By Harry Robertson

Source: City AM

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Unexpected inflation jump puts pressure on Bank of England

The Bank of England is set to come under pressure to control price growth after inflation in July came in at 2.1%, significantly above analyst expectations.

The figure, released by the Office for National Statistics (ONS) on Wednesday, follows bumper wage growth data earlier this week.

Analysts had predicted that the consumer price index, the measure of inflation used by the Bank of England and the government, would fall to 1.9%, or slightly below the Bank of England’s 2% target.

But the 2.1% growth in prices now suggests that record-low unemployment and high wage growth have now translated into higher consumer spending.

The ONS said on Tuesday that average weekly wages jumped by 3.7% in the year to June, the highest increase in more than a decade.

The Bank of England earlier this month forecast that inflation would fall below 1.6% in the final three months of the year, in part because of lower energy prices.

But the steep decline in the value of the pound in recent weeks has increased inflationary pressure in the UK, largely because it has raised the cost of imports.

The ONS said that higher prices for hotels, video games, and consoles combined with a decline in summer clothing discounts were responsible for the uptick in inflation.

Inflation in June had already hit the bank’s target.

Though markets expect the Bank of England to hold rates steady before the 31 October Brexit deadline, above-target inflation would normally prompt the bank to hike interest rates.

“The latest data will not change the position of the Bank of England, which is committed to keeping interest rates on hold at least until more clarity is provided on Brexit,” said Mike Jakeman, an economist at PwC, in a note on Wednesday.

The data, however, “could well be seen as supporting a hike,” said David Cheetham, chief market analyst at XTB.

Core inflation, which excludes energy, fuel, alcohol, and tobacco prices, also came in above expectations, climbing to a six-month high of 1.9%.

Another measure of inflation, the retail prices index, fell to 2.8%, from 2.9% in June.

That figure is used to determine the extent to which rail prices will be increased from January, meaning that commuters will face a £100 hike in season ticket costs.

Inflation has climbed since the June 2016 Brexit referendum, which prompted a 10% fall in the currency’s value.

The pound had its worst month since October 2016 in July, and earlier this month plunged below $1.21 (GBPUSD=X) for the first time since January 2017.

In normal times, surging inflation would see the bank tighten monetary policy, mostly by increasing its benchmark interest rate.

But the bank is expected to ease its policy stance — in part by lowering rates — in the event of a no-deal Brexit, because the economy will likely need a boost.

Under current guidance from the bank, which assumes that there will be an orderly exit from the European Union in October, the bank has said that it expects to gradually increase interest rates.

By Edmund Heaphy

Source: Yahoo Finance UK