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UK inflation expectations hit five-year high – BoE

The British public’s expectations for inflation in a year’s time have risen to a five-year high but fewer people expect an interest rate hike over the next 12 months, a Bank of England survey showed on Friday.

The BoE said median expectations for inflation in a year’s time rose to 3.2 percent from 3.0 percent in August’s survey.

That was the highest since the survey published in November 2013.

Britain’s inflation rate hit a recent peak of 3.1 percent in November 2017, pushed up by the fall in the value of the pound after the Brexit vote in 2016.

The consumer price index has since fallen back to 2.4 percent but remains above the BoE’s target of 2 percent.

Expectations for inflation in two years’ time eased back to 2.8 percent from 2.9 percent in August.

Inflation in five years’ time was seen at 3.5 percent, compared with 3.6 percent three months earlier.

The survey also showed 53 percent of respondents expected an interest rate increase over the next 12 months, down from 58 percent in August.

The BoE has raised interest rates twice since November 2017 and expects to continue pushing them up gradually, assuming Britain’s departure from the European Union goes smoothly.

The BoE’s data was based on a survey conducted by polling company TNS between Nov. 2 and 6.

Source: UK Reuters

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Bank of England chief Carney backs UK PM May’s Brexit deal

Bank of England Governor Mark Carney gave his backing to a Brexit deal struck by British Prime Minister Theresa May, saying the alternative of leaving the European Union with no transition could be akin to the 1970s oil shock.

“We have emphasized from the start the importance of having some transition between the current arrangements and the ultimate arrangements,” Carney said, speaking to lawmakers on Tuesday. “So we welcome the transition arrangements in the withdrawal agreement … and take note of the possibility of extending that transition period.”

May agreed with Brussels last week on a deal for Britain’s withdrawal from the EU in little more than four months’ time. But the agreement faces stiff resistance in her Conservative Party, meaning it could fail in parliament.

The value of sterling fell sharply on concerns that Britain could leave the EU with no deal.

Carney angered many euroskeptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU. On Tuesday he said a lack of a transition would deliver a “large negative shock” to the British economy

“This would be a very unusual situation,” he said. “It is very rare to see a large negative supply shock in an advanced economy. You would have to stretch back at least in our analysis until the 1970s to find analogies.”

An oil embargo by OPEC exporters imposed over the 1973 Arab-Israeli war and a leap in crude prices plunged many western economies into deep recessions.

Carney also said there were limits to what the BoE could do in the event of a Brexit shock to the economy, both in terms of offsetting a fall in demand and ensuring the country’s banking industry was able to continue lending.

“I think we’ve put (the financial sector) in a position … where it would dampen it,” he said. “That is not the same thing as saying it will be alright.”

Carney and other BoE officials speaking alongside him on Tuesday repeated their warning to investors not to assume that the central bank would respond to a no-deal shock by cutting interest rates, as it did after the Brexit referendum in 2016.

“That depends on the balance of demand, supply and the exchange rate… We could see either scenario,” Carney said.

He also said a planned analysis by the central bank of the economic implications of Brexit would not include a scenario in which Britain stays in the bloc.

Some of the analysis is due to be published on Nov. 28 alongside the latest bank stress tests and an assessment of Britain’s financial stability by the BoE.

Source: UK Reuters

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Brexit deal remains most likely outcome, says the Bank of England

The Bank of England predicted today that a deal remains the most likely Brexit outcome, despite ongoing uncertainty around UK and EU negotiations.

“I still think it’s the most likely outcome, but obviously over time, every day there are headlines – positive, negative – which will send the currency in particular one direction or the other,” deputy governor Ben Broadbent told CNBC.

“But for our part we have to make a particular assumption on which to condition our forecasts, that seems to me still to be the most likely outcome and that’s the one we choose.”

His comments come after former education minister Justine Greening said this morning that parliament would reject Theresa May’s Chequers deal.

Meanwhile, the Prime Minister suffered a setback after the EU reportedly rejected her proposal that the UK can decide to quit a so-called backstop agreement on the Irish border that would put the whole of the UK into a temporary customs union with the EU.

Sterling fell one per cent amid ongoing uncertainty.

In the event of a positive Brexit deal, Broadbent predicted businesses would begin to invest more after relatively weak spending since the referendum.

“If we get a good deal, a good transition, I think we can expect to see investment spending pick up, domestic demand growth pick up,” he said. “On the other hand, sterling presumably would also be stronger, and those act in different directions on inflation.”

However, the Bank predicts that the UK economy’s growth will slow in the fourth quarter, though there are signs that pay pressure is gradually building.

“The signs are we’ll have somewhat weaker growth in the fourth quarter,” Broadbent said.

But the BoE said pay pressure has been increasing, according to business surveys the Bank has conducted as well as official figures.

Wage growth hit its fastest rate since before the financial crisis in the three months to the end of August, the Office for National Statistics revealed last month, after a 40-year unemployment low helped push wages up.

“In terms of inflationary pressure we are seeing some signs of that domestically now,” Broadbent said.

The Bank monetary policy committee decided to hold interest rates at 0.75 per cent at the start of the month, in light of Brexit uncertainty, and Broadbent attempted to reassure businesses and households that rates were not going to rise quickly.

While the Bank has predicted “limited and gradual” interest rate increases, Broadbent said this wouldn’t necessarily come in the form of one rate hike a year.

A smooth transition to life outside the EU may mean that the Bank tightens monetary policy over the next three years to cut inflation to a two per cent target.

“We will do whatever we think we have to do to meet the remit,” Broadbent said. “The point of that box was to say that unfortunately either having a deal or not having a deal is not definitive in terms of the behaviour of interest rates.”

Source: City A.M.

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Sterling jumps most in nine months on Brexit news, hawkish BoE

Sterling spiked back above the 1.30 mark against the US Dollar to its highest level in over a week after investors latched onto the news that a deal between the UK and EU over financial services was close. This is a rare positive headline out of the Brexit talks since the October EU summit, which ended without an agreement. Comments from the Bank of England yesterday afternoon also suggested that the central bank could raise rates at a more aggressive pace in 2019 in the event of a smooth EU exit.

The Bank of England’s MPC voted unanimously to keep rates steady, as expected. The quarterly Inflation Report was on the hawkish side, stating that slack had fully disappeared from the economy and that inflation would remain above the 2% target during the forecasted horizon. Governor Mark Carney also stated that the MPC would keep a close eye on the impact of Brexit, stating that they may have to raise rates, even in the event of a disorderly Brexit or a ‘no deal’.

Thursday’s comments from the BoE reinforces our view that the central bank will raise rates in the second quarter of next year, after the UK’s EU exit date.

US Dollar fades on US-China trade deal optimism

The common currency also continued its impressive recovery yesterday, rallying back above the 1.14 mark against the US Dollar. This followed news out of the US that President Trump was hoping to resolve the recent trade conflict with China. According to a Bloomberg report, Trump asked US officials to begin drafting a trade deal with Beijing, with leaders of both countries expressing optimism over an agreement. Amid the trade dispute, the US Dollar rallied sharply as investors flock to safe-havens, while deem the US economy as mostly immune to trade disruption.

Today will be heavy in terms of economic indicator data. First up will be this morning’s updated PMI figures in the Eurozone, although these are expected to remain unrevised. Then we’ll have this afternoon’s US payrolls report. As always, we will be looking for signs of whether multi-decade low levels of unemployment are feeding through to higher wages.

Source: Ebury

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Bank of England hints at faster hikes, but says Brexit options wide open

The Bank of England said on Thursday that interest rates might need to rise a bit faster than investors expect, but it warned that all bets would be off if Britain leaves the European Union without a deal in less than five months.

The BoE’s nine rate-setters all voted to hold rates at 0.75 percent, as expected in a Reuters poll of economists, after raising them in August for only the second time in a decade.

Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

Brexit is dominating the outlook for the world’s fifth-largest economy which has slowed since 2016’s referendum.

“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney told a news conference.

The BoE cut rates and ramped up its bond-buying program after the shock referendum vote. Carney cautioned against assuming it would do the same in the event of a no-deal Brexit.

Unlike 2016, inflation is above target and the BoE would be responding to actual economic damage, not a fall in confidence.

Sterling would probably fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates, Carney said.

On the other hand, policymakers would need to balance the hit to growth from lost trade, uncertainty and tighter financial conditions. That would normally make a case for lower rates.

Sterling briefly edged up against the dollar GBP= after the BoE policy announcement and was on track for one its biggest daily gains this year due to optimism about Brexit talks and broader dollar weakness.

The BoE penciled into its forecasts the bets in financial markets that there will be almost three quarter-point rate rises over the next three years. That compared with just over one in the forecasts that accompanied August’s rate rise.

Asked whether investors were pricing in enough rate hikes, Carney pointed to the BoE’s forecast that inflation would still be above its target in two years’ time, suggesting he thought investors were being a bit too cautious about the pace of hikes.

“November’s statement makes it pretty clear the Bank of England would like to be hiking rates further,” ING economist James Smith said.

“But given that it may be quite some time before we know for sure that a no-deal Brexit has been avoided, we suspect policymakers will struggle to hike rates before May 2019 at the earliest.”

Most economists do not expect rates to rise again until the middle of next year.

CONSUMERS RESILIENT, BUSINESSES NERVOUS

The BoE said consumer spending had beaten its expectations but businesses were holding back on investment.

Prime Minister Theresa May has yet to secure a transition deal to ease Britain’s exit from the EU.

Assuming Brexit goes smoothly, the economy was likely to continue to grow by around 1.75 percent a year, the BoE said, below the rate of above 2 percent before the Brexit vote.

But the BoE said the economy was at full capacity and inflation would take three years to drop from 2.4 percent now to its 2 percent target.

The economy was expected to start running above capacity in late 2019, sooner than the BoE previously forecast, creating inflation pressure.

The forecasts did not include the stimulus from higher public spending and tax cuts in finance minister Philip Hammond’s Oct. 29 budget. Like Carney, Hammond has said he might need to review his plans after Brexit.

“The (BoE) would be minded to offset such additional demand by raising interest rates a little more rapidly than the ‘one hike per annum’ over the next three years, which it is guiding toward,” Investec economist Philip Shaw said.

Source: UK Reuters

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UK budget and Bank of England take back seat to Brexit drama

Britain’s budget announcement on Monday and a “Super Thursday” at the Bank of England would normally be key moments for the world’s fifth-biggest economy, but this time they are likely to be overshadowed by the drama of Brexit.

Finance minister Philip Hammond and Bank of England Governor Mark Carney have little option but to sit on the fence as they wait to see whether a no-deal exit from the European Union, which they warn would harm the economy, can be averted.

Both men have other business they want to get on with.

Hammond is under pressure from Prime Minister Theresa May to end a decade of austerity to see off a rise in popularity of the opposition Labour Party.

At the BoE — where an interest rate decision and economic forecasts are due to be announced on Thursday — Carney and his fellow policymakers want to progress with their plan to raise borrowing costs gradually over the coming years.

That would allow the British central bank to follow the lead of other central banks, especially in the United States and Canada, which are dismantling 10 years of massive stimulus.

Expectations of another rate hike by the U.S. Federal Reserve in December are likely to grow if the monthly payrolls report on Nov. 2 shows further jobs growth and rising pay.

In the euro zone, data on economic growth and inflation on Tuesday and Wednesday will show whether the recovery in the single currency area has kept pace.

But in Britain, with Brexit just five months away, things are much less clear cut.

BREXIT FOG

There is no sign of a Brexit breakthrough with Brussels, in large part because May’s Conservative Party is riven over how close Britain should remain to the European Union after it leaves the bloc.

“The budget is likely to be something of a holding exercise until the Brexit fog clears and the MPC is likely to remain in a state of inertia until there is a bit more clarity on the state of the Brexit negotiations,” Ruth Gregory, an economist with Capital Economics, a research firm, said.

When he stands up in parliament on Monday afternoon, Hammond is expected to use his high-profile budget speech to try to cool the Conservative rebels by dangling the prospect of higher spending in the future, as long as a Brexit deal is done.

Britain’s economy has slowed since the 2016 referendum decision to leave the EU. But it has not suffered as badly as many forecasters expected, giving Hammond some fiscal wiggle room to fund higher health spending already promised by May.

Hammond might get further help if Britain’s budget forecasters scale back their estimates of future deficits, as they have suggested they will.

But his ability to ramp up spending in other areas depends most on avoiding a new shock to the economy.

A no-deal Brexit would slash economic growth to just 0.3 percent a year in 2019 and 2020 compared with 1.9 and 1.6 percent if there is a deal, the National Institute of Economic and Social Research estimated on Friday.

Britain’s budget deficit would stop falling and would rise under a no-deal scenario, according to its forecasts.

Looking further ahead, Hammond has suggested he will need to raise taxes to help fund higher public spending.

SIGNS OF PAY “NEW DAWN”

But the prospect of getting controversial measures passed in parliament, where the Conservatives have no outright majority, is probably too daunting at a time of heightened Brexit tensions.

For the BoE, the Brexit stakes are high too.

It has begun raising interest rates from their crisis-era levels and its chief economist has said he sees signs of a “new dawn” for British workers’ pay, long the missing link in the country’s recovery from the financial crisis.

But most economists think it will wait until May to raise rates again, assuming Britain leaves the EU with a deal.

“In any other situation, we suspect the Bank of England would be looking to increase interest rates pretty soon,” ING economists said in a note to clients on Friday.

“But inevitably, Brexit remains policymakers’ number one consideration, and given that there may still be some time before we know for sure whether a deal will be in place before the UK formally leaves the EU, there is a risk growth slows as businesses and consumers grow more cautious.”

Source: UK Reuters

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Does this week’s data impact the GBP and FTSE 100 outlook?

This week has provided markets with a crucial insight into the UK economy with the release of inflation, jobs and retail sales figures. Those numbers are so important because they have an array of signals and consequences. Let’s take a look at how the UK economy is faring and what these data points mean for the Bank of England (BoE) and local markets going forward.

Employment

The UK jobs picture soured somewhat in September, with a rise in claimants coupled with an upward revision to the August number. The figure of 18,500 claimants is the second highest monthly figure since mid-2017. Meanwhile, the August average earnings figure rose to 2.7%, which is not far off the highest level seen over the past three years (2.8%). Put this together and you have a warning sign against the BoE raising rates (rising unemployment claims), alongside a signal that allows the BoE to worry less about the problem of falling real wages seen throughout 2018. The issue of rising inflation is certainly a problem for the BoE, but as long as wages rise by a greater amount, that worry is mitigated to an extent.

Inflation

With wages on the rise, a sharp decline in inflation has provided yet another signal that the BoE can rest easy for the time being, with consumer price index (CPI) declining from 2.7% to 2.4%; the joint lowest level since first quarter (Q1) 2017. Crucially, we also saw a sharp reduction in the core CPI reading, which strips out volatile elements such as food, energy, alcohol and tobacco items. The energy aspect is particularly important as this is an element which the central bank cannot do much about through the use of monetary policy. Thus, if the cost of petrol rises, the BoE would be foolhardy to think that they could mitigate that shift by raising rates. The fact that inflation has been declining with those more volatile aspects stripped out means that the BoE will take greater attention to the shift.

This reduction in inflation coupled with the rise in wages means that real wages are on the rise, taking some of the pressure off the BoE and lesseneing the chances of another rate rise in the near future.

Retail sales

The retail sales figure is often overlooked in terms of its impact on the economy, with the term retail typically associated with the small players in trading rather than institutional whales. However, in the economic sense, consumption is a huge determinant of growth, with household expenditure accounting for 60% of UK gross domestic product (GDP). Retail sales do not account for the total household consumption amount, yet it certainly has a significant impact on the total figure. The volatile monthly figure is less of an interest for us, yet with the yearly number declining to 3%, we are seeing continued stability following the recent recovery. That measure was below 2% for eight months between Q3 2017 and Q2 2018, so anyone worried about the declining monthly figure (-0.8%) today should look at the monthly trend to note that things are actually looking relatively rosy.

Taken in the context of the BoE, the recent recovery in retail sales will bolster the idea that growth could begin to pick up thanks to improving consumption. The rise in retail sales could point towards a strong Q3 GDP number, which could counteract any fears.

Brexit

It is important to note that while the BoE has previously showed intent to normalise rates to some extent, given the threat posed by inflation, the impact of Brexit will always remain a key determinant of whether the Monetary Policy Committee (MPC) can act. Easing real wages reduces the need to raise rates, while improving GDP prospects through the recovery in retail sales will prove that the economy could possibly handle another rate rise. However, the risk of a no-deal Brexit will loom large at the moment, making any action unlikely for the time being. A deal between the UK and EU would likely remove that barrier, and such a deal would make the pound more responsive to shifts in economic data. The decline in the pound this week has been partly due to the diminishing hopes of a deal at this week’s EU summit, but also a reaction to the falling economic data (rising claimant count and retail sales) and an easing on pressure for the BoE to act (rising wages, falling inflation).

Of course, it is obvious to keep an eye out for a Brexit deal as a key driver of price action in the pound, but be aware that a deal could open up the markets to recent economic trends. The BoE does want to raise rates again, but that will only happen if the economy is strong enough and the chance of a no-deal Brexit is negated. With retail sales pointing towards a strong Q3 growth reading, we could see a hawkish BoE soon after an agreement is found (if indeed it is). Such an event would point towards a likely rate rise soon after.

The daily chart below highlights the holding pattern we find ourselves within over the past month, with markets showing some signs of wanting to get into a relief rally in the event that a deal is reached, yet not confident enough to really follow through. Expect an initial boost to the pound if a deal is reached in the coming months, but bear in mind that such a shift could be accentuated when people realise that this would have a significant knock-on effect on the BoE’s monetary policy approach.

Interestingly, traders should remain aware of the potential counter-intuitive nature of the FTSE in all of this. The FTSE 100 has an inverse relationship to the pound, driven by the highly internationalised nature of the index. A higher pound will reduce the value of foreign earnings when they are reported back in sterling. Therefore, while many would expect to see a rise for the FTSE 100 and pound in the event of a breakthrough, there is a strong likeliness that we could see the index fall. Thus, expect to see the pound reflect improvements to the UK economy or a Brexit breakthrough, while the FTSE 100 will likely to do the opposite, as was the case on referendum day.

The weekly chart below sees breakdown from the rising wedge formation, with the price falling back towards the crucial 6841 swing low. This points towards a possible break to the downside in the event that an agreement is found in Brexit negotiations. While the trendline break is worrying for FTSE bulls, we would need to see a break below that 6841 level to signal the beginning of another leg lower for the index from here on in.

Source: IG
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When will the Bank of England raise interest rates again?

There are only really two ways to deal with burdensome debts, if you’re an individual.

You can repay them. Or you can refuse to repay them (default).

But if you happen to be a sovereign country, there’s a third option which combines the two in an apparently painless manner.

Inflation.

Getting rid of debt the painless way

Inflating away debt is an attractive option for governments. You don’t outright default. You pay your creditors the money you owe them. But the money they are getting is worth less than it was when you first borrowed the cash. So you win.

One of the key solutions (unspoken, because you can’t talk about inflating away your debt, or people get wise to the fact that you’re trying to do it) to the legacy of the financial crisis, has been to try to drive up inflation in order to make the level of indebtedness less painful.

It has taken a very long time. But it’s starting to look as though the strategy is gaining some traction.

We heard yesterday that the UK’s annual inflation rate (as measured by the consumer prices index – CPI), rose to 2.7% in August. Meanwhile “core” inflation (which excludes volatile essentials such as food, energy, cigarettes and booze) rose to 2.1%, from 1.9%.

Both of those readings were higher than either analysts or the Bank of England had expected – CPI was forecast to fall to 2.4%, for example.

Commentators have generally dismissed the reading as being “noise”, driven mainly by random things like computer game prices rising, and a big jump in clothing prices after a big fall the previous month. That said, as Capital Economics notes, “admittedly, utility and fuel price rises will probably hinder downward progress in inflation in the next few months”.

Yet while the Bank of England might hope that the CPI inflation rate won’t rise above 3% (as that means it’ll be at risk of having to write a letter to the Treasury), it probably isn’t too unhappy about inflation ticking higher.

There’s a couple of reasons for that. Firstly, despite the rise in inflation, wages are still rising ever so slightly more rapidly than prices, which means that individuals are at least able to keep up with the rising cost of living.

(And in fact, most people who have been in jobs for a while are probably doing a good bit better than that, as Merryn points out in her recent blog on wage rises).

So “real” wages are still rising, which means that consumers aren’t getting poorer, despite rising inflation.

Secondly, house price growth is moderating too. The latest official data suggests that annual house price growth came in at 3.1% in July, which is also barely above inflation (and in fact it’s below the retail price index measure).

This scenario is ideal for the Bank. The housing market is one of the biggest potential sources of political and financial instability in the UK. You don’t want prices to crash as that hurts everyone’s balance sheets, but you don’t want prices booming either, as that sets you up for problems in the future, not to mention the general sense of discontent it creates.

So as we’ve noted before, a gentle decline in “real” terms would be ideal – it improves affordability for those who feel locked out of the market, while inflation helps to make the mortgage burden on existing owners steadily lighter.

If Brexit isn’t a total disaster, it could give the Bank a headache

So for now, all the big numbers are going in roughly the right direction.

The tricky thing, of course, is that the Bank does need to be seen to be at least attempting to address inflation. It has raised interest rates this year, but not by very much.

Indeed, as the Bank’s own staff have pointed out in the past (and we’ve highlighted here), if interest rates were anywhere near approaching “normal”, then they’d already be a great deal higher. For example, given where inflation is now, the Bank rate would be above 3%. Instead, it’s currently at 0.75%.

So are rates likely to move again soon?

I suspect not. Given the Bank’s obsession with Brexit, it’s hard to see interest rates being moved much in the short term. Indeed, Capital Economics reckons the Bank won’t move them again until May 2019.

However, what’s more interesting is to consider what could happen if a Brexit deal is done – and then nothing particularly devastating happens to the economy.

In the “best-case” scenario, sterling would probably rebound somewhat, which would take some of the inflationary pressure off. But this would still leave the Bank playing catch-up on rate rises.

We’ll see. In the meantime, don’t expect your savings account to suddenly start paying out a decent rate of interest again anytime soon.

Source: Money Week

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Carney ‘asked to stay’ as BoE governor amid Brexit concerns

Bank of England (BoE) governor Mark Carney has been asked by the government to stay for another year in a move to settle the City’s Brexit concerns, according to a report.

This means Carney would remain BoE governor until June 2020, staying for an extra year on top of his original departure date of June 2019.

The report, in the London Evening Standard’s Diary section, claimed the chief reason would be so Carney could provide continuity following the UK’s exit from the European Union, which takes place on 29 March 2019.

However, a Treasury spokesperson denied the story.

Carney has already extended his term once at the Bank in a move to ensure continuity through the Brexit negotiations.

He had originally only intended to remain for five years after joining in 2013, but announced plans to stay an extra year four months after the Brexit Referendum in June 2016.

BoE deputy governors Ben Broadbent, Dave Ramsden and Jon Cunliffe are among the favourites to replace Carney, along with Financial Conduct Authority CEO Andrew Bailey.

In May, the governor warned economists about the dangers of a “disorderly Brexit”, adding monetary policy could be placed on a different path if the transition is not “smooth”.

In August, the Bank’s Monetary Policy Committee unanimously voted to hike interest rates by 25 basis points to 0.75%, the highest level in almost a decade and its first rise since November 2017.

Silvia Dall’Angelo, senior economist at Hermes Investment Management, commented: “It would be ideal if Carney decided to remain at the helm of the BoE for longer.

“It would provide continuity in the approach to monetary policy, shoring up business and consumer sentiment during the Brexit process and potentially allowing for a smoother transition.

“Reports he was asked to stay on until 2020 suggest there is broad-based awareness that continuity is needed at such a crucial juncture for the country.

“That said it is unclear whether the rock star governor is willing to accept what looks like an unpalatable offer.

“As the chances of a hard Brexit are “uncomfortably high”, risks that his otherwise stellar reputation gets smeared in a potentially disruptive process, are also elevated.”

Source: Professional Adviser

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Bank of England: base rate could stay under 2% for 30 years

The Bank of England (BoE) has admitted that current forecasts show its base rate could remain under 2% for the next 30 years.

Last year BoE governor Mark Carney suggested the Bank was keen to return the base rate to a more normal level with a series of steady rises.

However, after rejecting a previously expected increase in May, it appears forecasts for the much longer-term now suggest there will be little chance of a return to pre-crisis norms of around 5%.

Speaking at the Cumbria Chambers of Commerce, BoE deputy governor, financial stability, Sir Jon Cunliffe said base rate could in fact remain below 2% for decades.

Levelling off under 2%

Explaining why the Bank had been reluctant to aggressively increase base rate, he noted there were good economic arguments for taking a more proactive approach to lifting base rates, including that monetary policymakers will have insufficient ammunition to stimulate demand in future downturns.

He said: “One cannot help acknowledging this concern. If, as seems likely, we are and will continue to be in a lower natural interest rate environment, policy rates will not approach levels seen before the financial crisis. The average level of bank rate was around 5% for the 20 years preceding the crisis.

“The current yield curve sees bank rate rising slowly over three years and levelling off at under 2% for the next 30 years.

“The average policy loosening cycle in the UK was around 2% over the pre-crisis period. If that remained the case, we would clearly have less room for manoeuvre in the face of a sharp downturn, particularly if that happened in the near future.”

Brexit creating business uncertainty

Sir Jon also acknowledged that Brexit was already affecting the UK economy and the result of uncertainty was now playing a far greater role.

First the depreciation of sterling following the referendum generated inflation which squeezed real incomes and led to the drop in consumption and activity in the UK at the end of 2016.

In contrast, this also generated export growth that has helped to support the economy.

“More recently, there are signs that Brexit uncertainty is holding back investment,” he said.

“These impacts are incorporated into the MPC’s assessment of policy and forecast of the economy.

“But it is much harder – and in my view it would be mistaken – to set policy in anticipation of any particular Brexit outcome,” he added.

Source: Your Money