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Carney says BoE could cut interest rates if weakness persists

Bank of England Governor Mark Carney said on Thursday that the central bank could cut interest rates if it looks like weakness in the economy will persist.

His comments sent sterling to a near two-week low against the U.S. dollar as he outlined a debate on the Monetary Policy Committee about whether interest rates needed to be cut now.

Last month and in November, two of the nine policymakers on the BoE’s interest rate-setting committee voted to cut interest rates to 0.5% from 0.75%, though Carney himself backed keeping rates on hold.

Britain’s economy grew at its joint-weakest annual rate since 2012 late last year, and many indicators of the economy remain downbeat despite signs of optimism among businesses and consumers following Prime Minister Boris Johnson’s landslide election win last month.

While Carney also described reasons for optimism, investors honed in on the comments about a possible rate cut, which he linked directly to the current economic outlook — whereas previously he talked about cuts more as a contingency.

“With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” Carney said in a speech at a BoE event on inflation targeting.

Similar language was used in the most recent MPC minutes by Michael Saunders and Jonathan Haskel, who both voted for a rate cut.

Combining possible interest rate cuts and the prospect of more asset purchases, Carney said the BoE’s current armoury was the equivalent of cutting Bank Rate by 2.5 percentage points.

Money markets now price in a roughly 14% chance of a rate cut at the BoE’s Jan. 30 meeting, Carney’s last before he hands over the reins to Financial Conduct Authority chief executive Andrew Bailey, who takes over on March 16.

Markets price in a roughly 50% chance of a rate cut by the middle of the year.

“While this shouldn’t come as a huge surprise given that there has been a couple of MPC dissenters calling for lower rates at the past two policy meetings, it is the strongest hint yet for a rate cut in the not too distant future,” currency strategist David Cheetham of brokerage XTB said.

On asset purchases, Carney said there was room to “at least double” the BoE’s 60 billion pound stimulus package of August 2016, a sum that will increase further as more government bonds are issued over time.

Carney also gave reasons why the BoE might not cut interest rates, citing “tentative” signs that global growth was stabilising and ongoing tightness in Britain’s labour market.

He also said there were early indicators that there had been some reduction in business uncertainty since Johnson’s sweeping Dec. 12 election win.

The rest of his speech focused on possible changes to the BoE’s inflation targeting framework, which he said had served Britain well.

Carney said raising the inflation target, as advocated by some economists as a way to spur growth and escape from years of low interest rates, worked better in theory than in practice.

He also pushed back against those who think the BoE should use its quantitative easing stimulus to directly fund infrastructure or environmental spending.

“In my view, these should be resisted,” Carney said. “While carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot address broader societal challenges.”

Reporting by Andy Bruce

Source: UK Reuters

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BoE will cut rates twice in 2020, BofA says

Uncertainty around the future trading relationship between the UK and European Union will lead to two interest rate cuts by the Bank of England in 2020, a top-ranked research team said.

According to analysts at Bank of America Global Research, Britain’s gross domestic product was set to flatline in the last quarter of 2019.

However, rate-setters at the Old Lady of Threadneedle Street would wait to see how the economic data panned out following the general election before acting.

Their forecast was for a quarterly rate of growth of 0.0% over the three months ending in December.

“Uncertainty remains as unclear what UK-EU trade relationship will apply after next year. We expect short-lived growth bounce,” BofA said in a research note sent to clients.

Purchasing managers indices for the UK needed to “surge” in order to result in even a “mini” growth bounce, they added.

By Alexander Bueso

Source: ShareCast

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BoE might not be able to cut rates if Brexit delayed again – Ramsden

Bank of England Deputy Governor Dave Ramsden said he did not share the views of some of his colleagues who have suggested the British central bank might cut interest rates if the Brexit crisis drags on beyond the current Oct. 31 deadline.

In an interview with The Telegraph newspaper, Ramsden said Britain’s economy had been so damaged by uncertainty about Brexit – chiefly via a steady fall in investment by companies – that it could hamper the BoE’s ability to help it.

Referring to a scenario raised recently by the BoE of “entrenched uncertainty” if the deadline for leaving the European Union is pushed back again, Ramsden said: “I see less of a case for a more accommodative monetary position.”

Fellow BoE rate-setters Michael Saunders and Gertjan Vlieghe have suggested that another delay to leaving the EU might mean lower rates in Britain.

Prime Minister Boris Johnson says he will take Britain out of the EU on Oct. 31, with or without a deal, but lawmakers have passed legislation which they think will force him to seek a delay if no transition agreement is struck in time.

Ramsden told The Telegraph that he was cautious about the economy’s growth potential due to Britain’s poor record on productivity which contracted at the fastest annual pace in five years in the second quarter.

Company wage costs were “picking up quite significantly, which will drive domestic inflationary pressure” while spare capacity in the economy might not have opened up much despite the weakness in underlying growth, he said.

“I think supply potential, the speed limit of the economy, is also slowing through this period. That comes through for me pretty clearly in the latest productivity numbers.”

The global trade war was weighing on firms’ willingness to invest around the world too, Ramsden said.

Several BoE officials, including Governor Mark Carney, have said if Britain leaves the EU without a transition deal, they would probably move to cut rates.

Ramsden said higher public spending announced by finance minister Sajid Javid would also be a factor for the BoE as it would mean “more money going into the economy.”

He declined to comment when asked by The Telegraph whether he had applied to replace Carney, who is due to leave the BoE at the end of January.

Reporting by William Schomberg

Source: UK Reuters

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UK rate cut ‘plausible’ if Brexit uncertainty persists: BoE’s Saunders

The Bank of England may need to cut interest rates in the likely scenario that high levels of uncertainty over Brexit persist, policymaker Michael Saunders said on Friday in the first clear signal that the BoE is considering a cut.

Last week, without directly raising the prospect of cutting interest rates, the Bank of England said Brexit and slower world growth were increasingly causing Britain’s economy to perform below potential.

Saunders – who was one of the first BoE policymakers to vote for higher interest rates in 2017 and 2018 – said it was now his view that the unpredictable path of Brexit would effectively act as a “slow puncture” for the economy.

“Growth has slowed to a mere crawl,” he told local businesses in Barnsley, northern England. “I think it is quite plausible that the next move in Bank Rate would be down rather than up.”

After the comments, sterling GBP= fell by as much as half a cent against the dollar to a three-week low, and short-dated government bond yields dropped 4-5 basis points as investors priced in the increased chance of lower borrowing costs.

Prime Minister Boris Johnson has pledged to take Britain out of the European Union by Oct. 31, without any transition agreement if necessary, but is in a standoff with parliament which has voted to block a no-deal departure next month.

Even if Britain temporarily avoids a no-deal Brexit, uncertainty was likely to remain high, either due to the risk of a no-deal Brexit in 2020 or due to a lack of clarity about longer-term trading relationships with the EU, Saunders said.

“In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing,” he said.

British economic growth continuing at its current level of 0.1%-0.2% would be sufficient to justify lower rates, due to the risk of slack opening up in the economy and pushing inflation further below its 2% target, Saunders said.

The economy shrank by 0.2% in the second quarter of 2019 and last week the BoE trimmed its third-quarter growth forecast to 0.2% from 0.3%, while inflation dropped more sharply than expected to 1.7% in August.

David Cheetham, chief market analyst at brokers XTB, said the BoE looked increasingly likely to follow the U.S Federal Reserve and European Central Bank and cut rates.

“The economy is still barely keeping its head above water. Throw in the almost universally acknowledged continued levels of heightened uncertainty on the political front … and it is actually pretty shocking that a comment that a rate cut is ‘quite plausible’ has caused such a response.”

NO WAIT AND SEE

Simply waiting to see what happened with Brexit risked leading to inappropriate monetary policy, and the cost of reversing a rate cut if the outlook brightened would be low, Saunders added at the event hosted by the Barnsley and Rotherham Chamber of Commerce and Institute of Chartered Accountants.

“In general, I would prefer to be nimble… accepting that it may be necessary to change course if the outlook changes significantly,” he said.

Saunders still agreed with recent BoE guidance that a limited and gradual increase in interest rates would be needed over the medium term, if Brexit uncertainty reduced significantly and global growth perked up a bit.

In the event of a no-deal Brexit, Saunders repeated the BoE position that all policy options would be open.

Earlier this month, BoE Governor Mark Carney estimated in a worst-case, chaotic scenario that a no-deal Brexit could reduce the size of the economy by 5.5%. The Paris-based OECD has predicted a 2% hit in the case of a more managed no-deal Brexit.

Saunders was clear that a no-deal Brexit – advocated by some Brexit supporters as a way to resolve the uncertainty facing businesses – was not a good solution. “This would probably immediately leave some firms unprofitable. Others might face longer-term questions about their viability, or whether they would be better off relocating.”

Reporting by David Milliken

Source: UK Reuters

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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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UK mortgage approvals hit two-year high in July as market stabilises – BoE

British lenders approved the greatest number of mortgages in two years during July, adding to signs the housing market has stabilised from its pre-Brexit slowdown, official data showed on Friday.

The Bank of England said lenders approved 67,306 mortgages, up from 66,506 in June and more than any economist predicted in a Reuters poll that had pointed to 66,167 approvals for July.

Britain’s housing market has sagged since the 2016 Brexit referendum – especially in London and neighbouring areas – but has shown signs of a tentative recovery in recent months.

Earlier on Friday mortgage lender Nationwide said house price growth in annual terms inched up to a three-month high in August, although remained weak by recent standards.

The BoE said net mortgage lending rose by 4.611 billion pounds in July, the biggest increase since March 2016, while consumer lending increased by 0.897 billion pounds compared with a forecast rise of 1.0 billion pounds on the month.

Lending to businesses fell by 4.218 billion pounds last month, the sharpest fall since August 2017. While the series is volatile, the severity of the fall could be another sign of nerves in British companies as the Brexit crisis escalates.

Earlier on Friday Lloyds Bank said business confidence fell in August to its lowest level since late 2011.

Source: UK Reuters

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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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Mark Carney says negative interest rates ‘not an option’ for BoE

Bank of England governor Mark Carney has said his institution will not pursue negative interest rates, a monetary policy device employed by the European Central Bank (ECB) and Bank of Japan, among others.

“At this stage we do not see negative rates as an option here. I am not criticizing others that have used them, but we don’t see it as an option,” he told Central Banking magazine earlier this month in an interview published today.

Negative interest rates seek to encourage banks to spend their spare money by penalising them for keeping it in their country’s central bank.

The BoE has been less willing to cut interest rates than some of its peers. The US Federal Reserve last month cut interest rates by 25 basis points (0.25 percentage points) and the ECB has heavily suggested further stimulus is coming.

Carney’s Bank has kept the main interest rate – which determines the cost of lending in the economy – at 0.75 per cent, citing high employment and inflation close to its two per cent target.

Yet a no-deal Brexit on 31 October, the date Britain is scheduled to leave the European Union, could cause the Bank to lower rates to support the economy during a likely shock.

Carney told Central Banking that negative interest rates can be “counter-productive”. He said the Bank’s view “is that the effective lower bound is close to zero, but positive – just above zero.”

The governor also said he does not think changing the Bank’s inflation target, which is set at two per cent, is a good idea.

“I am not a big fan of changing the target,” he said. “If you are having trouble getting to two per cent it is not clear to me why moving to three per cent really helps.”

The Bank’s favoured inflation rate was 2.1 per cent in July, official figures showed earlier this month. Inflation in the Eurozone, on the other hand, was just one per cent in July, official data showed today.

By Harry Robertson

Source: City AM

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Bank of England’s Haldane ‘very cautious’ about cutting rates

Bank of England chief economist Andy Haldane sought to push back against market bets that the central bank’s next move will be an interest rate cut, saying he would resist lowering borrowing costs unless there was a sharp downturn.

Haldane contrasted the BoE’s stance with that of the U.S. Federal Reserve and the European Central Bank – both of which are expected to loosen policy – and stressed again that even a disruptive no-deal Brexit would not bring an automatic rate cut.

He acknowledged that business investment was “strikingly subdued” as companies struggled with Brexit uncertainty.

“My personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn,” he said at an event for local businesses in Scunthorpe, northern England.

BoE Governor Mark Carney and others have also deflected the idea that the Monetary Policy Committee is thinking of cutting rates while a Brexit deal remains possible.

They say the pricing of rate futures has been distorted by the risk of Britain leaving the EU without a transition deal on Oct. 31, creating a tension between their forecasts and market assumptions.

“Monetary policymakers are often cast as one-club golfers. In the current conjuncture, the problem is more that the MPC does not know which of two quite different fairways it should be aiming at,” Haldane said in his speech.

“With the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong.”

Britain’s economy appears to have slowed sharply during the three months to June, reflecting a lull after businesses rushed to prepare for Britain’s original EU exit date of March 29.

Some economists think the country risks slipping into recession especially if there is a no-deal Brexit.

But Haldane highlighted robust consumer spending and the strong labour market and said Britain’s economy was running at full capacity.

Even after a no-deal Brexit – something incoming prime minister Boris Johnson has said is prepared to do if the EU refuses to renegotiate the withdrawal deal – the case for a rate cut would not be clear-cut, Haldane said.

Carney and other BoE policymakers have said the BoE is more likely to cut rates than raise them after a no-deal Brexit.

Carney sounded less positive about the economy than Haldane when he said this month that underlying growth was running below its potential and relying heavily on household spending.

“PRISONER OF PAST”

Haldane used his speech to warn that markets and the public had grown too accustomed to ultra-low interest rates, a marked contrast in tone from 2016, when he defended “sledgehammer” stimulus after Britain voted to leave the EU.

“It is important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop,” Haldane said.

“Super-charging the supply side of the economy is what is now needed,” he added.

On Monday Britain’s National Institute of Economic and Social Research said a no-deal Brexit would hit the economy’s supply capacity and lower economic output by 5% relative to a softer Brexit.

Haldane said there was no better time to sort out deep-seated structural issues around education, training and transport links.

Johnson has said he wants to cut income taxes for higher earners as well as raise payroll tax thresholds, which would represent a major loosening of Britain’s fiscal policy.

Reporting by David Milliken

Source: Yahoo Finance UK

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What to expect from Bank of England’s interest rate decision

The Bank of England (BoE) is set to leave interest rates unchanged this week but will likely try to convince investors rate hikes are around the corner.

The BoE will on Thursday publish the minutes of the latest Monetary Policy Committee (MPC) meeting and the committee’s decision on interest rates. Analysts think the MPC will vote unanimously to kept the benchmark bank borrowing rate unchanged at 0.75%.

“We expect unchanged policy and for the minutes to maintain the current rhetoric of a gradual path of rate hikes,” Barclays’ senior UK economist Sree Kochugovindan said in a note sent to clients last Friday.

The Bank of England has repeatedly signalled that it wants to gradually raise the benchmark interest rate, which remains at a historic low. But economists, analysts, and investors think hikes are unlikely as long as Brexit remains unresolved and the UK’s economy remains lukewarm at best. Market prices indicate investors believe a rate cut is more likely than a hike.

As a result, Bank of England governor Mark Carney and his colleagues will have to signal in the MPC minutes and Thursday’s press conference that they do actually plan to hike rates if they don’t want markets to get a shock.

“We do not expect the BoE to move interest rates higher unless or until there is some positive resolution to the Brexit saga,” Nomura’s George Buckley wrote in a note to clients last week.

As well as Brexit uncertainty, Credit Suisse said economic “risks have turned to the downside” since the MPC’s last meeting. The investment bank cited recent worsening UK manufacturing data, as well as ongoing trade tensions between the US and China, both of which could hit economic growth. Barclays last week cut its forecast for UK GDP growth in 2019 from 1.2% to 1.1% on similar concerns.

Against this backdrop, the central bank looks more likely to cut rates than to raise them. Lower interest rates should help boost growth by encouraging borrowing and spending.

However, the Bank of England has consistently said it wants to gradually raise interest rates — not cut them further. Carney has even suggested he could raise rates if there is a no-deal Brexit, counter to conventional logic.

In order to keep this path open, the BoE will have to prepare the market for future hikes. It will likely do so by sounding a “hawkish” tone in the public comments of the committee. (In central banking, “doves” favour low interest rate policy, while “hawks” favour higher interest rates.)

“The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a note to clients.

“But with clearer signs emerging that domestic price pressures are building, we expect the Committee to reiterate its commitment to ‘ongoing’ tightening and to repeat its May warning that markets’ expectations are out of line with reality.“

Even if Carney and his colleagues do strike a more “hawkish” tone, investors may remain out of step with the bank.

“Markets are pricing out any prospect of a rate hike from the BoE this year (amid a Fed-led collapse in global rate expectations),” Michael Ingram, the chief market analyst at WH Ireland, told Yahoo Finance UK. “So they can try and sound hawkish, but the market ain’t buying it.”

The Bank of England’s decision will come a day after the US Federal Reserve makes its latest call on interest rates. Investors believe the Fed will signal rate cuts later this year. This loosening of policy may undermine the BoE’s attempts to threaten future rate rises.

Aside from the tone of comments from MPC members, investors will be watching the balance of voting on the nine-member committee closely. If even one member dissents, it could send shockwaves through the market as investors shift bets towards a rate hike later this year.

“A couple of hawkish comments from Haldane and Saunders have made that meeting a little more interesting than it might have been,” Allan Monks, JPMorgan’s UK economist, said in a note to clients.

“But we expect there will be no dissents at next week’s meeting, with the BoE instead using its communications to push back against current market expectations for cuts.”

By Oscar Williams-Grut

Source: Yahoo Finance UK