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Why the Bank of England should keep interest rates on hold

The Bank of England must leave interest rates on hold tomorrow and resist the urge to tinker until Britain’s economy is out of the General Election and Brexit fog, City A.M.’s panel of expert economists has said.

Much has changed in British politics since the BoE’s last monetary policy committee (MPC) decision in September. Prime Minister Boris Johnson failed to push his new deal quickly through parliament, leading him to request a Brexit extension and ultimately call a General Election, bringing yet more uncertainty to the economy.

City A.M.’s Shadow MPC today voted eight to one in favour of keeping the main interest rate on hold at 0.75 per cent. The consensus view was that with politics in flux, any move would be guess work and not grounded in any reliable expectations about the future.

Here’s what our Shadow MPC said:

Guest chair: Frances Haque – Santander

Hold: The bank rate should be kept flat. Inflation remains below the two per cent mark with economic growth data for the third quarter looking more positive than the previous quarter. And with real wage growth continuing, there is less of a rush required to create further stimulus. With the current political landscape now in General Election mode and further fiscal boosts on the cards, it seems prudent to wait and see the outcome of the election before making a change. However, if there is further Brexit delay leading to slower economic growth a cut may be required.

Jeavon Lolay – Lloyds Bank

Hold: There is a strong case for waiting for further news before any move. Brexit developments remain conditional on the upcoming election, adding another layer of uncertainty to the economic outlook.

Peter Dixon – Commerzbank

Hold: Economic conditions remain benign and inflation is contained. With the Brexit deadline merely having been postponed another three months, the prudent strategy is to keep the powder dry for now.

Vicky Pryce – CEBR

Hold: And be prepared to do more if needed. UK economy appears to be stagnating as world economy slows down, Brexit worries continue to dampen business and consumer sentiment and forthcoming general election is adding to uncertainty.

Mike Bell – JP Morgan Asset Management

Hold: With an election approaching that could potentially provide more clarity on what type of Brexit, if any, we are heading for, it makes sense to stay on hold for now.

Simon Ward – Janus Henderson

Cut: The case for easing is at least as strong as elsewhere. Inflation is below target and falling while economic weakness has spread to the labour market, with unemployment and redundancies picking up.

Ruth Gregory – Capital Economics

Hold: The chance of a Brexit deal in January suggests a cut would be premature. But unless the headwinds of weak global growth and Brexit uncertainty fade, the next move in rates may be down.

Tej Parikh – Institute of Directors

Hold: With the upcoming election largely making calculations about Brexit and the future path of the economy moot, it’s best to hold interest rates for now.

Joshua Mahony – IG

Hold: Carney had his hands burnt by the mistakenly cutting rates immediately after the referendum. With Brexit and election uncertainty looming, now is the time to wait for the dust to settle.

By Harry Robertson

Source: City AM

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Brexit and mortgages: what next for interest rates and repayments?

What’s next for Brexit and mortgages? Will mortgages become more expensive, and should you remortgage now?

What’s going to happen now with Brexit and mortgages, since the EU has agreed to grant Britain a three-month extension? How does this decision affect potential and current home owners, up to January and beyond? Will we see much of a fluctuation in the Bank of England’s base interest rate, and with it, cheaper or more expensive mortgages?

Martijn Van Der Heijden, Chief Strategy Officer at online mortgage brokerage Habito, comments on the implications of the Bank of England’s decision last month not to raise interest rates:

‘Interest rates remain relatively low which will be welcome news for those looking to get a good deal on their mortgage. This “wait and see” approach from the MPC (Monetary Policy Committee) is something we also see reflected in our own data with a surge in buyers choosing fixed deals for five years or more as they try to “Brexit-proof” their mortgage and lock in the same rate until 2024 and beyond.’

Basically, whether you are first-time buyer or remortgaging, now is the time to lock in a good fixed rate mortgage deal – if you don’t mind losing out somewhat in case the interest rates fall even lower than the current level. Why might that happen? It all depends on how the final Brexit deal is negotiated, and how smoothly it is executed. In the still possible event of Britain not securing a deal, the pound is likely to fall, and inflation will rise, which could lead the Bank to slash the interest rates even further. If this happens, and you are on a variable rate mortgage, you could see your repayments fall.

On the other hand, in the event of an orderly Brexit and a strengthening economy, interest rates could rise, which would be good news for your savings and wages, but not so good news for your variable rate mortgage repayments. A fixed rate deal would protect you from any significant interest rate spike, at least for a few years.

Which scenario is more likely? The truth is, nobody knows. We would say, though, that taking out a variable rate mortgage might not be worth the gamble under current uncertain circumstances – you could win a little, or lose big, so a good fixed rate deal will at least allow you to relax a little, for a while.

BY ANNA COTTRELL

Source: Real Homes

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One in four UK households now predict the Bank of England to cut interest rates

The number of households expecting the Bank of England (BoE) to cut interest rates has risen to its highest level since the Brexit referendum, survey data showed today, as Britons remain downbeat about their financial health over the coming months.

Households are pessimistic despite wages rising at a fast pace and unemployment close to record lows. Brexit uncertainty has been one factor dampening the mood, and there are signs that Britain’s jobs boom is slowing down.

The UK household finance index – a gauge of people’s perceptions of financial wellbeing by data firm IHS Markit – edged up to 44.4 in October from 43.1 in September.

The figure was the gauge’s highest mark since January but nonetheless signalled pessimism among households about their finances. A score of under 50 is considered a negative reading.

IHS Markit economist Joe Hayes said the “latest survey results from UK households continue to show how economic and political uncertainty is holding back what could have been a more resilient growth period for the UK economy”.

“These concerns, coupled with the uncertain economic outlook, have led to an increased proportion of UK households expecting the Bank of England to cut interest rates.”

At the start of the year over 70 per cent of UK households through the BoE would hike rates when it went to change them. That number has now fallen to around 58 per cent, its lowest level in two years.

A growing number of households – 25 per cent – now expect the Bank’s next move to be a cut, the highest proportion since October 2016.

Hayes said: “Negative job security perceptions and a pessimistic financial health outlook have led UK households to delay spending, with major purchases suffering as a result.”

By Harry Robertson

Source: City AM

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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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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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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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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