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Bank of England could cut interest rates to near zero in no-deal Brexit

Interest rates could be cut to almost zero if Britain leaves the European Union without a deal, a top official at the Bank of England said today.

Gertjan Vlieghe, a member of the Bank’s rate-setting monetary policy committee (MPC), told an audience in London today that Threadneedle Street might have to slash rates to nearly zero in the event of a no-deal Brexit.

The comments mark one of the strongest indications yet given from an MPC member of the potential direction the BoE could take if Britain and the EU failed to reach an agreement by the deadline of 31 October.

Boris Johnson, the bookies’ favourite to succeed Theresa May as the next Prime Minister, has pledged to take Britain out of the EU with or without a deal by the end of October, raising expectations of a potential no-deal exit.

In a speech given at Thomson Reuters, Vlieghe said: “On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to zero per cent in the event of a no-deal scenario.”

Sterling remained roughly flat at 1.252 against the dollar.

Vlieghe, who was once a bond strategist at Deutsche Bank, said it was “highly uncertain when I would want to reverse these interest rate cuts”, as it would depend on the rate of recovery from a potential no-deal shock to the markets.

In June the rate-setting committee at the Bank voted unanimously to hold interest rates.

It had raised rates to 0.75 per cent last August from a low of 0.25 per cent.

Yesterday governor Mark Carney refused to be drawn on whether he has his eyes set on the top job at the International Monetary Fund (IMF) after he leaves the Bank in January.

Carney said there were “a few orderly transitions” he had to look after at Threadneedle Street before he focused on anything else.

By Sebastian McCarthy

Source: City AM

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No rush for Bank of England to raise rates after a Brexit deal

The Bank of England probably has more time than it previously thought before it will need to raise interest rates, assuming Britain can leave the European Union with a transition deal, BoE interest-rate setter Silvana Tenreyro said on Wednesday.

The pound would probably rise after a Brexit deal, Tenreyro said. Combined with the ongoing slowdown in the world economy this would probably offset the inflation pressure building in Britain’s labour market and allow the BoE to keep rates on hold at their current level of 0.75% for a while.

“Coupled with signs of a weaker global outlook, recent developments likely lengthen the period until there is a sufficient pick-up in inflationary pressures for me to vote to raise Bank Rate,” Tenreyro said in a speech. “I do not currently anticipate such a pick-up in the next few months.”

Tenreyro said a “small amount of policy tightening” would be needed over the next three years in the event of a Brexit deal.

The BoE has long advised investors that rates are likely to go up in a gradual and limited way, as long as a Brexit deal is done.

In the event that Britain leaves the EU without a deal, it was more likely than not that the BoE would need to ease monetary policy to soften the shock, she said, repeating comments she made in March.

But this was “by no means certain,” she added.

The fall in yields on British debt reflected worries about the world economy and not just Brexit, she said.

Many investors are betting that the BoE’s next rate move will be a cut, not an increase, given their fear that a no-deal Brexit looks more likely.

Both contenders to replace Theresa May as the next prime minister have said they are prepared to take the country out of the EU without a deal if necessary.

BoE Governor Mark Carney said last week that the risks of a no-deal Brexit and an escalation of global trade tensions were rising, adding to bets in markets on a BoE rate cut.

Source: Investing

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Bank of England holds interest rate at 0.75% as ‘downside risks’ increase

The Bank of England on Thursday held the headline UK interest rate at 0.75%.

The central bank delivered its June interest rate decision at 12pm on Thursday. The 9-person Monetary Policy Committee (MPC) voted unanimously to hold the bank borrowing rate at 0.75%. Analysts and economists had widely forecast this outcome.

The MPC said UK economic growth appears to have “weakened slightly in the first half of the year” and said “downside risks to growth have increased.”

“Globally, trade tensions have intensified,” the MPC said in a statement. “Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further.”

Pound falls on decision

The pound fell against the dollar and the euro in the immediate aftermath of the Bank’s decision, although not significantly.

The pound was down about 0.1% against the euro at €1.123 10 minutes after the decision, having traded at €1.125 just before the announcement. Sterling was up 0.4% against the dollar at $1.269 but had been as high as $1.272 earlier in the morning.

The drop-off came as investors judged that Thursday’s update meant a future interest hike from the Bank of England looked less likely.

The Bank of England and governor Mark Carney have consistently said they plan to gradually raise the UK interest rate.

The MPC said on Thursday that if the economy develops “broadly in line” with forecasts and there is a smooth Brexit, then “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate.”

However, analyst and economists say the failure to resolve Brexit means the bank is unlikely to make any major changes this year.

“Despite a growing number of hawkish signals coming from the Monetary Policy Committee, in reality the Bank’s room for manoeuvre is limited until Brexit uncertainty clears,” Tej Parikh, chief economist at the Institute of Directors, said in a statement.

The MPC admitted on Thursday: “The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal.”

Brexit cloud hangs over the Bank

Despite the Bank’s signals about raising rates, Investors believe the Bank of England is more likely to cut interest rates than raise them, according to market data ahead of Thursday’s announcement.

The backdrop to Thursday’s decision was a mixed economic picture for the UK. Jobs and wage data has held up well so far in 2019, but GDP growth is sluggish and recent manufacturing data suggests it could remain that way.

The MPC said on Thursday that recent data has been “volatile, in large part due to Brexit-related effects on financial markets and businesses.”

However, the committee repeated the statement that its “response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” Carney has in the past said that the Bank could raise interest rates in response to a no-deal Brexit, although economists and investors largely think he is bluffing.

Central banks load the ‘bazookas’

The Bank of England’s decision to hold rates steady came as other major central banks this week signalled intentions to loosen monetary policy.

European Central Bank chief Mario Draghi said earlier this week that more stimulus may be needed in the eurozone if conditions do not improve. The US Federal Reserve held its benchmark interest rate unchanged at 2.5% on Wednesday but signalled a future interest rate cut looks increasingly likely.

IMF head Christine Lagarde warned in January that “the world economy is growing more slowly than expected and risks are rising.” Conditions have not improved markedly since then, with key issues such as the US-China trade war and Brexit yet to be resolved.

Bank of England governor Mark Carney will give a speech at the annual Mansion House dinner in London on Thursday evening. Carney could give more details on his outlook for the UK economy and future rate movements.

By Oscar Williams-Grut

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

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Bank to hold rates steady as growth falters

Bank of England policymakers are set to keep interest rates on hold again this week, as economic growth slows sharply after a stock-building boost at the start of 2019.

The Monetary Policy Committee (MPC) is seen keeping rates at 0.75% once more in Thursday’s noon decision, which comes after the latest official figures showed the economy shrank by a worse-than-feared 0.4% in April.

But MPC members have been banging the drum for the need to raise rates if the Government secures a smooth Brexit – which is the scenario on which it has based all its forecasts.

Ben Broadbent, deputy governor for monetary policy, and fellow MPC member Michael Saunders, told MPs on the Treasury Select Committee that financial markets are not pencilling in rate hikes soon enough.

This follows similar comments from Bank governor Mark Carney at the May inflation report, when he said investors were wrong to price in just one rise over the next three years.

Inflation has also moved up from recent lows, increasing to 2.1% in April against 1.9% in March.

But economists believe the Bank will sit on its hands until the Brexit outcome is clear.

Howard Archer, chief economic adviser to the EY Item Club, said: “April’s sharp dip in GDP and soft May surveys reinforces belief that the Bank of England will maintain a cautious “wait and see” approach on interest rates amid heightened economic, political and Brexit uncertainties.

“We believe the Bank of England is likely to keep interest rates at 0.75% through 2019.”

Philip Shaw at Investec added: “With no urgency to tighten policy again, the committee would probably want to avoid making a policy move now which it might well have to reverse relatively soon afterwards.”

In May, the Bank upped its forecasts for UK growth to 1.5% this year, up from the paltry 1.2% predicted in February thanks largely to a more stable global economic outlook.

It also increased its gross domestic product (GDP) growth outlook to 1.6% in 2020 and 2.1% in 2021, up from 1.5% and 1.9% previously.

Growth accelerated to 0.5% in the first quarter thanks to stockbuilding ahead of the original March 29 Brexit deadline.

But the monthly GDP figures for April confirmed expectations that this would quickly unwind in the second quarter.

A 24% slump in car production was largely behind the April contraction, while the services sector recorded its lowest three-month growth since this time last year, climbing just 0.2%.

Recent purchasing managers index (PMI) surveys have also pointed to a mixed May, with output contracting across manufacturing and construction, but activity edging up across the services sector.

And the global economic outlook has also become “murkier”, according to Mr Shaw.

He said: “Our central view is that the UK leaves the EU at the end of March 2020 and that the MPC eventually raises rates again the following November.

“We cannot pretend that there is any degree of inevitability here, bearing in mind the all-enveloping dark cloud of uncertainty.”

By Holly Williams

Source: Yahoo Finance UK

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Bank of England chief economist says UK rate rise is on the horizon

The Bank of England’s chief economist, Andy Haldane, has said the UK is nearing the time it will need to raise interest rates to keep inflation pressures in check.

Haldane wrote in The Sun on Saturday that “a lost decade” of wage growth is coming to an end ahead of “steady if not spectacular” growth in 2019.

“For me personally, the time is nearing when a small rise in rates would be prudent to nip any inflationary risks in the bud,” he said.

“Acting early with a rate rise acts as insurance against the need for faster and larger rises in interest rates in future.”

Last year, Haldane was one of two current members on the Monetary Policy Committee that voted for a rate raise ahead of the unanimous decision to increase interest from 0.5 per cent to 0.75 per cent.

He reaffirmed the Bank of England’s desire to raise rates in a gradual way, but financial markets believe rates are more likely to be cut than increased in the next year amid Brexit uncertainty.

The potential for further delays to the deal or a no deal scenario are key causes for concern, while the US-China trade war has also softened the global economy.

Markets also expect the US Federal Reserve to cut rates two or three times this year.

Haldane said it would be arrogant to bet against market predictions, but told The Sun that inflation pressures would probably increase once the Brexit impasse was resolve.

“With spending by both households and companies then picking up, that could put at risk the Bank of England’s 2% inflation target – with upward pressure on prices eating into pay and savings,” he wrote.

“Those are the circumstances in which the Bank’s Monetary Policy Committee, on which I sit, would need to consider the case for a further modest rise in interest rates.”

By Michael Searles

Source: City AM

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Interest rates would be hiked if Britain achieves orderly Brexit, says Bank of England

Deputy governor of the Bank of England Dave Ramsden has said interest rates would need to be hiked if Britain leaves the European Union in an orderly manner with a transition deal.

Ramsden, speaking in Inverness, Scotland, said although he expected growth to pick up if a deal is reached, he is more pessimistic about UK economic growth than his colleagues on the Bank’s monetary policy committee (MPC).

His speech echoed the position of the MPC on interest rates, which signalled at its last announcement earlier this month that “ongoing tightening of monetary policy” was appropriate, with governor Mark Carney saying he thought the markets were not accurately factoring in rates rises.

Ramsden, who has a slim chance of replacing Carney when he steps down in January 2020, said today: “If we get a smooth Brexit with a transition deal… I expect growth to pick up, leading to excess demand and building domestic inflationary pressure, so that further monetary tightening is appropriate to maintain monetary stability.”

He said he was “a little more pessimistic on GDP growth than my colleagues on the MPC”, saying he saw “more downside risks to productivity” and was “less optimistic that investment will recover as much as it does” in the MPC’s latest forecast.

The deputy governor warned that “unarguably the biggest risk to the UK economy and UK financial stability, remains that of a Brexit outcome of no deal and no transition”.

Britain’s departure date from the bloc was extended from 29 March to 31 October by Brussels and Prime Minister Theresa May in the hope of getting a deal through parliament.

However, after three failures to pass her agreement May announced her resignation. The contest to replace her as Conservative leader and PM is likely to see a Brexiter installed who may take Britain out of the EU without a deal.

“That would have large negative economic effects, both in the Bank’s view and in the views of the businesses we talk to up and down the country,” he said.

Yet he said the financial system would be resilient even to a “worst case disorderly scenario”, meaning “banks would be able to continue to lend to households and businesses in a way they couldn’t at the time of the financial crisis”.

Ramsden said the Bank’s response to such an event would depend on its exact shape. “There are scenarios where the balance of those factors would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to tighten,” he said.

By Harry Robertson

Source: City AM

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BoE’s Saunders does not expect UK rates to rise ‘far or fast’

The Bank of England is unlikely to raise interest rates far or fast, even if the economy picks up following a smooth Brexit, Monetary Policy Committee member Michael Saunders said in an interview published on Thursday.

Business investment would probably strengthen following a smooth Brexit but a series of “cliff edges” could cause it to continue to stagnate, Saunders told the Northern Echo newspaper during a visit to northeast England.

“I would expect interest rates will go a bit higher over time, but it won’t be far or fast,” he said.

A ‘neutral’ level for interest rates, which would neither stimulate nor slow the economy, was probably around 2 percent, compared to 5 percent before the 2008 financial crisis, Saunders added.

The Bank of England last raised interest rates in August, increasing them by a quarter of a percentage point to 0.75 percent. Financial markets see little chance of a rates rising this year while it remains unclear on what terms Britain will leave the European Union.

The BoE has long said interest rate rises will most likely be limited and gradual, but last week Governor Mark Carney said markets had gone too far in assuming rates would rise just once over the next three years.

However, on Tuesday the BoE’s chief economist, Andy Haldane, stressed the ongoing uncertainty over Brexit and said it would be “deeply arrogant” to say markets were wrong about the outlook for interest rates or the economy more broadly.

Saunders, the first BoE policymaker to vote for interest rates to rise last year, said Britain had missed out on two to three years of business investment growth since June 2016’s referendum decision to leave the EU.

A smooth Brexit transition to a trading relationship with the EU that was closer than Canada’s, but more distant than Norway’s, “probably wouldn’t be as bad as many businesses fear,” Saunders said.

“No-deal Brexit would be off the table, business investment would recover a bit, the economy would continue to grow steadily and the jobless rate would probably fall,” he added.

By contrast, a no-deal Brexit would most likely cause sterling to fall and push up inflation, as well as causing business investment to fall further.

“That would be painful,” he said.

Reporting by David Milliken, editing by Andy Bruce; Editing by Toby Chopra

Source: UK Reuters

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BoE’s Haldane: ‘Deeply arrogant’ to assume markets wrong on rates

Policymakers would be “deeply arrogant” to assume financial markets or other forecasters are definitely wrong about the outlook for interest rates or the broader economy, Bank of England chief economist Andy Haldane said on Tuesday.

Last week BoE Governor Mark Carney said investors were underestimating how much interest rates could rise, even as the British central bank kept borrowing costs on hold due to Brexit uncertainty.

Haldane said in a question and answer session after a lecture at the University of Sheffield that due to unusually high economic uncertainty related to Brexit, it was reasonable for others to take a different view on the outlook to the bank.

“I think such is the uncertainty right now – for all sorts of reasons, all sorts of obvious reasons about the future course of the economy, it’s not in anyone’s interests to say the markets are wrong and we are right. That would be deeply arrogant,” he said.

“It’s implausible that anyone has a crystal ball on how the economy will evolve. Last week we gave the Bank of England’s view on the economy, having made some assumptions about, for example, how Brexit might play out. Time will tell whether that view comes to pass,” Haldane added.

Reporting by David Milliken, editing by James Davey

Source: UK Reuters

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Rates to be held at 0.75% as Brexit ‘fog’ overshadows growth spurt

The Bank of England’s latest rates decision comes amid signs that Brexit stockpiling has boosted recent economic growth figures.

Bank of England policymakers are set to hold interest rates at 0.75% on Thursday as Brexit uncertainty overshadows a strong start to the year for the economy.

The Bank’s latest rates decision – which will be accompanied by its quarterly Inflation Report forecasts – comes amid signs that Brexit stockpiling has boosted recent economic growth figures.

Data suggests the economy may have expanded by at least 0.4% in the first quarter, up from 0.2% in the final three months of 2018.

But this was largely due to “no deal” precautionary stockbuilding ahead of the original March 29 Brexit deadline and relatively mild weather, which experts believe will unwind in the April to June quarter.

The MPC may see the extension of Brexit as prolonging the uncertainties facing the UK economy and increasing downside risks

Howard Archer, EY Item Club

The latest manufacturing sector survey figures suggest this has already started, with a slowdown in activity seen in April after a surprisingly buoyant March.

Given the six-month EU departure delay, the “fog” of Brexit – as Bank Governor Mark Carney put it earlier this year – is unlikely to lift for some time and policymakers are seen remaining firmly in wait-and-see mode.

Howard Archer, chief economic adviser to the EY Item Club, said: “The MPC (Monetary Policy Committee) is likely to hold off from hiking interest rates until the Brexit situation becomes clearer and it can see how the economy is responding.

“Indeed, the MPC may see the extension of Brexit as prolonging the uncertainties facing the UK economy and increasing downside risks.”

Investec economist Philip Shaw said worries over the state of the global economy have also increased in recent months, which is “likely to provide the main argument for keeping rates steady this time”.

But economists are increasingly expecting pressure building for the MPC to consider raising rates later in 2019.

Investec believes one member – Michael Saunders – may even vote for a hike on Thursday.

The Bank is expected to nudge its 2019 growth forecasts higher in the accompanying inflation report thanks to the stockpile-boosted first quarter.

It slashed its growth forecast to 1.2% in the February report, which would mark the weakest expansion since 2009, when the economy was in a recession following the financial crisis.

The Bank may also up its inflation outlook, despite the Consumer Prices Index remaining steady at 1.9% in March, with rising oil costs and the recent increase in Ofgem’s energy price cap set to have an effect.

“The MPC will find a case for higher rates increasingly compelling as the year draws on,” said Mr Shaw.

He is pencilling in a hike to 1% in November, although this is based on a Brexit deal being reached, while Mr Archer said the odds favour rates being held throughout 2019.

The Bank’s rates announcement also comes after the Treasury announced last week that it had kicked off the search for Mr Carney’s successor.

It is using a headhunter for the first time to look for a replacement ahead of his departure next January.

Source: Express and Star