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BoE’s Haldane says UK recovering ‘faster than anyone expected’

Britain is recovering faster than anyone had expected from the economic impact of COVID-19, but businesses need better incentives and access to finance to invest in technology, BoE’s chief economist Andy Haldane said.

“UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected,” Haldane said in an article for the Mail on Sunday newspaper written jointly with the former chairman of John Lewis Partnership, Charlie Mayfield.

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Britain’s central bank said in a policy statement on Thursday the economy was recovering faster than it had forecast in August, though prior to that several policymakers had struck a more cautious tone than Haldane.

Haldane said he was writing in his capacity as chairman of a government commission to boost economic productivity.

Reporting by David Milliken; Editing by Chris Reese

Source: UK Reuters

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Bank of England: UK economy ‘likely’ to need further stimulus

Bank of England interest rate-setter Michael Saunders said today that it was “quite likely” that more stimulus will be needed for Britain’s Covid-hit economy in a downbeat speech on the outlook.

“I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the two per cent target,” Saunders said.

Growth was likely to disappoint relative to the Bank’s forecasts published last month, Saunders said.

He said an ongoing recovery was the result of a “benign window” – the combination of huge government spending and the relaxation of lockdown measures.

“This window may now be closing,” Saunders said, adding that a downside scenario for the economy would be “very costly”.

Saunders said the withdrawal of the government’s furlough scheme at the end of October was likely to lead to a spike in unemployment.

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“Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers,” he said.

“The scale of the projected rise in unemployment (about 3½ percentage points) is similar to that seen in 2008-11, but it occurs much faster. Indeed, it would be, by some distance, the sharpest rise in unemployment for at least 50 years.

“While there are uncertainties around that forecast, my view is that the picture of a sharp rise in unemployment is – sadly – highly plausible,” he added.

On Wednesday, the Bank’s deputy governor Dave Ramsden and another rate setter, Gertjan Vlieghe, also warned the economy could suffer more damage from the coronavirus crisis than spelt out by the central bank last month.

Many economists expect the Bank to announce a ramping-up of its bond-buying programme in November.

By James Booth

Source: City AM

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Bank of England: Downturn better than feared but UK faces longer recovery

The Bank of England has significantly improved its prediction for the path of the UK economy this year, but said the recovery will take longer than initially expected.

The Bank’s projection, released today, said the UK economy was likely to shrink by 9.5 per cent this year and then grow by nine per cent in 2021.

It is still more optimistic than many forecasts, but predicts a slower rebound that the Bank expected in May. Then, it said GDP would shrink by 14 per cent this year and grow by 15 per cent in 2021.

Threadneedle Street’s latest monetary policy report predicted UK GDP would not recover its pre-coronavirus size until the end of 2021. It had previously expected it to recover by “the second half of 2021”.

It came as the Bank left interest rates on hold at their record low level of 0.1 per cent. And it left its bond-buying target at £745bn, both in 9-0 votes among the monetary policy committee (MPC).

The MPC flagged that rates could stay lower for longer, however. It changed its guidance to say it “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably”.

The pound jumped in the wake of the decision. It was last up 0.4 per cent at $1.317.

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Bank of England: 2020 better than expected but 2021 worse

Bank of England governor Andrew Bailey told journalists: “We have had a strong recovery in the last few months.”

“The pace of recovery in the data that we’ve had since May puts the economy ahead of where we thought it would be in May.” This was largely due to the lockdown being eased earlier than expected, the Bank said.

It predicted that unemployment is likely to touch 7.5 per cent this year and then drop to six per cent in the fourth quarter of 2021.

That would put 2.5m people out of work but is an improvement on May’s rough estimate of eight per cent unemployment on average in 2020 and seven per cent in 2021. It means unemployment would stay lower than during the financial crisis.

But unemployment is set to stay higher for longer, at 4.5 per cent by the end of 2022 compared to May’s expectation of a fall to four per cent for the year on average.

The Bank warned that much of the economy was still suffering. “Household spending that involves high levels of interactions with others fell the furthest and has recovered only partially,” it said.

Bailey said the recent rebound in growth is not “necessarily a good guide to the immediate future”. He said elevated concerns about coronavirus are likely to constrain spending. And heightened business uncertainty would likely weigh on investment.

Some analysts said the Bank was being too optimistic about the UK economy. Yael Selfin, chief economist at KPMG, said that “the cloud of a second wave and further localised lockdowns” pose a threat to the Bank’s forecasts.

Negative interest rates in ‘toolbox’ for the first time

The Bank today said that negative interest rates have been added to the ‘toolbox’ of possible measures for the first time. But Bailey said: “We’re not planning to use them at the moment.”

Negative interest rates mean banks who hold their spare money in the Bank’s virtual vaults would have to pay money to do so. The idea is that this forces them to lend their extra cash out to the benefit of the economy.

“I would say that this is, I think, the first time the Bank of England has said definitively, yes they’re in the toolbox,” Bailey said. “We don’t have a plan to use them at the moment but they are in the toolbox.”

Bailey said the Bank had concluded that they could be useful in some scenarios. It came to a different conclusion in the financial crisis, but Bailey said: “10 years is a long time in monetary policy. That was a different crisis.”

However, as negative interest rates squeeze banks’ profits, the Bank could face opposition from lenders over the move.

Analysts had expected the MPC to leave monetary policy on hold. Rain Newton-Smith, CBI chief economist, said: “It’s unsurprising that the monetary policy committee kept its powder dry this time around.”

She said there were “early signs of a recovery gathering pace”. But she added: “Downside risks to the outlook are still looming large, so a ‘wait and see’ approach seems like the right one at present.”

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said it was a “missed opportunity” to support the economy.

“The recovery in consumers’ spending could have been reinforced today by targeted action to get borrowing costs down,” he said.

Banks strong enough to take Covid hit

Britain’s lenders are strong enough to keep giving out loans and take a big hit from during coronavirus, the Bank of England said in a new financial stability report that was also published today.

It said banks are likely to lose £80bn through bad loans. But it said they “have buffers of capital more than sufficient to absorb the losses”.

Since the financial crisis exposed banks’ weak balance sheets, central banks such as the BoE have forced them to keep more cash at hand.

The Bank’s financial policy committee (FPC) said UK lenders would need to take around £120bn of credit losses to deplete their capital. And that would take a GDP hit much bigger than the Bank expects.

Capital buffers have helped banks keep lending to companies during the coronavirus pandemic.

The FPC said companies could well face a “cash-flow deficit” of up to around £200bn. That is more than double its normal size, than Bank said.

So far, banks have lent about £70bn to cash-strapped firms, the BoE said. Deputy government Jon Cunliffe said it was in banks’ own interests to continue to support lend to hard-hit firms.

“The financial sector needs to continue to support the economy,” he said.

Harry Robertson

Source: City AM

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Sterling set for biggest monthly rise in more than a decade as dollar slides

The pound advanced towards $1.32 on Friday, on track for its biggest monthly rise in more than a decade as a broad-based dollar decline fuelled demand for the British currency.

But concerns of a second wave of infections, a weak economy and growing pressure to strike a Brexit trade deal before a transition period ends in December are prompting investors to become wary of the currency’s prospects in coming months.

Bank of America Merrill Lynch strategists, who have been bearish on the pound, said the rest of 2020 could see weakness in the currency, especially as the period of August through December historically contains four negative months for sterling.

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“The fortunes of the pound will increasingly be driven by the monetary policy stance, the ability of the economy to rebound from the global pandemic, and Brexit negotiations, which are effectively stuck in the mud,” the strategists said.

On Friday, the pound rose 0.5% to $1.3159, its highest level since early March. On a monthly basis, it is up nearly 6%, its biggest rise since May 2009, according to Refinitiv data.

The pound’s gains can be attributed to the dollar’s losses.

The greenback has fallen nearly 5% in July, with most of the drop coming in the last 10 days as new cases of coronavirus surged across several U.S. states and some recent data pointed to an economic recovery losing steam.

British Prime Minister Boris Johnson said on Friday some lockdown easing planned for the whole of England would need to be delayed and the country’s chief medical officer said any further opening up of the economy would raise infection rates.

Concerns over the struggling economy have prompted hedge funds to unwind their bullish bets on the pound in recent weeks while derivatives data signal more weakness ahead.

Reporting by Saikat Chatterjee

Source: UK Reuters

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UK economy on course for V-shaped recovery, says Bank of England economist

UK economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound but “considerable” risks remain, according to the Bank of England’s chief economist.

Andy Haldane, who also sits on the Bank’s interest rate-setting committee, said the recovery in the UK and globally had come “sooner and faster” than expected.

In a webinar speech on Tuesday, Mr Haldane said the UK economy was benefiting from a rebound in consumer spending since lockdown restrictions have begun to ease.

He said: “It is early days, but my reading of the evidence is so far, so V.”

He added: “The recovery in both the UK and global economies has come somewhat sooner, and has been materially faster, than in the Monetary Policy Committee’s May Monetary Policy Report scenario – indeed, sooner and faster than any other mainstream macroeconomic forecaster.”

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But he said there was the risk of a “vicious cycle” in the economy if unemployment proves to be higher than expected and warned against a return to the mass youth unemployment seen in the 1980s.

He said: “Risks to the economy remain considerable and two-sided.

“Although these risks are in my view slightly more evenly balanced than in May, they remain skewed to the downside.

“Of these risks, the most important to avoid is a repeat of the high and long-duration unemployment rates of the 1980s, especially among young people.”

His comments come after the Bank recently said it now expects gross domestic product to tumble by 20% in the first half of the year, which is far less than the 27% it predicted in its May forecast.

But governor Andrew Bailey warned at the time against getting “carried away” by signs the recession may not have been quite as steep as it expected, with the Bank launching another £100 billion of quantitative easing (QE) to help boost the economy.

Mr Haldane was the only one on the nine-strong Monetary Policy Committee to vote against increasing QE in the June meeting.

In his speech, he said if the economy continues recovering on a similar path as lockdown measures ease further, then the loss in annual GDP could be far lower than first feared, at 8% against 17% forecast in May.

But he cautioned some of this may be down to pent-up demand, as well as the massive Government support for households and businesses through the scheme to furlough workers on 80% pay.

With nine million workers currently furloughed, he said there was a risk of soaring unemployment when the Government support measures end, which could impact the path of recovery.

Mr Haldane said he remained “open-minded” about more action to boost the economy.

Official figures also on Tuesday showed the economy shrank by more than first thought between January and March, down 2.2% – the largest fall since 1979.

Data has shown GDP contracted by a record 20.4% in April, but Mr Haldane said this was “ancient history” with the UK and global economy now fully in the recovery phase of the crisis.

Source: Express & Star

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Bailey: Bank of England will reverse QE before raising rates

Bank of England governor Andrew Bailey believes the Bank of England must begin reversing quantitative easing before hiking interest rates from record lows.

Bailey said today that a reveral of QE should come before lifting rates from their historic lows of 0.1 per cent, signalling an upending of long-standing Bank of England policy.

Bailey said the time for such action was not now, but that the high level of central bank asset purchases “shouldn’t always be taken for granted”.

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“When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis,” Bailey wrote in an article for Bloomberg.

Last week the Bank of England announced a further £100bn of stimulus to take its bond-buying target from £645bn to £745bn for 2020. However, it said the rate of QE would decrease for the rest of the year.

The Bank’s monetary policy committee slashed interest rates to 0.1 per cent back in March to combat coronavirus.

Bailey’s comments today signal a shift away from his predecessor Mark Carney’s strategy.

Carney had said the Bank would raise rates before trying to sell bonds back to the market.

But Bailey said today he did not want high Bank of England purchases of government bonds to become a long-standing scenario.

“Elevated balance sheets could limit the room for manoeuvre in future emergencies,” he said.

The Bank of England has purchased huge amounts of government bonds since the start of the coronavirus crisis.

By Joe Curtis

Source: City AM

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We must be ready for further stimulus, says Bank of England’s Andrew Bailey

The Bank of England and other policymakers must be ready to take further action to help the UK’s economy because of the risk of the coronavirus shutdown causing long-term damage, governor Andrew Bailey has said.

“We are still very much in the midst of this,” Bailey told broadcasters today.

His comments come after new data showed the UK’s economic output tumbled over 20 per cent in April, suffering the largest drop since records began in 1997 as the coronavirus lockdown brought many sections of the economy virtually to a halt.

“We hope that will be as small as possible but we have to be ready and ready to take action, not just the Bank of England but more broadly, on what we can do to offset those longer term damaging effects,” Bailey said.

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While the fall in April – when the economy spent a full month under lockdown – was dramatic, the big question was how much long-term damage this would inflict on Britain’s economy, he said.

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Bailey said the record drop in GDP was close to the central bank’s expectation for the month, and reiterated his view that some early signs of economic recovery have emerged since then.

The Band of England is expected to announce an expansion of at least £100bn in its bond-buying firepower when its Monetary Policy Committee meets next week in order to limit the damage caused to the economy by the Covid-19 pandemic.

The central bank has already spent the bulk of the record £200bn expansion to its asset-buying programme, which was launched in March.

While the BoE has reduced interest rates to an all-time low of 0.1 per cent in a bid to mitigate the economic impact of the virus, it has not been willing to follow other central banks in setting negative rates.

This decision means that the Bank’s main tool for combatting the coronavirus-induced recession is its bond-buying programme.

Speaking earlier this week, Bailey said the recession triggered by the pandemic will be “different” to others.

“If there is any such thing as a normal recession… this one will be different. There will be elements of a faster recovery, because the first stage of the recovery is literally lifting restrictions and allowing people to go out,” Bailey said at a panel hosted by the World Economic Forum.

By Anna Menin

Source: City AM

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BoE not remotely close to decision on negative rates, says chief economist

The Bank of England’s chief economist has said the bank is not remotely close to any decision on taking interest rates below zero to cope with the pandemic.

Andy Haldane said the key factors for the BoE to consider were the consequences of negative rates for banks and lenders, which would squeeze margins.

“Those are the aspects that we’ll look at,” Haldane said during an online discussion organised by the Confederation of British Industry on Tuesday.

“To be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing.”

Since the start of the coronavirus outbreak, the bank has slashed its main rate to a record low of 0.1 per cent, prompting questions about whether it will cut into negative territory to stimulate the economy further.

It would mean banks are charged a small amount for keeping their money with their country’s central bank. The European Central Bank’s (ECB) deposit rate is currently minus 0.5 per cent.

Last week, BoE governor Andrew Bailey said it would be “foolish” to rule out negative interest rates. He has previously argued against them but admitted he had changed his position.

He was keen to highlight that the Bank is not saying it will cut rates further: “We’re not ruling it in but we’re not ruling it out.”

Haldane also said the recent economic data was coming in a “shade better” than a scenario published by the bank earlier this month.

“This is perhaps still a V but perhaps a fairly lop-sided V,” he said, referring to the shape of the economy’s downturn and recovery.

“The risks to that probably…lie to the downside rather than the up and as I say, a rather more protracted recovery even than the one that I have mentioned.”

By Angharad Carrick

Source: City AM

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Bank of England not ruling out negative interest rates

Government bonds have been sold in Britain for the first time with a negative yield.

And the Bank of England has admitted it would be “foolish” to rule out cutting interest rate to below zero.

The negative yield bond (a £3.8billion three-year gilt auction with an interest rate of -0.003 per cent) effectively means investors are paying lend money to fund the Government as it deals with the financial impact of the coronavirus pandemic.

And Bank of England governor Andrew Bailey said how low the cost of borrowing could go would be kept under “active review”.

He said: “We do not rule things out as a matter of principle. That would be a foolish thing to do. But that doesn’t mean we rule things in either.:

Minimal or negative interest rates deter savers with the intention of them spending what money they have to stimulate the economy.

Tim Watkins, managing partner of Shurdington-based accountants Randall & Payne, said: “Another first!. Britain had never sold a government bond with a negative yield until Wednesday.

“The interest rate is 0.75 per cent but the price investors paid for the bonds was more than they will receive when the bond is repaid.

“A first for Britain but we join Japan, Germany and some others. It doesn’t mean investors will make a loss as bonds are traded but it’s a position no one would have imagined a few months ago.”

He continued: What does it signal? It’s an indication, if another was needed, that there could be a major recession coming, central banks want to own safe assets in these circumstances and our debt is considered safe.

“It’s a relief at the moment with such a borrowing requirement that Britain is considered safe and the cost of borrowing is low.

“If that were to change it would add even further to the debt mountain we could have when this is all over.”

Martin Day, director of The Bespoke Banking Consultancy in Gloucester believes the spectre of negative interest could encourage spending as the economy shrinks.

He said: “It seems the policymakers will come under more pressure to take action to boost the economy as the UK sells bonds with a negative yield for the first time.

“The sale does reflect rising expectations that the Bank of England will increase its £200billion bond purchase shortly.

“Bank of England governor Andrew Bailey recently told MPs that the possibility of negative rates is being kept under review.

“This move could be used to urge corporates and companies to spend rather than hold funds in bank accounts.”

By Rob Freeman

Source: Punchline Gloucester

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Bank of England ‘not contemplating’ negative interest rates, says governor Andrew Bailey

Bank of England governor Andrew Bailey has said Threadneedle Street is not considering cutting interest rates to below zero.

The governor said that it would be unwise to rule anything out, “particularly in these circumstances,” in an online question and answer session with the Financial Times.

Yet he said: “It is not something we are currently planning for or contemplating.”

His comments come after deputy governor Ben Broadbent said the Bank was open-minded about its next steps. He said of negative interest rates: “These are the balanced questions the committee has to think about.”

Although once unimaginable, negative interest rates have been put in place in various central banks around the world over the last decade. The European Central Bank (ECB), for example, charges banks to hold money with it in an effort to force them to lend.

Negative rates come with pros and cons. They help spur lending by penalising banks for sitting on money. But they also limit the profits banks can make through lending and the interest on savers’ deposits.

The Bank of England slashed its main interest rate to 0.1 per cent, its lowest ever level, in March.

Bailey said that one of the main obstacles to cutting interest rates into negative territory would be the optics of the complex move.

“I think from a communications point of view, and therefore from a reaction and expectations point of view, it is a very big step.”

He said it must be realised that negative interest rates cause banks problems. The Eurozone’s biggest banks have long complained that the policy hurts their profits.

Should the Bank decide to unleash more stimulus, most analysts think it will ramp up its £645 billion quantitative easing (QE) programme. Under QE, the Bank creates digital money and uses it to buy bonds – mainly government Gilts – in the secondary market.

The BoE stopped short of launching more bond-buying at its last meeting but could do so in June.

By Harry Robertson

Source: City AM