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Bank of England holds interest rate at 0.1%

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain the bank rate at 0.1%.

The BoE has warned banks to be prepared for the possibility of negative interest rates within six months.

The committee confirmed that the COVID-19 vaccination programmes are improving the economic outlook, and since the MPC’s last meeting, they say financial markets have remained resilient.

UK GDP is expected to have risen slightly in Q4 2020 to a level around 8% lower than in Q4 2019, which is stronger than expected in the MPC’s November report.

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The bank suggests that there would be a “rapid” recovery in GDP towards pre-pandemic levels this year, due to the vaccination programme.

However, the BoE outlined that the outlook for the economy remains “unusually uncertain, and that it depends on the evolution of the pandemic, measures taken to protect public health and how households, businesses and financial markets respond to these developments”.

The MPC has said that it will continue to monitor the situation closely, and if the outlook for inflation weakens, the committee is ready to take any “additional action necessary to achieve its remit”.

Nick Chadbourne, chief executive of LMS, said: “It’s no great surprise that Bank Rate remains at 0.1%, and it’s good news for homeowners as it keeps mortgage rates down.

“LMS data shows that on average, borrowers taking advantage of low rates decreased their monthly payments by £236 in December.

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“Recently we’ve seen lenders prepare for a busy remortgage market in Q2 with a steady stream of high loan-to-value products returning to the market and the introduction of increasingly competitive rates.

“While product transfers can offer a great deal in terms of ease and efficiency, as competition between lenders grows, borrowers should be seeking advice to ensure they are accessing the best deals available on the market.”

Ian Warwick, managing partner at Deepbridge Capital, added: “The pace at which the vaccine rollout has progressed has been incredibly encouraging and will provide much needed hope for people and businesses alike.

“The government has worked hard in an incredibly difficult environment to create a capital lifeline to many businesses via the BBLS and CBILS, as well as long-term support for growth-focused companies via the likes of the Enterprise Investment Scheme, but now we would urge that there needs to be even greater support – both via financial and via sustainable growth initiatives.

“Agile companies, which have survived 2020 and provide a product or service which has a genuine medium to long-term solution to a recognised problem, will continue to develop and grow but require capital to do so.”

Frances Haque, chief economist at Santander UK, said: “The MPC’s decision to leave bank rate unchanged at 0.1% was expected this month given rapid rollout of the COVID-19 vaccines, which will help boost confidence and support growth in the UK economy.

“However, the Bank of England remains committed to intervening should the financial markets and the UK economy need additional support measures as we move through 2021.“

By Jessica Nangle

Source: Mortgage Introducer

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Will the Bank of England cut interest rates this month?

This month’s Bank of England monetary policy meeting is shaping up to be a much more significant one than investors had anticipated.

Following a string of underwhelming macroeconomic data releases and some thoroughly dovish comments from a handful of Bank of England members, currency traders are now bracing themselves for the possibility of a rate cut as soon as the 30th January MPC meeting. This will be governor Mark Carney’s final meeting at the helm of the central bank, and the Canadian is set to be replaced by Chief Executive of the Financial Conduct Authority, Andrew Bailey on 17th March.

The soon to be former governor Carney gave the first real hint that lower rates could be on the horizon at the beginning of the year. Speaking during an event on inflation targeting, Carney stated that there would be a ‘relatively prompt response’ from the bank should weakness in the UK economy persist into 2020. Fellow policymaker Silvana Tenreyro struck a similar tone a few days later, claiming that UK growth was likely to undershoot the bank’s November projections and that she would support a rate cut should the economy continue to slow. Gertjan Vlieghe, who joined the rate-setting board in 2015, was even more forthright in his view, saying that he would vote for a rate cut this month, barring an ‘imminent and significant’ turnaround in UK growth data.

The dovish shift in the committee has come off the back of serially weak UK macroeconomic data since the most recent meeting on 19th December. Of the fifteen data releases that we consider most meaningful since then, nine have surprised to the downside, notably inflation, retail sales and the November growth number. Consumer price growth in the UK is now well short of the BoE’s 2% target. The main headline rate of inflation came in at a three-year low 1.3% year-on-year in December, while the core measure also nosedived to its lowest level since October 2016 (Figure 1).

Figure 1: UK Inflation Rate (2013 – 2019)

Source: Refinitiv Datastream Date: 23/01/2020Retail sales massively undershot expectations last month with 2020, on the whole, the worst year for consumer spending in the UK in twenty-five years according to the British Retail Consortium (BRC). Of even greater cause for concern for policymakers will be the rotten November GDP growth number, which showed that the UK economy contracted by 0.3% month-on-month. While undoubtedly disappointing, it is worth noting that activity in November was very likely to have been dragged lower by the intense political uncertainty surrounding the general election and Brexit – uncertainty that has, of course, since receded.

Figure 2: UK Macroeconomic Data (since December BoE meeting)

That being said, we did receive a much better-than-expected set of business activity PMI data out on Friday that has somewhat cooled expectations for a rate cut. The crucial services index, which accounts for around 80% of overall UK GDP, leapt to a sixteen-month high 52.9 in January, a sharp rebound from the December number. While the manufacturing index remained below the level of 50 that denotes contraction, even this moved sharply higher from December’s lows.

The strength of the data is not particularly surprising, given that it covered the first full month since Boris Johnson’s emphatic election victory on 12th December, which effectively removed the entirety of the short-term ‘no deal’ Brexit uncertainty. We had said prior to the data that we thought the key to whether or not the Bank of England cuts interest rates next week could depend on the strength of the January PMI figures. Now that the data has been released, we think that the MPC will have enough justification to refrain from cutting rates on Thursday, although it is likely to be a close call.

At the December meeting, members Saunders and Haskel both dissented in support of an immediate cut, with the vote split 7-2 in favour of no change. Even following Friday’s strong PMI numbers, we think that there is a decent chance that Vlieghe and Tenreyro follow suit. On the other end of the spectrum, hawks Ramsden and Haldane are very unlikely to vote for a cut this time around, particularly given their recent arguments regarding the need for a more restrictive policy. Jon Cunliffe has recently warned that prolonged easing may risk financial instability. Ben Broadbent has also appeared to place a greater onus on UK labour data, which has actually remained pretty resilient of late. Governor Mark Carney himself appears to be the most on the fence, although we think he’s now more likely than not to side with the hawks at the January meeting.

Figure 3: Bank of England Hawk-Dove Scale

Source:Ebury
Date:23/01/2020In the event of a cut, which we believe would be a ‘one and done’, we actually think that the reaction in the FX market could be relatively mild. This cut, we believe, would be of a similar ‘insurance’ nature to that conducted by the Federal Reserve in the US and certainly not part of a sustained easing cycle. Currency traders also appear to be taking the prospect of lower rates in their stride, with optimism surrounding Brexit offsetting much of the rate cut concerns. During the time in which market pricing for a January cut has risen from effectively zero to more than 50% (07/01-23/01), the GBP/USD cross has actually emerged more-or-less unchanged. So while we would expect a sell-off in the pound in the event of a cut, the magnitude of the move is, in our view, likely to be contained.

Should policymakers again vote in favour of stable rates, our base case scenario, we think a move higher in sterling would ensue given the relatively high market pricing for a cut. With UK economic data expected to improve in the coming months, January may prove to be the last opportunity the bank has to deliver its ‘insurance cut’ before domestic macroeconomic fundamentals simply do not warrant lower rates.

Written by Matthew Ryan

Source: Ebury

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Pound drops as Bank of England signals rate cut

The value of sterling has dropped after a trio of officials on the Bank of England’s Monetary Policy Committee (MPC) indicated that UK interest rates are likely to be cut in the coming months.

Outgoing governor Mark Carney told FTAdviser’s sister publication the Financial Times last week (January 7) that the central bank could cut interest rates to support economic growth.

Data released this morning (13 January) by the Office for National Statistics showed UK economic activity contracted by 0.3 per cent in November, the month prior to the general election, to reach a year-on-year growth of 0.6 per cent.

This and the trio’s remarks have led to sterling falling 0.7 per cent this morning and more than 2 per cent since the start of the year.

Mr Carney warned in the next economic downturn there would be limits to how much politicians can rely on central banks to boost economic growth, as most of the tools, including rate cuts and quantitative easing, are already being deployed.

But he said with the UK base rate presently at 0.75 per cent there was some scope for the UK central bank to cut rates.

UK interest rates are presently higher than those of the Eurozone and Japan, where interest rates are negative.

Mr Carney leaves his role as governor in March to be replaced by Andrew Bailey, the current FCA chief executive.

Jonathan Haskel, another member of the MPC, which sets interest rates at the Bank of England, said in a speech to the Resolution Foundation at the end of December that current economic indicators pointed to the UK economy and inflation slowing.

He said: “The global economic outlook has weakened materially since 2018, turning gloomier and less supportive of UK growth.

“This was mainly the result of heightened uncertainty combined with a slower pace of recovery in the Euro Area and, in particular, the escalation of US-China trade tensions.”

He said in the immediate aftermath of the UK voting to leave the EU the fall in the value of sterling had created a sharp increase in inflation to above 3 per cent, much higher than the inflation rate in other countries.

At first the higher prices did not, Mr Haskel said, translate into slower economic growth, as people maintained their consumption by reducing the amount they saved.

But while the UK savings rate fell to less than 3 per cent at the time, the lowest level since 1963, it has since risen to 4.5 per cent, and more recently to 6.75 per cent in the final quarter of 2019. The long-term average is 8 per cent.

If individuals are saving more and consuming less this means demand in the economy is weaker and so economic growth falls while consumption is also falling, meaning the rate of inflation falls.

Cutting interest rates makes saving cash less attractive, and so may encourage more spending, boosting growth and pushing inflation upwards. The current UK inflation rate is forecast to be below target at 1.5 per cent.

The Bank of England’s remit is to achieve inflation of around 2 per cent a year, if it falls materially below that level, then cutting rates to push inflation upwards towards the target would be the expected course of action.

A third member of the committee, Gertjan Vlieghe said he would favour an interest rate cut if economic data does not improve quickly.

He told the Financial Times on the weekend (January 12) that he expects there to be a pick up in UK economic activity as a result of the greater level of certainty as a result of Conservative party general election victory, but if this doesn’t happen, then rates will need to be cut.

He said it will be obvious by the end of January whether this has happened or not.

By David Thorpe

Source: FT Adviser

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Bank of England rate cut story hots up for UK markets

Despite some dovish-sounding language from Bank of England officials over recent days, we think it’s still too early to be pencilling in rate cuts. We take a look at what all of this means for the pound and UK rates.

Don’t over-interpret Governor Carney’s comments

Amid a temporary lull in Brexit turbulence, the Bank of England story is once again drawing the attention of investors.

The pound slipped on Thursday after BoE Governor Mark Carney signalled the MPC was debating the merits of near-term easing. Another MPC member Silvana Tenreyro indicated on Friday that she could join the rate cut camp if uncertainty persists.

For now though, we don’t think the Bank’s position has shifted significantly.

The fact that policymakers are considering easing is not a new revelation, after all two MPC members voted for immediate rate cuts at the past couple of meetings.

Admittedly, the Governor’s comments were perhaps the most candid so far on the possible need for easing. But then again, he noted that the combination of better Brexit and trade war newsflow has seen some modest optimism creep back into the outlook.

Carney also used the speech to push back on the idea that the Bank is out of ammunition. His assertion that there is roughly 250 basis points of easing space available can perhaps be debated. In particular, we’d argue that forward guidance may not add much to this “armoury” when markets aren’t pricing imminent tightening.

But the implied message is that the Bank doesn’t need to be so worried about having to act pre-emptively.

The jobs market holds the key to any policy easing

All of this suggests the core BoE position is still to ‘wait-and-see’ and stay data-dependent. And at a time of fairly high volatility in the growth numbers, we think the Bank will be keeping a close eye on the jobs figures.

Hiring indicators deteriorated over the latter stages of 2019. Vacancies have fallen consistently, while MPC member Tenreyro pointed towards a slowdown in job-to-job flows – another typical sign of slack.

But since the election, the Bank’s own Decision Maker survey provides tentative evidence that Brexit has become less of a concern among firms. The latest Markit/REC employment also points to the first rise in permanent staff appointments in a year.

Of course the Brexit saga is far from over, and there are plenty of question marks surrounding the UK government’s ambition to agree a free-trade deal this year.

That suggests a rate cut can’t be completely ruled out. But for the time being, we think the Bank will hold off on easing, barring a more significant deterioration in the state of the jobs market.

GBP: How much is an independent BoE easing cycle worth?

In a world of low interest rates, it is no surprise to read analysis of rate differentials having lost their explanatory powers for exchange rates. That is why GBP volatility on the back of recent BoE policy comments has proved a breath of fresh air for the GBP market.

Below we highlight the relationship between US and UK interest rate differentials and GBP/USD. We choose to look at the differentials between the one-year OIS swap rates, priced one, two and three years’ forward. The 1Y1Y differential naturally is the first to react to any kind of change in relative BoE-Fed policy settings.

The chart shows a decent relationship between the differentials and GBP/USD before Brexit and immediately post Brexit, as investors assessed the economic damage Brexit would cause. From 2018 onwards, however, that relationship has dramatically broken down as the market played ping-pong with the notion of a ‘no deal’ Brexit.

Notably, those differentials have been stuck in incredibly tight ranges since last summer, as the market had already priced in the Fed easing cycle, and the BoE remained in a Brexit moratorium. An independent BoE easing cycle would seem unlikely, and is not our call right now, but if the UK jobs data dramatically disappoints – 1Y1Y GBP OIS rates could at most fall 50 basis points.

As noted above, the relationship between rate differentials is quite weak, but we estimate that a BoE-prompted 50 basis point widening in the 1Y1Y rate differential might knock 180 pips off cable. Were rate differentials to regain their pre-Brexit powers – e.g. returning to the relationship that existed in the first half of 2016 – then that 50bp widening in differentials on an independent BoE easing story would knock 720 pips off cable – according to our estimates.

GBP rates: How low would they go?

Starting at the front-end, one of the clear takeaways of Carney’s speech is the very limited appetite for negative interest rates. These comments are not a surprise but reinforce the view that the Effective Lower Bound (ELB) is located somewhere just over 0%. We put that figure around five basis points which would ensure that Sonia remains in positive territory (Sonia has traded on average four basis points below the BOE Bank Rate over the past five years).

Another tool that Carney highlighted, as mentioned above, is the use of forward guidance to more clearly signal the path of base rates over the years. This should help to peg forward interest rates to the ELB for as long as the BOE can be credibly expected to forecast economic conditions. In a context fraught with political uncertainty relating to Brexit and the future relationship with the European Union, this might not be very long. We nonetheless feel comfortable with the assumption that the expected path for base interest rates for the next two years can be effectively controlled by the BOE. This implies a ‘floor’ for 1F1Y Sonia swaps also being just above 0%, from 59bp currently). In reality, the likelihood of touching that level is reduced by the risk premia that is contained in forward swaps.

Having established that 1Y1Y Sonia swap rates could approach that level, the next pressing question is whether this level can be sustained. This brings us back to the question of the credibility of any commitment to keep interest rates at the ELB for an extended period of time. Whilst the risk of a near-term no deal Brexit has been averted, failure to agree a trade deal with the EU by the end of the year is a significant risk for the economy and for the currency. Markets might question the BOE’s ability to keep interest rates this low in the face of sterling weakness.

Rates differentials: not as much downside as dollar rates

The implication for rate differentials with the dollar is much greater scope for the Fed to ease via the path of policy rates channel. For comparison, USD 1F1Y OIS is currently around 1.3% and has traded as low as 0.15%. One can debate the relative likelihood of UK and US economies requiring monetary easing but, from the point of view of the rates differential, there is clearly more downside to dollar rates.

Going one step further, we would also argue that unlike the US, the UK is a small, open economy and the currency is free to reflect any deterioration in the economic outlook. To an extent, this precludes the need for BoE easing and would make, in investors’ minds, the Fed more likely to ease than the BoE faced with a comparable shock to the domestic economy. The dollar’s reserve status, and its attractiveness as a safe-haven could in theory produce the opposite effect on the US economy. In a global downturn, it may well be that dollar rates markets price more aggressive Fed easing in response to the tightening of financial conditions brought by dollar strength.

Source: think.ing

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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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How have UK interest rates changed over time?

UK interest rates: key figures

Date set Rate
Current bas rate 2 May 2019 0.75%
Highest base rate 15 November 1979 17%
Lowest base rate 4 August 2016 0.25%

Who sets UK interest rates?

The UK interest rates are set by Bank of England’s (BoE) monetary policy committee (MPC) by means of a vote. Mark Carney is the governor of the BoE and chairman of the MPC. The meeting happens on the first Thursday of each month, and the announcement is made two weeks after the meeting.

Why is the Bank of England base rate important?

The BoE base rate is important because it influences all other interest rates, including bonds, loans and savings rates. In other words, it affects the interest that you pay to commercial banks from which you’re borrowing money and how much interest you’re earning if you have savings. People often borrow money to pay for property, vehicles, school fees, and more. Because it affects how people spend, it also influences how much things cost. This means that the interest rate is also an important factor in determining inflation. The aim is to keep inflation at around 2%.

In addition, the base rate is important to traders – especially forex traders – because it gives them an indication of currency valuations. If the rate is higher than expected, it often has a positive effect on GBP and if it’s lower than expected, it has a negative impact.

UK interest rate timeline: key events

There have been many key events between 1979 and today that have affected the UK interest rate. They include:

1979: Interest rates rise to a staggering 17% when the Margaret Thatcher administration is appointed. Its aim is to lower inflation, but it also has a severe effect on British manufacturing exports and housing prices.

1992: The UK withdraws from the European Exchange Rate Mechanism and interest rates rise from 10% to 12%. Though the government wanted to raise it even more to increase investors’ interest in the pound, this plan never took off, and the rate was reduced back to 10% in September of the same year.

1997: The Tony Blair administration is elected, and interest rate decisions are handed over to the independent Bank of England. In this year, the interest rate increases to its highest in six years.

2003: Interest rates fall below 4% and worry starts to creep in over inflation. The base rate is effectively increased over the next few years to combat high inflation.

2008 to 2016: The global financial crisis causes the UK interest rate to drop to a low of 0.25%.

2017 to 2019: The MPC decides to increase the base rate to 0.5% and 0.75% soon thereafter. More increases were expected, but Brexit has reduced the chance of this happening any time soon.

Bank of England base rate timeline: 1979 to 2019

Base rate at year end Base rate at year end
1979 17% 1999 5.5%
1980 14% 2000 6%
1981 14.38% 2001 4%
1982 10% 2002 4%
1983 9.063% 2003 3.75%
1984 9.5% 2004 4.75%
1985 11.38% 2005 4.5%
1986 10.88% 2006 5%
1987 8.38% 2007 5.5%
1988 12.88% 2008 2%
1989 14.88% 2009 0.5%
1990 13.88% 2010 0.5%
1991 10.38% 2011 0.5%
1992 6.88% 2012 0.5%
1993 5.38% 2013 0.5%
1994 6.13% 2014 0.5%
1995 6.38% 2015 0.5%
1996 5.94% 2016 0.25%
1997 7.25% 2017 0.5%
1998 6.25% 2018 0.75%

As at 24 June 2019, the BoE Base rate was 0.75%.

How to trade UK interest rate announcements

To trade UK interest rate announcements, you can open a position on forex, UK stocks and indices such as the FTSE 100. These markets are all impacted if the interest rate changes, because the interest rate affects the value of various financial instruments.

By Anzél Killian

Source: IG

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Brexit delay leaves little scope for Bank of England rate rise

A six-month delay to Brexit gives Britain’s central bankers space to take a broader view of the economy this week, but persistent uncertainty over leaving the European Union makes them unlikely to raise interest rates any time soon.

Since the Bank of England’s rate-setters last met in March, Prime Minister Theresa May has managed to push back the Brexit deadline to Oct. 31, shifting the Brexit cliff-edge further away than at any of their meetings since September.

But even with the immediate risk of a no-deal Brexit shock to the economy removed, most analysts expect the BoE to hold off on raising rates until Britain is out of the EU with some form of deal.

“While we see the need to raise interest rates slowly … the Bank of England is likely to sit on its hands until more clarity on the Brexit outcome is received,” said Nomura economist George Buckley, who predicts a rate rise in November.

None of the 75 economists polled by Reuters expect the BoE’s Monetary Policy Committee to raise Bank Rate from 0.75 percent this month, and only half a dozen predict a rate rise before Brexit is due.

The median forecast is for a rate rise in the first quarter of next year — when Governor Mark Carney will hand over to a successor. A large minority do not expect rates to rise at all this year or next, echoing financial market pricing.

So there is a risk that investors could be thrown by even mildly hawkish noises from the BoE on Thursday.

“The prospect of a hike in coming months is still dim, but less remote than market pricing,” UBS interest rate strategist John Wraith said.

SCOPE TO TIGHTEN?

Unlike the European Central Bank, the BoE faces inflation that is soon likely to rise above target, and in contrast to the U.S. Federal Reserve it has only raised rates twice in the current economic cycle, most recently in August 2018.

Wage growth, retail sales, job creation and overall economic growth have been slightly stronger than the BoE’s expectations in early 2019, even if businesses and consumers are downbeat.

“The bar in the macroeconomic data for another rate hike is low … but the BoE would need to find a window in a busy political calendar to deliver a hike this year,” J.P. Morgan economist Allan Monks said.

As well as no end to the Brexit impasse, risks that could delay a rate rise include a serious challenge to May’s leadership from within her Conservative Party, a fresh national election or a second referendum on leaving the EU, Barr said.

The economic outlook is uncertain too. Some of the growth in early 2019 came from businesses stockpiling to protect themselves against a no-deal Brexit.

Carney did not sound in a rush to raise rates when he spoke in Washington earlier this month, hours after the Brexit delay.

But he highlighted how Brexit uncertainty had hammered business investment in Britain, which fell in every quarter last year for the first time since the financial crisis.

“This is starting to feed through to productivity statistics, and will have broader consequences,” he warned.

Weak productivity growth limits rises in living standards over the long term and can push up prices.

Inflation has been below the BoE’s 2 percent target for the past three months, but is likely to rise above target soon due to higher household energy bills.

The BoE is likely to increase slightly its growth and inflation forecasts on Thursday, giving scope for a more hawkish tone from Carney and other MPC members.

“There is at present less than a 30 percent probability of a 25 basis point rate hike priced in by the end of 2019, and we think the MPC will view this as too complacent,” UBS’s Wraith said.

Reporting by David Milliken; Editing by Catherine Evans

Source: UK Reuters

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Bank of England set to freeze interest rates amid Brexit ‘fog’

BANK of England policymakers are set to hold rates firmly at 0.75% next week as the “fog” of Brexit continues after the six-month EU departure delay.

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 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.

Until the “fog” of Brexit – as Bank governor Mark Carney put it earlier this year – is lifted, policymakers are seen as remaining in wait-and-see mode for some time yet.

Investec economist Philip Shaw said: “The committee as a whole is likely to remain fretful over downside risks to the economic outlook.”

He added: “The committee’s immediate concerns over a disorderly Brexit could be eased somewhat by the new 31 October exit date.

“However its worries over the global economic background seem set to remain.

“Indeed it is probably this latter point 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 vote for a hike on Thursday.

The bank is expected to nudge its 2019 growth forecasts higher in the accompanying inflation report, up from the 1.2% predicted in February thanks to the stockpile-boosted first quarter.

It may also up its inflation outlook due to energy prices, despite the Consumer Prices Index remaining steady at 1.9% in March.

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

He is pencilling in a hike to 1% in November, although this is based on a Brexit deal being reached.

The bank’s rates announcement also comes after the Treasury announced it had kicked off the hunt to find a replacement for Carney.

Source: The National

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

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

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

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

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

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

Sterling fell one per cent amid ongoing uncertainty.

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

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

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

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

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

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

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

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

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

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

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

Source: City A.M.

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Bank of England hikes rates for the 2nd time since the financial crisis

  • The Bank of England increased interest rates for just the second time since the financial crisis on Thursday.
  • Britain’s central bank raised its benchmark interest rate to 0.75% from 0.5%.
  • Members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

The Bank of England raised interest rates for just the second time since the financial crisis on Thursday, in a move widely expected by commentators and market participants alike.

Britain’s central bank raised its base rate of interest from 0.5% to 0.75%, its second hike in less than a year as it continues the process of slowly normalizing monetary policy following more than a decade of unprecedented stimulus. The bank’s key rate now stands at its highest level since March 2009.

The nine members of the rate-setting Monetary Policy Committee voted unanimously to raise rates.

“Today, employment is at a record high, there is very limited spare capacity, real wages are picking up and external price pressures are declining,” the Bank of England’s Governor, Mark Carney, said at a press conference after the announcement.

“With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there.”

Prior to the announcement, markets were pricing in a more than 90% chance of a hike, with Carney and the other eight members of the MPC signaling for several months that a hike was likely to come at its August meeting.

The pound jumped on the announcement, before falling sharply after Governor Mark Carney began to speak to reporters. By 12.55 p.m. BST (7.55 a.m. ET) it was close to 0.7% lower against the dollar.

Within the announcement, the Bank of England made clear that it stands ready to continue the normalization of monetary policy.

“The Committee judged that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon,” the BOE said.

Reaction to the hike was mixed, with some analysts questioning the expediency of the bank raising rates less than a year before the potential hit to the economy that Brexit may bring.

“At first glance, raising rates now looks something of a strange decision,” Ben Brettell, senior economist at FTSE 100 investment manager Hargreaves Lansdown said in an email.

“Inflation is above the 2% target, but not disastrously so. And a large chunk of the inflation we’re seeing is down to higher oil prices – something beyond the Bank of England’s control. Wage growth is relatively subdued, and the economy isn’t exactly overheating at the moment,” he added.

Source: Business Insider UK