European Central Bank refrains from reducing the benchmark rate and keeps monetary policy on hold at Malta meeting. Markets prepare for hints of more QE to come at the ECB press conference. UK retail sales get a boost in September…
At today’s meeting, which was held in Malta, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.05%, 0.30% and -0.20% respectively.”
The ECB cut rates to record levels to kickstart the economy over a year ago. The main refinancing rate determines the cost of credit in the economy, while the marginal lending facility is the emergency overnight borrowing rate for banks. The deposit facility is the rate on bank overnight deposits, which banks pay to park funds at the central bank.
ECB president Mario Draghi will set out the central bank’s thinking at a press conference at 1.30pm UK time, and whether the bank will make any adjustments to its €60bn a month bond-buying programme.
The ECB has kept its key interest rates unchanged at record lows, as expected.
Markets steady ahead of ECB decision
Markets are steady ahead of the ECB’s policy decision at 12.45 UK time. The FTSE is trading 0.1% lower at 6340.48 after a profit warning from building merchant Travis Perkins dragged down housing stocks. Germany’s Dax has climbed 0.4% and France’s CAC is 0.15% ahead.
Chris Beauchamp, senior market analyst at spread-betting firm IG, said:
A steady battle of attrition continues in London, with the index still unable to establish a direction after four days of relentless grind. However, at least today we have a real reason for not moving too far – namely the ECB meeting. The general consensus is that Mario Draghi needs to do something to get things moving in the eurozone, but there is a sense that neither the ECB nor financial markets know exactly what that will be. We can hope for some indication that action is on its way, although the ECB president will be understandably keen to keep the details under wraps for now.
Housebuilders are jittery this morning after building merchant Travis Perkins warned on earnings. Weaker demand of late has taken the shine off a steady rise in sales overall, raising concerns that such names as Persimmon, Taylor Wimpey and others may be in line for a more sustained correction.”
Labour has responded to George Osborne’s comment that he is “comfortable” with his decision to cut tax credits. Shadow chancellor John McDonnell said:
Once again we’re seeing the true face of the Tory Party. It is shameful that David Cameron talked about his ‘delight’ at tax credit cuts and now George Osborne has said he is ‘comfortable’ with his decision to take £1,300 a year away from working families.
It’s time for David Cameron and George Osborne to think again and reverse these tax credit cuts.”
Expectations that ECB policymakers will announce fresh stimulus measures have gradually faded since governing council member Ewald Nowotny said last week euro area inflation is ‘clearly missing’ the ECB’s target, noted Jasper Lawler, market analyst at CMC Markets UK. Christian Noyer’s submission that the current QE is “well calibrated” is probably a better reflection of opinion on the governing council.
The ECB embarked on a scheme of sovereign bond purchases (quantitative easing) in March – more than €1 trillion in all at a rate of €60bn a month.
Lawler has looked at the ECB’s options:
A change to QE can really take three forms; increasing the size of asset purchases, increasing the length of the program or adding new assets to the mix such as corporate bonds. It is ten months until the programme is scheduled to end so increasing the length of the program seems rather premature.
Europe’s corporate bond market is not as deep as in the US with most companies traditionally favouring bank lending. Adding corporate bonds to the mix would probably work more as a signal of dovish intent than for any real impact on yields or the euro. If the ECB decided to buy shares or ETFs like the Bank of Japan, that would be a game changer and we’d be off to the races in European equities, but chances are slim.
Increasing the size of the programme would probably put the most downward pressure on the euro of all the likely options. However, the ECB runs the risk of crowding out private bondholders with more purchases, and would add to exit risks once the program finishes.”
So what are we expecting from the European Central Bank today?
Economists predict that ECB president Mario Draghi will repeat his pledge from September to add more stimulus if needed. However, few expect decisive action this week.
“The ECB’s October meeting is for watching. Draghi’s message will be dovish, but it’s not time to act yet”, said Holger Sandte, chief European analyst at Nordea Bank.
The ECB is currently committed to buying €60bn (£40bn) of government and corporate bonds each month until September 2016, in an €1.1tn (£810bn) attempt to stimulate growth, inflation and bank lending.
Capital Economics’s Jonathan Loynes expects the ECB to boost its QE firepower to €80bn a month in December, but does not totally rule out an announcement this week.
Osborne defends tax credit cuts
My colleague Heather Stewart, the Observer’s economics editor, reports:
George Osborne has defended his planned tax credit cuts to backbench MPs on the cross-party Treasury select committee.
The chancellor has come under growing pressure to soften the proposals; but he insisted: “this is fundamentally a judgment call, and I’m comfortable with the judgment call that I have made, and that the House of Commons has supported this week.” He urged the House of Lords not to overturn parliamentary convention by rejecting the tax credit cuts.
The chair of the committee, Andrew Tyrie, also repeated his demand for the Treasury to provide more detailed analysis of how the proposed cuts will hit households at different points on the income scale.
Earlier this morning, Lord Lawson, one of the leaders of the Conservative campaign to leave the EU, strongly criticised the Bank of England governor for wading into politics. But Osborne said the former chancellor was “probably a bit disappointed that Mark Carney didn’t agree with him”.
Osborne argued, in front of MPs on the Treasury Committee: “What Mark Carney’s speech shows today is that there is a strong argument for reform.”
Alan Clarke of Scotiabank’s reaction to the strong UK retail sales figures was: Wow!
We know that the consumer has the wind in his / her sales:
- Solid employment growth of 1.25% y/y;
- Wage inflation over 3% y/y in the private sector;
- Zero inflation
That all adds up to robust real income growth. With house price inflation picking up too, that is even more motivation for people to go shopping.
Last but not least, with expectations for the timing of the first rate hike being pushed back to end-2016 / early 2017 then consumer spending is clearly well supported.
In terms of the bigger picture, with Q3 GDP (1st estimate) scheduled for next week, I am all the more confident to go for 0.6% q/q rather than be cautious with 0.5.%.
I’m also starting to think about black eye Friday. Sure, it’s a good scheme to get people into the shops, but with sales volumes like this, do I really need to cut my prices? Not convinced.
Anyway – a great reading, and restores my faith that sooner rather than later is the right call on the first Bank Rate hike.”
The chancellor has been asked why the UK government has not clearly set out what it wants to achieve in its negotiations with the EU.
Osborne said it’s not sensible to turn up with a final list of demands on day one. “That’s not the way to start a negotiation.”
Osborne: not looking for special deal for City of London
Osborne told MPs on the Treasury Committee that the government is not looking for “special deals or carve-outs for the City of London” as it tries to renegotiate the terms of Britain’s EU membership, but wants a fair deal for all non-eurozone countries.
He said the other EU members have accepted the principle of a renegotiation and that discussions are now moving into a technical phase.
We are looking for a fair deal for non-euro members, including the United Kingdom.
We don’t want to be part of ever-closer union.
We are getting into specific discussions, technical discussions with the EU Commission and the Council.
He promised that this autumn more details will emerge as the EU talks move into a new phase.
An important part of the renegotiation is the relationship between non-euro and euro members of the EU, Osborne said.
You can watch the Treasury Committee hearing live here.
George Osborne is being quizzed by the Treasury Committee. MPs are asking about Mark Carney’s remarks on Britain’s EU membership.
The chancellor said:
I agree with the speech the governor made. The analysis he outlined was that EU membership has helped create a more open and dynamic economy, but, and there’s a crucial but, developments in the eurozone mean we do need safeguards for the UK.”
That’s why the UK has embarked on negotiations to secure reforms of the European Union, he added.
As the governor pointed out it’s [EU membership] not an unalloyed good. It’s presented challenges.
The single market in financial services is on balance a good thing for the UK.
The government’s position is not that we are against immigration. We are for controlled migration.
JPMorgan economist Allan Monks has taken a closer look at Mark Carney’s Brexit speech, which said “ensured there was more than just one liberal Canadian taking the headlines this week”.
The speech will be seen as another foray by Carney into a heated political debate, and its tone comes across as friendly to the campaign for keeping the UK within the European Union – ahead of a referendum which is to be held before the end of 2017.
Accompanying the speech was a chunky 100 page BoE report discussing the impact of EU membership on the central bank’s policy objectives. Despite Carney earlier this week having described the report as “a bit of a yawner” it will not prevent some from asking whether the BoE should be taking a more neutral stance on such a highly charged political issue (especially after similar interventions by Carney on Scottish independence and climate change).
Carney emphasised the report is not a thorough quantitative review of the pros and cons of EU membership, but rather is designed to assess the impact of membership on the Bank’s policy objectives.
In doing so, however, Carney highlights the beneficial impact EU membership has likely had in lifting sustainable growth in the UK (through fostering greater competition, efficiency and openness in key markets). The flip side of this openness to Europe is the higher sensitivity to external shocks, although Carney believes policy makers in the UK have adequate capacity to deal with these challenges.
A key concern for Carney looking forward is that UK policymakers retain adequate flexibility and control over policy, even as euro area countries go through a process of greater integration and risk sharing in the wake of the financial crisis. Carney’s comments have clear parallels with the government’s position in the debate.
The assertion that EU membership is a net positive for the UK, with caveats that the terms of membership need to reflect UK domestic interests and flexibility, will go down well with the Prime Minister – who seeks to renegotiate the terms of membership ahead of the referendum vote, and remove a requirement for the UK to commit to ‘ever closer union’.”
What difference could the BoE’s intervention make? The opinion polls suggest that the result of the referendum will be very close.
Our view has been that opinion will shift as the campaign heats up, with polls indicating a comfortable lead for the campaign to remain within the EU. While a natural status quo bias is central to this view, it also reflects our belief that the “in” campaign will gain the backing of at least a majority in the business community.
This week the CBI – which represents a broad cross section of small and large businesses – moved off the fence by coming out in support for the UK staying within the EU. The rhetoric behind Carney’s remarks put the BoE in the same camp, even if the Governor stops short of offering an explicit endorsement. The impact of these interventions may not be visible in the opinion polls right away, but we would expect them to grow in significance as the referendum draws closer.”
The ONS said retail sales will add 0.1 percentage points to overall economic growth in the third quarter, boosted by beer sales during the Rugby World Cup.
Tills are ringing on the high street: The breakdown of the retail sales figures showed that household goods retailers saw the biggest increase in sales last month, of 4.7%. Supermarkets and other food stores posted a 2.3% rise. Petrol sales were also strong, up 3.8%. However, clothes and shoe retailers did not have a good month, reporting a 0.9% drop.
Excluding petrol, overall retail sales rose by 1.7% in September.
The Rugby World Cup boosted retail sales last month, according to statisticians.
Kate Davies, ONS head of retail sales statistics, said:
Falling in-store prices and promotions around the Rugby World Cup are likely to be the main factors why the quantity bought in the retail sector increased in September at the fastest monthly rate seen since December 2013. The retail sector is continuing to grow with September seeing the 29th consecutive month of year-on-year increases.”
Average store prices (including petrol stations) fell by 3.6% in September from a year earlier, the 15th consecutive month of year-on-year price falls. It was the joint-lowest reading since the series began in 1988.
Sterling has hit a one-month high of 72.95p against the euro on the strong retail sales figures, up 0.8% on the day. Against the dollar, the pound climbed to $1.5510, up 0.5% on the day.
UK retail sales jump 1.9%, biggest rise since end 2013
News flash: UK retail sales jumped 1.9% in September from the previous month – the biggest rise since December 2013, according to the Office for National Statistics.
Bank of England paper analyses positive impact of migration
A Bank of England paper on EU membership analyses the positive impact of migration, as Jonathan Portes, director of the National Institute of Economic and Social Research, notes. Click on the link in his tweet to read the paper. It says:
Openness to labour flows – via migration – can allow an inflow of skills not otherwise available in the domestic economy. Ortega and Peri (2014) find that migration boosts long-run GDP per capita, acting both through increased diversity of skills and a greater degree of patenting. At the firm level, several studies further find that migration has a positive impact on productivity by diversifying the high-skilled labour employed by firms.”
In other news, Britain’s competition watchdog said highstreet banks will be forced to encourage their customers to switch to rivals. Switching could potentially save bank customers £70 a year, it said.
But consumer groups called on the Competition and Markets Authority to take tougher action to inject competition into banking, after it refrained from more radical measures to break up the biggest players. The market is dominated by the big four banks – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays – which together control 77% of the current account market.
The prime minister and the chancellor both welcomed the governor’s comments last night.
Howard Archer, chief UK and European economist at IHS Global Insight, said:
Despite Mark Carney’s stressing that his speech and the BOE report is not a comprehensive view of the pros and cons of UK membership of the EU, our strong suspicion is that the pro-EU membership camp will find more to grab hold of and champion than the Out camp.
Carney said Britain was possibly “the leading beneficiary” of the EU’s single market, and that being in the bloc had been one of the drivers of its strong economic performance in the four decades since it first joined.
He made some positive remarks on the free movement of labour, observing that it “can help better match workers with firms, alleviating skill shortages and boosting the supply side of the potential growth rate of the economy.”
In addition, he noted that the UK has been the top recipient of foreign direct investment in the UK since the single market was established in 1992.
However, Carney’s intervention is also likely to be seen as strengthening David Cameron’s hand in negotiations on reforms with Britain’s EU partners. Carney urged the prime minister to demand “clear principles” to safeguard Britain’s interests outside the euro, as he warned that botched European integration could threaten financial stability.
Lawson slams Carney for wading into EU debate
But former chancellor Nigel Lawson slammed the Bank of England governor for wading into the debate on EU membership, saying his remarks were “regrettable”.
The Spectator’s Coffee House team agreed.
Catherine Bearder MEP, chair of the Liberal Democrat EU referendum campaign, was quick to seize on Carney’s comments:
The Bank of England’s intervention confirms what we already know: being in the EU brings huge benefits to the UK economy.
Those calling for EU exit have failed to present a credible alternative that would protect the economy and secure jobs.
Instead of retreating to the side-lines, Britain should stay and lead reform in Europe from within.”
More on Carney’s speech on EU membership at St Peter’s College in Oxford last night. The governor concluded:
Overall, EU membership has increased the openness of the UK economy, facilitating dynamism but also creating some monetary and financial stability challenges for the Bank of England to manage. Thus far, we have been able to meet these challenges.”
You can read the speech on the Bank of England’s website, and watch the webcast.
ECB chief Draghi to hint of more QE
Good morning and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and the business world.
Policymakers from the European Central Bank have gathered in Valletta, Malta, for their monthly policy meeting (the governing council occasionally departs from its Frankfurt HQ to meet in other parts of the eurozone). The ECB is widely expected to keep its key interest rates unchanged along with its stimulus programme, despite fears over deflation.
But ECB president Mario Draghi may well strike a dovish tone again, and hint at further action towards the end of the year. Falling consumer prices (they slipped by 0.1% in the eurozone in September) and fears over the world economy suggest the central bank will ease policy at some point, unless things improve.
At the last press conference on 3 September, Draghi pointed to “renewed downside risks” to eurozone growth and inflation prospects, reflecting concerns about the outlook for emerging markets. He said that the ECB stood ready to adjust the size, composition or length of the QE programme if necessary.
Investec economist Chris Hare said:
Despite the QE teasers offered last month, our view is that Mr Draghi will not pull the trigger for now. In part, that is because developments since the then have seen a mixed bag, rather than an obvious worsening in conditions.
We still think that additional QE will be appropriate at some point, given global growth risks and the weakness of eurozone inflation (we are fairly agnostic on whether it will come in terms of size, composition or duration). More natural trigger dates would be the December, or perhaps next March’s, policy meeting. That would allow the ECB to announce the expansion alongside updated forecasts. December is also the month where we think the Federal Reserve will start raising rates: that, alongside a QE boost announcement, might give the euro a double kick down, offering a double whammy of stimulus to get inflation back on track.”
European stock markets are set to open lower ahead of the ECB’s decision, which will be announced at 12.45pm UK time, followed by Draghi’s press conference at 1.30pm.
Over here, Bank of England governor Mark Carney gave his “Brexit” speech in Oxford last night. He said that EU membership opened up the UK economy and made it more dynamic, although he added that it also left it more exposed to financial shocks like the eurozone debt crisis.
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