Martin Beck, senior economic advisor to the EY ITEM Club, agrees that the Bank was more downbeat than expected:
“While we expected a downgrade to the MPC’s growth and inflation forecasts in November’s Inflation Report, the MPC’s latest assessment of the economy struck an unexpectedly dovish tone for interest rates.
“Based on market expectations that the first interest rate rise won’t happen until Q1 2017, the MPC forecast that inflation would only slightly exceed the 2% target by that date. This implies the Committee’s view of the appropriate timing of a rate rise is roughly in line with the market consensus.
The Institute of Directors has hit out at the Bank of England for playing a “dangerous game” by leaving interest rates so low.
Chief economist James Sproule, who has been calling in vain for a rate hike, says:
“Caution won out again at the Bank of England today, with the Monetary Policy Committee spooked by a worsening outlook for global growth. But, with strong consumer confidence and wages on the up, the arguments against raising interest rates from the current exceptionally low level are falling away.”
Sproule argues that the Bank is storing up trouble; asset prices are being forced up, consumers are putting on more debt, and capital is being misallocated.
And so it begins…
Savers should brace for interest rates to stay at record lows until perhaps 2017, says Maike Currie, associate investment director at Fidelity International.
“Super Thursday has quickly turned into Superfluous Thursday.
It’s now 80 months and counting since the Bank of England has failed to push the button on rising interest rates with its surprisingly dovish stance today….
It leaves investors and retirees facing the ongoing conundrum of finding a home for their money in an environment of low inflation and low interest rates – a backdrop which typically makes for measly returns
Kallum Pickering of Berenberg Bank has kindly sent a chart, showing how the BoE cut its growth forecasts today:
The FT’s Chris Giles reckons Carney attempted a repair job during today’s press conference, which was more hawkish than the actual Inflation Report.
He didn’t row too far – the pound is still down heavily.
The pound has been thumped against all major currencies since the Bank of England unleashed its unexpectedly dovish inflation report.
That highlights that investors expect rates to remain at record lows for at least another year.
If this was a “Super Thursday” club night*, you’d probably be entitled to a refund.
* – these still exist, right?
Press conference over. Hacks scramble back to base, Mark Carney and colleagues return to protecting the monetary affair of the nation.
I’ll pull some reaction together now.
Carney: We could cut rates (but we didn’t discuss it)
Business Insider’s Mike Bird asks Carney about the possibility that UK interest rates could be lowered from 0.5%.
He cites recent comments from ECB chief Mario Draghi on this issue of zero interest-rate policy, suggesting that borrowing costs could go lower than previously thought.
Carney replies that the MPC did not consider easing monetary policy today.
But it could potentially lower borrowing costs if needed.
Reuters snapped the key points:
- BANK OF ENGLAND’S CARNEY – IF WE EVER NEEDED TO, WE COULD CUT RATES BELOW CURRENT LEVEL
- BANK OF ENGLAND’S CARNEY – FACT WE ARE NOT AT ZERO LOWER BOUND WEAKENS ARGUMENT FOR NOT RAISING INTEREST RATES
That seems to have knocked the pound, it’s down 1.5 cents or 1% at $1.5230.
Mind you, that could be the impact of Mike’s wardrobe….
Q: What discussions has the BoE had with other central banks about the possibility that monetary policy diverges next year, with the UK and US may raising rates while the eurozone and Japan could get more stimulus?
It feels like we meet almost continually, says Carney wearily. We’ll be meeting again next week in Basel.
We don’t sit there saying ‘here’s what I told that press conference but here’s what we really think’, he promises
And he also insists that monetary policy isn’t secretly agreed in advance:
There is no major central bank that knows what it is going to do at its next meeting.
They all have frameworks and objectives, and the factors that influence its decisions.
And in all Carney’s years as a G7 central bank governor in Canada and the UK, this has only changed once:
The only time that was different was the depth of 2008, when we agreed to do certain things.
That was the wild days of October 2008, when the world banks announced co-ordinated rate cuts to try to calm the global panic.
Yield curves (which show investors’ expectations of rate hikes) have not matched up to the Bank’s own forecasts. So how worried is the governor that he’s losing credibility in the markets?
Carney insists that he’s “not at all” concerned about this. One can read too much into market yield curves.
Q: Some of this summer’s market mayhem was caused by speculation that US interest rates might rise soon, so are central banks making the situation worse?
Deputy governor Minouche Shafik agrees that there was significant volatility this summer – with the VIX index (which measures this) hitting its highest level since 2011.
But volatility has dropped back since, suggesting the markets are operating as they should.
We’re returning to how things were before the Great Moderation, Shafik adds.
Our Katie Allen asks Carney about the Bank’s belief that the UK economy is ‘resilient’ despite the government’s fiscal consolidation (George Osborne’s ongoing attempts to eliminate the deficit).
Q: Should we expect major changes to these forecasts in February, once we’ve seen the Autumn Statement?
We have incorporated the current fiscal plans into our forecasts, Carney says. We’ll make adjustment if the government’s fiscal stance changes but we won’t react to rumour.
And he notes that this fiscal consolidation is “material”, and has had a significant impact on the UK economy.
What are households expect to make of things?
Many people expect rates to go up in the next year, Carney replies, and that’s a “reasonable” idea.
Governor Carney isn’t spoiling us with too many straight answers.
Here’s the proof that the markets have been consistently wrong about UK interest rates going up:
Chris Giles of the Financial Times points out that house price inflation is running at 9% (according to the Halifax).
So, does the Bank need to unleash some macro-prudential tools to cool the housing market while it leaves rates so low?
Mark Carney agrees that the housing market appears to be picking up, and unsecured credit is growing too.
We do have to think about the balance in the recovery, and the potential implication of the continuation of those development…And that does bring into scope some macro-prudential issues.
That sounds like a YES.
So what might it mean? In theory, the Bank could impose tougher lending rules on banks and building societies to cool the market.
Q: The Federal Reserve says it could raise interest rates in December; Could the Bank of England say the same about the first half of 2016?
Mark Carney won’t be lured into any predictions.
We take a decision each month, based on many factors, and we are committed to getting inflation back to target, he says.
Sky News Ed Conway’s asks whether we should even bother looking at market expectations for bank rate (a key part of today’s inflation report).
Five years ago, market expected rates to be 3.75% today. A year ago, they expected 1%, so should we stop paying attention?
Carney says that the Bank doesn’t endorse these expectations.
Ed squeezes in a second question – is there something ‘chronic’ wrong with the UK economy that means rates are still so low, or have we just suffered a series of unfortunate events?
Ben Broadbent, deputy governor, responds, points out that the equilibrium inflation rate has been falling for many years, even before the financial crisis.
“There are deep global forces that were at work here – including demographics”
Therefore the level of official interest rates aren’t an arbitrary choice. – we are responding to the situation.
Our ambition is to return ‘sustainably’ to the inflation target, Carney says, rather than blunder by trying to fight the ‘persistent’ factors keeping prices low.
Carney: No regrets over rate predictions
Robert Peston has the microphone, and uses it like a laser beam to target Carney’s credibility.
Q: Do you regret telling the public that the decision over UK interest rates will come into ‘sharper relief’ at the turn of the year?
Absolutely not, Carney replies.
Growth has ticked down in recent months, but domestic conditions have evolved rather as the Bank expected. “Foreign effect” are to blame for weak inflation expectations.
We have a situation where there is mixed progress, but there is progress…. towards monetary normalisation.
Q: Not much appears to have changed in today’s Inflation Report, but there’s a big reaction in the markets. Why?
Mark Carney says there have been some important changes since early August (the last meeting).
Firstly: Demand for risk-free assets has risen, and there’s been “a sharp selloff in risk assets”.
Bank funding costs are up, credit spreads are up, equity markets have fallen. There’s been “a big unwind”.
Secondly: concerns over the emerging markets has risen.
Now this is interesting. Carney says that the Bank expects to keep its stock of UK government bonds until interest rates have reached a level where they can be cut.
That means the BoE won’t be unwinding QE until rates have hit 2%.
There are a range of views among the monetary policy committee over the balance of risks to inflation, says Carney.
Mark Carney confirms that UK inflation is expected to remain below 1% until the second half of 2016, citing factors such as cheaper commodity prices and other imported goods prices.
Carney warns of global risks
“Remember, remember the 5th of November” grins Mark Carney as the press conference begins (maybe he’ll hand out some toffee apples later #hint)
So what’s memorable about today? There are some familiar themes – inflation remains low, rates remain unchanged, and it’s another 8-1 split.
But there are some subtle but significant shifts in the picture since August.
Global developments are the biggest change in the last three months; these post a downside risk to the UK economy.
But the UK economy is more encouraging, he adds.
Domestic momentum remains resilient, as does consumer confidence, while firms still have robust inflation intentions.
Bank of England Press Conference begins
The Bank of England press conference is starting now – you can watch it live here.
ITV’s Robert Peston is preparing to give Carney a grilling
The story: BoE signals rates will stay at 0.5% for a while
Here’s Katie Allen’s story on the Bank of England rate decision:
The Bank of England has sent a reassuring message to businesses and households that interest rates are to remain at their record low well into next year as it cut its forecast for near-term inflation.
The central bank signalled in its latest Inflation Report that interest rates would need to rise at some point from the current 0.5%, but it gave no indication a move was imminent and reiterated that when borrowing costs do go up, they will do so only gradually.
Rates have been at 0.5% since the depths of the global financial crisis more than six years ago. Minutes from the Bank’s latest rate-setting meeting, published alongside the report, showed that only one of the nine monetary policy committee members felt it was now time to start hiking. Ian McCafferty dissented from the rest of the MPC, as he has done in recent months, based on risks that inflation would start to pick up.
The Bank’s quarterly outlook said that based on recent falls in oil and other commodity prices, “inflation is likely to remain lower than previously expected until late 2017” and return to the government-set target of 2% in around two years’ time, then rise above it. The latest official figures put inflation at -0.1%.
The report also flagged a weaker outlook for global growth than at the time of its last forecasts in August and the MPC downgraded the prospects for emerging market economies. Such an outlook would continue to influence the UK economy and the path of interest rates.
Here’s the full story:
The Bank also flags up that market expectations of future interest rate rises have fallen since August:
Short-term interest rates in the United Kingdom, United States and euro area were lower in the run-up to the November Report than three months earlier.
While some of those falls may reflect lower expectations of the most likely path for policy, given the weaker outlook for global growth and inflation, some could also reflect increased perceptions of downside risks.
This chart explains why the Bank of England is worried about emerging markets:
The Bank’s new quarterly inflation report is online here (as a pdf).
It is packed with interesting charts.
These two show that the UK economy will take a serious hit if China suffers a hard landing.A 3% drop in Chinese growth wipes 0.3% off UK GDP.
The Bank says:
As in August, Chinese growth is projected to continue to moderate gently in the near term. But recent financial market developments have highlighted the challenges faced by the authorities in maintaining growth while both liberalising and rebalancing the Chinese economy…..
A sharp slowing in China could affect the UK economy.
Carney also told Osborne that inflation should start to pick up, from zero, in early 2016:
The Bank has also released a letter from governor Carney to chancellor George Osborne, explaining why he hasn’t managed to keep inflation on target.
He blames international factors such as cheaper oil and metals, the strength of sterling (pushing down the cost of imports) and limited earnings growth (although real wages are finally rising).
This chart of inflation forecasts shows exactly why the Bank isn’t rushing to raise borrowing costs:
The key message from the Bank is that the UK still needs record low borrowing costs to ward off the global downturn:
Peter Hemington, partner at accountancy firm BDO LLP, says the Bank of England made the right decision, given signs that UK growth is weakening amid a global slowdown.
“With rates so low, policymakers must act to insulate the UK economy from the increasingly gloomy global economic outlook. So far our recovery has largely been based on consumer spending, but we need business and public sector investment if we are to rebalance the economy, boost productivity and make sure that companies thrive across the country.
This will put the economy on the firmest possible footing for the potentially shaky months ahead.”
The Bank also reminds us that when (but when?!) Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
The Bank of England remains fairly optimistic about the domestic UK economy.
The minutes say:
Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust. As a result, domestic demand growth has been solid despite the fiscal consolidation….
Robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare capacity over the next year.
But with few inflationary pressures, and worries over the global economy, eight members of the committee voted to leave interest rates at 0.5%.
Pound hit by dovish Bank of England
DOWN GOES THE POUND.
Sterling is tumbling like a wounded hawk, as traders scramble to react to the Bank’s downgraded forecasts.
Sterling was trading at $1.5391 before the news broke, and it’s now dropped to $1.5312.
The Bank has also cut its inflation forecasts.
It now expects the Consumer Prices Index to remain below 1% until the second half of 2016, far from the official target of 2%.
BoE cuts growth forecasts on emerging market gloom
The Bank of England has also cut its forecasts for economic growth in 2015 and 2016.
In a gloomy statement, it reveals that it is less optimistic about the UK economy.
The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects.
And the Bank also fears trouble in emerging markets:
While growth in advanced economies has continued and broadened, the Committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August. There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.
The BoE also voted 9-0 to leave its quantitative easing programme unchanged, meaning it will still hold £375bn of UK gilts.
Ian McCafferty was the only MPC policy maker to vote to hike to 0.75% again.
That has dashed speculation that Kristin Forbes or Martin Weale would join him on the hawks perch.
Bank of England leaves rates unchanged
BREAKING: The Bank of England has voted 8-1 to leave interest rates unchanged, at the current record low of 0.5%.
A Bank of England official is phoning the speaking clock right now…. (seriously).
ONE MINUTE TO GO!
Reminder: We get the monetary policy decision at noon, along with the latest quarterly inflation report. Then there’s a 45 minute wait until Mark Carney faces the press pack.
Super Thursday: What to expect
Here are some key points to watch for from the Bank of England today:
- The timing of a rate rise: Financial markets are pricing in the first rate hike in autumn 2016, but economists believe it will come sooner. Today’s data could force one side to rethink.
- The latest economic forecasts: Global inflation and growth look weaker since the Bank’s last big meeting, in August, so we could get downgrades today.
- The EU referendum. Is the Bank worried that Britain could vote to leave the EU? How much damage is the Brexit risk already causing?
- How the MPC votes. A second policymaker could join Ian McCafferty and vote to raise rates, or the committee could split 8-1 once again
- How the pound reacts. A hawkish performance from Mark Carney at the press conference could drive sterling up, which would not please exporters.
Marketwatch’s preview has more details:
The mood in the City is rather subdued today, as investors wait for the Bank of England to unleash a plethora of announcements and reports at noon.
The FTSE 100 has lost 27 points, under-performing the rest of Europe. It’s been pulled down by the mining sector, and supermarket chain Morrisons which posted a 2.6% drop in sales.
Alastair McCaig, Market Analyst at IG, predicts few surprises from the BoE today.
Last quarter’s Super Thursday was not that super and it is difficult to see where the shock and awe will come from this time round. City traders will have to digest a plethora of data in quick succession, with a rate decision, policy minutes and the inflation report all followed by a speech from Mark Carney.
We might see another member vote for change but other than a 7-2 result it would be hard to see any change being viewed as anything other than forced.
Despite the emissions scandal, Volkswagen still had two cars in the top-ten bestsellers in the UK last month.
This chart from today’s report shows that Golfs and Polos remained popular:
And VW insiders are playing down suggestions that customers are shunning it.
ITV business editor Joel Hills says:
“It could have been a lot worse” a source at VW tells me. “UK sales are pretty robust”. VW’s Golf and Polo models moved up the best-seller list.
Experienced City economist George Magnus, adviser to UBS, is on Bloomberg TV now, arguing that there is no reason for the Bank of England to raise rates yet.
Instead, Mark Carney and colleagues should wait and let the US Federal Reserve make the first move (possibly at its December meeting).
The danger if the Bank steals a march on the Fed it could push up the pound, which is bad for manufacturing.
Magnus also warned that the upcoming EU referendum is the “big unknown, hanging over the economy like a big black cloud”.
Two hours to go until the Bank of England begins the Super Thursday party:
The SMMT says it is too early to tell if the drop in VW sales is due to the emission scandal.
Mike Hawes, SMMT Chief Executive, argues that the UK car sector is still robust, even though sales growth has finally dipped.
“The UK car market has gone through a period of unprecedented growth and, so far, 2015 has been a bumper year with the strongest performance since the recession.
As expected, demand has now begun to level off but the sector is in a strong position, as low interest rates, consumer confidence and exciting new products combine to attract new car buyers. The current full-year growth forecast remains on track.”
Volkswagen UK sales fall nearly 10%
Volkswagen sales in the UK have fallen, suggesting the company has been hurt by the news that it faked emission test results.
Sales of Volkswagen-branded models tumbled by 9.8% year-on-year in October, from 15,495 to 13,970, according to the SMMT’s new report. That means its market share shrank from 8.62% to 7.86%.
Other VW brands saw sales fall.
SEAT sales tumbled by 32%, from 3,450 to 2,338, while Skoda dipped by 3%.
Audi, though, posted a 3% jump in sales compared to a year ago, even though it has been caught up in the scandal.
And it’s worth noting that other carmakers had a bad month. Sales of Minis (part of the BMW group) fell by a fifth from 5,262 to 4,112.
But it’s certainly not great news for VW, on top of the plunge in South Korean sales reported this morning (see 7.50am post)
UK car sales fall for first time in 43 months
Just in. UK car sales have fallen, for the first time since early 2012.
The Society of Motor Manufacturers and Traders reports that new registrations were down 1.1% in October, compared with a year ago.
Sales so far this year are still 6.4% higher than in 2015, but it looks like the long run of post-recession growth is finally tailing off:
Here’s the key points from the SMMT’s sales report:
- New car registrations see 1.1% decline in October following period of phenomenal record growth.
- Total market year-to-date up 6.4% to 2,274,550 units registered – the best performance on record.
- Alternatively fuelled vehicle market enjoys 13.8% boost, with diesel and petrol registrations steady.
Just looking at the detail of the report now….
Jeremy Cook, chief economist at currency firm World First, reckons UK interest rates will remain at their record lows for another six months.
London newspaper City AM runs a ‘shadow MPC’, asking nine senior economists how they would vote.
And this month, it has split 6-3, with a trio calling for a rate hike.
One of the “shadow hawks” is Simon Ward of Henderson Global Investors, who argues:
Raise. Corporate liquidity is surging. Private pay growth is over three per cent, while productivity remains sluggish. Global risks have faded.
Andrew Sentance, who once served on the MPC, also believes the BoE should raise rates:
Here’s a handy chart showing which BoE policymakers appear keen to raise rates soon, and which are reluctant….
Andy Haldane, the premier Dove, has even suggested recently that rates might be cut to new record lows….
Some economists believe that divisions at the Bank of England over interest rate policy will widen today during Super Thursday.
At recent meetings, the monetary policy committee has split 8-1, with only Ian McCafferty voting to hike borrowing costs from 0.5% to 0.75%.
But a 7-2 split can’t be ruled out, or even a 6-3 (although that might be pushing it).
And that’s why Simon Wells, chief UK economist at HSBC, says today does feel like a “big day”.
He told Bloomberg TV:
It’s Bonfire Night, and if there are fireworks here, it will be in the vote.
Kristin Forbes has been very hawkish of late, and she may go and join McCafferty, and possibly Martin Weale too.
The markets would “react strongly” to a 6-3 split, probably driving the pound sharply higher on expectations of an early rate hike.
Wells expects that first rise will come in February 2016, so the BoE may be keen to communicate that today.
Today is probably the Bank of England’s last chance to prepare people for an interest rate hike early next year.
Brian Hilliard, chief U.K. economist at Societe Generale, explains:
“It’s make or break for clear communication on a first-quarter rate increase.
“If it is going to happen in February they’re going to have to send a strong and clear signal.”
German factory orders fall again
As if the Volkswagen scandal wasn’t bad enough, Germany’s factories have also suffered another drop in demand orders.
Industrial orders fall by 1.7% in September, new figures show, the third monthly decline in a row.
That’s rather worse than expected – economists forecast a 1% rise – and it suggests Europe’s largest economy is suffering from weaknesses overseas.
The economy ministry didn’t try to sugar-coat the figures either, saying that “overall, industrial orders are in a weak phase”.
VW sales slide in South Korea
We have firm evidence that the emissions scandal has hurt Volkswagen, from South Korea.
Sales to South Korean customers almost halved in October, new figures show, dropping below the 1,000 mark for the first time since 2011.
The Korea Automobile Importers & Distributors Association reported that VW only sold 947 cars last month, following the revelations that it used software to cheat nitrogen oxide emission tests. That’s 46% lower than a year ago, and 67% below September’s figures.
The sales collapse for Volkswagen contrasted with a 6% rise in sales of imported cars in South Korea in the same period, Reuters points out.
Have UK drivers also abandoned VW? We find out at 9am when the latest sales figures are released….
Introduction: Bank of England rate decision, and more…
Happy Super Thursday!
The Bank of England is preparing to hit us with a quadruple whammy of news and economic data at noon.
Firstly, the Bank’s Monetary Policy Committee will set UK interest rates. A rate rise isn’t expected, but some members of the MPC may vote for the first hike since the financial crisis began. Last month they split 8-1, but could another hawk jump the fence?
The minutes of the meeting are also released at noon, showing the details of the committee’s discussions and its views on the UK and global economy.
We also get the latest quarterly inflation report, packed with new economic forecasts.
And if that’s not enough of a treat, the Bank governor Mark Carney then holds a press conference at 12.45pm. That’s his opportunity to guide the markets – and potential housebuyers and borrowers – on the chances of an interest rate rise in early 2016.
Also coming up today….
We get new UK car sales figures for October at 9am. They are expected to show that some customers have deserted Volkswagen following its emissions crisis.
In the City, we have some disappointing results from Morrisons, which has reported its 15th straight quarterly sales fall.
And the European financial markets are expected to be calm, after a solid trading day in Asia which saw the Chinese market rise 20% above its recent low.
That means they are back into a bull market, as traders put this summer’s panic selling behind them.
We’ll be tracking all the main events through the day….
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