Mark Carney

 

Powered by Guardian.co.ukThis article titled “Bank of England cuts growth forecasts and leaves rates on hold – as it happened” was written by Graeme Wearden, for theguardian.com on Thursday 4th February 2016 18.51 UTC

One last thing…The London stock market outperformed its French and German rivals today, to finish 61 points higher, or 1%, at 5898.

Mining shares led the way, with Anglo American surging by 19%, Glencore gaining 15% and Antofagasta jumping by 14%.

That followed the sudden weakening in the US dollar, as Wall Street and the City anticipated that US interest rates would not rise much this year, given recent weak data.

A cheaper dollar pushes up commodity prices, while looser monetary policy should be good for growth. Welcome news for miners, who had a torrid 2015.

Mining stocks have also been heavily shorted by hedge funds, so those bears will have been squeezed by the rising share prices.

Good night. GW

Updated

A late PS…

Larry Elliott, our economics editor, has summed up the message from the Bank of England today. Here’s his conclusion:

There are three conclusions to be drawn from the inflation report, the minutes and the governor’s letter.

The first is that it would now be a major surprise if interest rates rose this year.

The second is that the Bank’s credibility has been dented by its failure to call the economy right and the confused messages it has been sending out to the public.

Finally, the prospect of 0.5% interest rates extending into an eighth and perhaps a ninth year risks stoking up a housing boom. The Bank has so-called macroprudential tools that can be deployed to cool down the property market without damaging the rest of the economy. It is going to need them.

And finally, a couple of photos from today’s press conference just landed:

Mark Carney, the Governor of the Bank of England, speaks during the quarterly Inflation Report press conference, in London, Thursday, Feb. 4, 2016. The Bank of England policymakers have voted to keep interest rates at their record low of 0.5 percent as Governor Mark Carney unveils economic forecasts for Britain. (Niklas Halle’n, Pool Photo via AP)
Bank of England Inflation Report Press Conferenceepa05142914 Bank of England Governor Mark Carney speaks during a press conference at the Bank of England in London, Britain, 04 February 2016. The Bank of England has cut its prediction for growth for 2016 from 2.5 per cent to 2.2 per cent and has decided to keep interest rates at 0.5 per cent. EPA/WILL OLIVER

Ouch. The latest economic data from America is a reminder of why the Bank of England is worried about the global economy.

US factory orders shrank by 2.9% in December, according to new data – the biggest drop since the end of 2014.

Being criticised by journalists is an occupational hazard in central banking, but Mark Carney doesn’t appear to enjoy it.

So he may not particularly like this analysis of today’s inflation report, from Sky News’s Ed Conway.

Mr Carney’s problem is that every time he makes a big forecast he seems to get it wrong.

When he came into office, the Governor brought with him a whizzy new framework for setting UK interest rates. Under “forward guidance”, he would provide clarity about borrowing costs.

He promised, based on the Bank’s forecasts, that he and the Monetary Policy Committee would start to consider lifting them only when unemployment dropped beneath 7%.

Suddenly, within a few months, the jobless rate, hitherto stuck stubbornly above that level, started to come down. Within a year, forward guidance had to be dropped, replaced with a far more vague set of promises some nicknamed “fuzzy guidance”.

Not to be deterred, Mr Carney started to drop hints about when the first rise in rates would come. In a speech at the Mansion House in 2014 he signalled that rates would go up sooner than markets expected (which meant within a year). That was wrong.

Last summer he predicted the decision to raise rates would come into sharper relief “at the turn of the year”. That was wrong. Well, unless you’re being very literal indeed and think it could also entail not raising rates.

The one prediction he has stuck to that had, up until now, looked pretty uncontroversial was that the next move in rates would be up rather than down. But, in the past few weeks even that has now come into question….

More here:

The Independent’s Ben Chu flags up one curious moment in today’s press conference:

That’s a bit odd, as you might expect inflation to take off sharpish once spare capacity in the labour market has been sucked up.

As, indeed, a former Bank deputy governor pointed out:

Updated

Today was dubbed “Super Thursday”, but it was more like “Party pooper Thursday” as the Bank of England cut its growth forecasts.

Savers, who might wonder when they might get a higher interest rate, won’t be feeling particularly super, either.

Rohan Sivajoti, advisory services director at financial advisor eVestor, says:

“With a unanimous vote to keep interest rates unchanged, a mediocre global economic outlook and growing deflation fears, ‘Super Thursday’ has proved to be anything but.

“Beleaguered savers, who yet again will be inwardly groaning at the news, may also be resigned to the fact that they have limited options at present. However, now more than ever, savers need to make their investments work harder for them. Those looking to secure their financial future, should review deposits and options for investments and look at reducing debt while it is still relatively cheap to do so.”

There was quite a contrast between Mark Carney’s performance at the press conference, and the minutes of this week’s Monetary Policy Committee meeting released at noon.

Kallum Pickering, senior UK economist at Berenberg Bank, says the MPC are clearly worried.

The MPC cautioned on risk from financial market volatility, slowing global growth and now the EU referendum.

The committee noted that since the previous report other central banks including the European Central Bank had eased further, oil prices had fallen and financial market volatility had risen. This was linked to developments in China and other emerging markets and had ‘coloured’ the outlook for the global economy

Stephanie Flanders, JP Morgan’s chief market strategist for Europe (and former BBC economics editor), says weak wage growth could scupper a rate hike this year.

She writes:

The bottom line of today’s report is that the UK cannot ignore the weakening of global growth prospects – particularly the weakness of global trade – and neither can the Bank of England. But domestic consumption is driving the recovery in the UK and the US and the Bank of England can see little reason to expect domestic consumption to grind to a halt.

On balance, we still expect the US Federal Reserve to raise rates again over the course of 2016 as recession worries recede and sentiment in emerging market economics starts to stabilise. In that environment, we would expect the Bank of England also to raise rates by the end of 2016. However, much will depend on domestic wage pressures, which look somewhat weaker now than they did 6 months ago.

Whatever happens, the high level of UK household debt – much of it borrowed on adjustable or semi-adjustable mortgages – underscores that the rate increases that do happen will be gradual and modest relative to past cycles.“

Snap summary: Carney rails against the doubters

Back in 2014, Mark Carney was labelled the “unreliable boyfriend” for giving mixed messages about possible rate rise timings.

Today, it felt like the governor was playing a defensive husband, denying that he ever misled the public while insisting that he’ll still raise rates at the right time.

Anyway, a quick recap:

The prospects of an early UK interest rate rise have receded, after the Bank of England left borrowing costs at a record low of just 0.5%. The Monetary Policy Committee voted 9-0 to leave rates at 0.5%, with noted hawk Ian McCafferty abandoning his calls for a rise.

The BoE has slashed its growth forecasts. It now expects GDP to rise by just 2.2% this year, not 2.5%, as Britain is hit by the weakening global economy.

Mark Carney has insisted that interest rates are still more likely to rise, than fall. The governor faced down a sceptical press pack in London, who reminded the governor that his previous forward guidance on the path of interest rises has proved somewhat unreliable.

Asked if he sticks to his previous prediction that the next move will be upwards, he declared

“Absolutely. The whole MPC stands by that.”

Carney also rejected criticism for telling households recently that interest rates were “more likely than not” to rise in 2016. He said his original forward guidance, that rates would stay on hold until the economy improved, had given businesses and households confidence.

We are not going to tie our hands ever to raise interest rates or adjust policy in any way, shape or form to a certain date.”

Governor Carney warned that problems in the global economy could hurt Britain, saying:

The outlook for trade is particularly challenging, with net exports expected to drag on UK growth over the forecast period.

But he tried to play down the idea that Britain could follow Japan and the Eurozone into imposing negative interest rates.

Carney said a rate cut hasn’t even been discussed at this week’s MPC meeting, but the committee does keep its tools under review.

And asked about the EU referendum, Carney said the Brexit risk has had some impact on the pound.

“There is not yet a big risk premium built into business and household confidence around the referendum. We do see in th eexchange rate market, and it’s observed in the report, that there has been some buying of protection if you will, around the referendum.”

That’s the end of the press conference. The press pack are scrambling back to their newsrooms, and Mark Carney has headed back to his office to keep the monetary wheels in motion.

I’ll pull together a summary shortly.

Carney: We haven’t discussed negative rates

Q: Negative interest rates are now in place in Japan, the eurozone, and Switzerland, so are they within the Bank’s toolkit?

Carney replies that the bank thinks interest rates are “not at the lower bound” – in other words, they could be cut further.

We will review our toolkit, he continues. But we have not discussed negative rates, as monetary policy is pointing in a different direction.

He reminds the reporters that they saw the minutes of this month’s MPC meeting, while they were locked in a room “being treated pretty badly and forced to read a bunch of documents”*.

Those minutes show that negative interest rates weren’t discussed. You’ll know when they are…

[* - don’t worry, they probably get drinks and biscuits too]

Another questions about Brexit — what contingency plans have the BoE taken?

Carney declines to reveal any details, but suggests that – like with the 2014 Scottish referendum – the Bank will reveal its homework after the event.

Q: Are you worried, governor, that you might go through your entire tenure at the Bank without raising interest rates?

Carney insist he’s relaxed about this prospect.

He points out that former policymaker David Miles did two terms without raising interest rates, but did plenty of other things such as quantitative easing.

The important thing is that we set policy to maximise the changes that we meet our objectives. That’s how we’re going to be judged.

Carney sees downside risks from global economy

Q: How worried is the Bank of England about the global economy?

We do see some downside risks, Carney replies. Britain is a particularly open economy, so it’s very vulnerable to global problems.

That’s why the Bank of England usually has lower growth forecast than other bodies, such as the IMF.

He cites market fears over China, and its knock-on impact on other emerging markets.

And monetary policy could tighten more quickly, if those upside risks develop.

Updated

Q: When does low inflation start to become a worry for the Bank?

Carney bats this question over to Ben Broadbent.

Broadbent says there’s “no simple level when it becomes an over-riding concern”, but the bank is watching wages closely for signs that inflation is weakening.

Now deputy governor Ben Broadbent takes the microphone, insisting that there’s no ‘mechanical link’ between the UK output gap and any interest rate move.

You might remember that the output gap was one measure cited by Mark Carney in 2014, when he took his second stab at setting forward guidance on interest rates.

So, it’s still a factor, but don’t expect it to trigger an interest rate hike.

We won’t be “bound by past comments” when we decide it’s time to raise interest rates, says Carney.

He also denies that his forward guidance, various speeches, and wotnot have caused volatility. Short-term UK interest rates are half as volatile as before he was parachuted into the BoE

City experts aren’t very impressed with Mark Carney’s performance, as he tries to talk down the Brexit risk and talk up the chances of an interest rate hike:

Our economics editor Larry Elliott asks Carney when the decision about rate rises will come into “sharper focus” again.

Carney denies that the MPC are looking at monetary policy through bleary eyes. We take a decision at every meeting. This week’s decision was “easy”, though.

Carney gets a question about the European Union referendum.

He says the Bank of England isn’t modelling for ‘parallel universes”, so today’s report doesn’t estimate the impact of Brexit.

He argues that there isn’t yet a “big risk premium” due to the possibility of Britain leaving the EU.

However, there has been some impact on the pound as investors seek protection ahead of the referendum.

Mark Carney is trying to argue that the financial markets are underpricing the chances of a UK interest rate rise.

Paul Diggle, economist at Aberdeen Asset Management, isn’t sure Carney’s message will get through:

The Bank did send a signal that they think the market is wrong about when it thinks rates will rise. Investors think the first rate rise won’t come until February 2018 and the Bank has tried to say they should bet on it coming sooner.

But the way they send this signal is so opaque – a couple of graphs buried in chapter 5 of the Inflation Report – it’s not really clear whether anyone will pay attention. Carney’s forward guidance certainly hasn’t paid dividends for investors up until now.”

Carney is now warning that there could be more slack in the labour market than first thought.

That would mean wage growth might be disappointing (as firms wouldn’t have to fight for workers as much), meaning inflation remains weak.

But he also points to the introduction of the national living wage, which should raise inflation a bit.

(from April, workers in the UK aged over 25 earning the minimum rate of £6.70 per hour will get a 50p per hour increase).

Updated

Q: Do you think the public gives your advice as much credibility as it used to, given previous guidance on rates?

Carney gives a long answer, defending his original forward guidance (he originally set a 7% jobless rate as a key target before considering a rate rise, only to backtrack when it was achieved sooner than planned).

The worst thing we can say about that guidance is that more people went to work earlier – and we’re not going to apologise for that, Carney smiles.

And he’s also happy that UK households believe rates may rise this year, as it means they are less likely to risk a credit splurge. Although households have made “great progress”, they are still pretty indebted.

Carney insists, though, that the MPC will never “tie its hands” to changing monetary policy at a certain time, or at certain events.

And in short, we have nothing to explain, he concludes — a classic central banker’s answer to criticism.

Carney insists rates more likely to rise than fall

Onto questions:

Q: Does Mark Carney still believe interest rate are more likely to rise, rather than fall?

Absolutely, the governor replies, and so does the monetary policy committee.

He reiterates that the market path of rates implies that inflation will overshoot the 2% target in the medium term unless borrowing costs are hiked.

Updated

Interest rates are more likely than not to rise during the forecast horizon, says Carney.

He points to the current “market path” for interest rates (where investors expect borrowing costs to be). On that path, inflation will hit its 2% target in the medium term, and then rise higher, meaning higher borrowing costs will be needed.

And Carney insists:

We’ll do the right thing at the right time, on rates.

Katie is tweeting the key points from Carney’s press conference:

Carney says the Bank of England expects real incomes in the UK to grow solidly this year, after several lean years.

And business investment should also continue to grow strongly.

Carney then warns that global financial conditions have deteriorated notably recently, with a “particularly challenging” outlook for trade.

That means Britain’s net exports will continue to drag on growth (ie, we’ll import more than we sell to the rest of the world)

Mark Carney’s press conference begins

The governor of the Bank of England is giving a press conference now, to discuss the quarterly inflation report.

Mark Carney begins by saying that the UK economy is in much better shape than in March 2009 when rates were first cut to 0.5%.

Seven years ago, the economy was in serious trouble at the height of the financial crisis, and heading into recession.

Today, we have sluggish global growth, turbulent financial markets, and a resilient UK economy.

And that’s why the Bank still expects the UK economy to keep growing.

The prospect of UK interest rates being cut to a new record low is looming over the City:

It’s staggering to think that UK interest rates have now been pegged at 0.5% for almost seven years (it started in the dark days of March 2009)

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, says we could see a decade of ultra-low rates:

‘An interest rate rise is like the pot of gold at the end of the rainbow, the nearer you get to it, the further away it moves. A rise in rates now looks firmly in the long grass, with growth forecasts cut and cheaper oil putting downward pressure on inflation, which is already way below the Bank of England’s target.

Markets are currently pricing in a rate rise in the middle of 2017, though they have been consistently premature in their forecasts, and reaching the dubious milestone of a decade of ultra-low interest rates is now a distinct possibility.

The prospect of an early UK interest rate rise has receded into the distance, writes Katie Allen from the Bank of England.

She reports:

The Bank flagged the recent sharp sell-off in global stock markets and investors’ jitters about a slowdown in China as it revealed that policymaker Ian McCafferty dropped his recent call for a rate rise.

He had voted against the eight other members of the Monetary Policy Committee (MPC) since last August but this month agreed with his colleagues that it was too soon to raise interest rates from 0.5%, where they have been for almost seven years.

Wage growth has been weaker than the MPC had been expecting and minutes to its latest policy meeting suggested it was cautious about predicting any significant pick-up in pay over coming months.

“Against that backdrop, all members of the committee thought that maintaining the current stance of policy was appropriate at this meeting,” the minutes said.

Here’s Katie’s full story:

The pound has fallen almost half a cent against the US dollar, to $1.456.

Markets are concluding that interest rates won’t move for some time, given today’s gloomy inflation report and the news that Ian McCafferty has given up calling for a rate hike.

The Inflation report is online here, and full of interesting charts if you like that kind of thing.

This one shows how the oil price has fallen much further than the Bank expected:

BoE

And this shows how the markets are already expecting interest rates to stay lower, for longer.

BoE

This chart shows how the Bank of England has cut its growth forecasts for the next three years (the old forecasts are in brackets after the new ones)

BoE grwoth o

And the message from the BoE is that economic conditions have deteriorated over the last quarter:

Since the November Report, global output and trade growth have slowed further and the latest data suggest a softer picture for UK activity in 2015 than previously assumed, with four-quarter growth slowing to 2¼% by Q4 on the MPC’s backcast.

Updated

The Bank of England also points to the turmoil in the financial markets:

Developments in financial markets seem in part to reflect greater weight being placed on the risks to the global outlook stemming from China and other emerging economies.

BoE cuts growth forecasts

The Bank of England has also taken a knife to its growth forecasts, admitting that the UK economy is not expanding as fast as expected.

It now expects GDP to rise by just 2.2% this year, down from 2.5% three months ago.

And for 2017, it has cut its growth forecast to 2.3%, down from 2.6%.

The Bank of England says that economic conditions have deteriorated in the last three since its November quarterly inflation report:

Global growth has fallen back further over the past three months, as emerging economies have generally continued to slow and as the US economy has grown by less than expected.

There have also been considerable falls in the prices of risky assets and another significant fall in oil prices.

The 9-0 vote means that Ian McCafferty has abandoned his calls for interest rates to rise.

He had been the lone hawk on the MPC, arguing that borrowing costs should go up now before inflation took hold. But with oil so cheap, and growth weakening around the globe, he’s had a rethink.

Bank of England interest rate decision

Breaking: The Bank of England has voted to leave UK interest rates at their current record low of 0.5%.

And the decision was unanimous, with the Bank’s monetary policy committee voting 9-0 not to alter borrowing costs.

Updated

Super Thursday, a preamble

We have less than 30 minutes to go until Bank of England announces its interest rate decision, at noon in London.

It will also release its latest quarterly inflation report, with new forecasts for growth and inflation.

And half an hour after that, Mark Carney will hold a press conference to discuss the report.

This is the third “Super Thursday” — but frankly, the first two haven’t lived up to this billing, thanks to the lack of pressure to raise interest rates and the mediocre global economic outlook.

Alastair McCaig of IG reckons it needs rebanding:

How the department overseeing the trade descriptions act have not intervened in the use of the term ‘Super Thursday’ when the Bank of England posts its inflation report and interest rate decision, is somewhat baffling.

Anyway, the smart money is on another ‘no change’ in interest rates, followed by plenty of questions about the darkening global outlook, deflation fears, and whether Britain could follow Japan and the eurozone into imposing negative interest rates.

Ed Conway, writing for Sky News today, points out that borrowing costs could be cut this year.

Households should prepare themselves for a possible UK interest rate cut this year, with investors betting that there is now a greater chance that the next move in borrowing costs is down not up.

Money markets are now putting a one-in-four probability on the Bank of England reducing its official rates below the 0.5% level they have been sitting at since 2009.

It follows a dramatic shift in their expectations for interest rates.

For the majority of the post-crisis recovery, markets were betting that 0.5% would be the floor for borrowing costs, which would rise in the coming years. Now they are not pricing in a full increase in Bank rate until August 2018 – two months after Mark Carney’s five year term as Bank Governor is due to end…

Back in Brussels, Pierre Moscovici has explained that his latest forecasts don’t factor in the prospect of Britain’s leaving the EU.

Why not? Because everyone’s committed to avoiding such an outcome.

Moscovici has also defended the EC’s more rosy forecasts for Greece (well, less gloomy, anyway):

Shares in London have been lurching around like a well-refreshed journalist leaving The Inkwell after last orders (I imagine).

After jumping almost 90 points at the open, the FTSE 100 index slowly subsided until it was only up 20 points, before getting a second wind and romping ahead again.

Mining companies are still leading the way, with Anglo American leaping by 11%, BHP Billiton gaining 8% and Antofagasta up 7.5%.

The FTSE 100 this morning
The FTSE 100 this morning Photograph: Thomson Reuters

It makes for a tricky morning for traders:

So why the wild lurches? Investors are trying to decide how much optimism to take from the rally in the oil price, and the sudden weakness in the US dollar.

This could mean that the turmoil in the commodity market is reaching a bottom, especially if the US Federal Reserve is backing away from raising American interest rates several times this year.

The City is also waiting for the Bank of England to deliver its quarterly inflation report, in an hour’s time.

Ilya Spivak, currency strategist, at DailyFX, says markets expect a “dovish outcome”.

Traders are currently pricing in a 64% chance that rates remain unchanged over the next year, and a 36% probability that rates are cut to 0.25%, he adds.

Commissioner Pierre Moscovici is briefing the media now, about the EC’s new economic forecasts.

My colleague Jennifer Rankin is tweeting the key points:

I can’t believe *anyone* is euphoric, given the last few years. But do carry on, Pierre…

The FT’s Peter Spiegel is also ferreting out some important facts:

Despite those headwinds from China and refugees, the European economy is now entering its fourth year of recovery, says the EC.

Today’s report states:

Growth continues at a moderate rate, driven mainly by consumption. At the same time, much of the world economy is grappling with major challenges and risks to European growth are therefore increasing.

EC forecasts

EC slashes inflation forecast as headwinds grow

A flurry of news is flying our way from Brussels, as the European Commission releases its new economic forecasts.

The headline event is that the EC has slashed its forecast for inflation this year to just 0.5%, from 1% three months ago.

That’s partly because of the oil price, and also because “wage growth remains subdued”.

It has also trimmed its growth forecast for 2016 to 1.7%, down from an earlier forecast of 1.8%.

The EC still expects eurozone GDP to rise by 1.9% in 2017, as the slow recovery picks up pace (a little).

The Commission blames problems in emerging markets, and also points to the refugee crisis.

Commission Vice President Valdis Dombrovskis warns:

Europe’s moderate growth is facing increasing headwinds, from slower growth in emerging markets such as China, to weak global trade and geopolitical tensions in Europe’s neighbourhood.”

The EC has also revised up its Greek forecasts, saying the economy didn’t actually contract in 2015. It also expects a smaller recession this year.

Updated

Anti-austerity general strike brings Athens to a standstill

Greece is in the grips of a general strike today as demonstrators renew their protests against the country’s latest bailout deal.

Transport links are shut down, shops are closed, and thousands of people are marching through the Greek capital right now.

Members of the PAME Communist-affiliated shout slogans during a 24-hour nationwide general strike in Athens, Thursday, Feb. 4, 2016. Unions called the strike to protest pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes. (AP Photo/Petros Giannakouris)
Members of the PAME Communist-affiliated shout slogans during a 24-hour nationwide general strike in Athens today. Photograph: Petros Giannakouris/AP

Our Athens correspondent, Helena Smith, reports that the effects are withering.

She writes:

This is the fifth general strike since the leftist Syriza first came to power but none has been so fully endorsed. In a reflection of the growing anger at all embracing tax and pension reforms, the entire country appears to be paralysed by industrial action supported by every walk of life.

In Athens, where almost nothing is open, streets and central boulevards resembled a ghost town this morning with the shutters down on shops, offices and ministerial buildings. Small businesses, which usually turn a blind eye to the pleas of unionists to stay closed, have today heeded their call. “We have no choice,” said Lakis Antonakis who owns the popular Piazza Duomo café opposite the capital’s cathedral.

“If they pass these laws more than 50 percent of our earnings will be taxed and I am one of the lucky ones because I can depend on tourists. Other businesses are really struggling. It’s become unsustainable to keep them open. Everyone is very pessimistic.”

Unionists, who planned mass protest rallies, attributed the high turn out to the determination of Greeks to ram home the message that they will not accept pension and tax reforms as they now stand.

Members of the communist-affiliated PAME union march during a 24-hour general strike against planned pension reforms in Athens, Greece, February 4, 2016. REUTERS/Alkis Konstantinidis
Members of the PAME Communist-affiliated hold a banner reads in Greek ‘’Social Security’’ during a 24-hour nationwide general strike in Athens, Thursday, Feb. 4, 2016. Unions called the strike to protest pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes. (AP Photo/Petros Giannakouris)
Members of the PAME Communist-affiliated hold a banner reading ‘’Social Security’’. Photograph: Petros Giannakouris/AP

International creditors, led by the IMF, are pushing prime minister Alexis Tsipras for further cuts in pensions to make up for a fiscal shortfall of up to €4.5bn over the next three years.

Grigoris Kalomoiris, of the civil servants union, Adedy, said he also thought Greeks had been encouraged by protesting farmers who have set up roadblocks nationwide. “Their action over the past two weeks has had a ripple effect. Everything is close even the state audit office,” he told me.

“Farmers are leading the way. People are very determined to stop this pillaging because pillaging is what it is. Greece and Greeks cannot go on being pushed like this in the name of debt.”

The strike, ironically, has the full support of Syriza – although government officials, who will soon be called to vote on the reforms, are keeping mum.

National wide strike in Athensepa05142365 Women stand in front of a closed suburban station at the Athens Eleftherios Venizelos airport during a 24-hour national strike, in Athens Greece, 04 February 2016. Greece’s largest private and public sector unions GSEE and ADEDY held a strike on 04 February to protest against the government’s planned pension reforms. Public transport was grinding to a halt, while trains were cancelled and ferries stayed put in harbours, also cutting off the Greek islands from the mainland. EPA/YANNIS KOLESIDIS
A closed suburban station at the Athens Eleftherios Venizelos airport. Photograph: Yannis Kolesidis/EPA

Apparently the solution to monetary policy paralysis is taller central bank governors:

Updated

You might have expected the euro to fall this morning, after Mario Draghi guilefully declared that central banks shouldn’t stop taking action to fight deflation.

But the single currency didn’t take the hint. Instead, the euro has hit a three-month high against the US dollar, at $1.116.

And that’s starting to weigh on European markets, pushing shares down from their earlier highs….

VW car sales fall 14% in Britain

FILE - In this Feb. 14, 2013, file photo, a Volkswagen logo is seen on the grill of a Volkswagen on display in Pittsburgh. New Mexico is suing Volkswagen and other German automakers over an emissions cheating scandal that involves millions of cars worldwide, the first state to do so but almost certainly not the last. (AP Photo/Gene J. Puskar, File)

Sales of Volkswagen cars slumped by almost 14% in the UK last month, suggesting that the company is still suffering from the emissions scandal.

Just 12,055 VW-branded cars were registered in January, down from 13,993 in January 2015, according to new figures from the Society of Motor Manufacturers and Traders.

That cuts VW’s market share to 7.1%, from 8.5%.

Other Volkswagen brands also had a bad month. Sales of Seat cars slumped by 25%, from 4,137 to 3,119.

This is the fourth month in a row that VW car sales have dropped, following last year’s revelations that it used cheat software to get around emissions tests.

Overall, the UK’s new car market got off to a positive start in January, according to the SMMT.

Registrations rose by 2.9% compared with the same month in 2015 to reach an 11-year high of 169,678 units.

SMMT car sales

Updated

Goldman Sachs has weighed into the Brexit debate, predicting that the pound would slump by around 15% if Britain vote to leave the EU.

In a new research note, it argues that investors would be put off from putting capital into the UK if the public reject David Cameron’s new deal.

And if the domestic economy also suffered, sterling would come under sustained pressure – due to the country’s current account deficit.

Goldman predicts:

In our framework, a decline of 2% in domestic demand would still see close to a 15% drop in the British pound to close the current account deficit.

Worth remembering that Goldman isn’t completely impartial in this fight. The Bank has apparently given a six-figure donation to the Britain Stronger in Europe campaign, which is fighting against Brexit.

Mario Draghi: No excuse for inaction

Mario Draghi Presents ECB Report At EU ParliamentSTRASBOURG, FRANCE - FEBRUARY 1: The governor of the European central Bank, or ECB Mario Draghi speaks to the plenary room in the European Parliament ahead of the debate on the ECB report for 2014 on February 1, 2016 in Strasbourg, France. During the last press conference in Frankfurt, Draghi indicated that the bank may review its course of action in March. (Photo by Michele Tantussi/Getty Images)

European Central Bank chief Mario Draghi has dropped a clear hint that the ECB embark on fresh stimulus measures next month.

Speaking in Frankfurt a few minute ago, Draghi insisted that central bankers can’t just stop trying to hit their inflation goals because “global disinflation” is dragging prices down.

He declared:

There are forces in the global economy today that are conspiring to hold inflation down. Those forces might cause inflation to return more slowly to our objective. But there is no reason why they should lead to a permanently lower inflation rate.

What matters is that central banks act within their mandates to fulfill their mandates. In the euro area, that might create different challenges than it does in other jurisdictions. But those challenges can be mitigated. They do not justify inaction.

The speech is online here.

Double ouch:

Ouch. Shares in Credit Suisse have tumbled by around 10% in early trading.

The Swiss bank is missing out on today’s rally, after hitting shareholders with a loss of 5.83 billion Swiss francs ($5.8 billion) in the last quarter. That drove the bank into its first annual loss since 2008.

Credit Suisse took a bigger-than-expected charge to cover restructuring its investment bank,. as new CEO Tidjane Thaim tries to turn the firm around.

Thaim was also quite gloomy about the situation today, warning that:

Market conditions in January 2016 have remained challenging and we expect markets to remain volatile throughout the remainder of the first quarter of 2016 as macroeconomic issues persist .

Oil is continuing to gain ground this morning, adding to last night’s 8% surge.

Brent crude has risen to $35.36, up another 1%.

European stock markets are a sea of green, as traders welcome the higher oil price and the weaker US dollar.

European markets jump in trading

Up we go!

European markets are rallying at the start of trading, breaking three days of declines during this volatile week.

The FTSE 100 index of blue-chip shares opened 80 points higher, at 5917. That’s a gain of 1.2%, clawing back Wednesday’’s losses.

The German, French, Italian and Spanish markets are also up at least 1%.

Mining companies are leading the recovery. The weaker US dollar should spur demand for natural resources, as it will take some pressure off emerging markets.

Top risers on the FTSE 100 today
Top risers on the FTSE 100 today Photograph: Thomson Reuters

And Shell’s shares are rising, despite the company posting an 87% drop in profits this morning. Investors may have feared an even worse performance, given the slump in the oil price.

The key to today’s market moves is that the US dollar took an almighty tumble overnight.

After strengthening for months, the greenback suffered its biggest one-day drop since 2011.

That followed Wednesday’s disappointing US services sector data, which made investors conclude that US interest rates are unlikely to be hiked anytime soon. Perhaps not until 2017?

Mike van Dulken of Accendo Markets says the dollar fell on hopes that the Federal Reserve will “reign in its over-egged hawkishness”.

This delivered a welcome overshadowing of global growth concerns for markets hooked on cheap money.

And this chart puts the dollar’s weakness into some contect:

Asian markets rallied as oil recovers

It’s been another day of wild market action in Asia.

Most stock markets have surged overnight, on relief that the oil price has climbed back to over $35 per barrel.

Australia’s S&P/ASX 200 index led the way, jumping by 2%, with investors hoping that the commodity crunch may be bottoming out.

Only Japan missed out, because the yen gained against the US dollar (bad news for Japanese exporters)

Asian markets today
Asian markets today Photograph: Thomson Reuters

From Melbourne, Chris Weston of IG calls it “an incredible night of moves in markets”. And the trigger was the oil price, which has gained almost 10% since yesterday afternoon.

What we have seen is one of the most amazing one day moves in oil one will ever see, with US and Brent oil rallying 9% and 8% from yesterday’s ASX 200 close.

Oil is benefitting from a weaker dollar, rumours that OPEC might pull an emergency meeting to cut production, and suggestions that the selloff has simply gone too far.

Updated

Introduction: Bank of England Super(?) Thursday

Bank of England Governor Mark Carney listens during an inflation report news conference at the Bank of England in London, Britain November 5, 2015. The Bank of England gave no sign that it was in any more of a hurry to raise interest rates on Thursday, predicting near-zero inflation would pick up only slowly even if borrowing costs stay on hold all of next year. REUTERS/Jonathan Brady/pool

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

It’s Bank of England Super Thursday — that time of the quarter when the UK central bank sets interest rates, and also releases its latest inflation report.

“Super” could be pushing it, though. We’re expecting rates to remain unchanged at 0.5% (of course). The BoE will probably also lower its forecasts for growth and inflation, reflecting recent turmoil and rising pessimism about the world economy.

Governor Mark Carney will then face the cream of the economic press pack, who will presumably try to get him to admit that interest rates are highly unlikely to rise this year (despite Carney’s recent pronouncements). Might they even be cut to fresh record lows, governor?…

Also coming up today…

It’s going to be another lively day in the markets. European shares are expected to rally strongly, after three days of falls, and oil is looking perkier too (more on that shortly)

European Central Bank chief Mario Draghi is giving a speech in Frankfurt this morning; could that include fresh hints about ECB stimulus in March?

In the corporate world, we’re getting results from oil group Shell and mobile network operator Vodafone, among others.

We’ll be tracking all the main events through the day…

Updated

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Published via the Guardian News Feed plugin for WordPress.


USA 

 

Powered by Guardian.co.ukThis article titled “Bank of England governor has ‘no regrets’ over interest rates – business live” was written by Graeme Wearden, for theguardian.com on Thursday 5th November 2015 14.52 UTC

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.

Bank of England

Updated

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

Updated

Kallum Pickering of Berenberg Bank has kindly sent a chart, showing how the BoE cut its growth forecasts today:

BoE forecasts

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.

Updated

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.

Updated

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.

Updated

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.

Updated

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.

Updated

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.

Updated

Onto questions:

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 at Bank press conference
Carney at press conference Photograph: Bloomberg TV

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.

Updated

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:

It says:

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.

Bank of England inflation report

Updated

This chart explains why the Bank of England is worried about emerging markets:

Bank of England quarterly inflation report

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.

Bank of England quarterly inflation report
Bank of England quarterly inflation report

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.

Updated

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%.

Updated

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.

Updated

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%.

Updated

A Bank of England official is phoning the speaking clock right now…. (seriously).

ONE MINUTE TO GO!

Spoiler alert:

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.

File photo of the logo as seen at the Bank of England in the City of London<br />The logo is seen at the Bank of England in the City of London, Britain in this January 16, 2014 file photo. The Bank of England is expected to make an interest rate decision this week. REUTERS/Luke MacGregor/FilesGLOBAL BUSINESS WEEK AHEAD PACKAGE – SEARCH “BUSINESS WEEK AHEAD OCTOBER 5” FOR ALL 29 IMAGES” width=”1000″ height=”742″ class=”gu-image” /> </figure>
<p><strong>Over at the Bank, they’ll be putting the finishing touches to their announcements — we can expect some rapidfire tweeting once the clock strikes 12.</strong></p>
<p>That’s also the moment that economics correspondents are released from their lock-in. Fleet Street’s finest have been confined in the Bank this morning, getting an early peek at the Inflation Report. </p>
<p>My colleague <strong>Katie Allen</strong> is in Guardian colours….</p>
</p></div>
<p class=Updated

Super Thursday: What to expect

Here are some key points to watch for from the Bank of England today:

  1. 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.
  2. 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.
  3. The EU referendum. Is the Bank worried that Britain could vote to leave the EU? How much damage is the Brexit risk already causing?
  4. 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
  5. 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:

5 things to watch for the Bank of England’s Super Thursday

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.

Biggest fallers on the FTSE 100
Biggest fallers on the FTSE 100 Photograph: Thomson Reuters

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:

UK car sales
UK car sales Photograph: SMMT

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.

George Magnus

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).

Magnus says:

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:

Updated

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)

Updated

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:

UK car sales

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….

Updated

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….

Updated

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”.

Simon Wells of HSBC
Simon Wells of HSBC (left) Photograph: Bloomberg TV

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

A German supporter with the national flags on her head watches the World Cup soccer match between Germany and Ghana at a public viewing area in Hamburg, southern Germany, on Wednesday, June 23, 2010. (AP Photo/Matthias Schrader)

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”.

Updated

VW sales slide in South Korea

Sign at the Volkswagen Chattanooga Assembly Plant in Chattanooga, Tennessee November 4, 2015. Volkswagen told NHTSA that it would recall about 92,000 vehicles, which are some 2015 and 2016 models of Jetta, Passat, Golf and Beetle, in the United States. REUTERS/Tami Chappell

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….

Updated

Introduction: Bank of England rate decision, and more…

Bank of England Governor Mark Carney makes a speech at The Sheldonian Theatre in the University of Oxford on October 21, 2015 in Oxford, United Kingdom. Carney spoke about the benefits and risks of Britain’s EU membership. (Photo by Eddie Keogh-Pool/Getty Images)
Bank of England Governor Mark Carney, who will hold a press conference at 12.45pm today Photograph: Pool/Getty Images

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….

Updated

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BoE has slashed its forecast for wage growth this year, warned that geopolitical risks are rising, and said contingency plans for financial upheaval over Scottish independence are ready. Here are key points from the Bank’s Quarterly Inflation Report…

 


Powered by Guardian.co.ukThis article titled “Business Liveblog: Bank of England cuts wage growth forecast, and reveals Scottish contingency plans” was written by Graeme Wearden, for theguardian.com on Wednesday 13th August 2014 12.51 UTC

US retail sales miss forecasts, with no growth in July

Over in America, a disappointing set of retail sales figures have just raises concerns over the strength of its recovery.

Retail sales were flat in July, the worst performance in six months, having only risen by 0.2% in June.

Car sales fell, and demand for electronics and home appliances was weak — not a great sign of consumer confidence.

Core retail sales, which strips out cars, gasoline, food services and building materials, rose by just 0.1% in July, and June’s figure was revised down from 0.6% to 0.5%.

Ahha! On page 29 of the BoE’s Inflation report is a bar chart, showing how most new jobs created in the last six months have been in ‘low skill’ professions.

This may help explain the low growth in average earnings in recent months, if more new hirers are taking lower paid positions.

Hat-tip to Jeremy Warner of the Telegraph for flagging it up:

Labour: Weak wage growth shows economy isn’t fixed

Chris Leslie MP, Labour’s Shadow Chief Secretary to the Treasury, has seized on the news that the Bank of England has slashed its forecast for wage growth this year, to just 1.25%.

He says:

“The inflation report shows why this is no time for complacent and out-of-touch claims from Ministers that the economy is fixed and people are better off.

“While the economy is finally growing again and unemployment is falling, working people are still seeing their living standards squeezed. Pay growth is at a record low and lagging behind inflation and the Bank of England has halved its forecasts for wage growth this year.”

As covered earlier this morning, the latest unemployment data showed earnings growth faltering,

Total wages (including bonuses) have shrunk for the first time since 2009. And stripping out bonuses, average earnings rose by the lowest since records began in 2001, up just 0.6%.

Michael Izza, chief executive of ICAEW (which represents accountants) says the Bank of England’s new, lower wage growth forecasts are a concern:

The numbers of self-employed and part-time workers, together with those on zero-hours contracts are contributing to a flexible labour market that is keeping wages down. In addition, auto-enrolment means that employers are having to fund pensions from somewhere, and wages are suffering as a result.

David Kern, chief economist at the British Chambers of Commerce, says the Bank of England is giving out “mixed messages” on the outlook for interest rates.

The higher growth forecast for 2014 and the lower estimate for the amount of slack in the economy may be seen as a signal to bring forward interest rate rises.

However, Governor Carney’s comments will reassure businesses that the MPC will not rush any increases in rates. He also acknowledged that the rising supply of labour in the economy may provide new sources of economic capacity.

An early UK interest rate rise looks a little less likely, reckons Neil Lovatt, director of financial products at Scottish Friendly.

He says:

“To read between the lines, the message today is that rates are still destined to rise, but when that will be is still up for debate. The fickle nature of the UK economy seems to keep everyone guessing.”

“Any rate rises will be small, but even very small rises in interest rates will have a significant effect on what is still a fragile economy. That said, savers thinking that the ‘good old days’ of high interest rates will return are going to be sorely disappointed and the sooner we adapt to this environment the better.”

Those new BoE forecasts

Berenberg Bank have kindly wrapped up the changes to the Bank of England’s forecasts:

  • Growth up. The BoE raised its growth forecasts to 3.5% in 2014 and 3.0% in 2015, both up by 0.1ppts from their previous forecast. Although they cut their 2016 forecast to 2.6% from 2.8%
  • Inflation up in 2014 but down in 2015 and 2016. The BoE now forecasts 1.9%, 1.7% and 1.8% inflation for 2014, 2015 and 2016, compared to 1.8%, 1.8% and 1.9% in their previous forecast.
  • Unemployment down. To 5.9%, 5.6% and 5.4% in 2014, 2015 and 2016, from 6.3%, 6.0% and 5.9% in the previous forecasts.
  • Pay growth cut in the near term but raised later in the forecast. Specifically, the BoE now forecasts wage growth of 1.25%, 3.25% and 4% in 2014, 2015 and 2016 from 2.5%, 3.5% and 3.75%.
  • Slack now estimated at 1% of GDP, compared to 1-1.5% in the second quarter.

So, good news on growth and unemployment, but bad news on pay.

As Berenberg’s UK economist, Rob Wood, puts it, there’s “something for everyone”.

This fan chart shows the new growth forecasts:

One more key point — the Bank of England flagged up that geopolitical dangers (think Ukraine or the Middle East) are a growing threat to Britain’s recovery.

Carney said:

“Markets have been remarkably resilient to some of these geopolitical events and we’re only beginning to see the first advance signs of the middle through some of our major export markets such as Germany and the movements of some of the confidence indicators.”

(thanks to Reuters for the quote)

Bank of England’s quarterly inflation report – the key points

Quick recap.

1) The Bank of England has slashed its forecasts for wage growth, conceding that the recovery has still not fed through to people’s pockets.

The BoE now expects earnings to rise by just 1.25% this year, down from 2.5% previously. It admitted that there appears to be more slack in the economy than it realised, although it is also being eaten up at a faster rate.

Governor Mark Carney said the UK was experiencing “strong output growth”, but this has not been matched by a material pickup in productivity, or wages.

2) The prospects of an early rise in UK interest rates appear to have faded.

The pound tumbled on the news, shedding one cent against the US dollar to $1.6714 as investors calculated that an early rate rise is less likely than before.

The Bank also hammered home that interest rate rises will be gradual and limited, when the time comes to end Britain’s long period of record-low borrowing costs.

3) “Contingency plans” have been drawn up in case Scotland votes for independence.

Carney said:

”Uncertainty about the currency arrangements could raise financial stability issues….We have contingency plans.”

4) During an occasionally barbed press conference, Carney denied that the Bank was increasingly clueless about the UK economy.

He argued that rising geopolitical risks mean there is naturally more uncertainty about the situation, and denied that his precious forward guidance policy has been a muddle.

5) Europe remains a big worry. The BoE says that:

Eurozone growth continued to disappoint, net lending has been falling and inflation has stayed low.

And deputy governor Minouche Shafik warned that the UK can’t rely on the eurozone to drive its recovery.

Eurozone industrial production hits recovery hopes

Incidentally, we had further confirmation this morning that the eurozone is struggling — a poor set of industrial production numbers.

My colleague Jo Moulds reports:

Factory output in the eurozone contracted unexpectedly in June, further damaging hopes of a strong recovery.

Industrial production dropped 0.3% on the month following a 1.1% drop in May, hit by the ongoing conflicts in the Ukraine, Iraq and Gaza.

Production was flat compared to the same time last year. Economists had been targetting a 0.1% rise on the year. The annual reading was the lowest since August 2013.

Bank of England: we can’t rely on the Eurozone for our recovery

Britain can’t rely on the eurozone economy to drive our recovery, warns the Bank of England’s new deputy governor, Minouche Shafik.

Asked about the impact of the European Central Bank’s new stimulus measures (including hundreds of billions of cheap loans for banks), Shafik urged caution, saying the new impact of this LTRO programme will become clear over time.

The eurozone still faces low growth and low inflation, Shafik says, and we need to see whether the ECB’s measures lead to stronger credit growth and a stronger recovery.

The UK can’t rely on a eurozone recovery to lift our recovery. It would be good if the eurozone could drive us forwards, as it’s such an important export market, that’s not very likely, she concludes.

And that was the end of the press conference. Summary and reaction to follow…

Updated

Asked about the rise in self-employed workers (as covered earlier in the blog) deputy governor Ben Broadbent plays down the suggestion that it’s a risk. This isn’t necessarily a bad thing for productivity, he claims.

The Bank of England is tweeting some of the key points from today’s briefing, including a rather dashing (and slightly menacing?) photo of the governor:

Carney treats a question about his ‘muddled’ forward guidance policy with some distain.

Asa Bennett of the Huffington Post points out that the initial pledge (no rate rise until unemployment has fallen below 7%), has evolved into a broader measure based on slack, wage growth, and the like. Was it a muddle, or a learning process?

Not an unfair question, frankly, if a little mischievous.

But Carney doesn’t look pleased, claiming that Bennett is the muddled one, and that his guidance has been entirely consistent across many inflation reports and MPC minutes.

It’s consistent, it’s boring, but what’s what you get, he smiles.

The audience aren’t smiling, though:

Mark Carney: Bank of England has contingency plans for Scottish independence

Mark Carney has revealed that the Bank of England has drawn up contingency plans in case Scotland votes for independence next month.

Asked for his views on the prospect of ‘sterlingisation’ (that Scotland would use the pound without a formal currency union), Carney reveals that that BoE is preparing for all eventualities, as “uncertainty” over Scotland’s currency arrangements could hit financial stability.

He concedes that

He says:

We have contingency plans…. but it’s never a good idea to talk about them in public apart from to say that you have them.

Carney says that in terms of the Bank’s responsibilities for financial stability, we have “a wide range of tools and plans”. And the BoE isn’t the only body with responsibilities here — some are shared with the Treasury.

Updated

Back on the markets…. Carney says he is “encouraged” that the financial markets are more responsive to the latest data.

James Macintosh of the Financial Times takes up Larry’s point, that the Bank is looking increasingly clueless (on a spectrum between certainty and cluelessness).

Mark Carney replies; if we can agree that the range is between perfect certainty and perfect uncertainty, it’s fair that there is more uncertainty, mainly around the issue of productivity.

Here’s a link to the inflation report (sorry for the delay #hectic)

Ah, the Scotland question — is it time for Alex Salmond to produce a Plan B on an independent Scotland’s currency?

Mark Carney takes a cautious line; the Bank will implement whatever policymakers decide, but it has “noted” the statements from the three main UK political parties that they would not enter a formal currency union with iScotland.

He also points out that the Bank has a responsibility for financial stability across the UK, and will keep discharging those duties until circumstances change.

Updated

Could the Bank of England raise interest rates by as little as 0.125%, or would that be the equivalent of ‘boiling the frog’, asks Szu Ping Chan of the Telegraph.

Carney chuckles at the analogy, but doesn’t suggest such a small rise is on the agenda.

Ed Conway of Sky invites Mark Carney to comment on the financial markets’ expectations for UK interest rate rises (harking back to his Mansion House speech in June, when he suggested they were too dovish).

Carney plays the ball deftly, saying that the overall shape of market expectations are consistent with an adjustment that is both gradual and limited.

Deputy governor Ben Broadbent chips in, saying that it’s a “false dichotomy” to suggest the Bank should either be completely certain about everything, or completely clueless.

Larry Elliott, the Guardian’s economics editor, isn’t impressed by today’s report:

Doesn’t today report show that the Bank “really hasn’t got a clue, the MPC is divided, and that anyone taking out a mortgage or an overdraft would be ill-advised, as anything you say must be taken with a very large pinch of salt?”, Larry politely suggests.

Governor Carney defends his record, suggesting rather archly that Larry should try speaking to a lot of firms around the country*. The firms I speak to insist that business have understood the Bank’s ‘forward guidance’, he adds.

Interest rates will go up as the economy improves, they will go up to a limited extent, ands gradually, Carney says. But there are geopolitical dangers, and we may need to react to them.

* – Like in Rochdale, perhaps, Governor?

How much spare capacity is left to be absorbed in the UK economy?

Carney says there is “tremendous uncertainty” about the degree of slack, among policymakers on the Bank’s monetary policy committee (the overall view is that there’s 1% of capacity to mop up).

That’s not hugely reassuring, given the importance that the Bank now puts on the issue when setting monetary policy.

Updated

Alex Brummer of the Daily Mail wants more details about the Bank’s worries about geopolitics.

Carney replies that there is a “slight downturn skew” to today’s growth forecasts.

Bank of England press conference – Q&A session begins

Onto questions — Ben Chu of the Independent asks why the Bank has lowered its forecasts for productivity growth.

Mark Carney explains that firms have been taking on workers rather than investing in new equipment, as labour is cheaper than capital.

That process should end once cheap labour has been mopped up, meaning workers demand higher wages, and encouraging firms to invest in new equipment that will boost productivity. That process is taking longer than thought.

Pound hits 10-week low against the US dollar

The pound has hit its lowest level against the US dollar since last May, as the markets digest the inflation report (and the jobless data).

Sterling is down by 0.45% today, at $1.6732.

Updated

On interest rates, Mark Carney again reiterated that borrowing costs will rise in a “small, slow” manner, when the appropriate moment comes.

The economy is returning to a semblance of normality, Carney concludes.

Carney says that the amount of spare capacity in the economy has fallen somewhat in the last quarter, but the Bank also reckons there was more slack in the UK than before.

Updated

Bank of England slashes forecast for wage growth.

Over at the Bank of England, governor Mark Carney is unveiling the Quarterly Inflation Report.

He is declaring that the Uk recovery is “on track”…. “Robust growth” has taken output above the pre-crisis peak, and the Bank has revised its near-term forecast for growth up.

But the Bank has also slashed its forecast for wage growth in the UK.

  • It now expects wages to rise by just 1.25% in 2014, down from 2.5% previously.
  • It sees growth picking up to 3.25% in 2015, down from 3.5% before.
  • And in 2016, it reckons wages will rise by 4%, up from 3.75% previously.

Carney is also warning that Britain faces rising geopolitical risks, while the eurozone economy remains weak.

And the persistent strength of sterling is also a worry.

You can watch the press conference live here (right-click to open in a new tab).

Updated

So much for the year of the pay rise

Today’s report have cast a shadow over hopes that 2014 will be “the year of the pay rise.”, says the Resolution Foundation.

Adam Corlett, their economic analyst, comments:

“Once again a strong employment performance is to be welcomed but concerns remain over wages. There is still good reason to expect that real pay will start increasing during 2014 but today’s disappointing performance pushes the wages recovery further down the road.

It’s now almost impossible for average real pay in 2014 as a whole to exceed last year’s unless we see an unprecedented surge in wages during the rest of the year.

The number of people receiving the Jobseekers Allowance could soon fall below the one million mark:

The Press Assocation reports:

The claimant count fell for the 21st month in a row in June, by 33,600 to 1.01 million, according to today’s data from the Office for National Statistics.

If the trend continues, the number of Jobseeker’s Allowance claimants will fall below a million next month for the first time since September 2008.

See the report yourself

Nearly forgot… you can see the full labour market report here (as a pdf).

Iain Duncan Smith: Long-term plan is working

Work and Pensions Secretary Iain Duncan Smith has claimed that his changes to the welfare system have helped heal the labour market.

Here’s his official response to the jobless figures:

“In the past, many people in our society were written off and trapped in unemployment and welfare dependency. But through our welfare reforms, we are helping people to break that cycle and get back into work.

“The Government’s long-term economic plan to build a stronger economy and a fairer society is working – with employment going up, record drops in youth unemployment and hundreds of thousands of people replacing their signing-on book with a wage packet.

“This is transformative, not only for these individuals and their families, but for society as a whole. That is why we have set full employment as one of our key targets – bringing security and hope to families who have lost their jobs and others who never had jobs, we put people at the heart of the plan.

“The best way to help even more people into work is to go on delivering a plan that’s creating growth and jobs.”

However….critics, such as our own Polly Toynbee, are less impressed with Duncan Smith’s performance, given the stuttering start to his universal credit project:

Iain Duncan Smith’s delusional world of welfare reform

Today’s slump in real wages are a blow to hopes that the cost of living squeeze was easing — readers may remember that four months ago there was chatter that the squeeze was over, after pay rises (briefly) burst above inflation.

Could Britain’s falling real wages be partly due to changes in the composition of the labour market, with more people taking lower-paid jobs?

Newsnight’s economics correspondent, Duncan Weldon, reckons so:

Britain’s youth unemployment total has fallen:

The ONS reports that there were 767,000 unemployed people aged from 16 to 24 in April-June 2014; 102,000 fewer than for January to March 2014 and 206,000 fewer than for a year earlier.

These were the largest quarterly and annual falls in youth unemployment since comparable records began in 1992.

Updated

The recovery in the labour market has partly been driven by Britain’s army of self-employed people, which swelled by almost 10% over the last year.

The ONS reports that, since April-June 2013,

  • The number of employees increased by 447,000 to reach 25.77 million.
  • The number of self-employed people increased by 408,000 to reach 4.59 million.

UK unemployment, the key charts:

These two charts show what a bizarre jobs recovery the UK is experencing.

On the one hand, the employment rate is close to its highest level on record, as jobless falls and more people find work (820,000 in the last year).

But yet, real wages are shrinking – with the gap between earnings and inflation widening alarmingly (whether you include volatile bonuses or not)

One reason for caution — pay packets were boosted a year ago, because many bonuses were held back until after the UK top tax rate fell to 45%, in April 2013.

The ONS points out that “some employers who usually paid bonuses in March paid them in April last year.”

But if you strip out bonuses, pay is still up a measly 0.6% year-on-year, the lowest on record.

Updated

This chart from Bloomberg confirms that UK wages have suffered their first fall since the depths of the financial crisis:

Here are the key points on today’s unemployment data, from the ONS:

  • For April to June 2014, there were 30.60 million people in work, 167,000 more than for January to March 2014 and 820,000 more than a year earlier.
  • For April to June 2014, there were 2.08 million unemployed people, 132,000 fewer than for January to March 2014 and 437,000 fewer than a year earlier.
  • For April to June 2014, there were 8.86 million economically inactive people (those out of work but not seeking or available to work) aged from 16 to 64. This was 15,000 more than for January to March 2014 but 130,000 fewer than a year earlier.
  • For April to June 2014, pay including bonuses for employees in Great Britain was 0.2% lower than a year earlier, but pay excluding bonuses was 0.6% higher.

UK unemployment rate drops to 6.4%, but wages fall

Breaking News: Wage growth in the UK has hit its lowest level on record, and actually contracted if bonuses are included.

The Office for National Statistics reports that average earnings, excluding bonuses, rose by a mere 0.6% in the three months to June.

That means pay packets lagged well behind inflation — which hit 1.9% in June.

Including bonuses, total pay packets actually contracted by 0.2% during the quarter, the first fall since 2009.

In brighter news, the overall unemployment rate fell to 6.4% in April-June, which is the lowest since the end of 2008. And the claimant count fell by 33,000, showing that the labour market continues to recover.

But that recovery still isn’t reaching people’s pockets.

More details and reaction to follow

Updated

Nearly time for the UK unemployment data to hit the wires….

Reminder — economists expect another rise in employment, and a drop in the number of people claiming benefits.

But a crucial issue is whether earnings are picking up, after years of low pay rises.

As my colleague Katie Allen reports, many employees have been hit hard:

Angela Chicken was still in hospital with her newborn son when she was made redundant. She had been earning £11 an hour as a graphic designer. Ten years on, the 52-year-old single mother makes around £8 an hour working part-time at her local Sure Start children’s centre in Southampton.

With the cost of living rising faster than her pay, Chicken’s wages have fallen even further in real terms, a pattern likely to be reflected across the country in the latest official labour market figures today. After bills and housing costs, Chicken is left with £108 a week to feed herself and her son, buy clothes and anything else they need. They eat well, she said, but there is little left for treats or outings.

“We don’t really have enough money to go on holiday … I don’t get haircuts, I very rarely buy any clothes,” she said. “What I have had to do is pull myself back over the last 10 years to a position that isn’t as good as it was because I got knocked off my perch.”

More here:

In low-wage economy employers paying well make sound investment

Updated

Most of Europe’s stock markets have risen this morning, despite the worrying economic news from Asia overnight (details).

Germany’s DAX is leading the way, up 77 points or 0.86% at 9147.

Insurance group Swiss Re has cheered investors by posting a 3.5% jump in profits.

In London the FTSE 100 is flat (dragged back by a few companies going ‘ex-dividend’).

The Bank of England may admit this morning that it was too optimistic about wage growth, reckons Bloomberg’s Emma Charlton:

We also have confirmation that the eurozone has slipped worryingly close to deflation last month.

Fresh data this morning showed that Spain’s consumer prices index fell by 0.3% year-on-year in July, the biggest drop in almost five years. Month-on-month they slipped by 0.9%.

In France, prices were up by a meagre 0.5% last month compared with July 2013, and also fell on a monthly basis, down 0.3%.

Japan’s GDP shrinks by 6.8%; Chinese new lending slumps

Global economy watchers have two big pieces of economic data from Asia to digest today.

1) Japan has suffered its biggest contraction since the 2011 tsunami, in a blow to efforts to revitalise its economy.

Japanese GDP fell at an annualised rate of 6.8% between April and June (meaning it shrank by 1.7% during the quarter). The slump is being blamed on the recent hike in Japan’s sales tax, from 5% to 8%, which encouraged firms and households to bring forward their spending to January-March.

The government remains relaxed, saying the economy is recovering. But critics of prime minister Abe’s stimulus plan suggest he may have to postpone plans to raise the sales tax again in December.

2) The news from China isn’t too rosy either. The broadest measure of new credit has dropped to the lowest since the global financial crisis, suggesting many banks are cutting back on new lending.

Economists are concerned, as Chinese banks also face the impact of the property market downturn. Beijing may need to unleash further stimulus measures to avoid growth weakening. fastFT has a round-up of analyst comments.

Updated

Analysts at ING will be combing the inflation report for signs that the Bank of England’s monetary policy committee was divided last week, when it voted to leave interest rates unchanged.

They say:

The Bank will release new forecasts and update its forward guidance which will leave the door open for a rates rise this year. Any hints of dissent at the August meeting will boost the case for a November hike.

Inflation report: what to watch for

The Bank of England inflation report will be scrutinised for hints over interest rate rises, the latest assessment of ‘slack’ in the economy, wage growth (or lack thereof), and the outlook for growth (could possibly be revised up) and inflation (might be revised down).

Mark Carney can also expect a few questions about the UK housing market.

Here’s Angela Monaghan’s preview:

Bank of England inflation report – what to watch for

City analyst Michael Hewson of CMC Markets predicts that today’s data will show another welcome drop in the jobless rate, but an unwelcome drop in wage growth.

He writes:

The latest ILO unemployment numbers for June are expected to see a drop from 6.5% to 6.4%, while jobless claims in July are expected to show another drop of 30k, slightly lower than the 36.3k drop seen in June.

Wages growth continues to be the economic head scratcher and is the Bank of England’s biggest problem when it comes to deciding when to raise rates. If we continue to see the gap with inflation widen out then it becomes increasingly difficult to see how the Bank could even contemplate a rate rise this year.

Expectations are for flat wage growth for the 3 months to June, down from the 0.3% rise in May.

* – The wages figures are skewed by the cut in Britain’s top rate of income tax back in April 2013. That prompted some firms to hold back bonus payments until then, making comparisons trickier.

UK unemployment and Bank of England inflation report in focus

Good morning, and welcome to our rolling coverage of the economy, the financial markets, the eurozone and business.

We’re tracking two big events in the UK this morning. First, the latest unemployment figures, due at 9.30am BST. They are expected to show another drop in the number of people out of work.

But that labour market recovery has come at a price — low wage growth, and today’s figures are likely to show pay rises lagging behind inflation again.

That would mean real wages are still falling; taking the shine off Britain’s economy recovery.

That data will set the scene for the Bank of England’s latest quarterly Inflation Report, released at 10.30am.

This is the Bank’s latest health-check on the UK economy, including forecasts for growth and inflation.

But the big issue is whether the BoE has moved closer to hiking interest rates — Governor Mark Carney will probably be quizzed on this during the press conference.

The key issue is whether the Bank thinks most of the spare capacity, or ‘slack’, in the economy has now been mopped up. Carney will probably reiterate that the Bank is watching wage growth closely – showing whether employers are having to pay more for talent, and whether households could cope with higher borrowing costs.

As Ian Williams of Peel Hunt explains:

Formal changes to the forecasts are likely to be minimal; the overall assessment of the degree of slack, especially regarding the labour market, will be the focus of investor interest.

Elsewhere, European stock markets are expected to rise modestly, despite ongoing geopolitical tensions [the Russian aid convoy chugging towards the Ukraine border could be the next flashpoint].

And in the euro area, investors are digesting yesterday’s slump in German investor confidence, and fretting about how bad tomorrow’s growth figures for the April-June quarter could be.

I’ll be tracking the key events though the day….

Updated

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Bank of England governor says recovery is gathering pace, but output gap means it’s too early to raise borrowing costs. New forward guidance based on spare capacity. Here are the details of the new plan and the market’s reaction to it…

 


Powered by Guardian.co.ukThis article titled “Bank of England rewrites forward guidance, signalling no rate rise until 2015 — inflation report live” was written by Graeme Wearden, for theguardian.com on Wednesday 12th February 2014 15.07 UTC

The latest news story

Our full, updated, news story on forward guidance is online here:

Bank of England to keep rates at 0.5% for at least another year

So we’ll take a break here in the blog, but will be back with any major developments….

Forward Guidance 2: What the readers say

Thanks, as ever, for the ace comments below the line – here’s a selection:

So, only 1-1.5% spare capacity.

But growth of 3.4%, 2.7% and 2.8% over three years.

With rates only going up slightly in, say, 18 months.

That makes no coherent sense, surely?

‘But the number of part-time workers looking for full time work is near a record high. And he cautions that “the recovery as yet is neither balanced nor sustainable.”’

It astonishes me that, apparently, part-time working has never been regarded with the significance it should: this, and the fact that “hours worked” is also to be given more consideration in the Bank’s assessment of economic progress, underlines his caution that “as yet the recovery is neither balanced nor sustainable.”

House of cards?

It is almost as if the Bank of England is trapped. Right now it should raise rates, but maybe it knows why the system cant take it if it does.

smoke and mirrors – we cant put up rates unless Europe and US also put up rates, its a macro economic war,

Italian PM to announce new plan tonight

Important developments in Italy, as coalition prime minister Enrico Letta tries to maintain his position as government leader in the face of a possible challenge from centre-left reformer Matteo Renzi (see 8.49am for details).

After holding talks with Renzi today, Letta has decided to announce his new plan for the coalition at 6pm local time, or 5pm GMT.

Here’s the statement:

“Enrico Letta will present “Commitment Italy”, a proposal for a coalition pact between the parties that support the government.”

Democratic Party (PD), the coalition partner (and Letta’s own party) will then decide on Thursday whether to support the current PM. If not, then PD leader Renzi could take over.

Renzi himself has tweeted that he will make his own position clear tomorrow “in the open” at the PD meeting:

A calm start to trading in New York. Here’s the opening prices:

  • DOW JONES UP 2.05 POINTS, OR 0.01 PERCENT, AT 15,996.82 AFTER MARKET OPEN
  • NASDAQ UP 6.38 POINTS, OR 0.15 PERCENT, AT 4,197.42 AFTER MARKET OPEN
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Updated

This may be a little awkward for the Bank — today’s quarterly inflation report (page 12) shows that forward guidance made households slightly less confident about future economic prospects.

Just 1% said they felt much more confident, while 14% were slightly more confidence. But 12% were slightly less confident, and 4% much less confident.

Here’s the chart (which also shows that, as Carney said earlier, the pledge did make firms more upbeat about their future prospects)

Updated

Economist Shaun Richards is unimpressed by Mark Carney’s defence of forward guidance:

Apparently the first version has been so successful it is to be immediately abandoned! It is being replaced by something so vacuous that it cannot go wrong. If you add eighteen new metrics to a system there is bound to be something you can hang your hat on.

Rather ironically this seems to involve the original inflation target as Mark Carney does what Elvis Presley described as this.

“Bright in early next morning /

it came right back to me.”

Here’s his analysis: Mark Carney’s honeymoon period is over as Forward Guidance is rebooted – let’s hope his luck isn’t

Two arrests in Rolls-Royce inquiry

In other news, two men were arrested in London this morning as part of the Serious Fraud Office’s investigation into British aerospace and defence group Rolls Royce, and its activities in Asia.

The SFO told Reuters that:

”In connection with a Serious Fraud Office investigation, we can confirm a number of search warrants have been executed at various properties in London today. Two men were also arrested.”

The SFO opened its criminal inquiry into Rolls-Royce just before Christmas, around a year after allegations of allegations of malpractice involving the aeroplane engine maker in Indonesia and China came to light.

Updated

Larry Elliott, our economics editor, has returned from the Bank of England to put his finger firmly on the problem with the rejigged forward guidance on monetary policy — can the Bank really judge the output gap correctly?

Here’s a flavour:

Put simply, the output gap is the difference between the actual level of activity in the economy and its potential level. Policy makers assume that the economy has a long-term trend rate of growth, which in the UK’s case is between 2-2.5%. In recessions, activity falls below this level and so there is scope for the economy to grow faster than trend during recovery periods without inflation picking up. But it is also assumed that some of the damage caused by recessions is permanent, because investment is scrapped and unemployed workers lose their skills.

As a result calculation of the output gap is highly subjective. The Treasury publishes a range of estimates from forecasters and these vary from 0.8% to 6%. The Bank’s estimate is 1-1.5%, but that figure depends on a) the economy’s trend rate of growth; b) the permanent damage caused by the recession and c) likely productivity growth in the future.

All of which means forward guidance is now extremely fuzzy….

More here: Forward guidance version 2: will the public believe it?

Forward Guidance 2 could threaten financial stability

Here’s the case against Forward Guidance 2, from Eimear Daly, head of market analysis at Monex Europe.

She warns that the Bank could easily threaten financial stability if it doesn’t end its exceptionally stimulative monetary policy in time.

Mark Carney has evolved forward guidance to its next phase. This is a nice euphemism for saying outright that forward guidance has been abandoned.

The Bank of England admitted that unemployment will reach the all-important 7% threshold in January, but the economy is by no means ready to stomach higher interest rates.

The next economic indicator that future rate rises will be linked to is labour market spare capacity – an economic idea so vague and hard to track that it provides the scope to keep policy ultra easy, despite a gathering recovery.

About that u-turn…..

The Independent’s economics editor, Ben Chu, has been rifling through the August 2013 quarterly inflation report, and reminds us that the Bank was more sceptical about using the output gap as a target six months ago:

While the FT’s Chris Giles flags up that the Bank argued against ‘fuzzy guidance’ initially:

The new forward guidance may sound like “we won’t raise rates until we decide it’s the right time to raise rates”.

It’s rather more complicated than that, of course (don’t forget those 18 different economic indicators that the bank will be tracking!). Ian Stewart, chief economist at Deloitte, sums it up thus:

Forward guidance has morphed into something fuzzier, but what is clear is that the Bank is in no hurry to raise rates and, when it does, it intends to go slowly. Mr Carney believes that the recovery is gaining momentum. The last thing he wants to do is to snuff it out with aggressive interest rate hikes.

CBI likes the look of Forward Guidance 2

Over to the CBI for the business reaction — its chief policy director, Katja Hall, agrees that there’s still a significant output gap in the UK economy:

“Forward guidance has clearly been effective in influencing companies’ expectations of when interest rates will rise and in cementing their confidence in the recovery.

“The Bank’s new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates. And the Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.”

People may be less willing to invest or spend on the high street because the new forward guidance provides more uncertainty, suggests Howard Archer of IHS Global Insight:

Son of Forward Guidance – necessitated by unemployment falling much faster than the Bank of England had forecast when it set up the policy last August – may well prove to be a more difficult entity for businesses and consumers to understand given that it is based on the overall state of the economy and is not linked to one variable….

Consequently, consumers and businesses may well find it more difficult to confidently gauge what is likely to happen with interest rates going forward, which could lead to greater caution in their spending decisions. While some degree of greater consumer caution may be no bad thing given concern over debt levels, the Bank of England does want to see businesses invest.

Dr Gerard Lyons, economics advisor to Boris Johnson, also reckons the Bank has done the right thing:

Rob Wood of Berenberg Bank has applauded Mark Carney’s willingness to tear up his first attempt at forward guidance, in the face of an improving economy.

Showing no problems at all with an abrupt U-turn, Mark Carney and the Bank of England binned their threshold based forward guidance and returned to inflation targeting, with a few bells and whistles attached. Rather than expecting the first rate hike in late 2016, as they did back in August, their forecasts are now consistent with a hike in Q2 2015. Given that past BoE forecasts have been so spectacularly wrong, we remain comfortable forecasting the first hike for Q1 2015.

Wood also argues that the new forward guidance is effectively a return to the old days of targeting inflation:

Guidance 2.0 is returning to inflation targeting with some added bells and whistles. Getting down to brass tacks, the BoE said clearly that it is planning to adjust interest rates as slack in the economy is eroded in order to deliver inflation around the target. That is inflation targeting. The inflation forecasts give now, as they always have, a steer on what the BoE think about interest rates.

The added bells and whistles are a continued break with the Mervyn King era; additional talk about where the BoE thinks interest rates are heading and a list of indicators that it will use to judge whether the economy is evolving as expected.

That was a missed opportunity to quiz Mark Carney on important issues, agues Simon Nixon of the Wall Street Journal:

Manos Schizas, Senior Economic Analyst at Association of Chartered Certified Accountants, says Carney is right to warn that the UK recovery is still fragile.

Schizas adds, though, that the new forward guidance (based on unemployment, involuntary part-time work, hours worked, participation, labour productivity, wages, and a range of other indicators) is hardly straightforward:

On the one hand, this will reassure those who say the recovery is not yet robust enough for the Bank to ease up on its stimulus – and this is the Governor’s view as well. On the other hand, making a call against all of these multiple variables is more art than science, which will create more uncertainty.

Stewart Cowley, portfolio manager at Old Mutual Strategic Bond Fund, puts his finger on the problem with the original forward guidance – the unemployment rate isn’t easy to predict:

“Setting strict economic targets for interest policy is like playing soccer with a rugby ball – it’s too imprecise and no matter your intentions it will bounce off course.

Unemployment numbers don’t take into account the breadth of human experience and is too coarse a measure to be useful for policy setting. In that case it isn’t surprising that the BOE abandons strict numerical targeting. What a capitalist economy like we have in the UK needs is a new and vigorous credit cycle built on a stable banking system and a working population that has the confidence and self-assurance to borrow. The BOE would do well to concentrate on that.”

Forward Guidance – all the best reaction

There’s masses of reaction to the quarterly inflation report – I’ll round up the best.

Jeremy Cook, chief economist at the foreign exchange company World First, dubbed the new policy “forward suggestion”, with an American flavour.

“With the Bank of England unable to meaningfully target unemployment for interest rate increases, it seems that Carney’s ‘forward guidance’ strategy is now better described as a plan for ‘forward suggestion’.

“The plan is to keep rates low after the threshold has been hit, much like the Federal Reserve’s forward guidance has changed in the past few months as it has become clear that job increases have come on quicker than had been expected.

Updated

A reminder from the Bank of England about how it handles the levers of monetary policy:

Inflation Report – the key charts

Here are the key fan charts from the Quarterly inflation report — the darker coloured areas show where the Bank reckons inflation and growth are most likely to proceed:

A quick summary

To recap — the Bank of England has revised its forward guidance on interest rates, pledging not to raise interest rates until the UK economy has mopped up most of the output lost in the financial crisis.

It is now suggesting that the first interest rate rise could come in just over a year’s time, in the second quarter of 2015.

The new policy was unveiled as the Bank conceded that its original guidance, released just six months ago, needed to ‘evolve’ as the UK unemployment rate has fallen more sharply than expected.

The new forward guidance is based on the remaining slack in the UK economy – measured by a range of indicatorsin an attempt to measure productivity as well as joblessness. There’s no single trigger for a rate rise — putting the BoE closer to other central banks.

In sometimes sharp exchanges with journalists in London, governor Mark Carney denied that forward guidance was a flop, saying that the policy had given businesses the confidence to invest.

He also insisted that future rate rises would be gradual, and did not see a return to historic averages (say 5%) for some time.

The Bank also hiked its growth forecasts, seeing GDP rising by 3.4% this year. And its chief economist, Spencer Dale, predicted that wages will probably finally rise faster than inflation by the end of this year.

The pound jumped on the news, up almost a cent at $1.6535.

Updated

Carney: We don’t want to have forward guidance forever

Final question — is this the governor’s final word on interest rate policy, or should we expect Forward Guidance 3?

After a pause, Carney insists that the Bank does not want to keep forward guidance forever. And turning to his colleagues alongside him, he asks whether they’ve enjoyed the last five years.

Not particularly, they grunt back.

Our aim, Carney reiterates, is to move from the recovery phase to the expansion phase — and to make sure that this expansion phase is durable.

That’s the end of the press conference. Details and reaction to follow!

A question about the eurozone.

Is the Bank of England worried that the German constitutional court has just asked the European Court of Justice to examine the European Central Bank’s OMT programme (a pledge to do ‘whatever it takes’ to protect the single currency by buying government bonds)?

Carney says that the Bank isn’t an expert on legal issues (especially German law) — and bats the question over to Paul Fisher, Executive Director of the Bank of England’s Markets division.

Fisher says there is now market confidence in the future of the euro – pointing to charts in today’s report showing how the borrowing costs of peripheral countries fell closer to Germany’s once Mario Draghi announced the OMT programme.

Are we getting carried away with talk of a UK recovery, with growth in 2014 now seen at 3.4% (now 2.8%)?

Carney says that the Bank is “not complacent at all” about the recovery.

Carney also sways away from a question on potential risks to the UK economy if an independent Scotland were to keep the pound (a hot topic today)

He says that the Bank’s job under all circumstances is to implement the mandate set by the democratic elected athorities.

We will execute whatever we’re given.

Carney points out that consumers have been proving much of the stimulus of the recovery — it’s “very important” that there is a transition to business investment to drive growth.

Why didn’t the Bank copy the Federal Reserve and publish a chart showing its predictions for future interest rate rises, asks Szu Ping Chan of the Telegraph.

Carney explains he’s not a fan of these charts, as they are inevitably based on the accuracy, or otherwise, of the Central Bank’s own forecasts. So they’re not a pure reaction function — they show “the path of rates if your forecasts turn out to be true”

Governor, you don’t want to provide time-contingent forward guidance, but can you rule out a rate rise in 2014?

No, that would be time-contingent forward guidance, responds Carney, driving the question to the boundary.

Bank sees real wages rising later this year

When might real wages finally turn positive (ie, grow faster than inflation)?

Chief economist Spencer Dale says the Bank hopes it could finally happen in the second half of this year – but only if productivity recovers.

Updated

Key event

City AM asks whether the Bank can see interest rates returning to historically normal levels.

Carney says he’s not a pessimist on the ability of the economy to return to interest rates which were once consistent with stable inflation and growth.

But, that is well beyond the Bank’s forecast horizon.

The financial markets are pricing in the first rate rise in spring 2015, and returning gradually to 2% from there – are they right, asks Hugo Duncan of the Daily Mail.

Carney doesn’t endorse, or otherwise — he says the Bank isn’t publishing its own forecast path for rates.

What’s your message to business today?

The message is that we will set an appropriate path of monetary policy so that jobs and businesses grow, says Carney.

Businesses are good listeners and seem to understand messages pretty well, he adds, pointedly.

Unlike pesky journalists?

Carney again denies that he blundered by picking the unemployment rate to underpin forward guidance.

It’s a good measure, he insists – it doesn’t get revised (unlike, say, GDP) and it shows slack in the economy being used up. It was the right metric, not the wrong one.

Carney reiterates that the Bank wants to eliminate spare capacity in the economy over the forecast horizon.

Deputy governor Charlie Bean also weighed in on this point, suggesting that the MPC would probably want to start tightening policy before all the space capacity is absorbed/closed.

Update: These reuters snaps explain Bean’s point:

BANK OF ENGLAND’S BEAN – WANT TO START TIGHTENING POLICY BEFORE SLACK IS COMPLETELY ELIMINATED

BANK OF ENGLAND’S BEAN – IF YOU WAIT UNTIL SLACK IS CLOSED, THAT IS A RECIPE FOR LEAVING THINGS TOO LATE

BANK OF ENGLAND’S BEAN – IF YOU TIGHTEN TOO EARLY, RISK OF FOREGOING SOME ENDOGENOUS PRODUCTIVITY GAINS

Updated

Chris Giles of the FT puts an elegant boot in — the governor’s first stab at forward guidance was billed as for the medium term and lasted six months, so how long until this effort needs to evolve?

Carney doesn’t offer a hostage to fortune, but concludes that forward guidance will be with us for a while.

Pound rises

The pound has jumped by almost a cent since the inflation report hit the wires — up to $1.654 against the US dollar.

Asked about this by Emma Charlton of Bloomberg, Carney points to the Bank’s new, raised, growth forecasts — saying that it is more optimistic about the eurozone for the first time in a while.

Updated

Our own Larry Elliott reminds Mark Carney that the Bank failed to spot the financial crisis, misread the recession, often misreads inflation, so how can the public believe a word it says?

Carney defends the Bank’s record – claiming it got the big decisions right (when to cut rate, when to see through short-term inflationary pressures, when to buy government gilts).

Updated

Ed Conway asks Mark Carney whether, with hindsight, he would have done things differently back in August if he’d known how poor the Bank’s forecasts would prove to be.

Carney indicates that he might perhaps have set the threshold differently if he’d known then what he knows now — before (as Conway slips a second question in) staunchly defending his flagship policy:

If I’d known then when I know now, than absolutely I’d have given a clean message to businesses – a message they understood, which many have responded to, says Carney.

That message has “absolutely” helped the recovery, he concludes.

So no admission that forward guidance was a mistake.

Updated

What is the public meant to make of forward guidance based on the output gap, asks Phil Aldrick of The Times.

Carney says that the recovery since August has been stronger than expected – that’s a goood thing

We’ll update our definitions of the state of the economy regularly, to give a medium-term perspective to households and business on where rates are likely to go.

And the key point is that productivity has not recovered — the Bank doesn’t see it hitting pre-crisis level for a while.

Updated

Onto questions — Hugh Pym of the BBC says the Bank has torn up the guidance it announced six months ago, what are borrowers to make of it?

Carney defends himself — saying the August policy worked. We’re in a different place now, we’ve taken stock, and revised the new guidance.

This is the take-away quote from Carney, explaining that as forward guidance evolves:

The MPC will not take risks with this recovery.

Here’s some other top lines:

“Forward guidance is working” – “uncertainty about interest rates has fallen” and “most importantly, businesses have understood the guidance” – with three quarters saying it has boosted their confidence according to a Bank survey.

Updated

The New Forward Guidance

Carney has now outlined his new forward guidance – and it’s a much more complex policy than before. Here’s the key points:

1) For the first time, the Bank will not raise rates until the spare capacity in the UK economy has been fully absorbed (which, as explained at 10.30am, won’t happen until 2015).

2) It will consider a broad range of indicators — including the unemployment rate, business surveys, the number of hours worked

3) When rates rise, they will do so gradually. Exceptional stimulus will remain appropriate for some time

4) The Bank is publishing a clutch of new forecasts (I think he said 18) – they won’t all be right, Carney said, but they’ll show the Bank’s view.

5) The Bank will hold its stock of £375bn bonds bought under quantitative easing at least until the first rate rise.

Carney: The recovery is neither balanced not sustainable, yet

Carney then concedes that the unemployment rate has fallen much faster than we expected, and will hit the initial 7% threshold “in the spring”.

He argues that some of the sharp fall is because the long-term unemployed total has fallen — that means that a lower rate of unemployment is consistent with stable inflation.

But the number of part-time workers looking for full time work is near a record high.

And he cautions that “the recovery as yet is neither balanced nor sustainable.”

Productivity is still below its pre-crisis level, wage growth is weak, and the household savings rate will probably fall further, he points out.

Updated

The inflation outlook has been “more benign” than the Bank expected, Carney says – (ie, there’s not much pressure to raise rates to control the cost of living).

Mark Carney begins by pointing to the encouraging signs in the UK economy — saying the recovery has gained momentum recently. Jobs are being created at a record pace.

And he defends his forward guidance – saying that it helped calm concerns that rates would rise too soon. Businesses got the message, he says – it encouraged them to invest and hire.

Inflation Report released

BREAKING: the Bank of England has signalled it will keep interest rates on hold at the historic low of 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014.

It had concluded that there is still too much spare capacity in the UK economy to stomach a rate rise yet, despite unemployment likely to fall to 7% in January.

From the Bank, Larry Elliott and Angela Monaghan report.

Threadneedle Street said in its February Inflation Report that a lack of inflationary pressure, spare capacity, and “headwinds” at home and abroad, meant that“bank rate may need to remain at low levels for some time to come”.

Seeking to reassure businesses and households, the Bank’s Monetary Policy Committee said that when rates did eventually go up, they would do so only gradually, settling around 2-3% – below the pre-crisis norm of around 5%.

“Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending.”

Last summer the Bank’s governor Mark Carney announced a “forward guidance” strategy, under which the Bank would consider a rate rise only when the unemployment rate – then 7.8% – fell to 7%. At that time it was not expecting the jobless to fall to the threshold until early 2016.

The MPC now expects the next set of official figures to show that the jobless rate fell to 7% in January, forcing it to assess whether the time is right to raise rates for the first time in five years from the all-time low of 0.5%.

It concluded that there is still spare capacity amounting to between 1-1.5% of national output, that can be absorbed by a growing economy before rates need to rise.

The Bank sharply upgraded its growth forecasts for 2014 to 3.4% from its November forecast of 2.8% – much higher than other predictions from the Office for Budget Responsibility and the International Monetary Fund.

The Bank is pencilling in a big surge in both business and housing investment of 11.5% and 23% respectively this year. Consumers are expected to run down their savings to compensate for another year of weak earnings growth.

The Bank is expecting the economy to grow by 2.7% in 2015 and by 2.8% in 2016.

Updated

Ever wanted to put some questions to the head of a UK bank? Now’s your chance.

Ross McEwan, RBS chief executive, will be holding a Q&A session with Guardian readers this morning — with our City editor Jill Treanor.

It starts at 11am – but you can suggest your question from 10.30am:

Q&A: Ross McEwan, RBS chief executive, answers your questions

Quarterly inflation report – how it works

Economics reporters are corralled at the Bank of England now, looking at an embargoed copy of the new Quarterly Inflation Report. There will be a flurry of newswire flashes at 10.30am GMT exactly when the report is released.

Mark Carney and senior colleagues will then hold a press conference at the Bank — starting with a prepared statement. The press conference will be streamed live here, and should also be carried on the main news channels.

The Bank will probably tweet details itself (they’re terribly up to date at Threadneedle Street)

The City is fairly calm this morning. The pound is unchanged against the dollar at $1.645 as investors wait to hear from Mark Carney in just under 30 minutes time.

The FTSE 100 has risen 23 points to 6696, led by supermarket Wm Morrison (and those rumours of a possible buyout). Mining stocks are also up, after China reported a surprisingly strong rise in imports and exports in January. That’s bolstered optimism for the global economy.

Here’s Nick Fletcher’s opening market report: FTSE moves higher after Yellen speech and ahead of Carney update

Jane Foley of Dutch bank Rabobank points out that UK inflation has finally fallen back to 2% (the BoE’s target), taking pressure of the central bank to raise borrowing costs.

She reckons Carney would be unwise to cut the jobless target to 6.5% — that could damage its credibility.

Instead, the governor could copy the Federal Reserve and argue that the recovery in the labour market hasn’t reached the sustainable point where justify higher borrowing costs.

She told clients :

Fed chair Janet Yellen spent some time in her appearance in Congress yesterday talking about underemployment in the US economy.

Carney could follow a similar tack and in effect water down the significance of the unemployment rate as a measure of the broad health of the labour market.

These charts, from the ONS, show how the UK unemployment rate has tumbled from 7.8% to 7.1% in the six months since forward guidance was announced (depicted by that black splodge).

But on a historic base, the jobless rate is still high:

And by simply targeting the jobless rate (as a measure of spare capacity in the UK economy), the Bank isn’t considering other factors — such as the failure of wages to keep pace with inflation since the financial crisis began.

Updated

One of the founding members of the Bank of England’s Monetary Policy Committee, Dame DeAnne Julius, has predicted that forward guidance will be broadened today.

Speaking on the Today programme this morning, she said Mark Carney will adjust the plan to include wider analysis of the UK labour market.

She also offered Carney some support, saying forward guidance was the right idea at the time – but now needs a rethink.

New power struggle in Italy

Over in the eurozone there is fresh political upheaval in Italy — where the country’s prime minister, Enrico Letta, faces the threat of being ejected from office.

An internal row in Letta’s party, the Democratic Party, means he could be succeeded by Mattio Renzi — the charismatic leader of PD who is dubbed, by some, Italy’s Tony Blair or Gerhard Schröder.

Renzi, the logic goes, is the best man to drive through structural economic reforms in Italy and get its economy growing again.

PD will hold an internal meeting tomorrow night — where they could decide to no longer back Letta, a move that would push Renzi into power.

The FT has a good take on the situation:

Mr Letta, who came to office last April after elections a year ago resulted in a hung parliament, has dismissed reports that he intended to resign. On Tuesday he stated that he would soon announce a new pact with his existing centre-right coalition partners with an ambitious programme to lift Italy out of recession. This plan would also involve a cabinet reshuffle.

The Democratic party leadership is due to discuss Mr Letta’s proposals and the fate of the government on Thursday, but expectations were rising that Mr Letta would fail to win his party’s support and be forced to resign.

Should that happen, then Giorgio Napolitano, the 88-year-old head of state with constitutional powers to dissolve parliament and nominate a prime minister, could ask Mr Renzi to form a new government – possibly as early as this weekend – rather than call snap elections

The financial markets are taking the news calmly. Italy’s government debt is trading pretty flat this morning, as bond trader Gustavo Baratta reports from Milan.

Our economics editor, Larry Elliott, laid out the five options for Mark Carney over interest rate forward guidance in his column on Monday.

They boil down to:

  • cut the threshold where the Bank might start considering raising borrowing costs to a 6.5% jobless rate, rather than today’s 7%.
  • Broaden the target, to include measures such as average earnings growth or the increase in nominal GDP (growth unadjusted for inflation)
  • Promise that the Bank won’t raise rates for at least two years
  • Copy the US Federal Reserve and release a chart showing the Bank’s view of where borrowing costs are heading
  • Copy the European Central Bank and embrace unconditional forward guidance — saying that rates will stay at their record low levels for an “extended period”.

That last option is quite risks, given the Bank’s patchy forecasting record. As Larry puts it:

Carney would say that the MPC is looking at a whole bunch of indicators and will start to talk about tighter policy when they are flashing amber.

On past form they will be flashing amber for some time before the Bank notices – so that moment is some way off.

More here: Bank of England’s method of setting interest rates needs reviewing

Reckitt Benckiser cautious on emerging markets

Reckitt Benckiser, the consumer products giant, has joined the ranks of companies warning that emerging economies are a trickier place to do business.

The firm (maker of Cillit Bang, Air Wick and Strepsils) told shareholders:

Market conditions are more challenging now than at the beginning of last year, particularly in some emerging markets.

It reported a 6% drop in sales across Russia, the Middle East and Africa (or RUMEA in Reckitt speak), blaming “a further slowdown in Russia and continued socio-political challenges in certain markets impacted growth in the quarter”.

Wm Morrison ‘looking for a buyer’

A flurry of excitement in the City this morning — the family behind supermarket chain Wm Morrison is reportedly inquiring whether a private equity firm might care to take them over.

Shares in Morrisons jumped 5% at the start of trading — although it’s not clear that a bid is imminent.

As Bloomberg put it:

The founding family of U.K. grocer Wm Morrison Supermarkets Plc has contacted private-equity funds such as CVC Capital Partners Ltd. and Carlyle Group LP to weigh their interest in taking the retailer private, people with knowledge of the matter said.

The family has so far been unable to find a buyout partner due to concerns about Morrison’s slow sales growth and the size of the deal, said two of the people, who asked not to be named because the talks are private. The Morrisons hold about 9 percent to 10 percent of the grocery-market chain, two of the people said.

The family also has approached other private-equity funds including Apax Partners LLP, the people said. However, Apax has decided not to pursue a deal, one of the people said.

More here: Wm Morrison Founding Family Said to Gauge Buyout Firms’ Interest

Quarterly Inflation Report: What the economists predict

Capital Economics’s Jonathan Loynes says Mark Carney would be wise to widen the scope of interest rate forward guidance, when he presents the Bank’s quarterly inflation report today:

There have been several hints from Governor Mark Carney and his colleagues to suggest that today’s Inflation Report will see the MPC’s existing single variable, state-contingent forward guidance dropped in favour of a rather broader form of guidance. In place of the unemployment forecast chart, or at least alongside it with greater prominence, there seems likely to be a discussion, and perhaps charts, of a number of other measures of labour market slack.

The broad message will be that borrowing costs are staying at their record low for some time, Loynes added….

While this change would help to tackle the problems associated with making monetary policy excessively dependent on one single indicator, it might also make it harder to extract a clear and straightforward message from the Inflation Report. Perhaps, then, the best course of action will be to concentrate most closely on the one thing we know will be included in the Report, the MPC’s inflation forecast. With inflation itself having fallen more sharply than the Committee expected back in November, while Q4 GDP growth was weaker and the pound is stronger, the message from that at least should be relatively clear. Interest rates are going nowhere for some time yet.

Chris Weston of IG reckons the Bank could learn from the Federal Reserve:

A view I feel seems realistic would be to change guidance in-line with the Fed; whereby rates will stay low even if the unemployment rate drops through the threshold or rates are staying low for a long period.

Clearly there is still slack in the UK economy and similar to Japan, earnings are still far too low, relative to the level of inflation, and certainly too low to deal with a central bank hiking interest rates.

Mark Carney could even factor in the UK’s cost of living crisis by saying the Bank won’t hike rates until real wages are rising, suggests Michael Hewson of CMC Markets:

The key question today will be whether or not Mr Carney either quietly drops the unemployment threshold, revises it, or pushes the market in the direction of average wage growth relative to price inflation, or whether he toughs it out by insisting that the unemployment rate was one indicator, and only a threshold, along with the inflation rate, and that because both are falling the need for a rate hike remains some way away.

It seems highly unlikely that he would tweak the guidance lower to 6.5% because he would run the risk of the Bank losing credibility, at a time when its credibility is already stretched due to its inability to hit its inflation target over the last five years.

Bank of England’s quarterly inflation report released this morning

Good morning, and welcome to our rolling coverage of the latest events across the financial markets, the economy, the eurozone and business.

A week may be a long time in politics, but six months is all too short in the world of central banking. Especially when it comes to predicting when interest rates might rise from their current record low levels.

When Mark Carney presents the Bank of England’s new quarterly inflation report this morning, the governor will have to admit that the “forward guidance” unveiled so proudly six months ago needs serious remedial attention.

Having pledged in August not to consider raising borrowing costs until the UK unemployment rate has fallen to 7% (which the Bank envisioned sometime in 2016) Carney has watched the jobless rate slide more dramatically than a Sochi snowboarder, from 7.7% to just 7.1% at the last count.

Carney has stated many times recently that the UK economic recovery isn’t strong enough to support a tightening of monetary policy. So the governor will be under serious pressure to convince the judges in the City, and the media, that he’s still got a firm grip on monetary policy.

Economists predict that he’ll adjust forward guidance — adding a wider range of factors, rather than just the blunt 7% target that has put the Bank’s forecasting credibility on the skids. I’ll round up some predictions shortly.

Alongside the updated forward guidance, today’s Inflation Report will also contain the Bank’s new forecasts for UK inflation and growth. It’s released at 10.30am sharp, followed by a press conference with Fleet Street’s finest….

Updated

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Minutes of latest monetary policy committee meeting signal interest rates could rise sooner than 2016. Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring…

 


Powered by Guardian.co.ukThis article titled “Growing evidence of ‘robust recovery’ in UK economy, says Bank of England” was written by Heather Stewart, for theguardian.com on Wednesday 23rd October 2013 10.34 UTC

Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring, raising the prospect of an earlier-than-expected rise in interest rates.

The Bank’s nine-member monetary policy committee voted unanimously to leave policy unchanged earlier this month; but minutes of their meeting showed that a strong increase in employment, and upbeat readings from business surveys, had prompted them to upgrade their expectations for growth.

Discussing the upbeat jobs data released this month, the minutes said: “It now therefore seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report.”

They described the latest news as pointing to a “robust recovery in activity” in the UK – though they also warn about the lack of the kind of rebalancing in the economy, towards trade and away from consumer spending, that the coalition was hoping for. “There is a risk that the recovery in the United Kingdom might be less well balanced between exports and domestic consumption than was ultimately needed.”

One of the Bank’s first decisions after its governor, Mark Carney, joined in July was to issue “forward guidance”, promising to keep interest rates unchanged until the unemployment rate falls to 7%, barring a surge in inflation.

When the policy was unveiled in August, Carney said he expected unemployment to remain above 7% at least until 2016; but a slew of data, including a fall in the unemployment rate to 7.7% in the three months to July, had raised doubts in markets about whether the Bank would wait so long before deciding to act. Wednesday’s minutes suggest the MPC may be coming round to the idea that the 7% threshold could be reached sooner, though the committee stressed that “it was too early to draw a strong inference about future prospects from the latest data”.

Simon Wells, UK economist at HSBC, said: “We expect the MPC to bring forward the timing of unemployment hitting the 7% threshold by around two quarters when it revises its forecasts in November.”

Discussions among MPC members also highlighted the growing strength of Britain’s housing market, which they expect to boost the economy. “Overall, indicators pointed to continued house price rises. This would increase the collateral available to both households and small businesses, which could provide some further support to activity,” the minutes say.

In the latest indication of a revival in the property market, the British Bankers Association announced on Wednesday that the number of mortgages approved by UK banks to fund house purchases reached 42,990 in September, its highest level in almost four years and well above the previous six-month average of 42,990.

The BBA data, which covers the run-up to the launch of Help to Buy mortgage guarantee scheme, shows that activity in the housing market continued to gain momentum over the summer, with house purchase loans showing the biggest increase month-on-month.

The BBA said its members approved new loans worth a total of £10.5bn in September, up from £9.9bn in August and above the six-month average of £9bn. Of this, £6.7bn was for house purchases and £3.5bn for remortgages. The remainder was other secured borrowing.

The BBA statistics director, David Dooks, said: “September’s figures build on the growing picture of improved consumer confidence, with stronger gross mortgage lending, rising house purchase approvals and increased consumer credit.”

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Bank of England governor’s move to persuade markets that interest rates will not immediately rise has provoked skepticism. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz…

 


Powered by Guardian.co.ukThis article titled “Is Mark Carney’s forward guidance plan a step backwards?” was written by Heather Stewart, for theguardian.com on Monday 7th October 2013 14.00 UTC

If Mark Carney was going to live up to his billing as a “rock star central banker” – and his £874,000 a year pay package – he had to arrive in Threadneedle Street on a crashing crescendo. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz.

From the need for more women on banknotes to his love of Everton football club, Carney has had plenty to say on a range of subjects since his appointment on 1 July this year. However, it’s the Bank’s new policy tool of forward guidance that has provoked the most interest, and a good measure of scepticism, among seasoned Bank-watchers.

Honed by Carney in Canada and adopted by the US Federal Reserve and the ECB in different forms, forward guidance is a way of signalling to the public and financial markets how the Bank will respond to shifts in the economy. In this case, the monetary policy committee has pledged to keep interest rates at their record low of 0.5% at least until the unemployment rate falls to 7%.

“Forward guidance is an attempt to persuade the markets that interest rates are not immediately going to go up,” says John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. “It’s one more tool in the toolbox.”

However, as implemented by Carney and his colleagues in the UK, guidance is hedged about with three separate “knockouts” – rates would rise if inflation, financial stability or the public’s inflation expectations got out of control. Moreover, the governor has stressed that the 7% unemployment rate is not a trigger for a rate rise, but a “staging post”, which will not necessarily prompt tighter policy.

During a somewhat fraught hearing with MPs on the cross-party Treasury select committee last month, in which Carney sought to clarify the policy, chairman Andrew Tyrie expostulated that it would be a hard one to explain “down the Dog and Duck”.

Financial markets have also been less than convinced. The yield, or effective interest rate, on British government bonds – partly a measure of investors’ expectations of future interest rates – has risen rather than fallen since the Bank’s announcement. That is partly because the latest data suggests the economic outlook is improving, but rapidly rising bond yields can be worrying because they tend to push up borrowing costs right across the economy. Carney, though, has insisted he is not concerned.

Meanwhile the pound has risen almost 4% against the dollar since Carney took the helm – again signalling markets expect rates to rise sooner than the Bank is indicating. Last week sterling hit a nine-month high, although it came off that peak as investors began to question if the UK’s recovery could continue at its current pace.

“I don’t think in practice forward guidance is very successful,” says Jamie Dannhauser of Lombard Street Research. He believes Carney has failed to convince the City he means business, because he has failed to back up forward guidance with action, such as the promise of a fresh round of quantitative easing – the Bank scheme that has pumped £375bn of freshly minted money into the economy.

“[Forward guidance] doesn’t work if you’re not willing to take on the markets if you don’t get your way,” says Dannhauser.

David Blanchflower, a former member of the MPC, is more blunt: “He looks already, within a hundred days, to have lost control. Bond yields are rising, the pound is rising like mad, and they’ve got no response.”

He argues that the hedged nature of the new policy is likely to reflect “horse-trading” between Carney and his fellow MPC members. Unlike in Canada, where what the central bank governor says goes, decision-making on the MPC is by vote. With a recovery now under way, its various members are known to have differing views on what are the most pressing risks to the economy.

Another former MPC member said: “Had I been on the MPC I would have let him do it [forward guidance], because I don’t think it does any particular harm; but I don’t think it does much good either.”

It’s not just the Bank’s approach to monetary policy that has changed on Carney’s watch. When outgoing deputy governor Paul Tucker, who missed out on the top job, leaves for the US later this month, it will mark the latest in a number of personnel changes that are starting to make Carney’s Bank look quite different from Lord (Mervyn) King’s.

Blue-blooded banker Charlotte Hogg joined as the Bank’s new chief operating officer, a post that didn’t exist under the old regime, on the same day as Carney. Meanwhile Tucker will be replaced by former Treasury and Foreign Office apparatchik Sir Jon Cunliffe. With long-serving deputy governor Charlie Bean due to leave early in 2014, Carney will be given another opportunity to bring in a new broom.

Insiders say the atmosphere in the Bank’s Threadneedle Street headquarters has already changed. Carney is often seen eating lunch in the canteen or showing visitors around. His approach is less hierarchical than that of King, who was derided as the “Sun King”, by former chancellor Alistair Darling – though Carney is said to be no keener on intellectual dissent than his predecessor.

He will need all the allies he can get both inside and outside the Bank, if he is to deal successfully with what many analysts see as the greatest threat facing the economy: the risk that an unsustainable bubble is starting to inflate in Britain’s boom-bust housing market.

Carney and his colleagues on the Bank’s Financial Policy Committee (FPC), the group tasked with preventing future crashes which partly overlaps with the MPC, have new powers to rein in mortgage lending if they believe a bubble is emerging, and the governor has said he won’t hesitate to use them.

But the FPC is untested and largely unknown to the public, and bubbles are notoriously hard to spot. Using the FPC’s influence to choke off the supply of high loan-to-value mortgages, for example, would be hugely controversial at a time when large numbers of would-be buyers have been frozen out of the market. Meanwhile, the government’s extension of the Help to Buy scheme, with details to be laid out on Tuesday, is likely to increase the demand for property, potentially pushing up prices.

Van Reenen warns that if property prices do take off, Carney could find himself in an unenviable position. “We have this terrible problem in this country that house prices have got completely out of kilter with incomes. I would be very reluctant to see interest rates start pushing up. Using other methods, such as being tougher on Help to Buy, and trying to do things through prudential regulation is better – but the fundamental thing is lack of houses, and Carney can’t do anything about that.”

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New governor tells MPs his pledge to keep interest rates at record lows for up to three years has reinforced recovery. Carney points out that he is the only serving central bank governor among the G7 countries to have increased rates while heading the Bank of Canada…

 


Powered by Guardian.co.ukThis article titled “Bank of England governor Mark Carney rattled as he defends forward guidance” was written by Heather Stewart, for theguardian.com on Thursday 12th September 2013 11.17 UTC

The Bank of England governor, Mark Carney, has launched a staunch defence of his pledge to keep interest rates at record lows for up to three years, claiming that it has “reinforced recovery”.

Carney faced tough questioning from the cross-party Treasury select committee of MPs about the likely consequences of the monetary policy committee’s new “forward guidance” strategy.

But he insisted: “Overall, my view is that the announcement has reinforced recovery. It’s made policy more effective, and more effective policy is stimulative at the margin.”

The new governor also stressed that despite the MPC’s expectation that rates will remain on hold for up to three years, he would be ready to push up borrowing costs if necessary.

“I’m not afraid to raise interest rates,” he said, pointing out that he is the only serving central bank governor among the G7 countries to have increased rates – in his previous post, in Canada.

City investors have pushed up long-term borrowing costs in financial markets sharply since the MPC announced its new pledge to leave borrowing costs unchanged at 0.5%, at least until unemployment falls to 7%.

But Carney, who was handpicked by George Osborne to kickstart recovery and took over in Threadneedle Street at the start of July, at times appeared rattled. He said the recent increase in long-term rates, which sent 10-year government bond yields through 3% last week for the first time in more than two years, was “benign”.

He also repeatedly refused to be drawn on whether the new approach represented a loosening of policy – equivalent to a reduction in interest rates – in itself.

Carney denied that the new framework, involving “knockouts” if inflation appears to be getting out of control, is too complex. But Andrew Tyrie, the committee’s Tory chairman, complained that Carney’s account of the Bank’s new approach would be difficult to explain “down the Dog and Duck”.

Asked about the plight of savers, whose savings are being eroded by inflation with interest rates at rock bottom, the governor said he had “great sympathy”, but the best thing the Bank could do to help was to generate a sustainable economic recovery.

“Our job is to make sure that that’s not another false dawn, and ensure that this economy reaches, as soon as possible, a speed of escape velocity, so that it can sustain higher interest rates.”

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During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to stay the course. Interest rates are to remain low, but what does that say about economic recovery, inflation and house prices?..

 


Powered by Guardian.co.ukThis article titled “Five things we learned from the Bank of England inflation report” was written by Phillip Inman, for theguardian.com on Wednesday 7th August 2013 14.37 UTC


1. Interest rates are going to stay low for a very long time

Current predictions say the Bank will only consider raising rates in 2016, but it could be 2017 or 2018 before the economy is considered strong enough to cope with higher rates. It will not consider raising rates until unemployment declines to 7% (from 7.8%), and its own forecast puts unemployment above 7% in 2016.

2. The current economic recovery is fragile

The UK might have seen a 0.9% jump in GDP in the first six months of the year, but the Bank of England is concerned that growth remains weak. The level of GDP is below where it was in 2008 and well below where it would be if the crash hadn’t happened. High unemployment shows there is slack in the economy that can be deployed without causing inflation.

3. Fears of a house price bubble are misplaced

Governor Mark Carney argued that the level of transactions are well below the peak (about a third lower) and house prices are still below the highest point in 2008, so a bubble is a long way off. And anyway, he said, the central bank now monitors the big lenders for dodgy or risky practices, so a repeat of the crazy lending in the first half of the last decade is unlikely.

4. Inflation is not a worry

This is not something the Bank of England has explicitly declared in its quarterly inflation report. It says monetary policy committee is still watching for any signs of inflation. However, there is little pressure from rising wages and it blames the current 2.9% rate (well above the 2% target) on the rising cost of train fares and regulated monopoly suppliers such as those related to water rates and gas prices.

5. More quantitative easing could be on the way

During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to “maintain the current highly stimulative stance of monetary policy” and could even extend it. The Bank is unlikely to cut rates further, but could boost QE. It has pumped £375bn into the financial system to promote lending to little avail (it might have been even worse without it, said Carney’s predecessor Lord King). Some analysts argue it should rise to £425bn.

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The pressure of economic bad news is becoming so intense that banker is turning publicly upon banker– and even supposed panaceas such as rate-setting independence are in question. Political interference puts central banks under attack…



Powered by Guardian.co.ukThis article titled “Facade of central bank control is starting to crumble” was written by William Keegan, for The Observer on Sunday 27th January 2013 00.06 UTC

The outgoing governor of the Bank of England indulges in thinly disguised criticism of the views of his nominated successor, the Canadian Mark Carney. A former member of the Bank’s monetary policy committee – the American Adam Posen – conducts a manifestly undisguised assault on the centralised way in which Sir Mervyn King allegedly runs the Bank, having already on many occasions differed from him on policy.

And Jens Weidmann, president of Germany’s Bundesbank, says that Stephen King, the chief economist at HSBC, is “perhaps right” in forecasting the demise of that fashionable financial panacea of recent decades – central bank independence. Weidmann cites political interference with the independence of the Bank of Japan, among others.

Yes, central banks are under attack: and central bankers are taking pot-shots at one another.

King, who did more than any other British official to promulgate the adoption of “inflation-targeting”, made an impassioned plea last week for its preservation, including, in his speech in Belfast, a history of all those inflationary problems of the 1970s, and the long struggle to bring inflation down to tolerable rates.

In saying “tolerable” I am begging the question; but economic history shows that a moderate amount of inflation is a necessary condition for growth. Rip-roaring inflation is certainly not, and is socially destructive as well. But deflation – falling prices – is inimical to growth, as the recent experience of Japan has demonstrated.

In recent years King’s position has been an Augustinian one: the necessity of announcing inflation targets, but the desirability of not hitting them too soon, if at all.

By contrast, Carney has revived the idea of a target for nominal gross domestic product, a measure that is the sum of inflation and real growth.

People seem to have forgotten that, under chancellor Nigel Lawson, the Thatcher government tried targeting “money GDP” with pretty poor results. Carney could do well to study that excellent book The Economy Under Mrs Thatcher, 1979-1990, by the economist Christopher Johnson (who, sadly, died just before Christmas). As Johnson wrote, with the money supply statistics all over the place, “the use of money GDP created further confusion and was ineffective in controlling either real growth or inflation”.

Another book worthy of Carney’s attention is Inside The Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84, which has been long delayed, but whose publication last week turns out to be well timed.

Dow, who was on the frontlines when inflation was serious (25% in 1975) kept a diary – against the wishes of the governor of the time, Gordon Richardson, who, I am pretty certain, would have granted him a posthumous pardon if he had read this remarkable book. (That is, if they are not already discussing it up there in the great central bankers’ resting parlour in the sky.)

Richardson was governor from 1973 to 1983. He arrived at the Bank shortly after Dow had been appointed by the previous governor, Leslie O’Brien, and worked closely with Dow throughout, one of the latter’s self-appointed tasks being to try to keep Richardson’s flirtations with monetarism, and concerns about public sector borrowing, within reasonable bounds.

In their introduction to the memoirs, the economists Graham Hacche and Christopher Taylor, who worked for Dow, note that “the main worries for UK watchers when Dow entered the Bank were slower trend productivity growth than in other major economies, persistent balance of payment problems, and an upward trend in inflation”.

Plus ça change, although, as noted, inflation then was in another league. But, as now, it was a time of economic crisis – welcome to the party, Mr Carney – and, in addition to concerns about economic policy, Richardson and Dow spent much of their time trying to reform the Bank, a task which, the chancellor and the Treasury have made no secret about, is due to be embarked upon all over again under the leadership of Carney.

In a foreword to the book, Sir Kit McMahon, former deputy governor, says of the Bank in the mid-1970s: “The Bank’s organisation was ancient and creaking.” Not to put too fine a point upon it, that is what the Treasury thought when appointing Carney.

But if the Treasury thinks that by tinkering with monetary policy Carney will help it out of a fiscal hole, it may have another think coming. A sound Keynesian, Dow thought that the management of aggregate demand, with the object of maintaining high output and employment, depended mainly on fiscal policy. A contractionary fiscal policy – especially one of trying to cut the deficit at a time of depression – is hardly calculated to bring us out of depression, as a succession of GDP figures, including the latest 0.3% decline, have shown.

Thus, as Gordon Brown wrote recently in an article for Reuters: “The policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership.” Brown demonstrated such leadership in 2008-09, both in his contribution to the rescue of the banking system and in coordinating the G20 economic stimulus in April 2009. Then came the austerity merchants, to, literally, devastating effect.

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