Economics news – for a further week, the good news keeps on coming ... falling inflation, a fall in unemployment plus a boost to retail sales in July ... Inflation figures were reported on Tuesday. The CPI inflation index fell to 2.8% in July from 2.9% in the prior month. By the end of the year we expect inflation to fall below the 2.5% threshold but the 2% target will be elusive for many months if not years ahead. In October the hefty tuition fees will fall out of the index providing a drop of 20 - 30 basis points. The 2% target will be a challenge - goods inflation averaged 2.4% and service sector inflation averaged 3.1%. Bad news for rail travelers, the rail fares will be indexed to RPI plus 1%. A 4.1% increase in fares is in prospect for 2014, placing additional pressure on retail prices and disposable incomes. The unemployment picture continues to improve, for those who can find work at least. The claimant count fell by 29,000, to a rate of 4.3% in July. The wider LFS data suggests a more modest fall in the three months to June. The rate of unemployment at 7.8% was unchanged, still way above the 7% threshold that may signal a change in monetary policy. Retail sales volumes increased by 3% in July as sunshine and consumer confidence provoked a spending rush, stimulated by sunny weather, a Murray win at Wimbledon and the Royal baby allegedly. Sunny weather boosted sales across a range of products including food, alcohol, clothing and outdoor items. By value retail sales increased by almost 5%. After a slow start to the year, the retail outlook has improved in the summer months. Will this continue? Why not! Employment is increasing and earnings are improving. A further 400,000 are in work compared to this time last year and earnings increased by 2% in the three months to June. We expect the retail rally to continue, though perhaps not at the 3% rate for the rest of the year. Housing - The big story continues to be the housing market. Prices are rising, mortgage activity is increasing, the help to buy scheme is providing a boost to first time buyers. New home build is set to increase by almost 30% this year. The housing market is on the move, time to lock up your fixed rates, as prices rise, the real cost of borrowing is zero, capital appreciation - the bonus. So what does this mean for the year? Our forecast is for growth of around 1.2% plus, rising to 2% in 2014. The economy has turned, the real risk - monetary policy is behind the curve. It is difficult to believe rates will be kept on hold until 2016, watch the US and add six months the best guide as always. Markets were equally sceptical, gilts and treasury yields are rising - gold is beginning to glitter again. What happened to sterling? Sterling responded to the economics news, moving higher. The pound closed at $1.5633, from $1.5505 against the dollar and at €1.1713 from €1.1617 against the euro. The dollar up against the yen closing at ¥97.5 from ¥96.24 Oil Price Brent Crude closed up at $110.40 from $108.22. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, were troubled - The Dow fell to 15,081 from 15,425. The FTSE closed down at 6.499.99 from 6,583. It’s a chance for market makers to clean out the bear pit. A good time to make a move. We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed at 2.72 from 2.45, US Treasury yields closed up at 2.83 from 2.58. Yields are moving higher, despite the wishes of central bankers. The name is Carney not Canute after all. Gold closed up at $1,377 from $1,315. Still waiting for the next big move but which way? Last week we said, the arguments are building for the bulls. It looks like they have made a decision. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.
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In the service sector, manufacturing , construction and housing, the news is good news... The August Inflation Report was presented this month by Mark Carney, the new Governor of the Bank of England. The Bank is forecasting growth of almost 1.5% this year and 2.5% next. Inflation will remain above target but base rates may be kept on hold for a further three years. So much for forward guidance. The time may come when the central banker "will take away the punchbowl" but for the moment Carney is "putting his credit card behind the bar". Enjoy. Business activity in the service sector increased in July at fastest rate since late 2006 according to the latest survey data*. The headline Business Activity Index climbed to its highest reading since December 2006, posting 60.2 up from 56.9 in June. Above 50.0 readings have now been recorded for seven months in a row, with growth accelerating continuously throughout this period. *Markit/CIPS UK Services PMI® data. In the manufacturing sector, output was up by 2% in June compared to prior year after a disappointing first half. Capital goods, continue to drive recovery with strong growth of almost 4%. Consumer goods also rallied in June with output of consumer durables increasing by 2%. In construction, output in the second quarter was estimated to be 1.4% higher when compared with Q1 2013. Comparing Q2 2013 with the same period a year ago, construction output actually fell by 0.5%. We expect a further recovery in output into the second half with growth of 1% year on year, boosted by some housing activity. On trade, the deficit on trade in goods reduced to £24.9 billion in Q2 2013 from £26.5 billion in the first quarter. Exports of goods in the second quarter of 2013 reached £78.4 billion, the highest on record. Imports of goods also increased in Q2 2013 to £103.3 billion. Seasonally adjusted, the UK’s deficit on trade in goods and services was estimated to have been £1.5 billion in June, compared with a deficit of £2.6 billion in May. The deficit of £8.1 billion on goods, was offset by an estimated surplus of £6.5 billion on services. So what does this mean for the year ahead? We still expect the deficit trade in goods to increase to £105 billion in the year. Exports of goods will improve as world trade recovers but imports will increase to meet the improving demand in the domestic economy. The service sector will continue to drive recovery with a trend rate accelerating from 1.5% to 2% over the next six months. Manufacturing and construction output will improve in the second half but contribution to growth for the year will be muted following such a poor start. Our forecast for growth this year is around 1.2% with further growth in 2014 of around 2%. Slightly more bearish than the “Bank”. For the moment, the good news keeps on coming, a sustained recovery will require a growth in real household incomes. In the housing market, the Halifax reported prices increasing by almost 5% in July. There is little sign of a great change in the volume of activity for the moment, although the Council of Mortgage Lenders reported a strong recovery in buy to let activity. Lenders advanced 40,000 mortgages, worth £5.1 billion, to buy-to-let investors in the second quarter of 2013. Both the number of buy-to-let loans, and the value of lending, were the highest since the third quarter of 2008. The promise of low rates will push prices higher as the real cost of borrowing falls. Strong rental yields, low costs of borrowing and the prospects of capital appreciation present a heady cocktail for buy to let. More pressure on first time buyers, the real price of life on planet ZIRP. What happened to sterling? Sterling responded to forward guidance, moving higher. The pound closed at $1.5505 from $1.5284 against the dollar and €1.1617 from €1.1504 against the euro. The dollar slipped against the yen closing at ¥96.24 Oil Price Brent Crude closed largely unchanged at $108.22 from $108.95. The average price in August last year was almost $115. Not much pressure on price as we move into the Autumn. Markets, were up - The Dow fell to 15,425 from 15,658. The FTSE closed down slightly to 6,583 from 6,648. Markets trade softly into August. Still a good time to average in. The FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed at 2.45 from 2.42, US Treasury yields closed down at 2.58 from 2.60. Yields are set to move higher but the path will be slow, we remain parked on the runway of Planet ZIRP, the pilot has gone off the to pub. Gold closed down at $1,315 from $1,308. Still waiting for the next big move but which way? The arguments are building for the bulls. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. 7% unemployment and 2.5% the inflation the thresholds - rates may be on hold until 2016. The Bank of England released its quarterly inflation report, the first since Governor Mark Carney assumed the role of Governor. The report presents a more optimistic view of the UK’s growth prospects following a batch of recent good news on the economy. The MPC increased the GDP growth forecast for this year to around 1.5% increasing the 2014 forecast to around 2.5%. Consumer price inflation is likely to fall back to 2.0% but not for some time yet. It could be 2015 before inflation falls back to target and then some, 2.5% is the new threshold target for CPI inflation. Governor Carney introduced the first every version of "Forward Guidance" linking a change in monetary policy to the rate of unemployment. In particular, the MPC intends not to raise Bank Rate from the current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a level of 7%. On current projections, this is unlikely to occur until 2016, inline with forward market forecasts on base rates. Is this an unconditional commitment? No. The Old Lady of Threadneedle Street will exercise the prerogative to change her mind subject to certain conditions. The guidance linking Bank Rate to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached: In the MPC’s view, CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target. Medium-term inflation expectations no longer remain sufficiently well anchored and the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability. What does that mean? We can’t be sure. The intention is to suggest rates will be held until the recovery is well developed and “escape velocity” from recession has been achieved. The MPC would have us believe this is 2016. The risk is that inflation will remain above target as the recovery gains momentum and the MPC will be forced to raise rates before the suggested 2016 timeline. It is a knock out start by Mark Carney. The economy is recovering, rates will be held for the next twelve to eighteen months at least. Forward guidance has made a promising start. Let’s hope it does not provide too much mis direction. For now enjoy the recovery. Bank of England inflation report, August 2013 7th August 2013 Economics news – Base rates on hold, houses are moving, manufacturing and construction - building on the recovery. No surprise this week - base rates and QE were kept on hold following the meeting of the Monetary Policy Committee on Thursday. Guidelines on the Bank of England’s use of intermediate thresholds and forward guidance on monetary policy, will be released next week, along with the Inflation Report. It will be ground breaking, The Old Lady has a new cosmetic tool in the handbag. Fashion is in all things, including monetary policy. The Federal Reserve has adopted forward guidance using inflation and the rate of unemployment (6.5%) as guidelines for the timing of any rate increases. Latest US data on growth (1.4%) and jobs (162,000) in July, pushed the unemployment rate down to 7.4%. Any change in US rates is unlikely until late 2014 at the earliest. US growth is still below trend rate 2.4%. So what will the UK version of forward guidance look like? It won’t be pretty but it will be protracted. It could turn out to be more misdirection than guidance, if the MPC is behind the curve. Check out our Forward Guidance on Forward Guidance on The Saturday Economist web site this week. The pace of recovery could catch many by surprise. Manufacturing and construction are staging a strong recovery. Markit/CIPS UK PMI® data in July, suggests, growth of UK manufacturing production and new orders “surged” higher in the month. An increase in domestic demand is the main driver of growth. The key index jumped to 54.6 in the month, marginally above the average rate prior to recession. The construction index jumped to 57.0 in July from 51.0 in June. New orders and a “surge” in housing activity led to a pick up in orders and positive sentiment about the future. Ah yes, the confidence fairy drives a mail van, stacked with orders. So what is happening in the housing market? The Nationwide House Price Index suggested prices increased by nearly 4% compared to July last year. Prices are moving back to levels last seen in June 2008 and within 8% of the peak in late 2007. “The Homes for Heroes” campaign is helping to push prices higher. The level of transactions and new home building are beginning to respond. Our full report on the housing market will follow next month. Time to book the Pickfords van, the housing market is on the move. The Prime Minister has installed Jim Messina, Obama’s major foreign policy advisor, as campaign strategy adviser ahead of the next election. As part of the new team line up, George Osborne will deliver growth, jobs and debt reduction in time for the hustings. The most successful Chancellor in history? Perhaps. What happened to sterling? Sterling slipped this week closing at $1.5284 from $1.5384 against the dollar and down against the euro to 1.1504 from 1.1581. The Euro dollar closed unchanged at 1.3279 and against the Yen, the dollar closed at 98.9 from 98.2. Oil Price Brent Crude closed up at $108.95 from $107.2. The average price in July 2012 was $103 approximately, the average price in July was $108.5. Markets, were up - The Dow closed up 15,658 from 15,558. The FTSE closed at 6,648 from 6,554. Markets continue to rally. This is the time to average in, steadily into August. The FTSE may clear 7,000 within ten weeks. UK Ten year gilt yields closed at 2.42 from 2.34, US Treasury yields closed down at 2.60 from 2.56. Yields are set to move higher albeit against the wishes of the central banks. It really is time to pack up and leave Planet ZIRP. Gold closed down at $1, 308 from $1,325. The ancient relic will be cast aside as markets focus on equities and bonds. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. The Chancellor George Osborne has asked the Bank of England to produce a report on forward guidance in time for the August inflation report. Forward guidance is in fashion. It has been used by the US Federal Reserve since 2008, and more recently the European Central Bank has offered some guidance on monetary policy. As the new Governor of the Bank of England, Mark Carney is obligated to produce a report for the Chancellor of the Exchequer on forward guidance. Below I consider some of the issues and key challenges that will be faced in developing monetary policy on this basis. What is Forward Guidance? Forward guidance is the release of information about when and under what conditions the Bank of England may feel obliged to lift the level of base rates in the economy, as the period of Zero Interest Rates (Life on Planet ZIRP) comes to an end. The Bank of England has the responsibility to maintain price stability around the 2% level. But with inflation above target, the Bank has been more concerned about the recession, lost output, job losses, unemployment and the lack of growth in the economy, rather than trying to hit the elusive inflation target by increasing interest rates. Base rates have been at the “zero bound” or thereabouts at 0.5% (50 basis points), since March 2009, but with inflation above target and with the economy showing signs of recovery, the question becomes: when will rates rise and by how much? Forward Guidance and Intermediate thresholds Using intermediate thresholds, the Bank's MPC would inform the markets that base rate would be kept at the historically low 0.5% for a certain minimum period of time. Or, they could be held until certain conditions in the economy have been met - for example, a fall in the unemployment rate to a certain level. Ben Bernanke has suggested an unemployment rate of 6.5% could lead to an end of the end of an easy monetary policy in the USA. Below, we consider if the same target would work in the UK. What's the point of Forward Guidance? Central Banks believe that if consumers and businesses can be convinced that base rates will be on hold for some considerable period of time into the future, spending or investment plans will be brought forward to benefit from the lower rate. However, some commentators are not entirely convinced by this argument. With inflation above target and likely to remain so, businesses realise that as the economy recovers, interest rates will begin to rise sooner or later. If growth is faster, the sooner the rates will rise. If growth is slower, the rate rise will be delayed. The irony for business is the cost of capital is only a small part of the investment payback proposition. Demand is far more important. Rising demand will lead to a rise in rates but the payback will be better, despite the rise in the “cost of money”. The converse is also true. Lower demand may mean that rates will be on hold for longer. Capital may cost less but returns from limited growth are lower, therefore investment plans may be kept on hold, irrespective of the timing of an increase in rates. How does the Bank decide what conditions to set? At the moment we don’t really know what parameters will be chosen by Mark Carney as the new governor. It could be a promise not to raise rates for a period of time, or not to raise them until unemployment falls back below a certain level, perhaps 6.0%. Alternatively, rates could be on hold until the economy's output gap - a measure of the country's under utilised capacity - is eliminated by growth in the economy. The Output Gap The problem with the “output gap” measure, is that we have no way of knowing what the gap is. We cannot identify, measure or quantify, the output gap, let alone use this as a policy parameter. One option is to measure the output gap relative to the average rate of growth of the British Economy over the long term and estimate the output gap relative to trend. Using a long run average of 2.4%, the output gap at present is around 10%. Growth in the economy would have to be significantly above the long term average for a considerable period of time, before the gap closed completely. It would take seven years of growth at 4% to close the output gap! Can we really believe that with inflation above target and with growth at say 4.0%, we will wait seven years for base rates to rise? Of course not! The output gap would create great problems if used as an intermediate threshold. Forward Market Guidance In the May Inflation report, the Bank of England was happy to use forward guidance derived from the financial markets. Complex swap data suggested base rates would not begin to rise until 2016. Subsequently, following statements by the Federal Reserve, gilt yields started to rise and the UK OIS swap data implied UK base rates would begin to rise in 2015. The Bank of England was unhappy with this and gave clear indications that market perceptions were at odds with intentions. As the swap curve returned to the 2016 gradient, implying rates would not increase until 2016 - calm, amongst the MPC members at least, resumed. Historically, forward rates have provided little guidance as to the future direction of base rates. Nevertheless, used as a rough guide, the comments by the Bank of England have been effective in providing some steer. Using the OIS template, forward swap rates could be used as a benchmark for comment and direction - a sort of rough time line. Unemployment Rate Should the Bank of England use the unemployment rate as an intermediate threshold? In this scenario, base rates would increase only when the economy recovers and unemployment falls to a certain level. Assuming the unemployment level target is set to 6.5%, (the rate below which base rates may begin to rise), then we have to ask, what will drive the reduction in unemployment? The answer of course is growth. Using standard models of growth and job creation, assuming a trend rate of growth of say 2.5% from 2014 onwards, unemployment would hit a level of 6.5% in 2017. That’s one year beyond the current time frontier identified by the swap rate forecasts. A more modest recovery rate of 2% would see rates on hold until 2019 before the 6.5% unemployment target is met. But with inflation above target, base rates may have to rise long before this to combat inflation. Forward Guidance - is not an easy option Whatever guidance the Bank of England may provide in the short term, the Old Lady of Threadneedle Street will always have the legal right to change its mind later. Indeed, it is mandated to do so if inflation gets out of hand. Can Mark Carney come up with a sensible set of rules on forward guidance and make a careful selection of suitable intermediate thresholds? It will not be easy. In any case, what is the value of forward guidance if the Bank can change its mind in the future? Forward guidance can easily become misdirection. Mervyn King was always set against the use of forward guidance, on this particular matter he may well be proved right. We look forward to the deliberations of the New Governor in August. Originally published on the GM Chamber of Commerce Web site1st August 2013 Economics news – news in the droppings - understanding market movements This week it doesn’t get more exciting for economists. The first set of minutes of the MPC under the Mark Carney regime were released on Wednesday. Looking for nuggets of information, amidst the download. A bit like the scene in Jurassic Park when Dr Ellie Sattler is digging with her hands through a pile of dinosaur droppings. Nuggets of information, amidst the download! How did the new Governor vote on QE? How did the other members vote? What was the guidance on forward guidance? Would the ten page minutes be worth the ten thousand minute wait? They were! The death of QE was foretold! “Regarding the Bank Rate and the stock of asset purchases, the Committee voted unanimously in favour of the proposition that base rates and Quantitative Easing (QE) should be kept on hold.” The MPC were united - Carney called time on QE. The epoch of Quantitative Easing draws to a close. David Miles [MPC member] and Paul Tucker [Deputy Governor Responsible for Financial Stability] fell into line with the “new reality”. The pair had been the two QE stalwarts who had “stuck it out” with Mervyn King right to the end of the line. With the economy recovering and inflation rising, it was time to say goodbye to QE. Time for the MPC to wash it’s hands of the monetary experiment, just as Dr Sattler, post examination of the dung, washed her hands before tucking into dinner, we hope. Now we enter the era of forward guidance and intermediate thresholds. The Governor is not ruling out a quantum of additional stimulus. He just needs time to think about the form it may take, plus guidance on the time frame and “triggers” for the new monetary policy framework. Can’t wait for the August deposit. Monetary policy is a bit like genetic experimentation. We have tried M3, shadowing the Deutschmark [An old Germanic monetary medium] and QE. Time for a cautionary word from Jurassic Park’s Dr. Ian Malcolm [Jeff Goldblum], “The kind of control you're attempting simply is... it's not possible. If there is one thing the history of evolution has taught us it's that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously, but, uh... well, there it is.” And so it is with gilt yields, sooner or later the market will break out, back to equilibrium value, as the period of financial repression and life on Planet ZIRP draws to a close. For the moment, rejoice. QE is dead, it ran out of intellectual currency long ago. In other news ... The good news for the UK economy continued. In jobs data, the claimant count fell by 20,000 in the month to June, an unemployment rate of 4.4%. The wider unemployment rate fell 6,000 to 2.51 million in the three months to May, a rate of 7.8%. Retail sales also presented a positive picture with volumes rising by 2.2% in June after 2.1% in May. On line sales continue to force the pace of change in the high street, with internet sales up by 18% in the month. In the first quarter of the year, retail sales were pretty flat but the second quarter (up 1.7%) offers promise for the rest of the year. Government borrowing figures were also released this week. Good news as the figures for last year were revised down by £2.1 billion to £116.5 billion last year. Not so good news as the borrowing figure for June was slightly higher than June last year. The net figure flattered by the transfer of almost £4 billion from the Bank of England Asset Purchase Facility. The old lady mugged again for gilt coupons under the Treasury - “Money for nothing, gilts for free” campaign. Public sector debt was £1.2 trillion at the end of the month equivalent to 75% of GDP. For the year as a whole, the recovery, if maintained will positively impact on net borrowing. The tax take is rising but spending is resilient to austerity. Nevertheless, the Chancellor may be in a much stronger position by close of year. Inflation, proved to be the real negative in the week. Inflation CPI increased to 2.9% in June from 2.7% in May. The Governor narrowly avoided having to write an explanatory letter to the Chancellor, explaining the missed target. Not to worry, the 2% target is off the agenda for now. We may not see the like in Mark Carney’s term in office. 2.5% by end of year will be challenge enough. Producer prices suggested inflation pressures are rising but not intense. Output prices increased to 2% in June as input costs increased to 4.2%. Home food prices along with energy and oil prices to blame for the latter. What happened to sterling? Sterling recovered further this week closing at $1.5258 from $1.51 against the dollar and up against the euro to 1.1608 from 1.1560. The Euro dollar closed relatively unchanged at 1.3411 and against the Yen, the dollar closed up 100.3 from 99.01. Oil Price Brent Crude closed relatively unchanged at $108.1. The average price in July 2012 was $103 approximately. Markets, were up - The Dow closed up 15,543 from 15,464. The FTSE closed at 6,630 from 6,545. Markets continue to rally. This is the time to average in, albeit slowly into August. UK Ten year gilt yields closed at 2.29 from 2.33, US Treasury yields closed down at 2.48 from 2.59. The feral hogs back in the pen. Yields are set to move higher, the financially repressed will break free from their golden fetters. Gold closed up at $1,292 from $1, 277. Bernanke admitted this week, he didn’t understand gold? I think he was referring to the movements, our theme of the week. That’s all for this week. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. “Regarding the Bank Rate and the stock of asset purchases, the Committee voted unanimously in favour of the proposition that base rates and Quantitative Easing (QE) should be kept on hold. The Governor had "invited the Committee to vote on the propositions that Bank Rate should be maintained at 0.5% and the Bank of England should maintain the stock of asset purchases at £375 billion". The MPC were united as Carney called time on QE. “And so the period of Quantitative Easing draws to a close, as an experiment in monetary policy. David Miles [MPC member] and Paul Tucker [Deputy Governor Responsible for Financial Stability] fell into line with the “new reality”. The pair had been the two QE stalwarts who had “stuck it out” with Mervyn King right to the end of the line. With the economy recovering and inflation rising, it was time to say goodbye to QE. A farewell stimulated by the arrival of the new Governor. “Earlier this week, Paul Fisher, Head of Markets at the Bank of England, gave evidence to the Treasury Select Committee. Fisher suggested any unwinding of monetary stimulus was likely to be years in the future. No need to worry about the unwinding of QE, the gilts will be held to redemption and like old soldiers will fade away, into the ghostly shadows of public sector accounting. “Paul Fisher also confirmed that market expectations of rate rises was much sooner than the Bank might expect. The MPC would like markets to believe base rates will not rise until 2016. We shall await the notes on forward guidance in August for more information on this. For the moment, rejoice, QE is dead, it ran out of funding and intellectual currency a long time ago.” - See more at: http://www.gmchamber.co.uk/stories/committee-united-on-quantitative-easing#sthash.Z3vxUJnC.dpuf The decision to hold rates was widely expected. The economy is showing signs of recovery, confirmed by recent data including our own QES survey and the important GM composite indicator. It is too early to begin the programme of base rates rises but it is time to say goodbye to QE as a policy option. Commenting on today's Monetary Policy Committee (MPC) interest rate decision, as Chief Economist at the Greater Manchester Chamber of Commerce. The sooner long term gilt rates return to some semblance of normality the better. The August meeting should be more interesting to rate watchers. Markets are looking for a statement on forward guidance and the future path of interest rates. Mark Carney must be careful not to make the same mistakes as Bernanke. Forward guidance increases market volatility with an unhealthy focus on the US non farm payroll data. The markets can no more ignore a speech delivered by Bernanke, than Chinese banks can ignore a directive from the People’s Bank of China. The new Governor must avoid becoming hostage to a monthly data set. What can the markets tell us about the future direction of interest rates? Not much if we look at the projections over the last few years. In the Inflation Report (May) the Bank of England suggested markets were not expecting base rates to rise until the middle of 2016. Why should the MPC worry if markets think rates may rise in 2015? The analysis of expectations over the last four year has not proven to be much of a guide as the Chart of the Day indicates. |
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
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