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Wednesday 26 February 2014

Bank of England could raise interest rates next spring, says MPC member

MPC member Ian McCafferty says market expectations rates could rise in the second quarter of 2015 are 'not unreasonable'

A Bank of England policymaker has reinforced expectations that the first rise in interest rates will come as soon as next spring, in remarks that pushed up the pound.

Ian McCafferty, a member of the monetary policy committee, said that market expectations that the Bank of England will start to raise rates in the second quarter of 2015 are "not unreasonable". He told news agency Reuters in an interview that wage deals in coming months would be "quite critical" as policymakers watch for inflation risks.

Under governor Mark Carney, earlier this month the Bank overhauled its forward guidance policy on when rates would rise from their record low of 0.5%. At the time it said a view in markets that rates could rise in the second quarter of 2015 was consistent with its goal of keeping inflation close to the government-set 2% target. McCafferty told Reuters: "In that sense, you'd have to say that that market curve is not unreasonable.

"The exact timing of course is going to depend on events that have yet to unfold in terms of how the recovery proceeds over the course of the next six to 12 months or so."

Following his remarks being published, the pound rose to session highs against the dollar and euro.

McCafferty, a former chief economic adviser to business group CBI, said he was watching for pressures on inflation from pay deals negotiated in coming months. After years above its target inflation has now fallen below 2%, to stand at 1.9% in January.

"I suppose my view would be if anything, the risk I am watching for, because I think it fits with our mandate, is were we to see inflation risks or inflation behaviour start to develop," he said. "At the moment, that seems to be well under control.

"If we did see some inflationary pressure – more than we currently expect in our central case – that would if anything, I suspect, lead the committee to consider slightly earlier rate rises."

The policymaker said another factor to watch was the strength of the pound, which last week strengthened to a four-year high against the dollar.

"Were it to continue to rise, I would get more worried," McCafferty said, and indicated further strengthening could delay a rate hike.

"It's clearly a consideration in terms of total monetary conditions in the economy so we would need to take it into account when determining what the appropriate monetary stance would be going forward," he said.

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Tuesday 25 February 2014

HSBC hands allowances to hundreds of bankers to avoid EU bonus cap

Britain's biggest bank awards staff 'fixed pay allowances' to side-step restriction on bonuses imposed by Brussels

A defiant HSBC is handing its chief executive, Stuart Gulliver, allowances worth £32,000 a week – on top of his £1.2m salary – to get around the EU's cap on bonuses, in a move that is expected to be replicated by the other high street banks.

HSBC became the first UK bank to reveal how it will sidestep the pay restrictions imposed by Brussels, as it further fuelled the debate over City pay by also revealing that 239 of its bankers received more than £1m last year. Gulliver, the boss of Britain's biggest bank, hit out against the new rules, which restrict bonuses to 200% of salary even with shareholder approval, but the TUC accused HSBC of "soaraway boardroom greed".

The £1.7m "fixed pay allowance", paid in shares every three months on top of Gulliver's salary, will ensure he is paid a minimum of £4.2m a year, up from £2.5m now. Similar allowances, in shares that cannot be sold for five years, are being handed to 111 top bankers at HSBC, while another 554 are to be handed extra payments in cash.

The move prompted Labour to call for a repeat of its bonus tax while the Robin Hood Tax campaign said the payments bolstered its argument for a tax on financial transactions.

"HSBC haven't so much circumvented rules on bonuses as driven a coach and horses through them. The only way to rein in bankers' remuneration is to make banks pay their fair share to society," a Robin Hood Tax campaigner said.

The TUC general secretary, Frances O'Grady, said: "It would be great if banks put the same effort into lending to small businesses and investing in infrastructure as they do to getting round EU rules on boardroom bonuses."

HSBC's response to the Brussels bonus cap was contained in its annual report, which showed profits rose 9% to $22.5bn (£13.6bn) in 2013, when its bonus pool for staff rose 6% to $3.9bn.

A year ago HSBC made $20.6bn profits and paid 204 of its staff more than £1m, although its shares were among the biggest fallers in the FTSE 100 index of blue chip shares on disappointment that the profit rise was not greater.

However, the rise in bonuses at HSBC was in contrast to Barclays, which increased them by 10% even though its profits fell 32%. HSBC said its dividends to shareholders were up 11% while staff costs were down 6%. Barclays is among the banks – including the bailed-out Lloyds Banking Group and Royal Bank of Scotland – that are expected to follow HSBC by handing out allowances to top staff as they respond to the EU cap on bonuses, which affects payouts to be made this time next year.

The disclosures by HSBC came as the pay-setting committee of RBS prepared to meet to confirm the bonus pool for its 120,000 staff. The size of the pot, expected to be £500m, will be announced on Thursday, when the 81% taxpayer-owned bank is expected to report losses of £8bn.

"We don't want to do this at all," said Gulliver, whose total pay and bonuses in 2013 were £8m, up from £6.3m the previous year. He stressed his maximum potential pay each year would fall to £11.4m from £13.8m to counteract the rise in the fixed part of his pay. Gulliver, who started his career at HSBC more than 30 years ago as a currency dealer, also receives £79,000 for the use of cars in Hong Kong and accommodation there worth £229,000.

George Osborne is taking legal action against the Brussels cap and Gulliver said the bank would revert to its previous schemes if this was successful.

"We had a compensation plan here that the shareholders liked but sadly because of the EU directive we've had to change. This isn't something we would have wanted to do … It's much more complicated," Gulliver said.

The Bank of England's Andrew Bailey has warned the cap could lead to a £500m rise in fixed salary costs at the big banks and make them riskier. Andrew Tyrie, the chairman of the Treasury select committee who also chaired the parliamentary commission on banking standards, said: "A crude bonus cap does nothing to incentivise higher standards. What we need is a fundamental reform of the bonus culture including much longer deferral and much greater scope for clawback, as the banking commission proposed."

HSBC – which after a £1.2bn fine in 2012 is subject to tough restrictions imposed by the US authorities – risked further controversy over pay by revealing that its chairman, Douglas Flint, who in the past has not received bonus payments, is line for new share awards because of his role in "intense regulatory change". The move could allow Flint to receive maximum pay of £4.6m a year, up from £2.4m.

Gulliver has taken the axe to costs since being promoted to chief executive three years ago, cutting 40,000 roles and pulling out of 63 countries or businesses. The bank – one of the highest dividend payers in the FTSE 100 – said that the government's bank levy on its balance sheet had cut its dividend by $0.05 per share as it had cost $904m last year, while it had set aside another $395m for misselling payment protection insurance and products to small businesses. From the start of this year, the bank has changed the way it pays the staff in its retail division to remove the link between sales and bonuses, with a view to cutting misselling bills.

Despite the controversy over the cap, Gulliver gave a clear commitment to remaining in the UK, although the bank generates less than 10% of its profits here. Some 70% of its business is generated in Hong Kong and the Asia-Pacific region, and Gulliver said that 208 bankers in London would receive the three-monthly allowances compared with 395 outside the UK. It employs 254,000 people, 46,000 of them in the UK.

In total the bank has 1,318 employees whose bonuses must be capped under the new rules – those regarded as taking and managing risks – but just over 650 will receive no extra allowances.

In more than 600 pages of documents, the bank also gave further breakdowns of staff pay, revealing for the first time the number of staff paid more than €1m – some 330 – and that 192 bankers defined as key staff received an average pay deal of $1.5m (£900,000).

Barclays has told staff affected by the cap that they will receive the payments, called role-based allowances, each month alongside their salaries but has yet to disclose how much its chief executive, Antony Jenkins, will receive. Jenkins has turned down a potential bonus of £2.7mon top of his £1.1m salary but still stands to receive at least £4m from long-term share plans due to be released next month.

The new boss of RBS, Ross McEwan, has waived his payout. António Horta-Osório, the boss of Lloyds, is receiving a £1.7m bonus on top of his £1m salary, a £500,000 pension contribution and a payout from a long-term incentive plan that could total £2.9m – half the potential sum – when it is formally revealed next month.

Wednesday 19 February 2014

UK unemployment rate ticks up, underlines steady stance on rates

Britain's unemployment rate unexpectedly edged up in the three months to December to mark a first rise in almost a year, underlining a message from the Bank of England that it is in no rush to hike borrowing costs.
The jobless rate edged up to 7.2 percent in the three months to December compared with 7.1 percent in November, the Office for National Statistics said on Wednesday.

That was the first rise since the three months to February 2013 and was higher than the unchanged reading forecast by economists in a Reuters poll.

But the number of claimants of jobless benefits - a narrower category than those who are deemed unemployed - fell for the 15th consecutive month, while wage growth accelerated.

That suggested a mixed picture for the labour market, adding weight to last week's shift of emphasis by the central bank to a broader range of measures of slack in the economy when considering changes to monetary policy.

The BoE was forced last Wednesday to overhaul its previous forward guidance policy that hinged on a 7.0 percent unemployment rate threshold, a level almost reached in the three months to November.

It also said it was in no rush to hike rates.

The minutes from the BoE's last meeting, also released this Wednesday, showed policymakers had no disagreements about major changes to the central bank's forward guidance policy.

"(With) weaker inflation below target, the unemployment rate tantalisingly moving away from their threshold, it helps to take the pressure off the BoE for early rate increases," said Brian Hilliard, economist at Societe Generale.

Sterling fell to a session low against the dollar and the euro while gilt futures extended gains after the data.

The ONS said the number of people claiming jobless benefits fell by 27,600 in January, compared with a forecast for a decline of 20,000 in a Reuters poll.

Wage growth has lagged inflation over the last years, and the squeeze on incomes is a key battleground of next year's general election.

Average weekly earnings rose by 1.1 percent in the three months to December 2013 compared with the same period in 2012 - its highest since July last year, although still below the inflation rate.

Excluding bonuses, average weekly earnings rose by 1.0 percent by the same comparison.

The annual inflation rate was 1.9 percent in January - below the BoE's target for the first time in over four years.

Tuesday 18 February 2014

UK inflation falls below Bank of England's 2% target

Rate dropped to 1.9% in January, the first time it has dipped below target in more than four years

Inflation fell below the Bank of England's 2% target for the first time in more than four years in January, brightening the outlook for Britain's squeezed consumers.

The annual rate of inflation dipped to 1.9% last month from 2% in December, according to the Office for National Statistics, driven lower by prices of furniture and other household goods, alcohol and tobacco, DVDs and tourist attraction entry costs.

It was the first time since November 2009 that inflation has fallen below target. Economists said the figures reflected particularly aggressive discounting this year as retailers competed in the January sales.

Inflation has been falling steadily in recent months after reaching a peak of 5.2% in September 2011. It finally returned to the 2% target for the first time in four years in December.

Economists said inflation was likely to fall further in the coming months, boosting the chance that wage growth will outpace inflation in 2014 for the first time in years, easing the pressure on household budgets.

Wage growth was just 0.9% in the latest available data for the three months to November, still less than half the inflation rate.

"There is a good chance that CPI inflation will fall to as low as 1% by the end of this year and remain subdued thereafter," said Samuel Tombs, UK economist at Capital Economics.

"This should enable real earnings to rise for the first year since 2007 and allow the [Bank's] monetary policy committee to keep interest rates on hold until well into next year."

Despite a backdrop of falling inflation and economic growth, the Bank of England made it clear last week it is in no hurry to raise interest rates – which have been at an all-time low of 0.5% since March 2009 – suggesting there would be no rise until after the general election next year.

The Bank's governor, Mark Carney, said its policymakers would not take risks with this recovery, which is as yet "neither balanced nor sustainable".

The retail prices index, historically used to calculate wage rises, rose to 2.8% in January from 2.7% in December, driven higher by insurance, air fares and fuel prices.

Monday 17 February 2014

Former Barclays bankers charged over Libor allegations

The three men are the first former or existing Barclays staff named in criminal proceedings linked to interest rate fixing allegations

Three former Barclays bankers have been charged in relation to allegations of a conspiracy to manipulate Libor interest rates.

The Serious Fraud Office said the men were charged in connection with an allegation of conspiracy to defraud between 1 June 2005 and 31 August 2007.

The bank was fined £290m by US and UK regulators two years ago for a "serious, widespread" role in trying to manipulate Libor rates. There was no admission of criminal liability but the scandal ultimately led to the departure of the chief executive, Bob Diamond.

Although Barclays was the first of several banks to reach a regulatory settlement of Libor allegations, neither existing nor former employees had been named in criminal proceedings until Monday.

The focus of criminal proceedings until now has been a former Citigroupand UBS trader, Tom Hayes, who is charged with conspiracy to fix Libor with employees at eight other financial firms including Royal Bank of Scotland, JP Morgan Chase, Deutsche Bank, Icap, Tullett Prebon, Rabobank RP Martin and HSBC.

It is thought that the latest charges brought against former Barclays staff relate to a separate alleged conspiracy, unrelated to the alleged plots between August 2006 and September 2010 involving Hayes.

The three former Barclays bankers are Jonathan Mathew, who worked in the bank's treasury unit in London and left this position in September 2012, Peter Johnson, who is thought to have been a senior dollar Libor submitter in London, and Stylianos Contogoulas, a former trader at Barclays who moved to Merrill Lynch in July 2006 and left there in September 2011.

Barclays declined to comment.

House price boom brings new wave of sellers into the market

Property website Rightmove says shortage of homes and buying frenzy have driven asking prices to record level

Surging house prices have prompted a wave of sellers to put their homes on the market, according to Britain's biggest property website, Rightmove, but it added that near-frenzied buying activity is sending asking prices to record levels.

The average asking price on the site jumped by £8,103 in January, equal to £261 a day, with the typical property now costing £251,964. Rightmove also said it had its 10 busiest days ever in January, with house hunters looking at 50m property pages a day for the first time, or about 500 a second.

The number of potential buyers sending emails to inquire about properties was also up around one-fifth compared with January last year and there was "firm evidence that interest is serious and being followed up", it said.

The booming market has provoked a big increase in the number of sellers, with 18% more properties being listed than a year ago. But Rightmove said it is yet to affect the supply shortage, as the number of homes being snapped up and removed from the site has risen in tandem.

Estate agents said they were also seeing more sellers come to the market. Haart, which is part of the largest estate agency group in the UK, said the number of properties advertised in its windows had increased by 10.6% over the past year. Its chief executive, Paul Smith, said: "It's good news that stock levels are increasing. However, new buyer registrations are up 41.2% annually so the market is still out of kilter."

The conventional approach to buying a home - where someone finds a house they like, then puts theirs up for sale – is breaking down in many local markets, where estate agents are not interested in prospective buyers unless they have sold already and can proceed immediately.

"Especially in the south, agents report that buyers with a property yet to sell are losing out to buyers able to proceed with speed," said Miles Shipside, a director and housing market analyst for Rightmove.

But bubble-like conditions in some parts of the country are making first-time buyers stretch themselves too far, warned the government-backed Money Advice Service. It researched 1,000 first-timers who had bought over the past two years, and found that one in five wished they had bought somewhere cheaper.

More than half admitted that the running cost of their first home was also more than expected, prompting the service to warn buyers: "You can afford your mortgage, but can you afford your home?"

Affordability is most stretched in London and the south-east. Haart said that over the past year, the average property it sold in London went up by 18.4% to £448,800, a rise of £69,784 over the year, double the average salary of a Londoner.

A Guardian/ICM poll last week found a growing exhaustion with rising house prices among the general population. Only 14% of people want house prices to continue to rise, while 63% would prefer they remain stable and 20% want prices to fall.

When asked to name the biggest problem in housing, 29% said it was buyers priced out of the market, a quarter said it was the lack of council housing, and 15% said it was excessive private rents.

But despite their despair over prices, most households expect them to continue to rise this year. A sentiment index produced by the upmarket agents Knight Frank found that households in every region of the UK perceive that the value of their home will rise over the next 12 months.

Expectations that rising interest rates may puncture a potential property bubble were dashed last week by the Bank of England governor, Mark Carney. He said he was comfortable with the City's view that interest rates would not rise before the spring of 2015 and then rise gently to 2% by 2017.

Figures from the Office for National Statistics suggest that higher house prices are also provoking a building boom. Figures released late last week revealed that in 2013 there was 1.3% annual growth in construction output, but it was "almost solely" attributed to house building, which jumped by 10.4% (£2.1bn) year on year.

Thursday 13 February 2014

Lloyds in £1bn tax dispute with HMRC over Irish losses

Bank reveals it is in a £1bn tax dispute with HMRC over the way it has used losses from its Irish buisness to cut its tax bill

Lloyds Banking Group faces a £1bn tax demand from HMRC related to billions of pounds of loss taken in Ireland by the state-backed lender as it wound down its defunct Irish subsidiary.

The lender revealed it was warned in the second half of last year that the UK tax authorities were not happy with its treatment of Irish losses to offset its tax bill, prompting a legal dispute between Britain’s largest retail bank and HMRC.

If the case is decided in HMRC’s favour, Lloyds has said its tax bill will rise by £1bn, with the bank forced to pay a further £600m of tax, as well as write off a £400m deferred tax asset that it would currently be able to write off against future profits.

In a statement to investors the bank said: “The group does not agree with HMRC’s position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due.”

The disclosure of the tax dispute came as Lloyds published its full-year results, which showed the lender had made a pre-tax statutory profit of £415m, reversing a loss in 2012 of £606m.

On an underlying basis, which strips out provisions such as the £3.1bn set aside for payment protection insurance compensation costs, the bank made a profit of £6.2bn.

The profit is the bank’s first in three years and led Antonio Horta-Osorio, chief executive of Lloyds, to confirm he would accept a £1.7m all-share bonus for 2013. The bonus will be deferred until 2019 and will be subject to several performance hurdles linked to the future performance of the business.

As well as Mr Horta-Osorio’s own bonus, Lloyds confirmed it had put aside an overall staff bonus pool worth £395m, equating to an average payout to each of the bank’s staff of £4,500.

Sir Win Bischoff, chairman of Lloyds, said the payment of the bonuses was “proportionate and fair”, adding that the payouts at the bank were “lower than anyone else”.

In an unscheduled update this month, Lloyds pre-released its underlying profit and PPI provision figures as they differed materially from market expectations.

Mr Horta-Osorio said Lloyds had been transformed into a “normal bank”, five years on from its state-funded rescue that saw the taxpayer take a 39pc stake in the bank, since reduced to 33pc.

Lloyds is in the process of preparing a prospectus for a second sale of the state’s holding in the bank that is expected to see the Treasury authorise a further disposal of the shares within months, including a first offer of the stock to the general public.

Mr Horta-Osorio said: “We have continued to improve the bank and the price [of the shares] is substantially above the price at which the first tranche was sold in September, 75p, and the bank is ready to sell another tranche, but it is absolutely up to the UK Treasury to decide when and how to do it.”

Shares in Lloyds fell on Thursday, closing the trading session down 2.72pc at 81.26p, valuing the bank at £41.2bn. However, even at this share price the stock is well above the Treasury’s break even point of 73.6p.

As part of the continuing turnaround of the lender, Mr Horta-Osorio said work had begun on an updated strategy for the bank that will map out its objectives for the next three years. The Lloyds chief said the plans would be published before the end of the year.

“Over the last three years we have reshaped, strengthened and simplified our business to create a low-risk efficient retail and commercial bank that is focused on our customers and on helping Britain prosper. This progress has seen the Group return to statutory profit in 2013 and despite our legacy issues, further strengthen our capital position,” said Mr Horta-Osorio.

He added: “As a result we expect to apply to the regulator in the second half of the year to restart dividend payments. This will be another important milestone on our journey to rebuild trust and confidence in our Group”

Lloyds will in the summer launch the £1.5bn float its 631-branch TSB subsidiary through a listing on the London market.

However, after spending £1.6bn to create the business as part of a European Commission ordered disposal necessitated by its 2008 bailout the sale is not expected to generate a profit for the bank.

The TSB business, previously known as Project Verde, had originally been expected to be sold to the Co-op Bank, but the troubled lender was eventually forced to pull out of the deal as the extent of its own capital problems became clear.