Bank of England governor: interest rate rise not on the agenda

Mark Carney vows to keep cost of borrowing at record low 0.5% despite policy linking a rate rise to a sharp fall in unemployment

An early increase in borrowing costs was ruled out by the governor of theBank of England as he insisted that this week's faster than expected fall in unemployment will not lead to an automatic interest rate rise that might choke off the recovery.

All but burying his "forward guidance" policy of linking an interest rate rise to a fall in the rate of unemployment to 7%, Mark Carney vowed to keep borrowing costs at their record low of 0.5% for the time being. He was speaking a day after it emerged that the unemployment rate fell to 7.1%.

Interviewed on BBC's Newsnight, Carney rejected the idea that plunging unemployment was a headache for the Bank. "If our forecast is going to be wrong it's better to be wrong in that direction," he said.

Carney also said that when the Bank decided to raise interest rates for the first time since the onset of the financial crisis in 2007, the moves would be gradual.

Economists have warned that a rise to around 3% in the interest rate would lead to huge increases in mortgage costs and a wave of repossessions, as well as damage business.

Downing Street and the Treasury have been looking nervously at the politically unpredictable consequences of repeated small interest rate rises before the general election in May 2015.

Although the Treasury maintains that an interest rate rise would help savers and be a sign of an economy returning to normality, No 10 is more ambivalent.

Downing Street feels assured that Carney is a practical Bank governor driven by the state of the real economy, unlike his more academic predecessor Mervyn King.

The governor said the Bank's monetary policy committee would be looking at all aspects of the labour market and not just the unemployment rate. The MPC had used the 7% figure to enshrine the idea that joblessness would have to fall considerably before he would "even begin to think about" raising borrowing costs.

Some City analysts are expecting Carney to announce in the next few months that he will lower the threshold at which the Bank would consider raising interest rates to an unemployment level of 6.5%.

The governor said that would be decided by the MPC but added that it was "really about overall conditions in the whole labour market", where productivity remains poor and many people working part-time still want full-time jobs.

Carney said the economy was "coming off a low base" and output was still below the levels when the economy dropped into its deepest recession since the second world war.

"The worst of the crisis is behind us but the financial system is not functioning as well as it could," he said. "Uncertainty among households and businesses is still preventing investment."

No 10 remains convinced that a year of growth, so long as it does not tip into over-heating, will ensure Labour's stubborn opinion poll lead is worn down into 2015.

Although David Cameron urged voters to be patient on living standards, his aides believe average incomes, once tax changes are taken into account, are already starting to rise above prices.

In a speech to business people in Davos, Switzerland, the prime minister will try to present his most optimistic long-term vision of the UK economy for many years , saying Britain can become "the re-shore nation" with businesses bringing production back to the UK, encouraged by cheaper energy costs and the lure of shorter customer chains.

Cameron will hold out the example of the United States where collapsing energy costs owing to fracking have led businesses to relocate back to the US.

He will say: "There is no doubt that when it comes to reshoring in the US, one of the most important factors has been the development of shale gas which is flooring US energy prices with billions of dollars of energy cost savings predicted over the next decade.

"I believe these trends have the ability to be a fresh driver of growth in Europe too. I want Britain to seize these opportunities. I think there is a chance for Britain to become the Reshore Nation."

Chuka Umunna, the shadow business secretary, said: "The Tory-led government came to office promising an export-led recovery but the UK's trade deficit is growing. Any help for manufacturers is welcome after three damaging years of flatlining and in a month where factory orders have fallen back.

"But after so many government schemes have failed to deliver for business, manufacturers will want to see what this one offers in practice."

Cameron's hopes for a boom built on fracking are not shared by the energy department, which is much more ambivalent about the ability of Britain – for geological, political and environmental reasons – to match the US fracking boom, at least not for more than a decade.

The prime minister will try to rebut internal critics tired of the Tory party's negativity by striking a more optimistic note. He will say: "For years the west has been written off. People say we are facing some sort of inevitable decline. They say we can't make anything any more.

"Whether it's the shift from manufacturing to services or the transfer from manual jobs to machines, the end point is the same dystopian vision – the east wins while the west loses, and the workers lose while the machines win. I don't believe it has to be this way. If we make the right decisions, we may also see more of what has been a small but discernible trend where some jobs that were once offshored are coming back from east to west."

To back the rhetoric, UK Trade & Investment will join forces with the Manufacturing Advisory Service to launch Reshore UK, a service to help companies bring production back to Britain.

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Mark Carney stands by forward guidance policy

Bank of Englang governor denies approach on future interest rates is confusing for business or consumers

The Bank of England governor, Mark Carney, has robustly defended his forward guidance policy in parliament against critics who argue it is confusing and has done little to persuade markets that an interest rate rise can be delayed for three years while the economy mends.

Speaking to the House of Lords economics committee, Carney said businesses and consumers understood that forward guidance meantinterest rates would stay low until unemployment falls to 7%, which the central bank predicts will happen in 2016.

Carney said: "A return to growth is not the same as a return to normality", and base rates should remain at the historically low 0.5% level until the recovery was established.

He spoke as the Office for National Statistics revealed that the consumer prices measure of inflation slowed to 2.1% in November from 2.2% in October and was at its lowest since November 2009. The move closer to the Bank of England's government-set target of 2% will give policymakers more leeway to leave interest rates at their record low.

Carney told the committee Britain's return to growth was sufficient to justify resisting calls to increase the quantitative easing (QE) stimulus programme, which Threadneedle Street has held steady for the last two years.

MPs have accused Carney of establishing a highly technical policy of forward guidance that relies on several caveats, or knockouts; this reliance has, they say, undermined the simplicity of the message. Forward guidance includes clauses that allow the bank to push up interest rates should it believe inflation is likely to increase sharply.

Markets have estimated that interest rates will need to rise in 2015 in response to a sustained increase in GDP and higher-than-expected inflation.

Carney said forward guidance had reassured households and businesses that credit would remain cheap until the economy was in better shape.

"Forward guidance is having an effect in the real economy. My experience, having met with more than 300 businesses around the country, is that business people understand forward guidance well. This is confirmed by the reports of our network of agents across the nation," he said.

"What matters most for households and businesses is not market expectations of interest rates, but what actually happens to bank rate now and in the future. That is because the interest rates on 70% of mortgage loans to households and more than 50% of loans to businesses are linked to bank rate."

Lord Lawson, the former Tory chancellor, said he was concerned that the central bank's QE programme to stimulate the economy would be maintained long after interest rates began to rise. He was responding to comments by Carney restating the bank's long-held policy that interest rates should increase before the sale of assets under the QE programme.

Lawson, who wants the bank to start selling the QE programme's £375bn of government bonds, said there was disquiet about the long-term effects of QE, which had artificially forced down the interest rate on government debt.

Carney said interest rates would need to rise to cool the economy ahead of a sale of government bonds.

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HMRC chiefs face grilling by MPs over lost tax

Officials will be urged to prosecute more evaders as giant firms' schemes left out of avoidance figures

The credibility of HM Revenue and Customs' £35bn estimate of Britain's "tax gap" – the amount lost from the public purse to evasion, avoidance and payment failure – is expected to face fierce challenge when three top officials appear before a parliamentary committee on Monday.

MPs on the public accounts committee, chaired by Margaret Hodge, are expected to ask why the complex tax policies of Google, Amazon and Starbucks do not register in official avoidance figures. When HMRC this month published its tax gap figures for 2012, it said the amount lost to what it narrowly defines as tax avoidance was just £4bn, the same amount as the previous year.

Other factors – including £5.1bn lost to evasion, £5.4bn to the hidden economy and £4.3bn to companies and individuals failing to take reasonable care – were all more costly than avoidance, HMRC claimed.

Tax fairness campaigners have criticised HMRC for excluding from its tax gap calculations what many, including the prime minister and chancellor, have described as tax abuse. MPs investigating the complex world of big-business tax engineering have accused HMRC of getting too close to large companies and tax advisers, and of failing to crack down on what they describe as abuses. The politicians are expected to ask why a more robust approach is not being taken towards multinationals, particularly internet and technology groups, whose business models frequently lend themselves to aggressive tax engineering. Other European countries, led by France, have raided offices of high-profile corporations including Google, Microsoft and LinkedIn.

This month the former energy secretary Chris Huhne attacked HMRC for its willingness to reach settlements with suspected tax evaders holding tens of thousands in Swiss bank accounts. He also said tax evaders using Liechtenstein had been offered "amnesty-lite" deals. In both cases, HMRC's approach contrasted with that of authorities in France and Germany.

In the past week there have also been reports of companies, including many British energy groups, exploiting tax-haven stock exchanges to qualify for a UK tax break known as the "quoted eurobond exemption". Ministers' plans to close loopholes in this area last year were ditched after an HMRC consultation.

On Sunday Chris Leslie, shadow chief secretary to the Treasury, said: "David Cameron needs to explain why he decided not to close down this tax loophole, which we know some energy companies are using to avoid millions in tax."

Among the officials appearing before MPs will be Edward Troup, HMRC's senior tax professional, responsible for overseeing settlements in sensitive tax disputes.

Alongside him will be Jim Harra, head of business tax, who is expected to repeat his insistence that HMRC is doing a good job and any loopholes exploited by the likes of Google and Amazon are a matter for international bodies such as the G20 and OECD, not for HMRC.

Jennie Granger, head of enforcement and compliance, is expected to face tough questioning on why HMRC agreed settlements with tax evaders rather than prosecuting. MPs will also want to know why more cannot be done to extract financial penalties from big accountancy firms shown to have marketed tax schemes

Granger is expected to maintain that HMRC's efforts to tackle marketed tax avoidance schemes continue to bear fruit, pointing to a win rate of eight out of 10 tax avoidance cases in 2012-13, producing more than £1bn in tax receipts.

That view is in contrast to the analysis of Amyas Morse, comptroller and auditor general of the National Audit, who noted that there were 41,000 open case relating to marketed avoidance schemes, suggesting that HMRC had "yet to demonstrate whether it could successfully manage this number down".

Granger has already defended HMRC's record. In July she said: "Compared to other countries that publish tax gap estimates, and allowing for differences in methodologies, we believe that the UK's tax gap is towards the lower end of the range."

She insists her tax inspectors are well resourced and able to "man mark" the largest firms operating in the UK. She claimed they brought in £20.7bn of revenues last year, a record total, with £8bn coming from large business.

Article Source : http://www.guardian.co.uk
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First-time house buyers and car sales fuel summer mini-boom

Sharp rise in numbers getting on property ladder while vehicle registrations show 18th straight monthly rise

Strong car sales and new data showing that the number of first-time buyers in Britain's housing market jumped by 45% in the year to July have reinforced the picture of an economy in the grip of a summer mini-boom.

An analysis by LSL Property Services, which owns estate agencies including Your Move, suggests there were more than 26,000 first-time buyer transactions in July – a dramatic increase of 45% on the same month in 2012.

David Newnes, director of LSL Property Services, said: "Mortgages are much more affordable for first-time buyers compared to last year, which has opened the door to thousands of would-be buyers who were shut out of the market. Economic confidence is returning, nudging many more buyers in the direction of property, and nudging lenders to offer more loans to buyers with smaller deposits."

Car sales have also been strong, echoing robust growth in high street sales. The number of new cars registered last month rose 10.9% to 65,937 compared with a year earlier, according to the Society of Motor Manufacturers and Traders (SMMT).

That marked the 18th successive monthly rise in new car sales and pushed year-to-date sales to 1.39m vehicles, 10.4% higher than a year ago. By the same point in 2007, before the financial crisis, 1.52m new cars had been sold.

Private purchases were the biggest drivers of growth, but fleet and business purchases also rose in August.

"UK new car registrations have now risen consecutively for a year and a half. Private and fleet buyers are clearly capitalising on attractive deals and new technologies against a backdrop of increasing economic confidence," said Mike Hawes, chief executive of the SMMT.

However, the strong data intensified the sell-off in the bond markets on Thursday, increasing the pressure on Bank of England governor Mark Carney's policy of "forward guidance". Carney, who was hand-picked by the chancellor, George Osborne, hoped to keep borrowing costs low across the economy by sending a clear signal that he would not raise interest rates until unemployment falls below 7%, which the Bank's nine-member monetary policy committee expects to take at least three years.

But a batch of data suggesting the economy has started to recover have prompted investors to bet against the Bank, in the belief that Carney will be forced to raise rates before 2016.

When the MPC opted not to deliver a fresh warning to the markets after its monthly rate-setting meeting on Thursday, the yield – effectively the interest rate – on 10-year government bonds, or gilts, surged through 3% for the first time since July 2011. Yields are now higher than in July this year, when the MPC released a statement within days of Carney's arrival saying that recent moves in financial markets had been "unwarranted".

There are growing concerns that the continuing sell-off in bond markets is driving up long-term interest rates, which could threaten the recovery, since many loans – particularly to businesses – are priced according to bond yields rather than the Bank's base rate.

"Ever higher market interest rates challenge the Bank's assessment of the outlook. Either the MPC needs to confront these market moves by stating that rate expectations are unwarranted – and thus guide rates lower – or it needs to acknowledge that the improving fundamentals have changed the position vis-à-vis the July and August meetings," said Ross Walker, UK economist at Royal Bank of Scotland.

Howard Archer of consultancy IHS Global Insight said: "The MPC is increasingly facing a real dilemma, resulting from the surprisingly strong growth that the economy is currently experiencing. While this robust growth is a hugely welcome development following the economy's prolonged struggles, it is making the markets even more sceptical that the Bank of England will not raise interest rates from 0.50% before mid-2016."

Carney will appear before MPs on the Treasury select committee to explain the policy of forward guidance next Thursday.

Mario Draghi, the president of the European Central Bank, also left interest rates on hold yesterday, after the 18-member eurozone clambered out of recession in the second quarter of the year; but he admitted that the bank's governing council had considered a rate cut.

At his press conference after the ECB's meeting, Draghi said: "I am very, very cautious about the recovery, I can't share the enthusiasm. These shoots are still very, very green."

Article Source : http://www.guardian.co.uk

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Strong services data signals UK growth is on track to outstrip rest of Europe

PMI survey's all-sector reading hits 15-year high, with order books growing at fastest pace since Tony Blair became PM

Britain's recovery is on track to outstrip the rest of Europe following a strong performance by the services sector in August.

The purchasing managers index, published by Markit, jumped to a new post-financial-crash high of 60.5 in August, up from 60.2 in July and its highest level since December 2006.

Markit said the latest survey of the all-important sector, which accounts for around 78% of the economy, sent the all-sector PMI to its highest level since the series began in 1998.

Chris Williamson, the data provider's chief European economist, said growth was now accelerating in manufacturing, services and construction, and that GDP growth could exceed 1.0% in the third quarter of the year.

The broad-based nature of the recovery will encourage George Osborne, who in public has remained careful to highlight the risks to the recovery.

Williamson said the latest data showed that growth was principally supported by a rise in new business.

Order books at companies ranging from banks to restaurants rose at the fastest pace since May 1997, the month Tony Blair first became prime minister.

"There were many reports of an ongoing strengthening of market confidence which helped companies convert enquiries into hard contract wins. Marketing and an improvement in the housing market were also noted as reasons for higher sales volumes," he said.

However, hopes that growth would bring a quick end to persistently high unemployment were dashed after the survey of services firms showed a slowdown in hiring.

The sector reported a net increase in employment for an eighth month in a row, but the rate of growth was described as "marginal".

Markit said: "A number of panellists attributed the slowdown to the non-replacement of leavers or cost considerations."

The lack of jobs growth will dash expectations that the Bank of England will raise rates earlier than expected in 2016.

The Bank of England governor, Mark Carney, said last month that he wanted to wait until the economy created an extra 750,000 jobs before considering a rise in base rates.

Martin Beck, UK economist at Capital Economics, said the services survey "adds to the relentlessly good news on the UK economy".

He said: "Following surprisingly strong gains in August's manufacturing and construction surveys, today's services result at face value points to quarterly GDP growth in Q3 not far off a rip-roaring 2%.

"However, this does not necessarily indicate that interest rates will have to rise earlier than the MPC expects. In common with the manufacturing and construction surveys released earlier this week, the expansion in services output suggested by the CIPS survey was accompanied by a softening in the survey's employment balance, which dropped from 53.6 to 50.6.

"This supports our, and the MPC's, view that rising productivity will accommodate much of the recovery in demand, with the unemployment rate taking a stubbornly long time to fall to the Bank's 7% threshold."

Across Europe's major economies services firms signalled that a year-long recession was coming to an end, with the exception of Italy, which failed to improve on July's poor performance.

The Italian services PMI improved only slightly on the previous month following a rise from July's 48.7 to 48.8. The August figure means another monthly contraction, in an economy that is already expected to shrink steadily this year. The City had hoped for a number close to 50, the cut-off between growth and contraction.

Article Source : http://www.guardian.co.uk

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