Bank of England in no rush to raise rates as unemployment plunges

British unemployment plunged to within a whisker of the Bank of England's level for considering an increase in interest rates, data showed on Wednesday, but the central bank stressed it would be in no rush to act.
The unemployment rate dropped to 7.1 percent in the three months to November, a fraction above the 7 percent level which the bank has said is its threshold for thinking about raising interest rates from their current all-time low of 0.5 percent.

Sterling hit a one-year high against the euro and British government bond spreads over German debt widened to an eight-year high as investors bet that the Bank of England will raise interest rates sooner than it has been signalling.

Citi's chief UK economist Michael Saunders brought forward his estimate by six months to the fourth quarter of this year. "We expect the MPC (Monetary Policy Committee) will lift the policy rate to 2 percent ... by late-2015, still leaving policy supportive of growth," he said.

The rate of 7.1 percent was below any forecast by economists in a Reuters poll and the lowest in nearly five years. It was down from a previous level of 7.4 percent, the Office for National Statistics said on Wednesday.

The number of people in work grew by a record amount, a further sign of the economy's rapid turnaround.

BoE policymakers stressed, however, they would not be hurried into raising rates. Their case has been helped by a fall in inflation to the Bank's target for the first time in more than four years.

"Members therefore saw no immediate need to raise Bank Rate even if the 7 percent unemployment threshold were to be reached in the near future," they said in minutes of their January policy meeting, released at the same time as the jobs data.

The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and low inflation means moves will be gradual.

The BoE is expected to use the publication of its Quarterly Inflation Report next month to give an update on its guidance, possibly by lowering the threshold unemployment rate below 7 percent or by underscoring how the threshold is not a trigger.

Policymakers said via the minutes they now expect unemployment to hit 7 percent "materially earlier than previously expected" and that the equilibrium employment "might be lower than previously thought".

The BoE has previously said that although Britain's long-run equilibrium unemployment rate is around 5 percent, inflation pressures could start to build around 6.5 percent.

THRESHOLD APPROACHING

The jobless rate was the lowest since the first quarter of 2009. The ONS said the number of people claiming jobless benefits fell by 24,000 in December, compared with a forecast for a fall of 35,000 in the Reuters poll.

It said the number of people in work rose by 280,000 in the three months to November, an all-time record.

Wage pressures remained low. Average weekly earnings rose by 0.9 percent on the year, half the rate of inflation.

The BoE put unemployment at the heart of its monetary policy last August when it said it would not think about raising borrowing costs - which have been at the record low since 2009 - until the rate fell to 7 percent.

Since then, Britain's recovery has picked up more speed than the Bank expected and unemployment has fallen fast. The International Monetary Fund on Tuesday sharply raised its forecasts for British economic growth this year.

The IMF also urged central banks around the world to avoid raising interest rates too soon to avoid choking off the recovery in their economies.

To quell speculation that the BoE might be hurried into raising interest rates, Governor Mark Carney has repeatedly stressed that unemployment falling to 7 percent would not be an automatic trigger for a rate hike.

The details of this month's BoE policy discussion strengthened that message, making clear the Bank does not intend to raise rates soon, even if unemployment hits 7 percent soon.

Despite its rapid recovery, the British economy remains 2 percent smaller than before the financial crisis.

As more long-term unemployed people have found jobs recently, the medium-term equilibrium rate could be a bit below 6.5 percent. This caused some traders to see a greater chance that the BoE could lower its 7 percent guidance threshold as soon as its February meeting. BoE official have previously floated the possibility of a lower unemployment threshold.

Any such decision is likely to be complex given the uncertainties around the labour market. The BoE said productivity was not picking up as expected.

That could push up longer-term inflation pressures and possibly strengthen the argument for not further delaying consideration of higher interest rates.

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Centrica abandons North Sea gas storage plans, blaming government

British Gas owner's decision could cost it £240m and follows move by energy minister to block subsidy to finance project

Centrica on Monday blamed the government as it abandoned plans to build two gas storage facilities that would have created hundreds of jobs and increased the security of energy supplies in the UK.

With the owner of British Gas expected to increase prices to consumers in the coming days, the company said it would not build a gas storage plant at Baird, in the North Sea, and put on hold "indefinitely" a project at Claythorpe in East Yorkshire.

The decision will cost Centrica £240m, which will be taken as an exceptional cost in its 2013 results, and was made after energy minister Michael Fallon concluded this month that subsidies would not be offered to encourage companies to build more gas storage.

Centrica said the move left the UK with the capacity to store 21 days of gas supplies, in stark contrast to countries in continental Europe, where France and Germany, for instance, have 122 days and 99 days respectively.

The company owns the biggest storage facility, Rough, capable on its own of holding 15 days' supply of gas. Baird, if it had gone ahead, would have added a further 13.5 days and potentially created hundreds of jobs building the site and more permanent ones after it was completed.

The UK has become increasingly reliant on gas imports in recent years and the lack of gas storage was highlighted this year when it emerged the country had come within hours of running out.

In May Rob Hastings, director of energy and infrastructure at the Crown Estate, which owns gas storage under the sea bed, admitted the UK had at one point in March just six hours of supply left in storage.

Hastings told the Financial Times: "We really only had six hours' worth of gas left in storage as a buffer." It followed the record low temperatures in March, which bolstered demand for heating at time when a pipeline was also damaged. Energy suppliers were later criticised for holding back supplies during this critical period.

The Department of Energy and Climate Change (Decc) insisted it had no concerns about storage facilities as stored gas was never used on its own but only in addition to other sources of supply – notably the North Sea, which still contributes 50% of supply, as well as pipelines and terminals.

"We get gas from a diverse range of sources, with around half from UK gas fields, a third from Norwegian and EU pipeline imports, a fifth from LNG (liquefied natural gas) imports from global markets and 7% from gas storage (in 2012)," a spokesperson for Decc said.

"The UK has the capacity to deliver twice the amount of gas required on a normal winter's day, and has coped well with recent extreme winter conditions. Gas storage, while important, only provides a small proportion of UK total supply," a spokesperson said.

Fallon argued this month that by not subsidising the cost of gas storage facilities the government would save customers £750m over a decade. The government did not just look at whether to provide subsidies but also considered forcing gas companies to secure a certain amount of supply or to hold more gas in storage.

Centrica, which has pulled out of building nuclear plants in the UK, cited "weak economics" for withdrawing from the gas storage facilities.

This relates to the narrowing difference between the price of gas in the winter and the summer, which had previously allowed companies to rely on selling gas more expensively in the winter than it was bought in the summer.

Centrica had warned in July that it might need government support for the projects because of the market conditions.

Decc pointed to two more storage facilities under construction in Cheshire, at Stublach and Hill Top Farm, as adding to storage next year and said two storage facilities were opened at Aldbrough, Yorkshire, in November 2012, and Holford, Cheshire, in February 2013.

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

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Barclays loan customers could be in line for windfall after paperwork errors

Bank could face costs of £100m to repay interest to customers whose statements did not comply with Consumer Credit Act

As many as 300,000 Barclays personal loan customers could be in line for a windfall after the bank uncovered "errors" in its paperwork.

Barclays said it was "implementing a plan to return interest payments to customers as swiftly and efficiently as possible" after reviewing the documentation sent to customers in past years.

The bank did not disclose the size of the bill but could face costs of £100m to repay interest to customers who should not have been charged during the period because their statements did not comply with the Consumer Credit Act.

The error appears to be similar to one that led to the taxpayer having to pick up a £270m bill for windfalls to 152,000 people who have, or had, a personal loan with Northern Rock. That blunder was disclosed in December 2012.

The Barclays disclosure was contained in the prospectus accompanying the bank's £6bn cash call. The bank said that a provision of an undisclosed size had been made for these costs and also revealed that it was now reviewing all its businesses – Barclaycard, Barclays Wealth and Barclays Corporate – to assess them for similar problems.

A Barclays spokesman said: "Barclays has proactively reviewed information it has historically sent to its customers relating to interest charges where we have found technical documentary errors. As a result, Barclays has identified certain issues with the information contained in some statements and arrears notices relating to consumer loan accounts."

He added that as a result of these errors, interest was not due on some accounts during the period that the bank made this mistake.

"While no one has been mis-sold to, customers are entitled to have their interest payments returned. No customer will pay more than they were ever contractually expected to," said the spokesman.

"Barclays has notified the Office of Fair Trading, which is responsible for consumer credit issues, and is implementing a plan to return interest payments to customers as swiftly and efficiently as possible. Barclays is undertaking a review of all its businesses where similar issues could arise to assess any related issues."

Any affected customer would be contacted by the bank and customers do not need to take any action, said the spokesman.

The Northern Rock error involved some customers with certain types of loan not being given all the information in their statements they were entitled to by law. As a result, interest payments on these loans were not legally enforceable.

The statements had failed to include the original amount borrowed. The Consumer Credit Act requires such statements to contain the sum borrowed, plus the opening and closing balance. Borrowers are not liable for interest relating to a period when a lender has not provided the information.

In the case of Northern Rock, most people had their loan account balance "corrected" to reverse the consequences of them being charged interest during the period when the paperwork did not meet the legal requirements. However, if the loan had already been paid off, they received a cash refund.

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

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Bank of England's Miles sees good reasons for low gilt yields

British government bond yields have good reason to remain low, despite a recent jump due to market expectations that the U.S. Federal Reserve may scale back its bond purchase programme, a senior Bank of England official said on Wednesday.
David Miles, an external member of the BoE's rate-setting Monetary Policy Committee, said the still-low current level of gilt yields appropriately reflected investors' risk aversion and market expectations that Bank of England rates will stay low.

He also raised the prospect that the BoE may hold some of the 375 billion pounds of gilts bought under its asset purchase programme indefinitely, even after monetary policy returns to normal - in contrast to the general assumption that almost all would be sold back to the market.

Miles's comments, in a speech to be delivered to a bond investors' conference, come less than a day after BoE Governor Mervyn King said that markets had "jumped the gun" by starting to price in tighter monetary policy.

Ten-year gilt yields hit a 20-month high of 2.597 percent on Monday, having risen almost 50 basis points since Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy is growing fast enough for the central bank to slow its bond-buying stimulus later this year.

Miles dismissed the idea that this marked the beginning of the end for what central bank critics say is a bubble in government bond prices caused by too much quantitative easing.

"Yields on UK government debt - both in nominal and real terms - are unusually low," he said. "(But) there are good reasons why yields on safe government bonds should be low today. I think some people are far too quick to label this a "bubble"."

The good reasons for low British government bond yields included investors' substantially greater risk aversion than before the financial crisis, and expectations that the BoE would keep offical interest rates low, Miles added.

Miles, a finance professor, has consistently voted for more BoE bond purchases since November and effectively endorsed market expectations for more loose monetary policy.

"I do not think we should be in any hurry in the UK to move the monetary policy dials back to more normal settings - indeed it might well be right for the next move in the UK to push them even further to give more support to demand," he said.

When the time did come to tighten monetary policy and sell back gilts, more normal market conditions should limit the impact on gilt prices, he added.

Miles, whose non-renewable term on the MPC expires in May 2015, also floated the possibility that the BoE might want to hold on to some gilts as a counterweight to increased cash deposited by commercial banks.

"It is very far from clear that returning monetary policy to a normal setting means that the Bank of England balance sheet will shrink back to where it was before the crisis," he said.

Article Source :http://uk.reuters.com

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