Bank of England switches to plastic pound notes with Churchill fiver

Introduction of polymer £5 note in 2016 and Jane Austen £10 note in 2017 will end 320 years of paper money

Mark Carney, the governor of the Bank of England, has formally announced that Britain will switch to using plastic banknotes in 2016, ending 320 years of paper money.

After a public consultation in which 87% of the 13,000 respondents backed the new-style currency, the Bank said it would introduce "polymer" notes, as it prefers to call them, in two years' time, starting with the new £5 note featuring Winston Churchill in 2016 and the Jane Austen £10 a year later.

Speaking at a press conference in the Bank's Threadneedle Street headquarters, Carney said: "Our polymer notes will combine the best of progress and tradition. They will be more secure from counterfeiting and more resistant to damage while celebrating the history and tradition that is important both to the Bank and the nation as a whole."

The move follows Carney's native Canada, where plastic notes are being rolled out, and Australia, where they have been in circulation for more than two decades.

Carney launched a public consultation on polymer banknotes, seen as cleaner and more durable, shortly after arriving at the Bank this summer. However, the Bank's notes division has been considering plastic money for several years.

Bank officials have been touring shopping centres and business groups around the country with prototype notes to canvas public opinion.

The Bank has promoted its polymer notes, featuring a see-through window and other new security features, as less threadbare and tougher to counterfeit.

It has sought to quell concerns about the environmental impact of printing on plastic by suggesting they can last up to two-and-a-half times longer than the cotton-paper notes in circulation at the moment. The durability will also compensate for the higher production costs and save an estimated £100m, the Bank claims.

Its laboratory tests showed polymer banknotes only begin to shrink and melt at 120C, so they would fare better in washing machines but could be damaged by a hot iron.

Carney has also announced that the Bank will follow new procedures when selecting the historical characters to appear on future notes, to avoid the furore it faced earlier this year, when the announcement of the Churchill £5 note appeared to suggest that no women – other than the Queen – would feature on any denomination.

A new advisory committee, with a majority of independent members, will now suggest a theme – such as scientific achievement – and the public will be invited to suggest specific figures for inclusion. However, the governor will retain the final decision over which person is featured.

"These changes will ensure that the characters on our banknotes are fully representative of the history and diversity of this great nation, while having the necessary public respect and legitimacy."

The move is the latest in a long line of changes for banknotes, first issued in return for deposits by the Bank when it was first established in 1694 to raise money for William III's war against France.

Colour £5 notes replaced white ones in the 1950s; the first portrayal of a monarch came in 1960, when the Queen appeared on a new £1 note; and the introduction of historical figures such as William Shakespeare started in the 1970s.

As part of the preparation for this latest change, banknote officials have already been working with retailers and the operators of vending machines and cashpoints.

Link, which runs the UK cash machine network, said its machines would need new cassettes to hold the plastic notes, because they will be smaller, and not because of the change in material.

The 15% reduction in size for Churchill notes compared with the current Elizabeth Fry fiver brings English notes into line with sizes in other countries. But they will remain larger than existing euro notes and the different denominations of sterling will retain tiered sizes to help blind people differentiate between them.

The Bank concedes no note is counterfeit-proof but says copying the new polymer notes will be slower and more expensive.

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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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Economic recovery? Bricks and motors build the evidence

Is this for real? The City certainly thinks the economy is finally emerging from the long, dark tunnel of stagnation into the sunlight of strong growth. That's why sterling and the interest rates on government gilts were up on Thursday. A recent run of strong data has convinced the financial markets that this time there will be no setback.

Houses and cars provided the latest evidence of recovery. That's significant because buying a home and buying a car represent the two big-ticket items of consumer spending. If the lipstick index is the barometer of the little treats people give themselves when times are bad, then the number of people putting their foot on the property ladder is a good guide to an economy starting to gather momentum.

So it is of some significance that the report from LSL property services showed that the number of first-time buyers was up by 45% between July 2012 and July 2013. The figure was the highest for any month since November 2007, when the financial crisis was still in its infancy.

The monthly sales report from the Society of Motor Manufacturers and Traders told a similar story. Indeed, the strength of new car sales by private buyers has been evident for the past 18 months and was one of the few positive signs during the flat-lining of the economy during 2012.

True, there may have been some special factors involved. There is some evidence that consumers have been using their compensation from miss-sold protection payment insurance as the deposits for a new car. Higher petrol prices have created incentives to trade in gas guzzlers for more fuel-efficient models. Motorists have been wooed by some smart promotions by dealers.

All that said, though, the year-on-year rates of growth reported by the SMMT are still impressively strong. Private car sales were almost 15% higher in August 2013 than they were a year earlier, and in the first eight months of 2013 they were up by more than 16%.

The data for first-time buyers and car sales reinforced the impression provided by the three surveys of manufacturing, construction and services from the CIPS/Markit earlier in the week. But snapshots of business confidence are one thing; people actually committing themselves to 25-year home loans and finance agreements quite another.

In the City, there was plenty of interest in how the Bank of England would respond to this batch of upbeat news. After the July meeting of Threadneedle Street's monetary policy committee, the first chaired by Mark Carney, the Bank issued a statement in which it sought to bring a halt to the upward drift in market interest rates which it fears could, if left unchecked, threaten the recovery.

Two months of strong data and a further increase in market interest rates later, however, there was radio silence from the Bank. No suggestion that the markets were getting ahead of themselves. No attempt to talk down rates. No suggestion that Threadneedle Street had a plan up its sleeve that would reverse the upward trend in gilt yields.

"This is quite a bizarre strategy by the Bank," said Nick Parsons, head of strategy at National Australia Bank. "If it issues a statement when it is not happy with the level of rates, the absence of a statement implies they are happy with the level of rates."

The lack of a statement did indeed lead to interest rates on 10-year gilts edging towards 3% and the pound rising against the dollar and the euro. It is hard to believe, however, that the Bank is happy with this state of affairs. It still believes that a premature tightening of policy could choke off nascent growth. But with the City paying more heed to evidence of an incipient housing boom than to Carney's forward guidance, it is at a loss as to what to do next.

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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Bank of England governor reiterates pledge on low interest rates

Mark Carney leaves door open for fresh stimulus measures if Britain's 'fledgling recovery' is threatened - but sterling rises against the dollar and 10-year gilts rise after the speech

Mark Carney, the governor of the Bank of England, sought to convince a sceptical City that borrowing costs will remain on hold for the next three years on Wednesday, as he warned that Britain needs a prolonged period of low interest rates to make up the ground lost during the recession.

In his first big speech since taking charge in July, Carney left the door open for fresh stimulus measures if adverse market reaction to the Bank's new forward guidance regime threatened the UK's "fledgling recovery".

The governor said he was trying to provide certainty to businesses and households that the recent signs of growth would not be followed swiftly by a tightening of policy.

"We have a recovery that's just beginning. It's a very long way back. We are lagging just about everybody else in the advanced world. There's a lot of spare capacity", Carney said in a press conference following his speech to business leaders in Nottingham.

The City was left unimpressed by the renewed commitment to leave interest rates at their record low of 0.5% and to maintain the level of assets purchased under the Bank's quantitative easing programme at £375bn. Sterling jumped by half a cent against the dollar after he spoke, while yields on 10 year gilts rose from 2.73% before his speech, to 2.8% afterwards – the opposite direction to the move Carney might have hoped for.

Traders believe that the pick-up in economic activity will strengthen over the coming months and that the unemployment rate will fall to 7% – the threshold at which Carney might raise interest rates - well before the 2016 date pencilled in by the Bank.

The governor's announcement on Wednesday that banks would be able to reduce their holdings of liquid assets by £90bn, thereby making it easier for them to lend, strengthened the belief that Threadneedle Street was being too pessimistic about growth prospects.

But Carney insisted that the 7% jobless rate was a "staging post", which would not necessarily lead to borrowing costs going up but only require the nine-strong monetary policy committee to re-think its approach. The jobless rate stands at 7.8% currently.

He said the Bank's task was "to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth. We aim to get there in part by reducing the uncertainty that has held back growth."

The Bank of England governor, Mark Carney
Since the MPC adopted its new policy of forward guidance in July, investors have brought forward their expectations of a rate rise, amid strong economic data for the UK, and fears about the knock-on effects if the US Federal Reserve phases out its own $85bn(£55bn)-a-month programme of QE.

But the new governor insisted the Bank will not be swayed by decisions made thousands of miles away in Washington.

"While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK," he said.

City analysts said, however, that the speech lacked details of how exactly Carney and his colleagues will respond if the current market reaction persists.

"If market rates are at 'unwarranted' levels and rise further, putting recovery in the real economy at risk, what would the BoE do?", said Ross Walker, UK economist at Royal Bank of Scotland.

Simon Wells, of HSBC, said: "There was little attempt to talk the market down with threats of imminent easing. Even if Mr Carney is personally irritated or concerned by the rise in market rates, he probably knows that there is little chance of garnering a majority on the MPC for policy loosening at this stage".

Carney did explain how he plans to use the Bank's new powers to supervise Britain's banks, in order to underpin recovery. He confirmed that once individual banks have increased their capital levels to the new minimum level of 7% of their risk-weighted assets, the Prudential Regulatory Authority will relax liquidity rules, allowing them to hold less of their capital in the form of the most liquid instruments such as government bonds. In total, the Bank says the move could free up £90bn for new lending.

The governor also addressed fears that the government's various schemes to rekindle the housing market, coupled with the Bank's promise to keep rates low, risked stoking a new speculative bubble. He said there was little evidence of a boom, with mortgage approvals running at just over half their pre-crisis level, and debt servicing costs low.

But he added that the Bank was "acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely".

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

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Bank of England v the City: who's right on interest rates?

Carney's argument is that recovery is in too early a stage to cope with rate rises – but the markets think otherwise

It's early days. Mark Carney is still finding his feet as the new governor of the Bank of England. Financial markets get things wrong with stunning regularity.

All this is true, yet the fact remains that the City's response to Threadneedle Street's forward guidance policy has been negative.

The yield on a 10-year government gilt – a good guide to the long-term cost of borrowing – has been on a rising curve ever since Carney advised that interest rates were on hold at least until the unemployment rate came down to 7%. Probably. Sort of. Unless something untoward happened that would force the Bank to act. In which case, action might need to be taken earlier.

Carney's first big policy intervention may go down as a masterstroke if he eventually convinces markets that interest rates really are on hold for the duration.

For now, though, it looks like a classic case of the old saw that there are some things best left unspoken.

Bank of England will make sure that monetary conditions are kept ultra-loose until there is irrefutable evidence that there will be no growth relapse. During Mervyn King's time as governor it was implicit that there would be no tightening of monetary policy for some time to come and that helped keep bond yields and sterling low. Since the implicit commitment was made explicit on 7 August, both the bond market and the foreign exchange market have brought forward the date when they think the Bank's monetary policy committee will push up the official interest rate from its record low of 0.5%.

Why? Because the City has taken a quick squint at the property market, where the interest-only mortgages that were a feature of the previous boom are making a comeback, and come to the conclusion that the UK is in the early stages of a credit bubble.

That, coupled with a slew of upbeat economic data, has convinced dealers that the Bank will need to cool things down long before the 2016 date pencilled in by Threadneedle Street in its recent inflation report.

This leaves Carney in a bit of a spot. The governor's argument is that recovery is in its early stages and would be jeopardised if bond yields continue to rise. That's quite true. The governor's problem is that the City is not listening and the Bank may need to back words with action in order to get the message across. And loosening policy just as the economy is picking up steam would take some explaining.

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

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Bank experts back Mark Carney on not expanding QE as recovery takes hold

Policymakers seeking alternative ways to encourage growth after unanimous vote to keep QE programme at £375bn

Bank of England policymakers swung behind Mark Carney, the new governor, and voted unanimously against extending quantitative easing at this month's monetary policy committee meeting, amid signs that economic recovery is becoming "more firmly established".

David Miles and Paul Fisher, the two MPC members who had repeatedly backed Carney's predecessor Sir Mervyn King's calls for an extension of the deflation-busting policy, decided instead to switch their votes and support Carney's plan of leaving the size of the QE programme unchanged at £375bn.

The Bank's apparent retreat from QE under Carney's leadership came as Ben Bernanke, Federal Reserve chairman, used an appearance before the House of Representatives to reassure financial markets that his own plans to scale down monetary stimulus were not "on a preset course", and would depend on the health of the economy.

Bernanke sparked a sharp sell-off in financial markets and a spike in bond yields in May when he suggested that the Fed would start to "taper" its $85bn a month in bond purchases as the US recovery gathers pace. But in yesterday's hearing the chairman said: "Markets are beginning to understand our message and the volatility has obviously moderated."

The minutes of the Bank of England's July MPC meeting, published on Wednesday, suggested that with the recovery still fragile, rather than halting stimulus, it was examining the idea of using a different approach to try to kick-start growth.

By August, when the chancellor has asked the Bank to decide on whether it wants to alter its policymaking remit, the MPC aims to establish "the quantum of additional stimulus required and the form it should take".

That suggests that Miles and Fisher may simply have decided to wait for next month's meeting before pushing for a fresh round of QE – or backing an alternative, such as a public promise to keep rates low until the economy meets specific targets, an approach known as "forward guidance". , which the Canadian governor is known to favour.

"An expansion of the asset purchase programme remained one means of injecting stimulus, but the committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting," the minutes said.

Simon Wells, UK economist at HSBC, said: "We expected unanimity next month, when the MPC assesses the merits of forward guidance, but Mark Carney has already got it."

The MPC made a first foray into forward guidance at its meeting a fortnight ago, taking the unusual step of issuing a statement to financial markets warning them that interest rates were unlikely to rise.

When Carney was governor of the Canadian central bank, he pledged to keep interest rates low for 12 months, helping to calm fears in financial markets that borrowing costs were about to rise.

The minutes show that MPC members were concerned by the "surprising" rise in UK government bond yields that followed Bernanke's statement in May. In April markets had not been expecting UK interest rates to go up until late 2016; by the time the MPC met, that had been brought forward to mid-2015.

"UK developments, while broadly positive, had not been enough to warrant such an upward move in the near-term path of bank rate," the minutes said.

Bank of England governor Mark Carney plans to leave the size of the QE programme unchanged at £375bnPersistently weak real income growth – with high inflation more than outweighing paltry pay deals – was highlighted as a risk to the recovery by MPC members: "Real income growth had remained weak … and it was unlikely that consumption growth could continue at its current rate without some rise in real incomes."

However, the MPC said, "developments in the domestic economy had generally been positive", and broadly in line with the moderately upbeat picture presented by King at his final inflation report press briefing. For "most members", therefore, "the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely", – subject to keeping inflation on track to hit the government's 2% target.

IMF boost for Osborne

George Osborne won a propaganda victory on Wednesday night as the IMF's powerful directors rejected its own economists' recommendations that the UK should slow the pace of spending cuts to boost recovery.

When the IMF announced the initial findings of its annual check-up of the UK economy in May, it caused a political storm by urging the chancellor to bring forward £10bn of infrastructure spending to avoid austerity becoming too much of a drag on growth.

But at a meeting on Monday, a big majority of the IMF's 24 directors – delegates from its member countries – spoke out against that proposal.

A statement released on Wednesday with the IMF's full findings on the UK, known as an Article IV, said: "Most directors underscored the importance of keeping fiscal consolidation on track to preserve credibility, not least in light of the persistent weakness of the fiscal position." However, Krishna Srinivasan, the mission chief for the IMF's UK assessment, said staff stood by their recommendations, despite the board's scepticism.

A Treasury spokesman said: "We thought they were wrong then, we still think they're wrong, and now it turns out most of the board agree with us."

But the IMF's report insisted that, "the economy remains a long way from a strong and sustainable recovery".

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

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Central bankers face fight to keep bond markets calm

Carney & Bernanke have to project gloom that satisfies markets without deterring businesses investing and consumers spending

For the next few weeks and months, Europe's central bankers will be arming themselves for yet another battle with the bond markets. After a brief period of calm following the Spanish debt crisis last year, interrupted only briefly by Cyprus flirting with bankruptcy, the bond markets are tense, poised for a seismic economic jolt.

The situation is complicated, undemocratic you might say, as the world's largest pension funds and sovereign wealth funds vie with each other to maximise their returns safe in the knowledge that only a few people at the heart of the financial system have a clue what they are doing.

One month they pile into sovereign bonds, the next they turn to stock markets. Driven by fear and greed, they swim the international money markets like sharks scenting a profitable kill.

Mark Carney, the Bank of England's new governor, was being sniffed by the markets for a sign of weakness or indecision within hours of his arrival last week.

Four days into his five-year tenure and he took the plunge into giving forward guidance to the markets. The guidance said: "There will be no shocks. We intend to maintain ultra low interest rates for some time", or words to that effect. Mario Draghi, his counterpart at the European Central Bank, took the same step just 90 minutes later, promising an "extended period" of record-low rates.

The problem faced by both men is that much of the bond markets is focused on the US where some major investors believe an end to ultra low rates is inevitable sooner rather than later.

Already, some of the biggest investment funds that populate the bond markets are wrestling with the prospect of the Federal Reserve not only pushing up interest rates within a couple of years, but also bringing its $1 trillion (£670bn) a year bond buying programme to a halt before next summer. After years of feeding on cheap dollars, the party might be over.

And if the US pulls back, there could be negative effects to inflation, commodity prices and the real economy.

The Fed's QE spree, which is set at $85bn a month, makes it one of the biggest bond buyers on the planet. Mostly, it buys US government bonds and in so doing effectively underwrites the Obama administration's growing debt pile.

Until a couple of months ago the only worry among bond investors was how the Fed's purchases pushed up the price of the remaining bonds left for sale. A higher demand for US Treasuries sent returns, known as the yield, spiralling down and encouraged many investors, often against their better judgment, to put their funds into US, UK and European stock markets.

Bank of England's news governor, Mark Carney, like his counterparts at the Federal Reserve and the European Central Bank, has a tough balancing act to master. The huge recovery in the FTSE 100 during the first half of this year can partly be attributed to a share-buying frenzy with money previously locked up in the bond market.

Such was the rise in the stock market that Fed boss Ben Bernanke has now hinted he might start to slow QE. Not switch it off, just slow the pace of growth.

Pimco, one of the biggest bond fund managers, promptly experienced a huge outflow. Its boss, Bill Gross, wrote last week, seemingly with his head in his hands, that panicky investors were blinded by the smoke from recent battles to the long term outcome of the war.

He pointed to the Fed's high tolerance of inflation. Just as the Bank of England has allowed inflation to yo-yo and peak at 5%, so the Fed is happy for its core inflation rate of around 1% to increase to beyond its 2% target, something Gross said would make inflation irrelevant as a guide to behaviour for many years. Then he talked about the likelihood of a dramatic fall in unemployment to the 6.5% level Bernanke has targeted. This target, he believes is also many years away.

"Fed [0.25% interest rate] will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth," he said.

Far from endorsing the Fed, he is even gloomier, saying that short bursts of goods news on the housing market or car buying belie the problems all western economies face of growing health and care costs, competition from Asia that drives down wages and a constant technological drive that is de-skilling important white-collar industries from architecture to the media.

"The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, 'Mr Chairman are you serious?'" Growth will be negatively influenced, Gross added.

Carney faces a similar problem to Bernanke. He needs to convince the bond markets that a decent run of car sales and a booming housing market in the south east of England does not make for a surging economy. And yet he won't want to sound so gloomy that he deters businesses from investing and consumers from spending.

There are many economists, mostly on the monetarist wing, who believe the underlying state of the economy is sound, and with the good times are so close we need to calm things down with higher rates.

So every time Carney sounds even modestly upbeat he will find himself stinging his audience with a bit of gloom.

Can he maintain this balancing act? As we have seen in the last few weeks, Bernanke only needed to allow the corners of his mouth to lift a little, to allow a slight smile, and the bond markets took flight.

The answer must be that central bankers can maintain their balance if they just keep recycling the same message every month for the next few years. Fund managers will, no doubt, read too much into one speech versus another and send demand rocketing, or the reverse, only for the status quo to reassert itself, which is great if you are a mortgage holder or have high debts. Low interest rates for longer is your saviour.

But the bond markets never lose. They will turn away and seek returns elsewhere, sniffing weakness in developing world countries or obscure stock markets. These investments could turn into nasty bubbles and crash, which means people – governments and small investors – getting hurt.

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

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UK construction sector grows for second consecutive month

Markit/CIPS construction PMI hits highest level since May 2012, fuelling hopes for faster economic growth

The UK's construction sector grew for a second month in June, boosted by a rise in house building and supporting expectations that economic growth accelerated in the second quarter.

Growth in output and new orders pushed the Markit/CIPS construction purchasing managers' index (PMI) to 51 from 50.8 in May, where anything above 50 indicates expansion. It was the highest level since May 2012.

Companies reported rising levels of client demand and larger volumes of new work.

Economists said the positive data raised the chances of stronger second-quarter growth than the 0.3% in the first three months of the year.

The positive news will be welcomed by the Bank of England's new governor, Mark Carney, who will oversee his first monetary policy committee decision on Thursday.

"June's construction data is one of the final pieces in the puzzle when it comes to survey evidence for second-quarter UK economic performance, and the sector's upturn adds to the upbeat news flow ahead of Mark Carney's first policy meeting at the Bank of England later this week," said Tim Moore, senior economist at Markit.

Construction sector employment rose for the first time since FebruaryHousing construction grew at the strongest rate in June according to the PMI, helped by the government's incentive schemes, although growth slowed to 51.5 from 54.4 on the index.

Commercial and civil engineering activity hit 50.1 and 50 respectively, improving after several months of contraction.

Employment in the sector rose for the first time since February and at the fastest rate since September, driven by the rising levels of new work and an improved outlook.

Howard Archer, chief UK economist at IHS Global Insight, said that although the positive survey reinforced the likelihood that the MPC will not announce additional stimulus this week, more quantitative easing was possible in August.

"This reflects our belief that Mark Carney is likely to be keen to build up escape velocity from extended economic weakness," he said.

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

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Mark Carney urged to kick start lending to small businesses

BBC ask Carney, who takes over from Sir Mervyn King today, to help sustain economic recovery by supporting small enterprises 

Business leaders urged Mark Carney on Sunday to back a £1bn investment bank at his first meeting as governor of the Bank of England to kickstart lending to small businesses.

The British Chamber of Commerce (BCC) also called on Carney, who takes over from Sir Mervyn Kingon Monday, to inject further funds into the economy as part of its quantitative easing (QE) programme to maintain the UK's fragile recovery.

BCC director general, John Longworth, said Carney needed to find ways to channel money to manufacturers and smaller enterprises or risk the recovery running out of steam.

"While we are seeing signs of a stronger recovery across the business community, we have no illusions about the challenges ahead for the UK economy," he said.

NEF spokesman Tony Greenham says Mark Carney’s arrival is the perfect opportunity to review the remit of our central bank.The Bank of England's interest rate setting committee is expected to reject boosting QE beyond its current £375bn level at its monthly meeting on Thursday, despite the arrival of Carney amid a welter of expectations that he will spur his colleagues into action.

City analysts agree that the monetary policy committee will hold its fire until the publication of a review in August of its policies, which will broaden its remit and encourage committee members to adopt a more radical mix of initiatives.

A report by the Bank's officials into the prospects for rising prices is also likely to show inflation falling over the next two years, giving the MPC more leeway to boost QE.

The chancellor wants the committee to take a more active role in encouraging lenders to promote borrowing to the wider economy. He has already allowed the committee to adopt a more flexible view of how to meet the 2% inflation target.

A report by the CBI and the accountants Price water house Coopers into the health of the financial services industry appeared to support the view that the banking sector is returning to health. It found that banks recovered strongly in the three months to the end of June after long period of cost cutting following the 2008 crash, though with lower profits and further cuts in employment.

However, the BoE's own figures show that RBS and Lloyds have reduced the amount of money they lend to households and businesses, while Barclays has threatened to cut back following demands from the main City regulator that it must bolster its reserves. Meanwhile the Co-op, which until earlier this year planned to take over 600 Lloyds branches, is in trouble after discovering a large shortfall in its capital reserves.

A funding for lending scheme designed to cut the cost of borrowing has pushed down the cost of mortgages since it was launched last year, but has so far had little effect on business lending.

A leading thinktank called on Carney to bypass the main banks with a direct intervention into the housing industry to support the building of 60,000 homes.

The New Economics Foundation said that instead of using quantitative easing to buy government bonds, the BoE should buy assets that will directly support the economy, which would mean purchasing bonds to support home building and energy efficiency, infrastructure projects and small business lending.

A foundation spokesman, Tony Greenham, said: "It's time for the Old Lady of Threadneedle St to get some new clothes. Mark Carney's arrival at the Bank of England is the perfect opportunity to review the remit of our central bank.

"Measures like QE and funding for lending are not providing the investment boost our economy clearly needs. Strategic QE can enable the Bank of England to maintain independence and control over inflation whilst more effectively supporting the government's economic objectives."

Greenham said Carney should adopt a new monetary allocation committee that would redirect central bank funds for investment in green projects and house building.

Like the BCC, the thinktank also backed funding for an investment bank.

"The funding for lending scheme uses public money to give cheap loans to banks to persuade them to lend to small businesses. Strategic QE could make loans to a British Business Bank, set up specifically to support lending to SMEs.

"Capitalising the green investment bank and British business bank so they could reach a scale similar to the investment banks of our major competitors like Germany, Brazil and Scandinavia would be a good place to start," Greenham said.

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

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