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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Bank of England holds interest rates and quantitative easing

Governor Mark Carney believes much of the current 2.7% inflation rate can be blamed on one-off shocks

The Bank of England has rejected calls for a rise in interest rates despite a strong run of surveys showing the economy is recovering at its fastest pace since 2010.

In a widely expected decision, the central bank's interest rate setters kept the base rate at 0.5% and the level of its monetary stimulus to the economy, known as quantitative easing, at £375bn.

Some analysts have called for a rise in interest rates in response to the improving economic picture and a recent jump in housing market activity.

However, the bank's monetary policy committee has agreed to maintain its current policy stance until the unemployment rate falls to 7%. It expects to reach this milestone in 2016 after 750,000 jobs have been created.

Governor Mark Carney believes the economy remains weak and much of the current 2.7% inflation rate can be blamed on one-off shocks.

The bank is known to be extremely concerned at the level of business investment, which has continued to fall this year despite the pace of recovery picking up since the spring and many commentators describing it as a well-advanced and sustainable expansion of economic activity. Without a return to healthy rates of business investment, senior Bank staff fear the economy will be forced to rely on consumer spending to maintain growth.

Philip Shaw, UK economist at Investec, said the positive momentum of the economy made more QE unlikely.

"The key question surrounds the possible timing of the first interest rate hike. This is some way off and the likelihood is that the UK faces a long period of steady policy. Nonetheless markets and ourselves are sceptical that this move will occur as far in the future as the second half of 2016, as the Bank of England's guidance implies," he said, adding that the debt markets expect a rise in early 2015.

Peter Dixon, UK economist at Commerzbank, said: "As far as the immediate future is concerned, the BoE is expected to remain on the sidelines.

"Although the economy can be expected to lose momentum relative to recent trends, we look for a self-sustaining recovery with GDP growth in the region of 2% next year. This is not an environment in which additional policy activism is required, implying no more QE as well as no rate moves."

Howard Archer, chief UK economist at IHS Global Insight, said: "The already limited likelihood of any further QE appears to have waned further as the good news on the UK economy has been largely sustained – notwithstanding a few blips such as the surprise marked drop in industrial production in August. Meanwhile, any change in interest rates is clearly a long way off whether or not unemployment ends up falling more rapidly than the Bank of England currently expects."

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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