Closed Bank of England August rate decision – as it happened

FILE PHOTO: A bus passes the Bank of England in London

A live blog from FT.com


Welcome to the FT’s live blog – it’s about 40 minutes until the Bank of England’s interest rate decision. The market’s expecting the central bank to increase interest rates for just the second time in 10 years.


Markets are overwhelmingly expecting an interest rate hike, with the implied probability topping 90 per cent.


The MPC’s remarks will be crucial for sterling, our markets reporter Chloe Cornish wrote earlier today – sterling, which was on the rise up till the middle of April, has since been in retreat against both the dollar and the euro.


There’s a nice “what to watch out for” summary here from the FT’s Delphine Strauss, who points out that the BoE was also widely expected to hike in May…only to hold fire when the economy started to look a bit soft.


So how’s the economy doing? It looks a bit perkier than in May, and the employment rate keeps reaching new record highs. But not everyone thinks now is the moment to raise interest rates. One reason for caution: it’s really hard to see much sign that wage growth is accelerating, even though unemployment is so low.

As you can see, wage growth is still trundling along at about half the rate that was typical before the financial crisis.


The uncertainty about the UK economic outlook – along with Brexit-related political turbulence – has been weighing on markets. Global bond yields have been on a rising trend in recent months but gilts are lagging behind – the spread between US and UK yields is at historically high levels.


If you’re interested in the dovish case for holding fire today, the FT is running an op-ed by Patience Wheatcroft, a Conservative peer, who says:

The arguments to justify a rise are still far from clear and it would be perverse were the BoE to raise rates simply to honour the City’s conviction that, this time, it will deliver on its guidance.


Just because investors are overwhelmingly expecting a rate rise does not necessarily mean that the Bank’s monetary policy committee will deliver one – as Sarah points out, Mark Carney had to talk markets down earlier in the year as rate rise expectations ramped up. The MPC could deliver a dovish surprise today.


Advocates of raising rates point out that at some point Britain needs to get back to something like the longrun norm, and as this chart shows, we are still far from that:


While investors seem to be about 90% certain that the Bank will raise rates today, there’s less certainty about what the vote breakdown will be between the nine MPC members. That will be important in shaping the market’s reaction to the news. Last month, three of the nine voted to raise rates by 25 basis points. Those hawks were Andrew Haldane, Ian McCafferty and Michael Saunders.

Since then, the only really dovish signals have come from Jon Cunliffe. The FT reported a few weeks ago:

He called for a “somewhat higher burden of proof” that the economy was behaving normally before taking action, and dismissed the suggestion that it was wise to tighten monetary policy now to give more scope for cuts later.


It is possible that we may get a move from the MPC on QT – quantitative tightening. It has been the subject of some discussion recently, with deputy BoE governor Ben Broadbent saying on Monday that research by the BoE suggested that to date QT in the US had not had a significant impact on US treasury yields.

David Owen, chief European economist at Jefferies, notes that Mr Broadbent also said that once the BoE had started to unwind the balance sheet, this might not necessarily come to a halt if, at a later stage, the BoE was cutting rates again.

The BoE has said that it will continue to reinvest the proceeds of maturing gilts that it owns until the base rate is at 1.5 per cent.

“It stands to reason that the more the BoE raises rates and gets closer to that 1.5 per cent trigger, there will have to be more guidance surrounding QT and discussion about what should represent an optimal central bank balance sheet in the new normal,” Mr Owen said.


One new thing to watch out for today: the Bank of England is likely to publish it’s first ever estimate of R* (R-star) – the “goldilocks” level of interest rates that will keep the economy neither too hot nor too cool. Analysts expect that to be something around 2 per cent.


Even if we do get a rate rise, some analysts are expecting to hear dovish mood music from the MPC.

Lee Hardman, a currency analyst at MUFG, said: “A hawkish policy statement from the BoE appears unlikely. The accompanying communication should signal that the BoE is in no rush to adjust policy again in the near-term. They can then wait until there is more clarity over the outcome from the final stages of the Article 50 negotiations.”


Emoticon The Bank of England has raised the base rate of interest from 0.5 per cent to 0.75 per cent. It is the second time the Bank has raised rates in more than a decade since the financial crisis.


The committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.


The vote was unanimous in favour of the vote rise. Here are the key paragraphs from the MPC meeting minutes:

The Committee considered the immediate policy decision. Since the May Report, the near-term outlook had evolved broadly in line with the MPC’s expectations. Although the global outlook was a little softer, recent data appeared to confirm that the dip in UK output in the first quarter had been temporary, with momentum recovering in the second quarter. The labour market had continued to tighten and unit labour cost growth had firmed. Given these developments, a 0.25 percentage point increase in Bank Rate was warranted at this meeting to return inflation sustainably to the target.


Our markets reporter Chloe Cornish says that sterling is moving on the news:

Sterling is bouncing but is off around 0.2 per cent at $1.31, stronger than it was earlier.


The MPC shrugged off the latest inflation data, which was slightly weaker than expected. From the minutes:

Annual CPI inflation had been 2.4% in June, weaker than expected. Although it was possible that recent CPI data were signalling slightly weaker inflationary pressures, the judgement was that the news had been largely erratic. Indeed, recent developments in energy prices and the exchange rate meant that the shorter term inflation outlook was a little stronger than it had been at the time of the May Report. The combined contribution of those pressures was projected to ease over the forecast period. Taking external and domestic influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remained slightly above 2% throughout most of the forecast period, reaching the target in the third year.


Here is the BoE’s projection of GDP growth:


And here is how the BoE’s inflation expectations have changed in the past three months. The bank notes that external forecasters’ central expectations were “broadly unchanged” relative to three months ago so it is a bit hard to spot the difference:


Chloe Cornish reports that the UK currency is now down around 0.1 per cent against the dollar, at $1.311. Meanwhile the FTSE 100 is down 1.3 per cent, along with other major European bourses which followed Asia-Pacific markets lower after US-China trade war tensions re-escalated last night.


Is the economy “rebalancing” away from household consumption? Not quite as much as the MPC expected, according to this paragraph of the MPC’s meeting minutes:

Recent activity data appeared to confirm that the dip in output in 2018 Q1 had been temporary, with momentum recovering in the second quarter. The latest expenditure indicators had, however, thrown up some question marks around the rotation in demand, away from household consumption and towards net trade and business investment, that was expected in the MPC’s central forecast. Some household indicators, such as retail sales, had bounced back. Although surveys of UK export orders had remained much stronger than official export data, net trade might be weaker than expected should recent developments in global trade presage a broader slowdown in global growth. Taken in isolation, the 2½% depreciation in sterling since the May Report should be expected to provide a further boost to net trade. To the extent that this depreciation had reflected developments related to the UK’s withdrawal from the European Union, however, the Committee’s judgement was that there could be offsetting negative effects on growth if, for example, higher uncertainty were to lead to weaker business investment. Even if the rotation in demand was now somewhat less marked, prospects for aggregate GDP growth had not appeared to have weakened.


In its inflation report, the BoE notes that some of the recent weakness in business investment “may reflect the effects of uncertainty around Brexit”.

The BoE said: “Respondents to the 2018 Q2 Deloitte CFO Survey again ranked Brexit as the top risk facing their businesses, and three quarters of respondents expected Brexit to lead to a deterioration in the business environment in the long term, the highest proportion since the referendum.”

It also noted: “Investment intentions for the next 12 months continued to be
depressed by economic and political uncertainty. Contacts’ references to uncertainty had picked up, with many related to concerns around Brexit. UK-based subsidiaries of foreign-owned companies reported holding back investment, and firms with export markets or with international supply chains were reluctant to expand capacity until there was more clarity on future EU market access.”

On the plus side, the BoE noted that Brexit was partially responsible for an uptick in business services activity, as businesses seek advice.


Adam Samson on our FastFT team has charted the move in sterling:

Sterling is up rather more against the euro, climbing 0.23 per cent on the day, with a pound buying €1.1275.


The Bank of England’s Inflation Report contains a warning about the outlook for global economic growth if President Trump’s trade war with China should escalate.

Tighter financial conditions are likely to dampen growth, as are greater barriers to trade. The direct impact of the higher tariffs that have been implemented or proposed on bilateral trade between the US and China and any associated reciprocal measures, as well as wider aluminium and steel tariffs, will weigh somewhat on activity in those countries in coming quarters, and elsewhere to a modest extent. Moreover, the prospect of a further escalation in trade protectionism — particularly if business and consumer confidence and financial conditions were to deteriorate materially — could weigh further on the global outlook.


Investors are unsurprised by the BoE’s move, but do not expect further action in the coming months.

Iain Lindsay, co-head of fixed income global portfolio management at Goldman Sachs Asset Management, said it was “a significant, albeit not an unexpected move”.
“The policy rate is now at its highest level since the financial crisis, with the emergency post-referendum cut having been reversed last November,” he said. “That said, we expect future policy actions to be slow and steady – not least given the ongoing uncertainty around Brexit.”

Neil Williams, senior economic adviser at Hermes Investment Management, said: “As with their first rise last November, the Bank’s tone again reflects caution … With CPI inflation likely to fall back, the only further hike we expect, to a 1 per cent Bank rate, should again be seen as a muscle flex, rather than the start of an extended tightening … Unless something else is done, this means there will still be very loose monetary policy for this stage of the growth-cycle.”


Chloe Cornish reports that the markets are retrenching:

The pound is now off 0.25 per cent against the dollar. It is better than it was earlier this morning, but its post-announcement rally looks to have been short lived. The FTSE 250, the UK’s wider stock market, slipped further after the rates decision and is now off just over 1 per cent today. Yields on the 10-year UK gilt, which headed lower after the vote was announced at midday, are finding their footing around 1.363 per cent, down around 2 basis points.


The press conference is now starting; Mark Carney is making his opening statement.


Mark Carney, in his opening message, says the economy is recovering and “a modest tightening of monetary policy is now appropriate”. The weak first quarter was mostly about the weather, he says. Meanwhile, he says business investment will expand at an annual rate of about 3.5% – a subdued pace “reflecting the drag from Brexit related uncertainties.”


Here is today’s rate rise in historical context:


On the labour market, Carney says pay growth has picked up as companies compete to retain staff, backed up by survey evidence. “Although the current rates of pay growth are lower than pre-crisis averages,” he says, “this reflects low productivity growth”. In other words, the economy just can’t sustain punchier wage growth any more, given its poor productivity performance.


Part of corporate Britain aren’t happy with the rate rise, based on a salvo of press releases from the business lobby groups.

The Institute of Directors: “The Bank has jumped the gun with the today’s rate hike. The rise threatens to dampen consumer and business confidence at an already fragile time.” . . . .


. . . . and the British Chambers of Commerce: “The decision to raise interest rates, while expected, looks ill-judged against a backdrop of a sluggish economy. While a quarter point rise may have a limited long-term financial impact on most businesses, it risks undermining confidence at a time of significant political and economic uncertainty.”


. . . while the CBI is more sanguine: “This decision was in line with our expectations. The case for another rate rise has been building, with inflationary pressures being stoked by a tight labour market and many indicators now suggesting that weak activity in the first quarter of 2018 was a blip.”


Carney broaches the big topic: Brexit. The MPC’s forecast is based on the assumption of a smooth Brexit – which is “not a prediction”. The negotiations are now entering a “critical period”. “Although the range of potential outcomes is wide, what matters for monetary policy is how people react to these outcomes.” Thus far British households have been resilient but not indifferent to Brexit news.”

He explains how the economy has responded to Brexit so far, and adds: “There are signs that business investment is softening again” because of uncertainty about the Brexit deal.


Carney also reiterates that future rate rises will be limited and gradual . “Policy needs to walk, not run, to stand still”. (Answers on a postcard as to what that means!)


Sterling sliding

It looks like currency traders don’t like what they are hearing in the press conference. The pound is falling, down 0.6 per cent against the dollar to $1.304. That’s its lowest level for over a week, says Chloe Cornish, the FT’s markets reporter.


On to questions. Ed Conway from Sky asks whether Mr Carney thinks people and businesses are ready for a rate rise, and cites ONS data showing households have become net borrowers. Is he concerned about the debts that some households have taken on?

Mr Carney says the MPC and FPC look at detailed household data to assess risk and monetary policy impacts. We are looking to return inflation sustainably to target and that means taking those factors into account, he says.
The gradual pace of rate rises is intended to give households, businesses and markets some context for the changes we think are needed for that sustainable change in the economy, he says. Around three-quarters of households anticipated that rates would go up, he says.
We look very carefully at households’ ability to shoulder rate increases, he says. Over the last decade UK households have worked hard to put themselves into a better financial position and paid down a lot of debt, he says, and their ability to service debt has improved quite markedly. This has been hard because of the slow growth in real incomes, Mr Carney adds.
The FPC put in place mortgage affordability tests which assess mortgage servicing ability with much higher interest rates, which has also been an important factor, he says.

Then he hands over to Ben Broadbent.


Economists who watch the Bank closely think this is a “hawkish” hike. See Capital Economics below. But sterling has weakened as Carney started talking…

The Monetary Policy Committee (MPC)’s decision to hike interest rates from 0.50% to 0.75% today comes as no great surprise – it had been over 90% priced into markets ahead of the meeting. However, the minutes and Inflation Report lend some support to our view that interest rates will rise by more than markets currently expect over the next few years. Indeed, the announcements were pretty hawkish, prompting the pound to rise by around 0.3% against the US dollar and the euro immediately after the publications. For a start, contrary to expectations of a 7-2 split, the vote to raise rates in August was unanimous. What’s more, the MPC’s new forecasts in the August Inflation Report show a slight upgrade to GDP growth in 2019, from 1.7% to 1.8%. Note too that inflation is now projected to be a touch above its target at the two-year policy horizon, suggesting that markets might well be slightly underestimating the degree of monetary tightening required.


Mr Broadbent says that initial estimates of annual household savings were negative on 13 out of 17 occasions since 2000, and in every case it has subsequently been revised up. It is clear saving has fallen since the EU referendum but one should wait until the estimates settle down to conclude that saving rates are definitely negative before reading too much into it.


A question about people who are indebted: how many households will struggle with this interest rate rise?

Carney says the MPC and FPC spend a lot of time looking into this issue, delving into dis-aggregated data. Carney says quite often for the poorest households, their debt is credit card debt rather than mortgage debt. Credit card interest rates (which are really high) aren’t so sensitive to a 25 basis point interest rate increase. He says around 2.5% of households will be most affected. But monetary policy “is for the economy as a whole” – and the poorest households are also most vulnerable to unemployment and high inflation, so it’s in their best interests to keep the economy on track and inflation in check.


The Mail asks Mr Carney what his message is to banks in terms of passing the rate rise on to savers.

Mr Carney says that savers have suffered in the past decade through very low interest rates which were absolutely necessary. For context, when rates hit historic lows, the difference between bank rates and deposit rates was compressed so the banks were squeezed. The pass-through of the last rate rise meant that spread compression for banks was still there. The more we raise rates, the less of an issue that is.
What banks pay partly depends on their borrowing costs. That had been very low at the time of the last rate increase. Costs of borrowing in international markets have gone up since then which should reinforce the passthrough of this. We watch closely to ensure the bank market operates competitively. As rates move up, one should expect more of that to be passed along.
The only caution Mr Carney says he would add is that everyone needs to bear in mind that rates are rising to a limited extent and at a gradual pace.


Ben Broadbent adds some context on that: you never get full passthrough to deposit rates, he says. There has been some pickup on instant access deposit rates, though. The wider range of savings products are affected by a number of factors, he adds. Price comparison websites show that.


Next question is about the swing towards a unanimous vote for a rate rise. “Are you a bit more hawkish” about the future, asks the BBC?

Carney: “You think I’ve changed my view since the opening statement?… No,” says Carney, in what is surely a reference to his reputation as an “unreliable boyfriend” who has given mixed signals about monetary policy in the past. He goes on to restate the rationale for raising rates that was already laid out in the MPC minutes.


The Guardian asks about different estimates of the natural rate of unemployment. Who is right?

Mr Carney says that given how low productivity is, we are seeing 2.25 per cent labour cost growth and you can see the broad trend building. Labour cost growth is within the range that is consistent with inflation at 2 per cent. There are a few uncomfortable new normals to reconcile us with – low productivity, for example. 3 per cent wage growth is broadly consistent with the inflation target. The speed limit of the economy is around 1.5 per cent [GDP]. We have to reorient ourselves to the current realities.

Ben Broadbent adds that wage growth is bang in line with the forecasts we made a year ago. Productivity growth has again been weaker than we expected.

Mr Carney says that the very weak productivity growth in the first quarter was an aberration.


That question to Mr Carney about the differing estimates of the natural rate of unemployment referenced former MPC member Danny Blanchflower, who is ultra-dovish about rate rises.

Here is Mr Blanchflower on Twitter just now, setting out his case for why a rate rise is not a good idea:


Sterling remains under pressure

Chloe Cornish has an update on the pound which has continued to slide as Mark Carney holds his press conference. It is now off 0.8 per cent against the dollar to $1.302. The session low so far is $1.3018.


A question about the neutral rate estimate (also known as R-star): what is it and how useful is it?

Carney says the value is in providing more rigour to something we’ve thought and talked about. The big forces on “global R-star” are demographics and weak productivity. In the UK, there are some shorter term factors that have meant the estimate of the longer-term R-star is lower in the UK. It’s been going through fiscal consolidation (i.e. austerity), there’s higher uncertainty “for reasons everyone knows” (i.e. Brexit). Carney says markets can now make a judgement about how likely are those factors to go away. The outcome of the Brexit deal will affect the wedge between global R-star and UK R-star, he says.


The Times asks Mr Carney about estimates of R* and whether it can be used to infer the Bank’s vision for where interest rates should end up?

Mr Carney says no – certain short term factors are creating a wedge between that forecast and where we are today. As those short term factors change, the R* estimate moves up. That is as much guidance as one can meaningfully give. The range of interest rates post-financial crisis is much lower than it was pre-crisis.


UK business getting nervous about Brexit

Our colleagues on FastFT are also listening in and have this to say:

Signs are growing that businesses are getting more nervous about Brexit with less than eight months left until the UK formally departs the EU, Bank of England governor Mark Carney said on Thursday.

British households and companies had been “resilient but not indifferent to Brexit” so far, Mr Carney said in his opening remarks at a press conference following the Bank’s decision to raise interest rates for the second time in a year.

Here’s the full article


Mr Blanchflower hits back at Mr Carney’s earlier comments:


Euro strengthening against the pound

Sterling is also losing ground to the European single currency: it’s down 0.3 per cent at €1.1214


A question about the BoE’s work with the European Central Bank on the potential of a cliff edge Brexit.

Mr Carney says the BoE, the Treasury, the European Commission, the ECB and other bodies sit down together and discuss the relevant issues but declines to give further detail of those talks.


A question from the WSJ on the global trade war: how vulnerable will the UK be if tensions escalate? (good question, that)

Carney says the forecast does include some of the trade tariffs & the reciprocal actions against the US. “But last night’s tweet (from Trump) is not in the forecast, not surprisingly”.

“What we have seen…is that there is some tentative evidence of tariffs having an impact on trade flows…but there as yet is not much evidence of a hit on business confidence…or big risk premia going into financial markets more broadly.”

He says the UK could be affected, but the main effects would be confidence effects and financial markets effects. “We can understand how this could get worse,” but we’re not picking it up yet “to a material degree”.


Mr Carney is next asked why the minutes do not show much discussion of Brexit and whether there is a risk that the unanimous decision could be taken as an example of groupthink?

We have a wide range of discussions, he replies. The important thing to recognise on Brexit is that there are a wide range of potential outcomes. What matters for the economy is not just the arrangements but how people and markets react to them. In a number of outcomes, rates need to be higher. In the path that is consistent with the forecast, involving a relatively smooth transition, we need a gentle increase in interest rates in the next few years. So we can’t be tied by the range of Brexit possibilities. If there is a major shift that is disinflationary as a result of the Brexit negotiations then that could have consequences for monetary policy. We can incorporate that through our regular meeting schedule. It is not that we don’t discuss potential outcomes, but equally we can adjust where necessary. It is not as simple as saying ‘Brexit = interest rate cuts’.


The Telegraph points out that some of the business lobby groups don’t like the rate rise. Do you have words of comfort for them?

Carney says the overwhelming issue for business is the outcome of Brexit negotiations. “The comfort we can give is we’ll stay focused on our responsibilities.” And the financial system will be there, whatever the Brexit outcome. We will all get to the other side of these negotiations, whatever the outcome is.

In other words, he’s saying businesses have much bigger things to worry about than a 25 basis point increase in rates. And the Bank’s job is to keep the economy on track no matter what happens with Brexit.


Mr Carney is asked about polling showing that consumer confidence is softening and concern about Brexit is rising. Can he give some indication of how the BoE intends to react to evidence such as this and would the Bank consider raising rates if there is an extension of Brexit talks next spring?

Mr Carney says the MPC has reacted to the post-referendum slack in the economy, higher inflation and the fall in sterling – we responded to that, choosing to take longer to get back to target in order to help people stay in work. That gives some indication of how we might react if the Brexit outcome led to a similar set of circumstances.

Now, the economy is basically at full employment and it is a question of managing demand – depending on a different Brexit outcome, that tells you what our broad reaction function would be. I don’t want to expand on it more than that.

Ben Broadbent says that seasonally adjusted data did not decline and have overall been pretty stable over the last couple of years.


And it’s another question about Brexit… “Shouldn’t you wait to raise rates until you know how it will shake out?”

Carney says there’s a wide range of Brexit outcomes, but in many of them interest rates will be at least as high as they are today. There are certain circumstances that one can imagine…where it would be appropriate to keep rates the same or lower them… But we’ll do it once that knowledge is there. He doesn’t want to wait for “perfect knowledge” if the economy needs a small increase now.


Another Brexit question – one outcome that has been floated is no deal and defaulting on to WTO terms of trade. Would the shock be comparable to the shock you saw after the 2016 vote and do you think the policy response would be similar?

Mr Carney says it would matter whether there was a transition period and the impact on demand and business investment and consumer confidence and consumption and the exchange rate. That would determine the policy response.
All the Bank’s forward planning is around a no-deal cliffedge situation in March so that as much as possible the financial sector damps the impact rather than amplifying it, we see that very much as our job.


The FT’s Delphine Strauss has the final question: given R-star, does QE stay as a standard part of the policy, rather than a tool for exceptional downturns?

Carney reiterates that the MPC wouldn’t start to think about changing QE until interest rates reached about 150bp. That’s below the estimate of the equilibrium rate… so if you put those two together, he says, it is not necessarily the case that the lower level of R-star means that QE has to remain on the balance sheet. (Although he adds that you could envision more extreme scenarios where that could be the case.)


The press conference has now ended and our markets reporter Chloe Cornish reports that sterling is settling at a somewhat lower level after Mr Carney has finished speaking:

Sterling has given us a run-around. After initially ticking up after the announcement it dumped as much as 0.8 per cent against the dollar during the press conference, hitting a $1.3017 floor – its lowest level in more than a week.

The pound is currently finding its feet at around $1.304, down 0.6 per cent against the dollar. It has softened about 0.2 per cent against the euro, to €1.122.

These moves are not too substantial though – let’s not forget that when the BoE raised rates in November, as expected, the pound fell 1.4 per cent against the dollar on the day.


The FT’s Gavin Jackson and Delphine Strauss from our economics team have been at the Bank of England all morning and have filed their analysis on the reasoning behind the rate hike

You can read the full article here


So what did we learn? Here are the key points:

1. Even though only 3 members of the MPC voted for a rate rise last month, all nine were unanimous this time in backing a hike to 0.75%.

2. The MPC seems pretty confident that, with unemployment so low, wage growth will start to pick up as it expects.

3. For the first time, we learned the central bank’s estimated equilibrium rate (or R-star) is between 2 and 3 per cent, lower than it has been in the past (though that might change).


And a couple more:

4. On Brexit, Carney said the UK was entering a crucial period as the negotiations come to a head, but insisted the Bank’s job was just to keep the economy on track. There was no point in waiting for the outcome of the negotiations before raising rates, he said.


And finally, Mark Carney acknowledged there were risks to the UK from the trade war between the US and China and the tensions between Washington and the EU. But he added that the UK had so far seen little impact.

We’re going to wrap up our live coverage for today. Thanks very much for joining us.