The Bank of England has left interest rates on hold and kept its bond-buying programme unchanged. It has increased growth forecast for the next three years and said it will continue to tolerate higher inflation.
- Bank holds rate at 0.25%
- Government bond buying target remains at £435bn plus £10bn of corporate bonds
- Sterling weakens against dollar as markets rule out chance of near-term rate rise
By Gavin Jackson and Elaine Moore
Morning all, welcome to our live blog of Super Thursday. Ahead of the deluge of data and upcoming press conference at the Bank of England here’s what to watch out for today.
Investors are not expecting the Bank of England to announce any changes to interest rates today, but they’re keen to hear whether the Bank’s view of the economy has changed at all. The pound has been moving around this morning – up against the dollar in early trading before falling back sharply. If the Bank revises inflation forecasts and seems more willing to raise interest rates in the near future then expect the pound to rally against the dollar.
Here’s a chart showing what the pound has been doing today:
For a bit of added context, the pound remains about 16 per cent weaker than it was on the morning of the EU referendum:
In January, Mark Carney gave a speech in which he discussed the tradeoff between economic growth and inflation that central bankers face. The governor hinted at a more hawkish stance for monetary policy to ward off inflation but also flagged the risks to growth from a consumption-driven expansion. He said the bank would monitor how consumers behaved.
Mr Carney said policy should reflect whether any slowdown to the UK economy is due to a temporary fall in a spending or higher costs for business. Higher costs may mean prices and unemployment increase at the same time, making it harder for the central bank to fight inflation.
In the last three months of 2016, since the Bank’s November inflation report, official figures found that consumers kept spending and the economy continued to grow. Overall, the economy was stronger in the six months since the referendum vote than economists had predicted.
More recent survey data finds that while manufacturing order books have been filling up, consumer borrowing and spending slowed slightly in December. It’s too soon to know whether this is a one off blip or the start of a slow down in growth.
On the inflation front, sterling has recovered somewhat since its lows, which should help to dampen price rises. But oil prices have also increased meaning there may be no overall effect on inflation.
Fairly calm in the gilt market this morning with the yield on benchmark 10-year government bonds trading sideways at 1.44 per cent.
Elsewhere in markets the US Federal Reserve’s decision to leave interest rates unchanged on Wednesday has left investors recalibrating their views on the speed with which US rates will rise this year. The dollar, which hit a 14 year high against a basket of its peers at the start of the year, has been drifting down this morning.
Here’s the FT’s morning markets overview on the fallout from yesterday’s Fed decision.
The National Institute for Economic and Social Research, the influential think tank, revised up its forecast of growth for 2017 on Wednesday due to the better-than-expected performance last year, but revised down their forecast for 2018 as they believe the UK will still suffer from a hit to the long term potential of the economy.
If the Bank of England’s makes similar changes to its growth forecasts today it should give a hint to how it sees the world.
The Bank has said it will “look through” a temporary increase in inflation in order to protect growth but if they revise up their growth forecasts for both 2017 and 2018 it suggests they believe inflation is the bigger threat to the economy.
But if they only revise their 2017 figures upwards, then they likely think the risks to growth have not gone away — only delayed.
Bank of England have kept rates on hold
Rates on hold, government bond purchases £435bn, corporate bond purchases up to £10bn.
The decision was unanimous on all policies.
Here’s an excerpt from the press release:
At its meeting ending on 1 February 2017, the Committee voted unanimously to maintain Bank Rate at 0.25%. The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, totalling up to £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 full release is here
And below a screenshot of how the Bank presented it on Twitter:
The Bank increased its growth forecast for 2017, 2018 and 2019
“The Committee’s latest economic projections are contained in the February Inflation Report. The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019. The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households. Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum. Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow.”
Investors were expecting no change to rates so there’s no dramatic market reaction. The FT’s Michael Hunter says: “The pound moved across its modest and established trading range for the day around the announcement, coming off highs just under the $1.27 level.”
Policy remains appropriate; Bank will continue to tolerate higher inflation
“Monetary policy cannot prevent either the real adjustment that is necessary as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany it over the next few years. Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth,” the Bank said.
“For this reason, the MPC’s remit specifies that in such exceptional circumstances the Committee must balance the trade-off between the speed with which it intends to return inflation to the target and the support that monetary policy provides to jobs and activity. At its February meeting, the MPC continued to judge that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.”
The BoE’s growth forecast:
The pound has given up earlier gains following the BoE’s growth forecast revision. See FastFT’s update.
The Bank of England have partly revised up their forecast due to better expectations of global growth as the chart below from the Inflation Report shows.
T-minus 5 minutes until we hear what BoE governor Mark Carney has to say. If you want to watch the Bank’s inflation report press conference it will be live streamed here.
The FT’s economics correspondent Gemma Tetlow has been sequestered inside the Bank of England this morning. Her story is our splash – you can read it here.
The press conference has started and Mark Carney is reading from his prepared statement
The Bank of England expects the rate of household saving to fall to its lowest level on record this year, the same as it did in 2016. They also believe investment expectations have recovered.
They think this increase in spending does not merit a policy response as there is more slack in the economy than they previously thought so it will not lead to inflationary pressures.
With sterling and gilts giving up this morning’s price moves investors will be watching closely to see if Mr Carney shows any signs of concern about rising prices
Our colleague Katie Martin has a summary of the key points from the inflation report on FastFT.
Carney says the Bank now believes the economy can sustain a 4.5 per cent rate of unemployment without significant wage pressures, down from a previous estimate of 5 per cent.
This means the Bank are less likely to raise interest rates in order to curtail increases in economic demand.
Reaction is coming in from fund houses. Here’s Shilen Shah, bond strategist at Investec Wealth & Investment:
The resilience of the UK consumer has led the BoE to further increase its GDP forecast 2016 to 2% to 1.4%. However, there are hints that the tolerance of a number of MPC members to higher inflation is close to their limit… If the strength in the economy continues over the coming quarters, despite the uncertainty created by Brexit, the MPC patience may be further strained.”
Carney announces three tests for the current policy stance:
1. Lower level of sterling continues to boost prices as expected without changing inflation expectations.
2. Regular pay growth remains modest.
3. Resilient consumer spending slows as expected as inflation erodes real incomes.
Fidelity’s global economist, Anna Stupnytska says:
The BoE is certainly in a tough spot as they seek to balance the ongoing cyclical strength of the UK economy while bearing in mind the potential for a Brexit-related slowdown in the months ahead. While the macro backdrop remains encouraging for now, investment intentions are already very depressed relative to growth and consumption is likely to be hit as inflation accelerates further.
Better global outlook and policy measures explain why the Bank’s forecasts were wrong, Carney says
The first question after Carney finished reading from his statement concerns the big revisions in growth forecasts. Carney is asked what went wrong with his forecasts.
The governor replies that the Bank and the Treasury got the policy response right and the measures had more traction than they expected. He says the second thing that “has gone right” is the stronger global economic outlook.
What the Bank got wrong was the strength of consumer spending and how quickly it bounced back from the referendum. “Consumers have not been affected by any of the associated uncertainty around Brexit,” he says.
It’s understandable because the labour market has stayed strong and credit remains available and cheap, he says. But that dynamic will be tested over this year as real income growth slows, if their forecast is correct.
Rate rise might be needed if wage growth outstrips expectations
Next question from Kamal Ahmed at the BBC asking if the next BoE move is more likely to be an interest rate rise than a cut?
Carney answers that the Bank’s forecast is that the economy can run without a rate adjustment. But if wages grow faster than expected a rate rise might be needed – although this is not a signal, he adds.
Monetary Policy Committee’s views will evolve over time, Carney says
The FT’s Chris Giles asks about the revisions to the forecast.
You have revised up demand and revised up slack, so you do not have to do anything. Reasonable people could disagree on both, you have nine reasonable people on the committee who have all come to the same conclusion? Is that odd?
Carney replies: There’s been an appreciation in sterling, markets also expect some increase in interest rates. There’s a range of views on the committee both on slack and demand and the risks around the trade off and the risks around the economic forecasts.
We share a view of the main forecasts. and the framework for analysing those. Those opinions will evolve with time.
MPC looking closely at household saving and borrowing
Question from Sky News: Is the Bank relaxed about the sharp fall in the household savings ratio? Carney answers that the MPC is looking closely at spending and household borrowing – but notes that this not a debt-fuelled consumer expansion in spending.
Brexit is having an impact
The Bank of England is using Twitter to underline some of Mark Carney’s key points. Although the economy is doing better after the Brexit referendum than the bank had forecast, he cautions the UK’s decision to leave the EU is still having an impact. This is the extract from the Tweet:
Would be ‘false precision’ to predict UK-EU trading arrangements, Carney says
Carney is asked about possible arrangements between the UK and the EU.
We have not changed our views on the long term resting place for the UK’s relationship with Europe. The PM laid out a range of potential alternatives, at one end was walking away. At the other end was an ambitious, bold, comprehensive trading arrangement with Europe.
That’s a wide range and it would be false precision for us to narrow that. The UK has also begun a range of discussions with other countries.
The bigger impact of all of these is off stage from the forecasts. They will take place beyond the forecast horizon. We estimate them by looking at companies’ investment plans in anticipation of these arrangements. The uncertainty does lower business investment over the period.
We have to forecasts businesses reactions, Carney says.
Era of central bankers taking centre stage is coming to an end
Asked about the difficulty of being a central banker in the midst of unpredictable political developments Carney answers that these are the last seconds of central banker’s 15 minutes of fame – which is a good thing. Our job is to respond to policies, he says, whether of the UK or it’s major trading partners.
Bank will watch pay growth ‘closely’ over the coming months
Mark Carney is asked about the Bank’s view of the labour market and whether workers will try to bid up the price of their labour given employment is low and inflation is increasing.
It is possible. The question is whether that is likely, Mr Carney says.
The governor and his fellow MPC member Ben Broadbent reply that the bank was consistently overestimating wage growth and so have changed their view on the amount of slack in the labour market.
“We will be watching pay growth quite closely over the next coming months,” Mr Broadbent says.
Sterling is on the slide
The pounds is hitting intra-day lows against the US dollar as Carney’s press conference continues
Here’s a screenshot from Bloomberg:
Reasons for sterling’s dip
The FT’s Michael Hunter has some reasons behind sterling’s weakness – it’s down about 0.8 per cent against the dollar intraday. He says there is is a whiff of disappointment around the Bank’s tone on the economic outlook. Not as much of an upbeat feel as many investors had hoped. The sense is that the rise in inflation looks more robust than the outlook for growth, meaning a squeeze on consumer spending is likely, if the Bank has got the emphasis right this time.
“The BoE has set the bar high for altering its monetary stance,” says Derek Halpenny, European Head of Global Markets Research at MUFG.
He continues: “The get out of jail card allowing the BoE to justify maintaining its easy monetary stance is the shift in supply-side economic assumptions on the labour market.
“However, higher wage growth could quickly put doubts on the BoE’s change in view on full employment. If wage growth does pick up more than assumed, UK rates will shift higher later this year along with the pound.
“Our own view is that the economy may prove more resilient going forward and the financial market’s interpretation of the BoE’s ability to keep policy on hold will change. We maintain that market doubts over the BoE’s ability to keep policy on hold will increase.”
BoE policy response to the Brexit vote was correct
Asked if the Bank should change its models because it did not expect consumers to keep spending after the vote for Brexit, Carney says the UK was in exceptional circumstances last summer and that the committee decided to support the economy at a difficult time. We will continue to help as the squeeze on real incomes begins this year and next year and we are doing it from a position of strength, he says. Given the market’s judgement on Brexit (with sterling down against the US dollar) the Bank decided to help support the economy – and that decision is still valid today.
Consumer credit growth is an issue for the FPC not the MPC, Carney says
The governor is asked about growth in consumer credit and a statement he made at the Financial Policy Committee that it would be a “big call for the FPC” to make.
He says, it is a call for the FPC or the Prudential Regulatory Authority. The question is whether there is a group of people who are borrowing so much that it could lead to problems over a longer time frame than is used to set monetary policy.
For the MPC consumer debt becomes an issue as part of a driver of consumer behaviour and the short term economic health. At this stage it is more of an issue for the FPC.
Business investment is a mixed picture
Asked about the impact of weaker corporate investment Carney says the data shows projects in motion prior to the EU referendum are proceeding. New projects – if they rely on access to the EU – are being deferred. But businesses with exposure to the rest of the world are unaffected. Overall there is lower investment than the UK would have seen a year ago. But the economy is growing – so the effects should not be overstated.
Carney is asked about market expectations of interest rates and the fact markets are pricing in an interest rate hike in 2018 “a few months before Brexit”
I’m not going to comment on the day to day moves of the market, Mark Carney says. The current forecast is conditioned on market expectations of a gently rising rate of interest.
There are two-sided risks around that to do with the way in which the fall in the pound is fed through into inflation and the Bank’s understanding of the labour market.
The job of the Bank is to flag the key drivers and the trade off that they face in setting monetary policy.
The FT’s Michael Hunter has more reaction, explaining sterling’s weakness, from Stephen Gallo, European head of FX strategy at Bank of Montreal, who says:
“The Bank’s views on price pressures in the economy [from pass-through or otherwise] didn’t come close to solidifying the chances of a move up in rates by year-end, and given the anti-inflation rhetoric the MPC had already been injecting into the mix since the last quarterly inflation report, there wasn’t really an option for them to turn that dial up any further today without sending too hawkish of a signal – so they held off. They’re just waiting around now.”
Asked to defend his view that the UK will not face greater financial stability risk than the rest of the EU as the result of Brexit. Carney says he stands by his argument. Take derivative markets, for example, which are complex and need to be constantly supervised. The ability to move this to a new jurisdiction is a complicated exercise. It cannot be done overnight. The people, capital and expertise are here in the UK.
Diverging global monetary policies are taken as given
The European Central Bank is expected to continue easing while the Federal Reserve is pricing in three hikes. How do you weigh diverging policy regimes?
Those potential policy paths are incorporated in asset prices. so they fold into our forecast., Carney replies.
One of the reasons why we marked up global growth is because of an anticipated fiscal stimulus in the US. A tightening of monetary policy in the US does not fully offset this stimulus, Carney says.
It then effects demand for UK exports and the pressures on inflation here and ultimately feeds into the policy here. In effect we take it as given.
Risks to the global economy have been flagged
Final question is on the risks that the UK faces from the global economic recovery. Carney says the Bank is paying attention to potential risks including changes to global trade and the possibility of domestic problems in China spilling over.
And with that the press conference has come to an end
This chart shows how Sterling’s slide against the dollar started as soon as the Bank of England released its minutes and quarterly inflation report at 12 noon GMT
Investors appear to regard the BoE’s inflation report and press conference as more optimistic that some had expected. The headline for markets is the rise in UK growth forecasts and relative lack of movement in inflation expectations which has quietened talk of a near-term BoE rate rise (for now).
Sterling is now down 0.6 per cent against the US dollar at $1.2564 while prices for government bonds are up, pushing the yield on benchmark 10-year gilts down from 1.44 per cent this morning to 1.36 per cent. The FTSE 100 has nudged up 0.7 per cent on the day.
What did we learn?
Overall a quite muted press conference from Mark Carney but we learned about how the Bank sees the world.
The Bank revised up their expectations of both short term economic demand and long term capacity. That means they do not see a need to adjust policy and rates could either go up or down in the future.
There are three moving parts to their forecast; the exchange rate, the labour market and consumer credit. Depending on how they change over the next year could lead to a change in the Bank’s policy.
The bank has not particularly changed its mind on the way that exchange rate feeds through into prices but will continue to monitor it. A steeper rise in inflation than anticipated could lead to a policy tightening.
It now believes there is more slack in the labour market than it previously did, as it kept forecasting higher wage growth than the outturn. If wage growth accelerates more than forecast this could mean rates increase but if unemployment increases they could gal.
Carney did not seem particularly worried about the financial stability implications of consumer borrowing. He said, “this is not a debt-fueled expansion” and it was a matter for the Financial Policy Committee to consider.
But if consumers do not continue to borrow to spend then it could put at risk the Bank’s higher growth forecasts.