Archive for the ‘Bank of England’ Category
Thursday, September 9th, 2010
The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around 1½ per cent on an annualized basis in the second half of 2010 compared with the previous estimate of around 1¾ per cent in the OECD’s May Economic Outlook.
The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. “The uncertainty is caused by a combination of both positive and negative factors,” said OECD Chief Economist Pier Carlo Padoan. “But it is unlikely that we are heading into another downturn.”
While consumer spending is set to remain weak, a combination of robust corporate profits and low business investment suggest that capital spending is unlikely to weaken further. Because inventories are now close to desired levels, a renewed depletion of stocks is also unlikely. Overall financial conditions have stabilised, the report notes, and growth remains strong in the major emerging-market economies.
Based on the most recent data, the OECD short-term forecasting models show that US GDP is expected to rise by 2.0% in the third quarter but then moderate to 1.2% in the fourth quarter of 2010. In Japan, GDP growth is forecast at 0.7% in the fourth quarter after 0.6% in the third. As can be seen in the diagram below, UK growth is expected to be 2.7% in the 3rd quarter and 1.5% in the fourth.
This is quite surprising as the National Institute of Economic and Social Research (NIESR) has just said that GDP in the three months to August slowed sharply to 0.7% , compared to 1.3% in the three months to July.
According to the NIESR report, “The pace of economic growth may have softened in the three months to August, but is still a robust rate for the UK.” But it went on to say: “Unfortunately, the rate of growth will continue to decelerate over the coming months.”
Mr Padoan, of the OECD also said that the current stance of both fiscal and monetary policy should remain on course. If the slowdown in the recovery becomes entrenched, and the risk of downturn increases, additional monetary stimulus in the form of quantitative easing and keeping interest rates close to zero for a longer period may be necessary. Countries with more fiscal space could also delay plans for fiscal consolidation.
In fact, the Monetary Policy Committee of the Bank of England decided today that interest rates will remain at their record low of 0.5% for the 18th consecutive month. There was no change to the total of quantitative easing but some commentators feel that the £200bn limit is about to be increased over the next couple of months.
Posted in Bank of England, GDP, Interest rates, Monetary Policy Committee, OECD, economic growth | No Comments »
Wednesday, August 11th, 2010
It will be several years before the economy gets “back to anything we can call remotely normal”, said the governor of the Bank of England, Mervyn King in the Bank’s August Inflation Report.
Personally I would hate to be seen as normal, but there is something quite reassuring about having that name applied to the economy. However, we are not going to see ‘normal’ again for years in the UK.
The Bank downgraded their forecast for economic growth next year from 3.5% which was in their May report, to 3% in the current report. Mr King said: “The UK recovery is likely to continue, but the overall outlook is weaker than that presented in the May Report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation.”
However, there is a big gap between the forecasts made by the Office for Budget Responsibility (OBR) and the Bank. The OBR has forecast growth of 2.3% for 2011 and 2.8% in 2012. In fact the general agreement in the City is more with the OBR forecast.
What does the Bank see as the downsides to growth? It is felt that the lack of bank lending will limit growth and it is expected that it will take many years for bank balance sheets and fiscal positions to return to anything like normal.
On the plus side was the fall in the value of the pound and the continuing effect of the economic stimulus.
As far as inflation is concerned, the Bank expects CPI, currently at 3.2%, to remain over its 2% target until the end of 2011. This is because the effect of the increase in VAT from 17.5% to 20% from next January will drop out of the price comparisons twelve months later.
Mr King thought that continued inflation above target would not raise inflationary expectations and that there would not be a response of higher wages causing an inflationary spiral. He backed this up by pointing to the slack in the labour market which has an extra million people out of work compared to pre-crisis figures, which is causing downward pressure on pay.
In the meantime we will have to tighten our belts. Not only metaphorically, but literally too for far too many people.
Tags: Bank of England, economic growth, Inflation, sterling
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Wednesday, April 21st, 2010
So, inflation is still on the rise. The government’s target measure of CPI rose from 3.0% in February to 3.4% in March.
This was mainly due to the cost of gas and petrol prices and a spike in food prices. A weak level of sterling is coupling with very high prices for oil and other commodities, and on top of that poor weather in Spain has added to food prices. Also, there may be a knock-on effect on food prices as a result of the UK becoming a no-fly zone over the past week – with dwindling supplies of some foods in the shops.
The RPI measure of inflation was 4.4% in March, up from 3.7% in February. This was affected by the same factors as the CPI but also a rise in mortgage interest payments. RPIX inflation, which excludes mortgage interest payments, was up to 4.8% in March from 4.2% in February. The recent trend can be seen in the graphic below.
 Source: ONS The latest comparable figures for CPI inflation show that the UK rate of 3.0% in February was far higher than the 1.4% for the EU as a whole.
What then are the consequences of this continued rise in prices?
Firstly, savers are suffering. Real interest rates are actually negative at the moment, and according to the Moneyfacts website the average no-notice account after tax and inflation is standing at a very enticing minus 2.82%.
Secondly, there could be an impact on wages and employment. Wage growth has been very restrained in the private sector but many wage settlements take RPI into account. With some economists suggesting that RPI could rise as high as 5%, this is likely to put some pressure on wage settlements. Given the delicate nature of the recovery this could well have a major impact on employment.
Finally, how is the Bank of England going to react? There will certainly be pressure on the MPC to raise interest rates although the governor of the Bank of England, Mervyn King, has maintained that he expects inflation to full back towards its target level over the coming months. A hike in interest rates will doubtless damage the recovery. However, the measure for core inflation, which removes the more volatile items in the measure, only rose from 2.9% to 3% last month, so perhaps pressures are not as great as they seem.
Tags: Bank of England, core inflation, CPI, Inflation, Interest rates, MPC, RPI, RPIX, savings, wage rates
Posted in Bank of England, Consumer Price Index, Earnings, Employment, Inflation, Interest rates, Monetary Policy Committee, sterling | No Comments »
Thursday, February 25th, 2010
Paul Tucker, who is a member of the Monetary Policy Committee and Deputy Governor for Financial Stability, has just given a speech in which he discusses some of the current challenges facing monetary policy and issues relevant to the overall framework for preserving macroeconomic stability.
First, he discusses the effects of household and bank balance sheet repair on aggregate demand, which pose a downside risk to the outlook for activity.
Second, he considers how supply capacity has been affected by the recession.
Third, he notes the volatility of inflation and its impact on medium-term inflation expectations, which the MPC has to be sensitive about.
And, fourth, he discusses how the monetary effects of the MPC’s asset purchases may come through gradually, and how they may have assisted the process of de-leveraging by banks.
 What lessons can be learned from the recent crisis? He also looks at what lessons can be learned for maintaining macroeconomic stability, and discusses how the evolution of the financial system can alter the transmission mechanism of monetary policy and the sorts of data that need to be analysed when assessing it.
In conclusion, Paul Tucker states that: “…it is the credibility of our commitment to price stability that has enabled the Bank to cut interest rates and to inject money so aggressively in order to support nominal demand in the wake of the credit crisis… That underlines the risks of tinkering with central bankers’ inflation targets….” But another element of stability – in the financial system – needs to be addressed. He says, “…macroprudential instruments …could be used to lean against future credit booms and for making our financial system more resilient. If we could manage that, it might be the most significant extension in the overall international macro policy framework in a generation.”
To read his talk in full click here.
Tags: Bank of England, growth, Inflation, macroeconomic stability, quanititative easing
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Wednesday, February 17th, 2010
The Consumer Prices Index (CPI) rose to 3.5% in January from 2.9% in December. According to the Office of National Statistics (ONS) this is the second largest ever increase in the annual inflation rate between two months. It follows on from the record increase of 1.0% in the annual inflation rate between November and December.
The reason for the increase was due to the restoration of the VAT rate in January to 17.5% and the increase in the price of petrol. This time last year petrol was 86.3p a litre and has now risen to 110.9p per litre. There was also an increase in some food prices with cauliflowers rising in price by 59.7%.
Because the CPI deviated more than 1% from its official target rate of 2.0%, the governor of the Bank of England was forced to write a letter of explanation to the Chancellor. In this, Mervyn King wrote that the committee saw this as a “temporary deviation”. He said: “Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.”
The RPI measure of inflation, which is often quoted in wage negotiations, rose from 2.4% in December to 3.7% in January. The largest upward contribution to this change came from housing. This is because mortgage interest payments rose this year but had fallen significantly a year ago, when the majority of lenders passed on the decline in Bank rate which fell from 3.0% to 2.0%. This is the highest RPI figure since October 2008 and is the first time that RPI has exceeded the CPI figure since August 2008.
 Source: ONS The RPIX measure, which excludes mortgage interest payments, rose from 3.8% in December to 4.6% in January. And, what is particularly of interest, is that underlying inflation which excludes more volatile elements such as food and fuel, rose from 2.8% to 3.1%. This suggests that there are underlying pressures on prices, which could partly be due to the weakness of sterling, which is pushing up import prices.
UK inflation can be very difficult to budge and when looking at the December figures the UK CPI inflation rate stood at 2.9% compared to only 1.4% in the EU as a whole.
There are big implications of this jump in inflation for savers. Moneyfacts, who are experts in personal finance, suggest that with a typical savings account offering instant withdrawal only offering 0.73% in interest, basic rate taxpayers are losing the equivalent of 2.92% a year, and higher rate taxpayers are losing 3.06%.
Although the Bank feels that inflation will be back below target in the coming months, this could be upset by attempts to rectify the budget deficit after the election. Many City economists now believe that VAT will be raised to 20%, which will have a large inflationary impact if it comes to pass.
Tags: Bank of England, CPI, Inflation, MPC, RPI, RPIX, savings, sterling, underlying inflation, VAT
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Thursday, February 11th, 2010
“The UK economy has continued to bump along the bottom, but a gradual recovery in output may now be in prospect.” This was the view of Mervyn King, governor of the Bank of England, in launching the Bank’s quarterly Inflation Report.
The Bank said that the strength of the recovery is “highly uncertain” and “the pace of recovery is somewhat less strong than three months ago.” The current forecast is that Gross Domestic Product could rise to 3.2% by the second quarter of 2011, although this is well down on the earlier prediction of a 4.0% rise.
The Report also said that: “At home, the tailwinds of an enormous policy stimulus and the depreciation of sterling are meeting the headwinds created by the balance sheet adjustment of the damaged banking system. Spare capacity will press down on inflation in the medium term. But the near-term outlook is for inflation to rise further.”
 The Bank said that growth will be slower than anticipated. In fact, the Bank is predicting that January’s inflation figure will rise above 3.0%, whilst maintaining that this is only temporary, the result of the increase in VAT back up to 17.5% and a rise in petrol prices. However, it is predicted that inflation will thereafter fall back fairly rapidly below the 2% target rate, and would fall as low as 0.9%. It is thought that inflation could remain below the target rate for several years.
This probably means that we will not expect any increase in interest rates for some time, with the present rate being maintained at 0.5%, giving the temporary nature of the rise in inflation and the precarious nature of the economy recovery. Mr King left open the prospect of more quantitative easing and said that more purchases may be necessary to keep inflation on track.
Tags: Bank of England, CPI, economic growth, Inflation, target 2.0
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Friday, February 5th, 2010
The Bank of England decided yesterday that they would call a halt to their experimental, not to say unprecedented, policy of quantitative easing (QE). QE was started in March 2009 and over the following months the Bank bought up £200bn of gilts in the open market from banks and financial institutions. This was aimed at preventing the economy falling into an even deeper recession and pushing increased liquidity into the economy via bank lending.
Has it been successful? It is always difficult to know. How bad would it have been without it? A couple of days ago a think tank, the National Institute of Economic and Social Research estimated that QE had increased output by 0.5% in 2009 and would contribute an additional 1.0% growth this year.
 Quantitative easing and interest rates both put on hold.
In making their decision to suspend QE the Bank’s Monetary Policy Committee (MPC) decided that: “…this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.” The MPC also said that: “…further purchases would be made should the outlook warrant them.”
The MPC is torn between the fact that GDP only increased by 0.1% in the final quarter of 2009 and may require further stimulation. Yet, CPI inflation rose to 2.9% in December, above the 2% target. However, on balance the MPC decided that: “…the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.”
The Committee continued to leave interest rates at their historic low of 0.5%.
Tags: Bank of England, CPI, gdp growth, Interest rates, Monetary Policy Committee, quantitative easing
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Thursday, December 3rd, 2009
This is the title of a talk given by Spencer Dale, Chief Economist at the Bank of England yesterday in which he discusses the policy response to the economic downturn, evidence that the economy has stabilised, and the prospects for 2010 and beyond.
In it he notes that the MPC’s interest rate decisions have acted to improve companies’ cash flow and lower the monthly repayments of households holding floating rate mortgages, while encouraging both groups to spend rather than save. He adds that the MPC’s programme of asset purchases has further stimulated demand by reducing yields across a range of assets and lowering the cost of company finance. He believes these measures, in combination with the range of Government policies, “…have been successful and the risk of a severe adverse feedback loop…avoided”. As evidence, he points to the rises in corporate insolvencies and unemployment, both of which have not increased by as much as might have been feared on the basis of past recessions.
He continues by looking at the prospects for 2010 and beyond. Spencer Dale states that: “The economy appears to have turned” and “…we are likely to be moving into a period of renewed expansion”. He points to the depreciation of sterling as providing additional support to the recovery, along with the further boost to output expected as the adjustment of inventories by companies runs its course. He warns however that “…the emerging recovery should not obscure the fact that structural adjustments need to occur in our economy”. He notes that monetary policy cannot and should not prevent these adjustments happening. But he says, “…the job of monetary policy…is to ensure that these adjustments occur in as orderly a manner as possible and within an economic environment which is consistent with hitting the 2% inflation target”.
Spencer Dale concludes by reflecting on the most recent monetary policy decision and his vote to maintain the level of asset purchases at £175bn in November in contrast to other Committee members who wanted an increase. He says it is important not to make too much of this difference. His main concern reflected the considerable uncertainty about the degree of spare capacity in the economy and the behaviour of inflation when output is growing at above trend rates, adding that his preference “…was to aim to grow the economy a little less rapidly”. To read the whole speech click here.
Tags: asset purchases, Bank of England, monetary policy, MPC, quantitative easing
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Wednesday, November 18th, 2009
Minutes of the last meeting of the Monetary Policy Committee (MPC) of the Bank of England have just been published, and show that seven of the nine members agreed that an extra £25bn should be pumped into the economy through the programme of asset purchasing or quantitative easing. This was enough to secure agreement to raise the total spend to £200bn.
However, one member, David Miles thought that this was insufficient and that it should be raised by another £40bn. In contrast, Spencer Dale, the Bank’s chief economist thought that there should be no increase in the scheme. According to the minutes he stress the potential risks of such a policy, noting that monetary policy was already extraordinary stimulatory. He thought that the considerable uncertainty about the degree of spare capacity and the behaviour of inflation when output was growing at above trend meant there were risks from attempting to eliminate the margin of spare capacity more rapidly. He also noted a risk that further substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify, which would complicate the task of meeting the inflation target in future.
 Some dissension over the continued asset purchase scheme. It was also noted that the decline in GDP during the third quarter was a “surprise” to the MPC, and that there were some reasons to anticipate a small upward revision in future data releases. The Committee also noted that output has fallen by almost 6% since its peak in 2008.
Tags: Bank of England, Inflation, MPC, quantitative easing
Posted in Bank of England, Inflation, Monetary Policy Committee | 1 Comment »
Thursday, November 5th, 2009
The Bank of England’s Monetary Policy Committee has just confirmed that Bank Rate will remain at 0.5%, as it has since early March this year. However, the MPC decided to extend its asset purchase programme to the tune of an additional £25bn, to reach a total of £200bn.
The Committee set the scene by noting that output has fallen by almost 6% since the beginning of 2008. Household spending is down and investment by businesses has fallen sharply, although there are some signs that economic activity is picking up.
In the medium term they note two opposing forces on the UK economy. On the one hand the substantial easing of both fiscal and monetary policy is still working its way through the economy. They noted that the level of quantitative easing thus far has helped to boost asset prices and improve access to capital markets. However, on the other hand, banks are continuing to repair their balance sheets which is likely to limit the availability of credit.
 Interest rates on hold and asset purchase scheme expanded. They believe the recovery will be slow and that the margin of under-utilised resources will keep inflation in check, although this will be partly offset by the previous depreciation in the sterling exchange rate.
The Bank has opted for an increased level of asset purchases because of the slow growth in the measure of broad money. In fact, the M4 measure, excluding other financial corporations, has recently shown a surprising drop in the rate of growth instead of the rise that might have been expected from the Bank’s actions. Does this mean that the quantitative easing scheme is not working? The Bank argues that it does not although it has no real proof. The argument is that broad money growth would be even slower if not for the £175bn injected already through the asset purchase scheme and that capital markets would be even more constrained. The Bank obviously believes that the injection of another £25bn will not have an inflationary effect in the short term because of the size of the output gap.
Tags: Bank of England, Bank Rate, Inflation, Money Supply, MPC, output gap, quantitative easing, sterling
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