David Miles says strong pick-up in investment, fading housing market boom and low wage growth means sharp rate rise is unlikely
Bank of England governor Mark Carney dampened talk of a sharp interest rate rise on Wednesday. Photograph: Suzanne Plunkett/PA
The Bank of England will not be pushed into raising interest rates sharply because the outlook for inflation is subdued, a policymaker on the Bank's rate-setting commmittee has said.
Speaking to BBC Radio, David Miles said that investment spending in Britain had started to increase strongly and he expected that to continue, making for more than a consumer-led recovery.
Miles, regarded as a dove on the monetary policy committee (MPC), noted that inflation is now slightly below the Bank's 2% target.
"That's very good news because it means that we're not going to be pushed into raising interest sharply, because the inflation outlook remains pretty subdued."
Miles said Britons were probably getting pay settlements of around 2% on average, and that he expected wages to start outstripping the rate of inflation going into next year.
Miles, an external member of the MPC, said the spread between mortgage rates and the Bank's official interest rate would likely be higher than it was in the past – a legacy of the financial crisis.
As a result, Bank rates will probably run at a "new normal" in future – lower than they were before the financial crisis, he added.
He also noted that some of the forward-looking indicators of Britain's housing market were starting to cool.
Miles declined to say how he voted in the MPC's August meeting. Minutes from the meeting will be published next Wednesday. (Reporting by Andy Bruce; Editing by Kim Coghill and Eric Meijer)
Dollar stays firm today and maintain the broad based weekly gain. The cautious FOMC statement released overnight halted the greenback's GDP inspired rally. But there is no change in the overall near term bullish outlook. So far, the greenback is gaining most against the Japanese yen thanks to strong rebound in treasury yields. Aussie is feeling additional pressure today after much weaker than expected housing data. Meanwhile, Canadian dollar followed closely as recent reversal continues. The economic calendar is rather busy today, in particular with Eurozone CPI and Canadian GDP featured. But markets could be a bit cautious before tomorrow's non-farm payroll report from US.
As expected, the FOMC tapered by another US$ 10B in July with few changes in the monetary statement. The reduction in purchase was evenly divided between Treasuries and MBS, taking the former down to US $15B per month and the latter down to US $10B per month. Policymakers acknowledged rebound in the economy in the second quarter of the year, noting 'somewhat diminished' downside risks to inflation and improvements in labor market conditions. Yet, they cautioned that a number of labor market indicators signaled that slacks remained 'significant'. The statement suggested that the Fed is not in any rush to hike interest rates. More in FOMC Focused On Slack In Job Market Despite Resilient 2Q14 Growth.
In addition to the strong rally in dollar, there are two developments to note in the financial markets. Firstly, DOW's decline this week now put focus back to 16805.38 key near term support level. Further fall and break of this support will confirm topping at 17151.56, just missing 100% projection of 14719.43 to 16588.25 from 15340.69 at 17209.51, on bearish divergence condition in daily MACD. And in such case, we'd see deeper pull back to medium term trend line support (now at 16480. And such development could put additional pressure on commodity currencies.
Secondly, the strong rally is TNX, 10 year yield, suggests that pull back from 2.692 is already finished at 2.448. The current development sets up stronger rebound back to test 2.692 resistance. That would likely be accompanied by USD/JPY rise back towards 104.12 resistance. The reactions from 2.692 would be closely watched. At this point, we're favoring that TNX is in a sideway pattern between 2.402 and 2.692. USD/JPY is in the sideway pattern between 100.75 and 104.12. Decisive break of 2.692 would trigger an upside breakout in USD/JPY too.
On the data front, UK Gfk consumer sentiment dropped to -2 in July. Australia import price dropped -3.0% qoq in Q2, building approvals dropped sharply by -5.0% mom in June. Japan labor cash earnings rose 0.4% yoy in June while housing starts dropped -9.5% yoy in June. German unemployment, Eurozone unemployment and CPI will be featured in European session. Canada GDP, US Challenger job cuts, employment cost index, jobless claims and Chicago PMI will be featured in US session. USD/JPY Daily Outlook
USD/JPY rose to as high as 103.08 so far and reached mentioned target of 100% projection of 100.82 to 102.79 from 101.06 at 103.03 already. Intraday bias remains on the upside and further rally could be seen towards 104.12 resistance. Nonetheless, as the pair is still bounded in the sideway pattern from 100.75, we'd be cautious on strong resistance below 104.12 to limit upside. On the downside, below 102.59 minor support will turn bias neutral and bring retreat first.
In the bigger picture, at this point, there is no confirmation of medium term reversal yet even though bearish divergence condition was clear in weekly MACD. Attention remains on 100.61 key support level and decisive break there will confirm the bearish case. In that case, deeper decline should be seen back to 38.2% retracement o 75.56 to 105.41 at 94.00. In case of another rise, we'll focus on reversal as it approaches 50% retracement of 147.68 to 75.56 at 111.62.
Market Overview | Written by ActionForex.com | Jul 31 14 05:43 GMT
Gold is listless on Wednesday, as the metal hugs the $1300 line late in the European session. On the release front, it's a busy day, with three key events out of the US - Advance GDP, ADP Nonfarm Payrolls and the Federal Reserve Policy Statement. Many investors have remained on the sidelines so far this week, waiting for some market-moving data before making any moves.
Gold prices are sensitive to geopolitical events, and there are two current hotspots that could affect dramatically affect prices if the current situation deteriorates. In the Ukraine, tensions remain high after the downing of a Malaysian jetliner, and sporadic fighting continues between pro-Russian separatists and Ukrainian forces. European countries are expected to slap Russia with further sanctions. The second trouble spot is in Gaza, as fighting has raged between Hamas and Israel for over three weeks. The US has intensified efforts to halt the violence, but numerous ceasefires have been declared and broken and casualties continue to mount.
CB Consumer Confidence was outstanding on Tuesday, pointing to a sharp increase in June. The key indicator jumped to 90.9 points, crushing the estimate of 85.5 points. This was the indicator's highest level since September 2007. Consumer confidence is closely tracked by analysts since a confident consumer is likely to increase consumption, which is critical for economic growth.
Daily Forex Fundamentals | Written by MarketPulse | Jul 30 14 12:06 GMT
Barclays office in New York. Photograph: Oliver Morris/Getty Images
The cost of the payment protection insurance scandal escalated again on Wednesday as Barclays took another £900m provision to cover the costs of compensating customers mis-sold the insurance product.
The scale of the PPI provisions, which the embattled bank blamed on continued claims brought by claims management firms for older policies, came as the bank reported a 7% fall in first half profits to £3.3bn and a near halving in the profits in its once dominant investment bank.
In eight pages of legal warnings attached to its interim results, the bank admitted it was being subjected to additional scrutiny by the US authorities for another year as the Department of Justice was extending the two year non-prosecution agreement (NPA) put in place at the time of its £290m Libor rigging fine in June 2012.
That NPA, which subjects the bank to tough oversight, would have expired last month but has been extended because of the ongoing investigations into alleged foreign exchange manipulation, which much of the industry is facing.
The bank said the agreement with Department of Justice gives the division until 27 June 2015 to decide if any of the bank's trading activities in the foreign exchange market during the two year period from 26 June 2012 constituted a "United States crime" which could leave Barclays open to fresh prosecution over Libor.
However, the decision by the Department of Justice means that the latest allegations facing the bank, brought by the New York attorney general, that it committed fraud will not leave the bank open to prosecution. These allegations by Eric Schneiderman about the way Barclays treated customers in its "dark pool" - a type of private stock exchange - have knocked attempts by Barclays' new boss Antony Jenkins to clean up the bank's image. Barclays, though, is strongly denying the accusationsabout the activities and other banks, such as Deutsche and UBS, have admitted they too are facing scrutiny of these dark pools which were highlighted in the recent book, Flash Boys: A Wall Street Revolt, by Michael Lewis.
Barclays shares – down a third this year and knocked by the allegations brought by Schneiderman in June – rose 3.1% to 226p, the biggest risers in the FTSE 100 in early trading.
The share price came even as profits in the troublesome investment bank, which is being scaled back with the axing of 19,000 jobs in the coming years, almost halved. Tushar Morzaria, the new finance director, said the investment bank was "pretty much in line" with where the management expected it to be given the restructuring underway.
Jenkins highlighted a cut in costs and said the number of people employed by the bank – 135,000 – was the lowest since before the financial crisis began. 5,000 jobs have gone in the first half of the year.
"Structural cost reduction is vital to achieving strong returns, and we continued to make progress on reducing operating expenses while maintaining controls and improving customer and client experience. Headcount across the Group is now at the lowest level since 2007," he said.
The scaling back of the investment bank was illustrated by a 46% fall in profits in the division, which has been subjected to repeated criticism of its bonus policies in the past. Profits in its African arm were down 12% although profits in Barclaycard rose 24% and its high street banking division rose 23%.
A year ago, Jenkins had to ask investors to back a £6bn cash call to bolster its capital position to meet regulatory requirements set out by the Bank of England.
The legal disclosures repeat that the bank is fighting a £50m fine from the Financial Conduct Authority for disclosures it made at the time of cash calls during 2008 but that this process has been stalled by an on-going investigation by the Serious Fraud Office.
A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013.
CREDIT: REUTERS/JONATHAN ERNST
(Reuters) - After slashing interest rates to almost nothing and printing trillions of dollars, central banks are becoming increasingly reliant on another policy weapon: sucker punchingmarkets.
The European Central Bank shocked investors and forecasters last Thursday by cutting its main refinancing rate to a record low, reacting to a shock decline in inflation.
It was the second big central bank surprise in less than two months, after the U.S. Federal Reserve decided in September not to trim its monthly bond purchase stimulus.
And beyond the immediate impact on financial markets, central banks' shock therapy tactics have also had a lasting effect.
The yield on the U.S. 10-year Treasury bond -- one measure of government borrowing costs -- fell sharply in the aftermath of the Fed's decision, and it shows no signs of revisiting September's peaks for the year any time soon.
The ECB's rate cut helped weaken the euro more than 1 percent against the dollar, and most economists polled by Reuters reckon it will put the currency on a firmly lower path from here -- huge help for the fragile euro zone recovery. <ECB/INT>
With scant room left to cut interest rates again and appetite for more rounds of money printing waning, economists say surprising markets will increasingly feature in policymaking.
"It makes sense that with the artillery becoming depleted, central banks want more bang for their buck now. One way of doing that is to launch surprises in markets," said Philip Shaw, chief economist at Investec in London.
"It wouldn't be a shock if the ECB was pleased that it surprised markets," he added, noting the ECB managed this without breaking its guidance to keep interest rates low or lower for an extended period of time.
AN OLD TOOL, BUT A GOOD ONE
Jolting markets with an unexpected decision has always been in the central bankers' toolkit.
Germany's Bundesbank, for instance, was famed for its sudden moves when it set monetary policy for Europe's biggest economy in the pre-euro days, said Elwin de Groot, senior market economist at Rabobank in Amsterdam.
But there are good reasons why bolt-from-the-blue policy moves are even more effective today.
"In recent years, the trend in central bank policymaking has been for more transparency, more guidance, and trying not to surprise the market," said de Groot.
"But occasionally you can surprise, and it works better. It keeps the market sharp; it sends a strong signal to the market that its assumptions were wrong."
This year has been peppered with such instances.
Back in April, economists expected the Bank of Japan would ease policy -- but few dreamed it would unveil a plan to unleash $1.4 trillion worth of monetary stimulus into the economyover less than two years.
And wrong-footing markets has become a defining policy tool for the ECB since Mario Draghi became its president.
The ECB cut rates unexpectedly at the first meeting where Draghi was in charge, two years ago this month.
His shock announcement last July that the ECB would take on rising government borrowing costs and do "whatever it takes" to save the euro proved decisive in easing the region's debt crisis.
It remains to be seen whether Draghi's incoming counterpart at the Fed, Janet Yellen, will share his penchant for surprise.
Markets might get a better sense of that when the U.S. Senate Banking Committee vets Yellen's nomination as Fed chairman on Thursday to replace Ben Bernanke, whose term expires on January 31.
In a quiet week for international economic data, focus will also rest on the Bank of England's quarterly Inflation Report outlook for the UK economy, due on Wednesday, the second since Mark Carney's appointment as governor.
"What markets will be looking for is where the new forecasts lie, and in particular, where the Monetary Policy Committee views the unemployment rate is going," said Investec's Shaw.
The Bank of England left interest rates at record lows on Thursday, but is likely to suggest next week that borrowing costs could rise sooner than it had forecast as the economic recovery gathers pace.
(Reporting by Andy Bruce; Editing by Leslie Adler)
When will interest rates rise? Growing divide between economists, markets and the Bank over when an increase will come
By SIMON LAMBERT -dailymail
UPDATED: 09:01 GMT, 8 November 2013
LATEST
Base rate was held once more at 0.5 per cent yesterday but a growing divide is emerging between the Bank of England's forward guidance, the money markets and some economists on when it will have to rise.
Britain's rapidly improving economy has not dramatically pulled forward money market expectations but another forecast for a swifter increase arrived this week from think tank the NIESR.
There is a view gaining increasing traction that unemployment will fall faster than the Bank predicted in its forward guidance, which pledged to not consider a raise until this was below 7 per cent.
But this week’s forecast of rates needing to go up sooner was not tied to this. Instead an earlier rise was tipped by the NIESR, to keep the economy from overheating. It said rates would move off their record low in 2015 - earlier than the Bank of England's late 2016 forecast.
Divided: A gap is emerging between Mark Carney's forward guidance and what economists say will happen to interest rates.
The economists who believe the Bank will find it impossible to stick to its predication are looking at the property market, economy and confidence heating up.
The NIESR predicts an ahead of schedule increase to stop low rates from causing instability - with rising consumer spending and house price inflation the potential triggers.
In contrast, money markets have calmed since their late summer wobble and now put a first rise slightly earlier in 2016 than the Bank does. They also suggest that even if an earlier rise comes, rates will stay low for a long time
All eyes are now on the Bank's inflation report on November 13 and whether it will stick to its forward guidance guns in that.
Strong GDP growth of 0.8 per cent was reported while minutes from the Bank of England monetary policy committee meeting showed members admitting they foresee unemployment falling faster than previously predicted as a result of the stronger economic growth. Read more here.
Swap rates, which measure the cost of fixed term borrowing, have risen slightly over the past week. Five-year swaps stood at 1.755 on 6 November, up from 1.664 per cent on 28 October. Two-year swaps stood at 0.845 up from 0.805 per cent.
Holding steady: Consumer prices stayed at 2.7 per cent in September despite falls in petrol prices, food and airfares
Forward guidance, inflation and unemployment
The all important numbers for the interest rate outlook show both inflation and unemployment proving sticky.
Higher than expected inflation, at 2.7 per cent, was offset by no drop in unemployment to keep interest rates set reasonably fair for no rise from 0.5 per cent until 2016.
The Bank of England has laid out a plan to keep rates at 0.5 per cent until 2016, unless unemployment falls to 7 per cent, or the inflation outlook spikes.
Money markets have calmed after initially rejecting this forward guidance as unrealistic and now also suggest a first rate rise will not come until early 2016 - slightly earlier than the Bank's forecasts.
The unemployment rate held steady at 7.7 per cent in the three months to the end of August, official figures showed. A potential fly in the ointment for low rates for longer was that despite this, the claimant count – those people claiming jobseeker’s allowance – fell at the sharpest rate since 1997.
The Office of National Statistics showed the fall in the overall unemployment figure was 18,000 in the three months to the end of August, taking the total jobless figure to 2.49million - or 7.7 per cent of the UK's available workforce.
Yet at 41,700 the fall in the claimant count well surpassed expectations for a drop of 25,000 and the number of people in full time jobs also rose 148,000.
Some economists suggest we could therefore see unemployment at 7 per cent by 2015 and a stronger than expected recovery could see rates rise sooner than tipped.
However, the Bank and other analysts argue that Britain has plenty of underused jobs capacity and unemployment may fall more slowly, as firms up the hours of those working part-time and more of those not currently actively looking for work start to do so.
Bolstering that case, the ONS figures also showed that 1.45million people were working part-time because they could not find full-time jobs, the highest figure since records began in 1992.
Inflation stuck at 2.7 per cent in August, higher than expectations of a dip to 2.6 per cent. The ONS said despite the fall in food, petrol and diesel prices other contributing factors to CPI saw little change compared to most months.
Petrol prices have declined further in recent weeks and could have a bigger impact on October's cost of living measure.
But further ahead utility bill rises could have an upward effect, after SSE last week became the first of the Big Six energy firms this year to announce a hike in gas and electricity tariffs. Other major energy firms are tipped to soon follow suit.
Robust growth: Economists described the employment figures as showing economic conditions were continuing to improve
Forward guidance vs inflation
The UK interest rate outlook has undergone a transformation with this initiative from Mark Carney, which was launched alongside his first quarterly inflation report as Bank of England governor.
He has pledged that rates will not go up as long as the unemployment rate remains above 7 per cent. The Bank itself projects a very slow recovery that will not see it fall below 7 per cent much before late 2016.
The move has been broadly welcomed by the markets and economists, although they have indicated the Bank may be overly pessimistic and rates could go up sooner than suggested.
While forward guidance has many supporters, there are fears that the Bank will be painting itself into an even tighter corner by saying when it expects to raise base rate.
It is already hamstrung by the nation's high levels of mortgage debt and the more mortgage lending that is done at low interest rates now, the harder it will be for homeowners to stomach rates returning to anywhere near normal.
Luckily, for those borrowers but unfortunately for savers, economists don't predict a rise anytime soon.
When will rates rise? The benchmark chart from the inflation report shows how money markets expect rates to rise.
QE vs Funding for Lending
Should the economy take another serious turn for the worse, more QE is forecast, but if it continues along the current path the Funding for Lending scheme is tipped to be the most likely stimulus for the near future - allowing banks and building societies to take cheap cash from the Bank and pass it on to mortgage borrowers and businesses.
The jury is still out on whether Funding for Lending is a winner.
It has driven mortgage rates down substantially, albeit with the best benefits delivered to those with big deposits, but banks are still being accused of hoarding cash and shunning small and medium-sized businesses.
Figures are being skewed by mammoths Lloyds Banking Group and Royal Bank of Scotland winding down their historical loan books and Spanish giant Santander easing back on its former mortgage expansion policy.
One group undeniably hit very hard by Funding for Lending has been savers. Returns on savings accounts have dived since its launch in a race to the bottom that has seen big cuts in the best deals on offer.
The best easy access savings rate now stands at just 1.6 per cent, whereas before the launch of Funding for Lending savers could get between 2.5 per cent and 3 per cent.
Mind the gap: How base rate and inflation have moved over the past 24 years - the dramatic slashing of rates since the financial crisis shows how far from normal we are.
Rollercoaster ride: The inflation report chart shows how money market and economists' expectations of when a first rate rise will come have moved.
HOW DO YOU FORECAST FUTURE INTEREST RATE RISES?
We can't - no one can. But we look at overnight swap rates to work out roughly when money markets forecast the Bank Rate will start to rise from the rock-bottom level of 0.5 per cent.
This is very far from a precise business - not only do financial traders make wrong predictions all the time, but swap rates are only a snapshot of their views at a given moment in time.
Money market forecasts often diverge from reality, as well. For instance, swap markets for some time predicted a cut to 0.25 per cent within the next few years, well before a hike to 0.75 per cent is likely to materialise.
However, this was considered most unlikely to happen even though the Bank rate-setters dutifully discussed it every month. Economic experts say that for practical reasons it could curb lending rather than increase it, making it counterproductive as a method of promoting recovery.
The overnight swap rates move substantially. Take a look at the following chart, which appeared in the May Bank of England inflation report and illustrates interest rate projections in May compared with February. There is almost a two year gap between the outlook just a few months apart.
Outlook: The Bank of England's May Quarterly Inflation report mapped out the market's expected path for Bank Rate.
Like the Bank of England, we use the overnight index swaps curve to look at what the money markets are predicting for interest rates, and importantly how this is shifting.
Economists also make predictions of when rates will go up, which are often quite different from those signalled by the money markets.
We frequently quote their views here too if they help shed light on the issue for readers.
You can then consider all the available information and make your own best guess on when interest rates will rise.
Why 'swap rate' money markets matter to savers and borrowers
When markets move a decent amount - and the move holds - it can affect the pricing of some mortgages and savings accounts. When swaps price a rate rise to come sooner, fixed rate savings bonds tend to marginally improve in the weeks that follow. But it also puts pressure on lenders to withdraw the best fixed mortgages.
As for using swaps as a forecast, we've consistently warned on this round-up that they are extremely volatile and should be treated with caution - they should be used more as a guide of swinging sentiment rather than an actual prediction.
Important note: Markets, economists and other experts haven't had a great record of making the right calls in recent years: 2010 predictions2008 predictions.
This is Money has always advocated caution with any sort of prediction (including our own!). There's no guarantee that those who have made correct calls in the past will make them in the future.
We'd also urge consumers not to gamble with their personal finances when it comes to predicting rate swings.
Rate rise predictions: Money markets and economists
Swap markets reflect the City's bank rate expectations - not in an exact way, but they indicate trends in forecasting.
Some swap rate prices and and charts are displayed below to show how the market moves as economic prospects shift.
One year ago - 2012
8 August 25 July (after dire GDP figures) • 0.91% - one year • 0.80% - two years • 1.03% - five years
• 0.82% - one year • 0.80% - two years • 1.07% - five years
2 October • 0.75% - one year • 0.71% - two years • 1.00% - five years
21 November • 0.67% - one year • 0.70% - two years • 1.06% - five years
12 December • 0.65% - one year • 0.66% - two years • 1.00% - five years
This year - 2013
16 January 2013• 0.67% - one year• 0.72% - two years• 1.12% - five years
19 February• 0.64% - one year• 0.69% - two years• 1.19% - five years
Five-year swaps (influences 5-yr savings bonds and fixed mortgages) Since January 2010
Beware false dawns
In early 2010, markets prematurely began pricing in a greater chance of rate rises because of rising UK inflation. They did the same again in early 2011. But as we've repeatedly argued on this round-up, deflation rather than inflation has remained the greater long-term threat. Treat claims of rapidly rising rates with caution!
What decides rates?
The BoE's Monetary Policy Committee meets once a month and sets the bank rate. Its government-set task is to keep inflation below 2% (and above 1%), looking two years ahead. So if inflation looks likely to pick up, it raises rates.
Viewpoint: Why rates WILL rise
The 'inflation nutters' (in the words of former BoE MPC member Adam Posen) fear that measures aimed at reviving the economy - rate cuts and masses of quantitative easing - have unleashed forces that will create rampant price rises and that rate rises will be needed to prevent hyperinflation taking hold. They also fear rising demand from emerging market economies will push up prices.
When inflation was worryingly high in 2011, these views gained traction.
One popular theory is that Western governments want to create inflation to try and erode their record debts, created in part by bailing out banks. Billionaire Warren Buffett (right) warned about this in August 2009 well ahead of the pack (as usual).
One controversial economist warned inflation would force the MPC into a series of rate rises, taking the bank rate to 8% by 2012.
Weak sterling in 2010 and 2011 also added inflationary pressure: falls in the pound make it more expensive for Britons to buy foreign goods, effectively importing inflation. [ what next for the pound?] And we're also importing inflation from booming China.
Others point out that rapid rate rises are rarely expected. Insurance service RateGuard points out periods of quick-fire increases in the chart below.
Central bank rates in the run-up to the crisis
This round-up was created in 2007 by Andrew Oxlade and downloaded more than 13 million times. His involvement ceased in December 2012 and it is now updated by the ThisisMoney team.
