Last night saw the Mansion House set-piece speeches by the Chancellor George Osborne and the Governor of the Bank of England Mark Carney. Something was missing which I shall highlight with a quote from last year’s speech by Mark Carney.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.
There is the obvious point that Governor Carney led the financial markets a not very merry dance last year as they rushed to reassess UK interest-rate prospects after what was considered a broad hint about an interest-rate rise. Not only did it not happen “sooner than markets currently expect” it has not happened at all and the silence on the subject hints that we are further away from it rather than nearer.
In fact there was no mention of monetary policy at all last night which was somewhat odd although a partial explanation might be that the Governor wanted to avoid last year’s debacle. However in my opinion there is more to it than that.
I regularly cover the fact that 2015 has been the year of interest-rate cuts rather than rises and just as they were tucking into the main course (canon of lamb aubergine) this happened.
The Reserve Bank (of New Zealand) today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.
Another theme can into play as an economy “growing at an annual rate around three percent” apparently needs an interest-rate cut. There were times when that was justification for an interest-rate rise. Apparently not any more! Perhaps the shock loss of a one-day cricket match to England came into play and unsettled them. Also this factor seemed to find itself being ignored.
House prices in Auckland continue to increase rapidly
Following on from this the Kiwi dropped like a stone and is 2% down versus the UK Pound £ as I type this.
This morning the Kiwis found a friend in the Pacific as this was announced in South Korea.
The Monetary Policy Committee of the Bank of Korea decided today to lower the Base Rate by 25 basis points from 1.75% to 1.50%.
It may be true that they fear repercussions from the MERS outbreak but the underlying drumbeat here is this in my opinion.
the trends of weakening of certain major country currencies
For South Korea the fall in the value of the Japanese Yen is a very important development as they are close competitors. In effect Japan is sucking demand from South Korea.
So we move on in an environment of interest-rate cuts and I think that puts us in the 50s for such moves in 2015 so far. Rises have only come in response to a currency crisis.
The UK economy
This has shown a few disappointing features recently. The first quarter of 2015 saw economic growth of only 0.3% in 2015 partly driven by the fact that as I discussed on Tuesday our weak trade position sucked some 0.9% out of the economy. Unfortunately the soft spot for the UK economy seems to be continuing.
Industrial Production and Manufacturing
Yesterday’s update was something of a disappointment.
Total production output is estimated to have increased by 0.4% in April 2015 compared with March 2015……Total production output is estimated to have increased by 1.2% in April 2015 compared with April 2014.
So production has so far in 2015 mostly rumbled higher at a rate of just over 1% in annual terms. Even worse this month saw quite a boost from North Sea Oil and Gas of 9.8% which is hardly typical these days and begs a question as to what happens when it declines again.
A driving force of the decline has been a sector which was doing pretty well.
Manufacturing output increased by 0.2% in April 2015 compared with April 2014……Manufacturing output decreased by 0.4% in April 2015 compared with March 2015.
So far in 2015 annual manufacturing output has gone 1.8%,1.2%,1.2% and now 0.2% which is a pretty clear trend. This contrasts quite markedly with the numbers for 2014 which varied between 2.3% and 4.7% and I note that we have yet to get near last year’s worst number.
At such rates of growth it is going to be some time before we get back to the levels these parts of our economy achieved before the credit crunch hit.
In the 3 months to April 2015, production and manufacturing were 9.5% and 4.4% respectively below their figures reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.
Production is now 14.6% of our economy whereas it used to be manufacturing which was that amount. It feels a bit like secular decline doesn’t it?
The mood music was improved by the latest monthly Gross Domestic Product release from the NIESR (National Institute for Economic and Social Research).
Our monthly estimates of GDP suggest that output grew by 0.6 per cent in the three months ending in May after growth of 0.5 per cent in the three months ending in April 2015.
Interestingly they are also upbeat for the rest of 2015.
We expect the slight softening of GDP growth experienced in the first quarter of this year to be temporary and forecast the UK economy will expand by 2½ per cent for the year as a whole
It is interesting that the NIESR upgraded its forecast for economic growth in both April and May in response to weak production numbers. They must think that the UK services sector is really pushing forwards.
Monetary policy has tightened
The main player these days is the exchange-rate as in the year since Mark Carney last spoke at Mansion House the UK Pound has strengthened from 87.5 to 91.5 on a trade-weighted basis. Using the Bank of England rule of thumb suggests that this is equivalent to a 1% rise in Base Rates. That provides not a little food for thought when an explicit rise in Base Rates of even 0.25% is often treated with not far off terror.
There has been a little offsetting of this as Gilt yields have fallen but even these have been rising recently in response to moves in Europe. The ten-year yield is back up to 2.15% now. I expect such moves to push fixed-rate mortgages higher if they are sustained.
London House Prices
These seem to have seen a chill wind of change blow through the more upmarket boroughs according to LSL. From the BBC.
The company said that Kensington and Chelsea had seen prices plummet by 16% since a peak in September 2014.
In Westminster it claimed there had been a fall of 22% between a peak in November, and the end of May.
It is instructive I think to compare the latest Mansion House speech with that of last year. It would appear that Bank Rate rises are no longer something to broadcast as we did not even get a “few and gradual” type exposition as Governor Carney looks to move the debate onto pastures new. Perhaps also he was distracted by the scandal that has sprung up in Canada over the issue of art purchases. However the mood music at the Bank of England over Bank Rate increases has changed it would appear and I note that so many of its peers seem to think that it is time for interest-rate cuts including countries with a better economic growth trajectory than the UK. So we are left wondering if Governor Carney will confirm his reputation shown below.
‘Cause he’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.
As to his “ethical crisis” campaign I hope that we will see jail terms for bankers who behave really badly and welcome the tenet of his argument whilst noting that it is a little odd he has taken 2 years to spot it. However noting that Yes Prime Minister has returned to our screens it would be remiss of me not to point out that it would suggest such a campaign really means that the Bank of England thinks the banking scandals are over. Another failure for Forward Guidance in the making?