When will the Bank of England raise interest-rates?

Welcome to the first day of the non-ZIRP (Zero Interest-Rate Policy) for the United States since December 2008. The reason for this is contained in the announcement below by the US Federal Reserve from yesterday evening.

Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent,

Actually use of the term ZIRP is slightly loose as the Fed Funds rate had been mostly between 0.1% and 0.15% but near zero has come to mean the same thing. Looking forwards it seems set to be in the range 0.35% to 0.4% as the Federal Reserve enforces its policy.

Quite a few people have asked me about this so just to be clear Fed Funds is an overnight interest-rate which fluctuates with conditions these days. The US also has a fixed rate which is shown below.

raise the interest rate paid on required and excess reserve balances to 0.50 percent,

The latter of course is the same as Bank Rate in the UK by chance now and frankly as we move forwards Janet Yellen may regret the decision in which she was involved to let Fed Funds “float” but that is done now. It was unlikely to be changed on the first raise as if by chance it did then upset the apple cart it would be quite an own goal.

What happens next?

According to the projections of the US Fed – the dot plot matrix – we can expect an interest-rate rise around every quarter in 2016. We also got an addition to the language used as the word “gradual” came into play as a description of this. Of course as we have seen with both “temporary” and “transitory”  central bankers have their own private language so some care is needed.

The markets probably mindful of the various false dawns and Fed promises in 2015 downplayed this and set the two-year bond yield at 1%. So they currently price in only a couple of moves at the most.

Market Reaction

As you might expect from a move that had more trailers than A Force Awakens markets were rather nonplussed. Equity markets have responded positively and the US Dollar has risen but in essence the US government bond market went “meh”. Indeed the 30 year yield used to set many fixed rate mortgages moved lower to 2.95% as it tried to digest the meaning of “gradual”.

If we look to commodity markets then prices fell again but that is the current norm so we end up with Janet Yellen going to bed fairly happy on day one.

What about the Bank of England?

The obvious question as the United States raises interest-rates is what will the Bank of England do? If we go through an economic checklist we see quite a few similarities. For example economic growth is not only similar but is expected to be as the NIESR expects 0.6% quarterly growth for the UK and the Atlanta Fed expects just under 0.5% for the US. If we move to unemployment we have 5.2% for the UK and falling compared to 5% and falling for the US. Here we have to factor in that the participation rate in the UK has not dropped in the way that the US one has. If we move to wages yesterday we were told US real weekly wages had risen by 1.8% and on Tuesday we were told that UK real wages were rising at 2.4% on our monthly measure. The only real difference is that the United States recovered the ground lost in the credit crunch more quickly whereas the UK only picked up from 2013.

If we move to consumer inflation we see a similar pattern with US CPI at 0.5% and the UK CPI at 0.1%. The similarity in terms of name is misleading as they are rather different measures as the US has a high weighting for owner occupied rents which the UK tries to believe does not exist! Once you allow for what is called “shelter” in the UK rising at an annual rate of 3.2% then the picture ends up being rather similar.

Governor Carney

We know that he is a “dedicated follower of fashion” except he has a problem right now as I pointed out last night on Twitter.

Somewhere a dedicated follower of fashion called Carney is wondering do I follow Yellen or Draghi?!

So he could raise 0.25% or cut 0.1%! If in his spinning around he thought he might wait and see what others would do well he will find himself in a land of confusion. From Bloomberg.

Hong Kong’s key rate was raised to 0.75 percent Thursday…..Taiwan lowered the benchmark discount rate by another 12.5 basis points to 1.625 percent, it said in a statement in Taipei on Thursday……Norway’s central bank has maintained its key rate at 0.75 percent

Yep, we have seen a raise, a cut and an unchanged for interest-rates already! Will nobody give poor Mark a clear lead? Will the Forward Guidance mark 9 which was only launched on Tuesday in the Financial Times be replaced by marks 10 and 11?

Retail Sales catch light again

This morning the debate has shifted again and let me remind you of the UK’s economic past. If we have a sweeping generalisation then we have excess consumption often driven by  booming house prices (check) which leads to balance of payments problems (check) as we suck in imports to feed the need. Okay so how is consumption doing?

Compared with October 2015, the quantity bought in the retail industry is estimated to have increased by 1.7%.

Quite a surge as we wonder about the impact of what is called Black Friday so let us look further back.

Year-on-year estimates of the quantity bought in the retail industry show growth for the 31st consecutive month in November 2015, increasing by 5.0% compared with November 2014.

So we are reminded of a typical Eurovision entry along the lines of “boom,bang a boom”.

Regular readers will recall that I pointed out in January 29th that this looked likely to be a good year for UK (and Irish and Spanish) retail sales and we see that this has come true. Indeed with commodity prices falling again and therefore real wage growth continuing this will push into the spring of 2016 now. How much is the impact? Well take a look at this.

Average store prices (including petrol stations) fell by 3.3% in November 2015 compared with November 2014, the 17th consecutive month of year-on-year price falls.

I hope that those who pushed the “deflation” headlines with the implication of bad news at the end of last year and the beginning of this feel contrition. Also my argument that it was disinflation not deflation has also proven true.

But if we return to a comparison with the United States which has just raised interest-rates what is happening to retail sales there? From the UK ONS.

In its advanced retail sales estimates for November 2015, the amount spent in the US retail industry, including motor vehicles and parts and food services, increased by 0.2% from the previous month and increased by 1.4% compared with November 2014.

As you can see on this measure it should be the UK which should have raised interest-rates ahead of the United States. That is if any central banker these days still holds to the dictum that their job is to take away the punchbowl before the party really gets going.

Comment

Bank of England Governor Mark Carney has returned to home territory overnight by giving an interview to the Canadian public-service CBC network. We learned nothing about interest-rates which is odd you might think considering the Fed action. It was not as if they were short of time as there was plenty of time for some toadying.

Halfway into his term as governor of the Bank of England, Canada’s Mark Carney seems to be hitting his stride.

A bit of a long warm-up you might think! Also the more thoughtful might wonder how more “transparency” is provided by fewer Monetary Policy Committee meetings. But what we have in Forward Guidance mark 9 is a U-Turn on “around the turn of the year” for a Bank Rate rise. If we look at timing then there is another loose cannon on the decks as unemployment was supposed to fall below 7% next year thus raising the interest-rate question. Yet apparently at 5.2% it can safely be ignored. That is why we received an official denial this week that Forward Guidance is not working.

Thus an interest-rate rise looks still a long way away in the UK. Indeed if we look at our past history we wonder how an “emergency” interest-rate of 0.5% goes with retail sales rising at an annual rate of 5%?! They may be erratic but 2015 overall could not have been much stronger.

After all these years it is still afraid to move towards an exit strategy as I predicted back in the beginnings of this blog. Also I would point out that the US Fed still has problems too as its US $4 trillion balance sheet has become an ever more permanent part of the economic landscape.

 

 

 

 

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27 thoughts on “When will the Bank of England raise interest-rates?

  1. The B of E should be well into a cycle of raising rates by now, ‘fixing the roof while the sun shines’ and all of that, to provide ammunition in the next crisis. Every time a rate rise looks to be on the cards there is no shortage of businessmen warning against it and predicting also sorts of dire problems if rates go up. Well they would say that wouldn’t they! They have a rather selfish interest in keeping rates as low as possible for as long as possible. Getting them to support a rise would be like trying to get turkeys to vote for an early Xmas. Unfortunately our governor appears to be rather influenced by their arguments and the consumer debt binge that has resulted from his policies. Perhaps if he hadn’t allowed the housing market to get out of hand then the debt levels would not be so high. That isn’t, however, an argument for doing nothing now. If our economy isn’t robust enough now to weather a few rate increases then it never will be.

    • “….our economy isn’t robust enough now to weather a few rate increases then it never will be.”

      re-write

      if our banks aren’t robust enough now to weather a few rate increases then they never will be.

      now check on that 🙂

      Forbin

      • Indeed,our current bank business model seems based on taxpayer susbsidy rather entrepreneurship and risk/reward based credit creation.

        Back to work.

  2. Hi Shaun
    Thank goodness they finally took this step. Now they have made it, I think the rate increases will be faster than most believe. BoE will follow their lead, the link with Fed much greater than with ECB, if nothing else ‘the squid’ will determine it. So I think first 0.25% increase at roughly the same time as next Fed increase, end of Q1 2016. Once the oil effect falls out of CPI, the increases will come quicker and may yet end up higher than most forecasts. After all there is almost a decade of pent up ‘bubbles’ to release. There will be casualties, ‘constructive destruction’ is long overdue.

    • Hi JW

      The concept of an “exit strategy” was one of my earliest themes on here with the precept that they would dither and dally and be too late. Actually of course they ploughed on forwards with even more enthusiasm leaving the Bank of England with £375 of QE with no plan for reversing it (otherwise Nemat Shafik would not be in charge of it….) and of course FLS is still expanding albeit slowly.

      If we measured inflation properly and put in house prices then we would be recording low inflation and would be in much better shape in terms of understanding where we are. For now the oil price drums continue to beat as Brent Crude Oil falls below US $37 on which subject I think that Noo 2 was looking for you yesterday.

      It is interesting that Mark Carney now seems interested in serving an 8 year term rather than a 5 year one also.

  3. Hi Shaun

    Unlike some above I’m inclined to the view that the BOE will delay as much as possible. Indeed I think there’s a fair chance that the Fed is wrong and will have to reverse course before long which will put us back to square one, the reason being the onset of a recession.

    Most of the models which these people operate do not take account of debt, either the stock or the rate of increase, and the fact that any increase in IRs will pre-empt income and consumption to increased debt service which will, at the very least, take the sheen off economic growth and possibly worse. Our economy is based on consumption and debt leverage any any increase in rates, reflected at the retail level, will adversely affect the economy.

    Both the US and the UK economies are much more highly leveraged than twenty years ago and jobs are much less secure; the underlying structure is much more vulnerable. Add to this the structural headwinds of demographics and globalization and you only add to the uncertainties.

    It will also affect the fiscal position and throws that fabled time in the future when we are supposed to achieve a budget surplus that much further ahead and this will not go down well with the government, which is likely to be in trouble anyway when the slowdown hits.

    I think most reaction is far too sanguine; this isn’t the point at which the fun ends ( and the punch bowl is taken away); it’s the point at which it begins.

    • ‘Unlike some above I’m inclined to the view that the BOE will delay as much as possible. ‘

      Agreed Bob,Pavlaki nails it in comment one.

      ‘Most of the models which these people operate do not take account of debt, either the stock or the rate of increase, and the fact that any increase in IRs will pre-empt income and consumption to increased debt service which will, at the very least, take the sheen off economic growth and possibly worse. ‘

      I’d agree on the first part,and it’s a common point of Steve keen.On the latter point though,I think there’s a growing realisation that rasing rates will bring different consumers into the market place ie borrowers aren’t as keen to take loans and savers living on interest income have cut consumption over the last 7 years.Personally,i think the Fed has tightened because

    • Yes Bob, I think the Fed are in for a bumpy ride. Every credit to them for having the b_ _ _ _ _ cks to do it though when all around mocked them as an actionless organisation.

  4. I also think that the BoE will delay as long as possible, until summer at least, unless circumstances force, but that’s not because I believe that the Fed was wrong to raise, it’s because
    a) Capture of our political system by the financial sector is much greater than in the US.
    b) As a result of “a)” our economic policy has been geared to inveigling as much of the population as possible in the desperate need for ZIRP, so as to socialise our financial sector’s need for that ZIRP.

    • “a) Capture of our political system by the financial sector is much greater than in the US. ”

      Exactly , Buzzin , exactly

      its the Banks first because they are the country !

      we , just living here , are mere bagatels , serfs , unwashed ignorant fools ……. ( well most are )

      Carney , isnt he on Eastenders yet?

      no ? then the public dont care !

      Forbin

  5. http://money.cnn.com/2015/09/23/investing/bill-gross-federal-reserve/

    ‘Gross argues that a 0% interest rate hurts pension funds, takes away incentives to save and eventually suppresses economic growth. ‘

    I’m with Bill Gross here.I think the Fed has raised rates to bring the economy back to life.Whilst all the headline factors eg unemployment/inflation to justify it’s decision,the reality is that ZIRP was going nowhere fast.

    A stock market bubble isn’t real growth.Nor is having record numbers of people getting Federal assistance via foodstamps.

    Statistically the USA is due a recession and traditionally they’ve needed a 3% cut in IR’s to bring them to an end using their playbook of the last forty years.raising rates now while they can is a necessary evil.

    I think Yellen was bbetween a rock and a hard place.

    • Hi Dutch
      Yes Gross is correct, 7 to 1 savers to borrowers, given population profiles pension funds are critical. An interest rate of 3% makes the world of difference to IRAs, 401ks etc. But crucially it changes the valuations of corporate pension funds, so industry can invest rather than plug pension holes.
      There are other specific ‘US’ reasons for the Fed going first on this, but the BoE will follow.
      Canadians must be wondering why when commodity prices are on the floor that they have joined the Swedish/Swiss route. Interestingly Swiss mortgage rates are increasing as NIRP goes more negative. Commercial banks found that their customers threatened to leave in droves if they didn’t get a positive return on savings so this has to be paid for by higher borrowing rates. Swiss are a great savings nation.

  6. While I’m on,I’d also like to make a point about the commodity markets.

    Experience has taught me to ‘follow the money’.Whilst the sell side piled into stocks,commodities sold off again.

    When it comes to forecasting next years growth prospects I know which one I’d rather time off.

    • Hi Dutch

      The pressure is certainly still on the commodity markets. Tonight we see Brent Crude Oil below US $37 and the Bloomberg Commodity Index which was at 80.3 I think the last time I did a commodity markets blog is at 76.6. It has been quite abear market and whoever gets the turn will see some juicy pickings.

  7. Great blog, Shaun, as usual. Thank you very much for mentioning the CBC interview with Mark Carney. I will look for it.
    The US HICP for the total population is virtually equivalent to the UK CPI in terms of its methodology. The biggest difference is that the basket is updated only every two years rather than every year, which would imply an additional upward bias in it as a measure probably not exceeding 0.1 percentage points. The All-items index had an annual inflation rate of 0.35% in November, up from -0.81% in October, as compared to an annual inflation rate of 0.1% for the UK CPI, up from -0.1% in October. The All-items index excluding food and energy was at 1.57% in November, up from 1.4% in October. This compares with a November increase of 1.2% for the UK CPI ex energy, food alcohol and tobacco and an increase of 1.0% for the UK CPI ex energy and unprocessed food.
    Of course, the Achilles heel of both measures is that they ignore house price changes. Here both the UK and the US are showing strong increases, although the UK is stronger. The 20-city composite Case-Shiller house price index was up by 5.5% in September, with Zillow Real Estate Research forecasting a 5.4% increase for October.
    On balance, it would seem to me that US inflation is slightly stronger than UK inflation and offers a better argument for a rate increase, but the inflation in the two countries certainly is comparable.

    • Hi Andrew and thank you

      I have a bit more Mark Carney news for you as the Financial Times is tweeting this tonight.

      ” ‏@ChrisGiles_ 45m45 minutes ago
      Mark Carney opens door to full 8-year stay at Bank of England: ”

      As he said he would serve only five years then it is another Forward Guidance fail! Anyway it does mean that he won’t be coming back home to Canada for a bit and we will be left to speculate if it was the Trudeau success that did this or whether he thinks his chances of the IMF or World Bank job have gone.

      • Thank you, Shaun. I am not sure that Mark Carney’s political aspirations are altogether dead. If he came back to Canada in July 2018 he could help Jonathan Kay, the journo who wrote Justin Trudeau’s memoir, write his own autobiography which would be out just in time for the October 2019 election campaign. If Bill Morneau doesn’t work out as Minister of Finance he could be PM Trudeau’s new star candidate, ready to take over Finance if he could win a seat. No Canadian has ever served as both Governor of the Bank of Canada and the Finance Minister. Just the same, it does seem like small beer compared to being Governor of the Bank of England and head of the FSB.

  8. Pingback: When will the Bank of England raise interest-rates? | ageanvelosblog

  9. There are two influences that bear on interest rates, economical and political.
    As most supporters of the current government live in the South and have the highest value houses and mortgages, who will adversely affected by interest increase, don’t expect any major changes anytime soon!
    Minor infrequent rises are possible, but they will be few and far between, and will explained as technical adjustment.
    Who is going to risk loosing the next election, just because the economic arguments are persuasive?

    • I have thought along the same lines however there is a growing sector, the folk condemned to rent forever and a day, who may form a voter backlash against this policy. The disenfranchised vote as well! I’m sure the government will be aware of this.

  10. So an interest rate rise had been announced and effectively nothing has changed. The US Treasury yield curve has slipped to flattest in 9 months.
    This is a new sort of interest rate rise, a big announcement and no follow up.

    • Hi Andrew and welcome to my corner of the blogosphere

      The beat continued on later in the day a last 30 minutes equity market drop took the Dow Jones down 250 or so and back pretty much to where it was before the Federal Reserve announcement. The main change has been that the US Dollar has pushed higher with the Dollar Index at 99.15.

  11. Shaun, I have seen the Peter Mansbridge interview with Mark Carney now. He has been the anchor at CBC News for many years now. He’s a very good interviewer, but has a reputation for giving soft interviews with people like Mark Carney and Stephen Harper, which is only buttressed by this one. I didn’t really expect him to brandish a copy of your August 8, 2013 blog “How Mark Carney tightened UK monetary policy yesterday” in Governor Carney’s face and ask: “How do you respond to Shaun Richards’s evisceration of your blundering forward guidance policy?” but it certainly would have made for a less boring interview.
    Very disappointing that he would have started the interview talking about misconduct without mentioning Mark Carney’s incredible breach of judgement in carrying on a business relationship with Evan Solomon, the disgraced former host of CBC TV’s Power & Politics and CBC Radio’s The House. Governor Carney was interviewed by Mr. Solomon on both programs.

  12. Hi Shaun, too late for a reply I guess but I see the $ is already at 1.48 to the £ (over valued imo). This may be initial market reaction, but if it turns into a trend this will constitute a counterpoise to the falling oil price and we may find inflation returning sooner than many think.

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