Pound plunges after Bank of England's dovish rates signal

Is the Bank of England right to plan another interest rate cut?

16 September

Bank of England rate setters are currently caught in a post-Brexit vote paradox.

According to the minutes from a meeting of the latest Monetary Policy Committee (MPC), which were published only yesterday, the committee's members are much more confident about the economy than they were last month. But they are still worried enough to be hinting at another rates cut before the end of the year.

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By most estimations the "lower bound" the minutes cite is 0.1 per cent – and that could come as soon as the MPC's next meeting in November.

The Guardian's Larry Elliott says the apparent discord can be explained by the committee's view that the short-term resilience we are seeing now will not persist into the longer term.

"Firstly, the Bank thinks some of the deleterious effects of Brexit – on investment in particular – will take time to show up. Secondly, it wants to keep downward pressure on the pound to boost exports. And finally, the prospect of still cheaper money has boosted financial markets and it [the Bank] fears a backlash if it fails to deliver.

"That doesn't mean rates at 0.1 per cent are a dead cert. But it will take even better economic news over the coming weeks to prevent them from happening", says Elliott.

For the Daily Telegraph's Allister Heath, the issue is more vexing. He says that forecast growth of 0.3 and 0.2 per cent in the next two quarters is in line with most economies in the West – and that the Bank's rapid revision implies it is uncertain about the future trend.

"But the Bank will not know that much more about the real state of the economy in a month or two, especially given that any genuine Brexit impact (positive or negative) will be a (very) long-term phenomenon.

"So if the Bank is so committed to cutting rates, even though neither it nor anybody else fully know what is going on, why did it not go the whole hog and slash them to zero in August?"

Some are less convinced that another rates cut is now certain. Kamal Ahmed writes in a blog for the BBC that the re-evaluation of the economy's prospects could continue in the months to come in relation to expected growth in 2017 and 2018.

"Looking at 2017, the MPC says it is harder to make a judgement, but if the present economic momentum continues, then expect an upgrade in growth forecasts for next year and 2018 after brutal downgrades last month."

He adds: "It [the Bank of England] still says that it is considering cutting interest rates again… but the chances of that must be lower given the better economic news."

Bank of England signals interest rate cut to near-zero

15 September

Rate setters at the Bank of England have hinted that they are likely to cut interest rates again to close to zero before the end of the year, despite the economy's resilience since the Brexit vote.

In the minutes of its latest meeting, published today, the Monetary Policy Committee (MPC) sounded a more optimistic note on the near-term effects of the shock referendum result – but warned that long-term concerns remain.

Panel members said economic activity was proving "somewhat stronger than expected" and they revised upwards the third quarter growth forecast from 0.1 to 0.3 per cent.

This would still be around half the rate seen in the second quarter, however, and policy makers are not convinced the more benign conditions will persist.

They said there had been no new data to change their view on the UK economy's long-term prospects, adding that business investment was assumed to be slowing down amid the uncertainty over the UK's future trading relationship with Europe.

The nine members said that if current forecasts for growth in the coming years are "broadly consistent" in November, when the next vote on rates takes place, "a majority is … expected to support a further cut in [the base rate] to its effective lower bound".

Bank of England governor Mark Carney has effectively ruled out negative rates due to their potential impact on the banking sector, putting the expected "lower bound" at around 0.1 per cent.

The November vote on rates is in accordance with a new calendar that will reduce the number of MPC meetings to eight per year.

"The Bank's view is that the Brexit process will take some time, and will create uncertainties for households and firms," said Ian Kernohan, an economist at Royal London Asset Management, according to The Guardian.

"Specifically, they expect business spending to slow more sharply than consumer spending in response to this uncertainty. I expect another rate cut in November," he added.

Emphasising the short-term strength of the economy, separate data published today by the Office for National Statistics showed that retail sales fell by just 0.2 per cent in August compared to July – and were up no less than six per cent year on year.

The Times says that even if sales stagnate in September, the sector would still see positive growth of 1.5 per cent for the third quarter as a whole, in line with the preceding three months.

Millions of UK savers 'devastated' by interest rate cuts

1 September

Millions of savers have been "devastated" by cuts to interest rates since the UK voted to leave the EU, a financial information firm says.

The Bank of England cut the base rate by 0.25 per cent earlier this month - and a further cut is expected later this year. The average easy access savings rate has fallen below 0.5 per cent for the first time in 300 years, with cash Isas dropping under one per cent.

As a result, savings rates were reduced on 354 financial products during August, says financial comparison website Moneyfacts. At least 50 were cut by more than 0.25 per cent, including the Halifax Help to Buy Isa, Norwich and Peterborough's Instant Isa and the Yorkshire Building Society's Triple Access Saver.

Moneyfacts' Rachel Springall said cutting the base rate to its lowest level in more than 300 years "has just given providers another excuse to slash rates".

She added: "It's clear to see that savers have been left devastated by persistent rate cuts across the market and will struggle to find decent returns for their cash in the immediate future."

Springall warned there could be further cuts to come, especially if the Bank of England reduces the base rate again.

US interest rates: Will Janet Yellen signal a rate hike at Jackson Hole?

26 August 2016

Federal Reserve chairwoman Janet Yellen is addressing the annual Jackson Hole meeting of the world's central bankers in Wyoming today – and some analysts think she will hint that US interest rates will rise this year.

Yellen is speaking at 3pm UK time on the subject of "The Fed's Monetary Policy Toolkit" - the "main event" at Jackson Hole this year, says The Guardian, and the markets have been "waiting all week" for it.

Investors were on "standby mode" yesterday, reports the Daily Telegraph. The FTSE 100 fell by 18.8 points as traders held their breath.

Writing in the Wall Street Journal, Steven Russolillo says markets have risen in recent weeks because the "lack of clear signals" from the Fed has given investors the confidence to buy and sell.

"Fed types do not just contradict each other, now they contradict themselves," UBS's Art Cashin wrote yesterday. He added that San Francisco's Federal Reserve boss, John Williams, had followed a "very dovish speech with a call to raise rates soon".

So will Yellen signal a rate rise? Some investors are confident she will after upbeat remarks by her colleagues in recent days, such as Esther George, the Kansas City Federal Reserve president, telling CNBC she was in favour of a gradual rise in rates.

Daniel Katzive, of BNP Paribas, told Reuters he expects a "hawkish message", paving the way for a rate increase in September.

"However, we do not expect the Fed to signal or embark on a series of rate hikes, which should limit the extent to which US real yields can recover from current low levels," he added.

Citigroup's Steven Englander, meanwhile, says investors expect a "dovish hike signal". He surveyed experts and found 85 per cent expected her to announce a rate increase.

Bank of America and Merrill Lynch economist Michell Meyer does not anticipate a clear message today, writing: "We do not expect much insight about the timing of the next Fed hike from Yellen’s speech."

But Russolillo says the Fed Reserve chief is "likely to keep her options open", despite the clamour for a clear expression of intention – meaning some will see the Jackson Hole speech as "much ado about nothing".

Not so, he adds: "Jackson Hole has historically proven to be an important platform in which future Fed policies were telegraphed to investors."

Halifax, Tesco and Nationwide defy interest rate cut

17 August

Several big-name high street mortgage lenders have defied the Bank of England by limiting or eroding altogether the benefit of the latest cut in the base interest rate.

Halifax has upped the rate on its two-year tracker mortgage for first-time buyers by almost double the 0.25 per cent reduction in base borrowing costs announced earlier this month.

The mortgage, with a 15 to 20 per cent deposit, now carries a rate of 2.04 per cent, up from 1.59 per cent and adding £86 a month to the cost of a 25-year £400,000 mortgage, says the Daily Telegraph.

A spokesman for Lloyds Banking Group, which owns Halifax, said it had minimised the impact on customers by increasing cashback by £500.

He added: "Base rate is only one of a number of factors we use to take into account when reviewing interest rates."

Tesco Bank has also increased its rates on 12 tracker mortgages in the past week. A two-year tracker for borrowers with a ten per cent deposit has risen 0.28 per cent to 2.83 per cent, cancelling out the rates cut and adding £57 a month to a 25-year £400,000 mortgage.

A spokesman said: "We have reviewed our mortgage tracker rates in line with market variation and whilst they have changed, they are still among the lowest rates currently available."

Nationwide increased a number of its tracker rates by a lower 0.1 per cent, meaning around 0.15 per cent of the base rate is still being passed on to prospective borrowers.

Bank of England governor Mark Carney had said lenders have "no excuse" not to pass on the rates cut, especially with the launch of a £100bn funding scheme designed to protect profit margins in the ultra-low-rates environment.

Andrew Montlake, a mortgage expert at Coreco, said the move, while it would be considered "sneaky", is "not uncommon in a falling market".

The good news for first-time buyers is that the wider sector does not appear to be following these lenders. Moneyfacts data show average tracker rates fell below two per cent for the first time ever yesterday.

Tracker rates have proved less popular in recent years as buyers have favoured the security of fixed-rate deals. Here, too, the average has hit a new record low, of 2.47 per cent.