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Bank Woes Ensure Interest Rate Will Stay Low
inspector_monkfish
Posts: 9,276 Forumite
14:57 13May09 BOE WATCH: Bank Woes Ensure Interest Rate Will Stay Low
LONDON - The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year, and that there remains room to further increase its bond-buying program.
In recent weeks, a number of surveys have suggested that the U.K.'s economic contraction is easing, inspiring talk of a return to growth later this year.
The central bank's Monetary Policy Committee doesn't doubt that growth will return, citing the unprecedented monetary and fiscal stimulus provided since October, sterling's depreciation and an imminent turn in the stock cycle.
But in its quarterly Inflation Report, the MPC was much more cautious than in February, saying that continued problems in the banking sector mean the recovery will be slower in coming that it had previously expected, and more fragile when it arrives.
As a result, it signaled that it is unlikely to raise its key interest rate
in the early months of 2010, as investors had expected.
"The MPC ... are clearly nervous about the sustainability of the 'green
shoots' that have emerged," said Karen Ward, U.K. economist at HSBC. "As such, inflation still sits below their target at the two to three year horizon, leaving them open to more policy action, should it prove necessary."
The pound slumped in response to the bank's dovish tone, with the euro rising to GBP0.9012 from GBP0.8994 just prior to the report's release. Sterling also hit a session low of $1.5088 against the dollar, down from $1.5168 beforehand.
The new forecasts also explain why the MPC voted to increase its planned purchases of bonds to GBP125 billion from GBP75 billion at its meeting last week. The purchases are aimed at creating new money and boosting nominal demand.
According to the bank's projections, the U.K. economy reached a trough in the first quarter of this year, when it contracted 4.1% in annual terms. It should start growing again in early 2010, and return to its trend growth rate in the first half of 2011.
That was a significantly delayed and more muted recovery than forecast in February. The MPC's gloom reflected its assessment that while U.K. banks have raised enough new capital to remain solvent, they haven't raised enough capital to resume normal lending.
Indeed, BOE Governor Mervyn King said the banks may not even know how much capital they need.
"In the light of the state of balance sheets, especially in the financial
sector, the Committee judges that the risks are weighted towards a relatively slow and protracted recovery," with the flow of credit likely to be restricted for some while, BOE Governor Mervyn King said.
U.K. businesses continue to report difficulties borrowing money.
"Although there are signs that the pace of decline is starting to moderate, the big problem for many companies continues to be access to credit," said Richard Lambert, director general of the Confederation of British Industry. "From what businesses are telling us, the credit situation might not be getting any worse, but it isn't getting much better either."
Both of the MPC's forecasts for consumer price inflation showed price growth below the 2.0% target in the medium term, with the undershoot particularly pronounced when it assumed that it would raise its key Bank rate early next year, as investors had expected.
When the projections assumed that interest rates were kept on hold at 0.5% and the stock of asset purchases reached and remained at GBP125 billion for the duration of the forecast period, the MPC said inflation was likely to be somewhat below 2% in two years' time.
"The clear message is that any renewed tightening of policy - be it the
reversal of quantitative easing or a rise in interest rates - is a long way off," said Jonathan Loynes, U.K. economist at Capital Economics.
While King ruled out a conditional commitment to keep policy unchanged for a significant period of time, like the U.S. Federal Reserve and other central banks have done, he did indicate that it would probably be a while before monetary easing could be reversed.
"We will make up our mind month by month - that's the role of the Monetary Policy Committee," King said.
"What we have said, however, is that if you look at our fancharts, you can form your own judgments as to what is likely to happen to the policy level - both Bank rate and asset purchases, because you'll be able to see what we think of the balance of risks," he said. But he stressed there was "great uncertainty" surrounding the outlook.
The MPC needs to be "alert and ready to respond," and it is ready to tighten policy whenever it needs to, King said, indicating that that would involve a combination of interest rate hikes and bond selling.
LONDON - The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year, and that there remains room to further increase its bond-buying program.
In recent weeks, a number of surveys have suggested that the U.K.'s economic contraction is easing, inspiring talk of a return to growth later this year.
The central bank's Monetary Policy Committee doesn't doubt that growth will return, citing the unprecedented monetary and fiscal stimulus provided since October, sterling's depreciation and an imminent turn in the stock cycle.
But in its quarterly Inflation Report, the MPC was much more cautious than in February, saying that continued problems in the banking sector mean the recovery will be slower in coming that it had previously expected, and more fragile when it arrives.
As a result, it signaled that it is unlikely to raise its key interest rate
in the early months of 2010, as investors had expected.
"The MPC ... are clearly nervous about the sustainability of the 'green
shoots' that have emerged," said Karen Ward, U.K. economist at HSBC. "As such, inflation still sits below their target at the two to three year horizon, leaving them open to more policy action, should it prove necessary."
The pound slumped in response to the bank's dovish tone, with the euro rising to GBP0.9012 from GBP0.8994 just prior to the report's release. Sterling also hit a session low of $1.5088 against the dollar, down from $1.5168 beforehand.
The new forecasts also explain why the MPC voted to increase its planned purchases of bonds to GBP125 billion from GBP75 billion at its meeting last week. The purchases are aimed at creating new money and boosting nominal demand.
According to the bank's projections, the U.K. economy reached a trough in the first quarter of this year, when it contracted 4.1% in annual terms. It should start growing again in early 2010, and return to its trend growth rate in the first half of 2011.
That was a significantly delayed and more muted recovery than forecast in February. The MPC's gloom reflected its assessment that while U.K. banks have raised enough new capital to remain solvent, they haven't raised enough capital to resume normal lending.
Indeed, BOE Governor Mervyn King said the banks may not even know how much capital they need.
"In the light of the state of balance sheets, especially in the financial
sector, the Committee judges that the risks are weighted towards a relatively slow and protracted recovery," with the flow of credit likely to be restricted for some while, BOE Governor Mervyn King said.
U.K. businesses continue to report difficulties borrowing money.
"Although there are signs that the pace of decline is starting to moderate, the big problem for many companies continues to be access to credit," said Richard Lambert, director general of the Confederation of British Industry. "From what businesses are telling us, the credit situation might not be getting any worse, but it isn't getting much better either."
Both of the MPC's forecasts for consumer price inflation showed price growth below the 2.0% target in the medium term, with the undershoot particularly pronounced when it assumed that it would raise its key Bank rate early next year, as investors had expected.
When the projections assumed that interest rates were kept on hold at 0.5% and the stock of asset purchases reached and remained at GBP125 billion for the duration of the forecast period, the MPC said inflation was likely to be somewhat below 2% in two years' time.
"The clear message is that any renewed tightening of policy - be it the
reversal of quantitative easing or a rise in interest rates - is a long way off," said Jonathan Loynes, U.K. economist at Capital Economics.
While King ruled out a conditional commitment to keep policy unchanged for a significant period of time, like the U.S. Federal Reserve and other central banks have done, he did indicate that it would probably be a while before monetary easing could be reversed.
"We will make up our mind month by month - that's the role of the Monetary Policy Committee," King said.
"What we have said, however, is that if you look at our fancharts, you can form your own judgments as to what is likely to happen to the policy level - both Bank rate and asset purchases, because you'll be able to see what we think of the balance of risks," he said. But he stressed there was "great uncertainty" surrounding the outlook.
The MPC needs to be "alert and ready to respond," and it is ready to tighten policy whenever it needs to, King said, indicating that that would involve a combination of interest rate hikes and bond selling.
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)
(MSE Andrea says ok!)
0
Comments
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The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year
---
Until after the election that is....Not Again0 -
1984ReturnsForReal wrote: »The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year
---
Until after the election that is....
are we getting a new Monetary Policy Commitee then ?
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
An obvious solution strikes me when interest rates eventually need to come up without damaging the banks - allow the banks to gradually put up their interest rates while leaving the Bank of England rate low. That will:
* Help restore the banks balance sheets by encouraging savers
* Help damp down the predicted inflationary pressures
The government expended a lot of effort bullying the banks into dropping their rates when they didn't want to. Of course they look weak. Let them make commercial decisions instead of being dictated to by politicians.
Lending will only increase once the banks have more money to lend out.0 -
Lending will only increase once the banks have more money to lend out.
they have the money now, they just don't want to lend it !
they would rather park it with the central banksPlease take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
Not according to your original post!inspector_monkfish wrote: »The MPC's gloom reflected its assessment that while U.K. banks have raised enough new capital to remain solvent, they haven't raised enough capital to resume normal lending.0
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Not according to your original post!
exactly, what i'm saying is, the Banks aren't playing fair!!
they could 'resume normal lending' if they wanted to, as they have plenty of cash, but they are choosing not to at the moment..Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
LONDON - The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year, and that there remains room to further increase its bond-buying program.
Ok, this is bad. They are basically warning us that QE may go even further than the £150bn planned, while keeping rates at an all time low.
They know something that we don't.
This was dangerous to start with, but extending it, and basically stating that they could use QE further? Thats pretty damning.
This is starting to get into teritory which I'm finding frightening, and I knew we had to do a lot and suffer a lot of pain, but this is somewhat out of my comfort zone now.0 -
Graham_Devon wrote: »LONDON - The Bank of England Wednesday indicated that its key interest rate is likely to stay on hold for much of next year, and that there remains room to further increase its bond-buying program.
Ok, this is bad. They are basically warning us that QE may go even further than the £150bn planned, while keeping rates at an all time low.
They know something that we don't.
This was dangerous to start with, but extending it, and basically stating that they could use QE further? Thats pretty damning.
This is starting to get into teritory which I'm finding frightening, and I knew we had to do a lot and suffer a lot of pain, but this is somewhat out of my comfort zone now.
why are you talking like an undercover MI5 agent ?:D Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
Not necessarily. So far they have spent £75bn. They are now planning to spend another £50bn. That leaves them £25bn more to play with if they feel the need without going over the £150bn target.Graham_Devon wrote: »Ok, this is bad. They are basically warning us that QE may go even further than the £150bn planned0 -
Not necessarily. So far they have spent £75bn. They are now planning to spend another £50bn. That leaves them £25bn more to play with if they feel the need without going over the £150bn target.
In a few months time you wont know what they do because its all going private.Not Again0
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