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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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What a copy and paste article. LOL.
Come on.. Everyone knew this was happening? Did'nt you?
The government say they are easing the economy but the model they are working on is a mix of the japanese economy. Interest rates did'nt rise until 2 years and even then only slightly. Inflation was horrendous though.
Can't see they came inflation either way. No government (except Thatcher Iron Lady with the iron fist) would do anything uptil May 2010 until at least the new government is in place.
Does the above phrase sound like a chinese kung fu movie. LOL.Motto: 'If you don't ask, you don't get!!'
Remember to say thank you to people who help you out!
Also, thank you to people who help me out.0 -
LOL LOL LOL!!!1oneone ROFLOMG LOLThis is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0
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Brokers,
I've just pinned this to my wall and included copy in my TCF IN ACTION file to demonstrate 'TCF in action' in the sense I have evidence that I take an interest in the economic outlook and the impacts on interest rates going forward.
So thanks for the article OP.0 -
Conrad.
Are you just making your TCF look good when the FSA know on your door?
I believe in these two years, all mortgage advisors, independent or with a bank/building society will be mystery shopped more often by the FSA.
Just make sure your compliance are up to check and don't you have all the necessary paper work. LOL.Motto: 'If you don't ask, you don't get!!'
Remember to say thank you to people who help you out!
Also, thank you to people who help me out.0 -
Am so torn with this.
Yay that means the BOE rate is set to stay for the next 18 months, meaning my rate stays at 1.49%
But !!!!!!, the company I work for has a hold in the construction and home improvement industry which means the longer this goes on for, the sicker it looks.The will to save every money saving penny we can0 -
Am so torn with this.
Yay that means the BOE rate is set to stay for the next 18 months, meaning my rate stays at 1.49%
But !!!!!!, the company I work for has a hold in the construction and home improvement industry which means the longer this goes on for, the sicker it looks.
just keep your head down, and enjoy the low rates
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
Am so torn with this.
Yay that means the BOE rate is set to stay for the next 18 months, meaning my rate stays at 1.49%
But !!!!!!, the company I work for has a hold in the construction and home improvement industry which means the longer this goes on for, the sicker it looks.
Hold your horses. No need to panic. Did'nt the government make up a story about the house market moving? LOL.
Anyway, would not worry. I would bet the government will release a new scheme by the end of the year where they will borrow money to new businesses or SME's directly. Many countries are offering this now.
PS. Anyone who goes to Mexico and gets Swine Flu (pig), gets a free holiday to mexico for life. Did anyone read this? Could'nt stop laughing.....................
Erm.. death? or free mexican holiday with squits included? LOL.
:rolleyes:Motto: 'If you don't ask, you don't get!!'
Remember to say thank you to people who help you out!
Also, thank you to people who help me out.0 -
Unless your are a 10 year old girl please stop typing "LOL".This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0
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Unless your are a 10 year old girl please stop typing "LOL".
LOL.
:p:p:p:p:p:p:p:p:p:p:p:p:p:p
:money::money::money::money::money::money::money::money::money::money::money::money::money::money::money:Motto: 'If you don't ask, you don't get!!'
Remember to say thank you to people who help you out!
Also, thank you to people who help me out.0 -
And it's Ruxpin This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0
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