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BOE:King's Sweden Visit Lifts Expectations Of Rate Cut
inspector_monkfish
Posts: 9,276 Forumite
14:02 28Sep09 BOE WATCH:King's Sweden Visit Lifts Expectations Of Rate Cut
LONDON - Expectations are mounting that the Bank of England will soon lower the deposit rate on reserves after the central bank confirmed that Governor Mervyn King last week traveled to Sweden for meetings with Riksbank officials.
Earlier this month, King told U.K. lawmakers that the BOE was considering reducing the deposit rate on a portion of the reserves held by banks, in an effort to improve the effectiveness of its quantitative easing policy, under which it buys government bonds using freshly created central bank money.
In early July, Sweden's Riksbank took the unusual step of charging banks 0.25% to hold deposits, having previously paid them 0.25%.
The BOE has confirmed that King had a series of official meetings, including some with the Riksbank, during his visit to Sweden Thursday and Friday.
"Given that Mervyn King has openly talked about lowering the interest rate that the Bank of England pays on commercial banks' deposits, such a visit can only fuel speculation that he is seriously interested in going down that path," said Howard Archer, chief U.K. economist at Global Insight.
"However, there are other matters he may well be keen to discuss such as the Sweden banking crisis in the 1990s and what happened with bank lending then," he said.
King and other BOE officials have frequently voiced concerns that the
continuing lack of credit availability could hinder a hoped-for economic
recovery.
Testifying to lawmakers earlier this month, King said that lowering the
deposit rate on reserves held above a certain level might help discourage banks from hoarding the cash that the BOE is pumping into the economy through its GBP175 billion quantitative easing policy.
But King also indicated that any cut should be regarded as a complement to rather than a replacement for any further bond buying.
"This may be a useful supplement. We will think about it, but it is not going to be a major change," King said.
It remains unclear whether responsibility for cutting the deposit rate would lie with the rate-setting Monetary Policy Committee or the BOE's management, but analysts believe that any action would be likely to be announced to coincide with the MPC's regular monthly policy decisions. The MPC next meets October 7 and 8.
The BOE pays an already low 0.5% on reserves, and some analysts are skeptical that lowering the deposit rate - even into negative territory - would have a significant impact on banks' behavior, since they are already receiving a far lower return than they could by lending or investing.
"The timing of the visit is certainly interesting, and could heighten
expectations that the BOE is set to follow the Riksbank and charge a negative rate for excess reserves," said Colin Ellis, European economist at Daiwa Securities SMBC.
"In any event, while such a move could offer support to short-dated gilts, we still think it would have little impact on banks' appetite for lending funds to households and businesses," he said.
There are strong expectations for a reduction in the deposit rate, with investors already pricing in a 100% chance of a 25 basis point cut and a 50% chance of a 50 basis point cut.
But while such a move would be seen as following the lead of the Riksbank, there are a number of differences between circumstances in Sweden and the U.K.
The Riksbank didn't primarily set out to apply a negative deposit rate. That was a byproduct of its decision to cut its key interest rate by 0.25% and maintain the 50 basis point gap with the deposit rate. The Swedish central bank never expected the cut in the deposit rate to have a big impact.
Since the Riksbank carries out daily fine tuning operations at 10 basis
points below the key rate, that means that only a tiny amount of money is actually liable for the bank's negative rate.
And while Swedish banks have to 'square off' every day, making good any shortfalls of cash or offloading any surpluses, the policy of quantitative easing in the U.K. means that banks are constantly in surplus, so the BOE would be unlikely to cut the rate paid on all reserves, analysts say.
But, despite the differences, "it is obviously sensible to tap the wisdom of the Riksbank given that they already have negative remuneration," said Alan Clarke, U.K. economist at BNP Paribas.
LONDON - Expectations are mounting that the Bank of England will soon lower the deposit rate on reserves after the central bank confirmed that Governor Mervyn King last week traveled to Sweden for meetings with Riksbank officials.
Earlier this month, King told U.K. lawmakers that the BOE was considering reducing the deposit rate on a portion of the reserves held by banks, in an effort to improve the effectiveness of its quantitative easing policy, under which it buys government bonds using freshly created central bank money.
In early July, Sweden's Riksbank took the unusual step of charging banks 0.25% to hold deposits, having previously paid them 0.25%.
The BOE has confirmed that King had a series of official meetings, including some with the Riksbank, during his visit to Sweden Thursday and Friday.
"Given that Mervyn King has openly talked about lowering the interest rate that the Bank of England pays on commercial banks' deposits, such a visit can only fuel speculation that he is seriously interested in going down that path," said Howard Archer, chief U.K. economist at Global Insight.
"However, there are other matters he may well be keen to discuss such as the Sweden banking crisis in the 1990s and what happened with bank lending then," he said.
King and other BOE officials have frequently voiced concerns that the
continuing lack of credit availability could hinder a hoped-for economic
recovery.
Testifying to lawmakers earlier this month, King said that lowering the
deposit rate on reserves held above a certain level might help discourage banks from hoarding the cash that the BOE is pumping into the economy through its GBP175 billion quantitative easing policy.
But King also indicated that any cut should be regarded as a complement to rather than a replacement for any further bond buying.
"This may be a useful supplement. We will think about it, but it is not going to be a major change," King said.
It remains unclear whether responsibility for cutting the deposit rate would lie with the rate-setting Monetary Policy Committee or the BOE's management, but analysts believe that any action would be likely to be announced to coincide with the MPC's regular monthly policy decisions. The MPC next meets October 7 and 8.
The BOE pays an already low 0.5% on reserves, and some analysts are skeptical that lowering the deposit rate - even into negative territory - would have a significant impact on banks' behavior, since they are already receiving a far lower return than they could by lending or investing.
"The timing of the visit is certainly interesting, and could heighten
expectations that the BOE is set to follow the Riksbank and charge a negative rate for excess reserves," said Colin Ellis, European economist at Daiwa Securities SMBC.
"In any event, while such a move could offer support to short-dated gilts, we still think it would have little impact on banks' appetite for lending funds to households and businesses," he said.
There are strong expectations for a reduction in the deposit rate, with investors already pricing in a 100% chance of a 25 basis point cut and a 50% chance of a 50 basis point cut.
But while such a move would be seen as following the lead of the Riksbank, there are a number of differences between circumstances in Sweden and the U.K.
The Riksbank didn't primarily set out to apply a negative deposit rate. That was a byproduct of its decision to cut its key interest rate by 0.25% and maintain the 50 basis point gap with the deposit rate. The Swedish central bank never expected the cut in the deposit rate to have a big impact.
Since the Riksbank carries out daily fine tuning operations at 10 basis
points below the key rate, that means that only a tiny amount of money is actually liable for the bank's negative rate.
And while Swedish banks have to 'square off' every day, making good any shortfalls of cash or offloading any surpluses, the policy of quantitative easing in the U.K. means that banks are constantly in surplus, so the BOE would be unlikely to cut the rate paid on all reserves, analysts say.
But, despite the differences, "it is obviously sensible to tap the wisdom of the Riksbank given that they already have negative remuneration," said Alan Clarke, U.K. economist at BNP Paribas.
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
-
Right, best guess here IM. He'll cut rates, to lessen the devaluing of the £, & as a tentative first step to prevent the possible spectral figure of inflation? Markets will approve, & cable will bounce skywards.
How'd I do?It's getting harder & harder to keep the government in the manner to which they have become accustomed.0 -
personally, i don't think they'll do anything in october
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
inspector_monkfish wrote: »personally, i don't think they'll do anything in october
Dang! Started to think I was understanding this malarky!
It's getting harder & harder to keep the government in the manner to which they have become accustomed.0 -
lemonjelly wrote: »Dang! Started to think I was understanding this malarky!
dont get me wrong, you are understanding it
just gotta think outside the box sometimes !!!
learn to expect the unexpected also !!
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
inspector_monkfish wrote: »dont get me wrong, you are understanding it
just gotta think outside the box sometimes !!!
learn to expect the unexpected also !!
Er, thanks, I think.
Exactly how many variables do I have to consider?;):cool:It's getting harder & harder to keep the government in the manner to which they have become accustomed.0 -
lemonjelly wrote: »Er, thanks, I think.
Exactly how many variables do I have to consider?;):cool:
everything,..... and more these days !!Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)0 -
inspector_monkfish wrote: »everything,..... and more these days !!
:rotfl:
See, I was wrong again - I thought your answer would be in the region of 61.4 million variableshttp://www.statistics.gov.uk/cci/nugget.asp?ID=6 It's getting harder & harder to keep the government in the manner to which they have become accustomed.0
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