Three days ago the Bank of England’s Monetary Policy Committee held interest rates at 0.25%. The accompanying summary for this decision reveals a significant change in language from the bank, one which began several weeks ago and is now starting to branch out into the mainstream.
Some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target. Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.
They expect inflation – a key marker for raising interest rates as proven by the Federal Reserve this year – to reach a peak of around 3% by October. This indicates a strong likelihood of rates going up before the end of the year, in line with the international directive of ‘normalising‘ monetary policy. The Fed began this programme of normalisation in 2016 after Donald Trump’s election. Now the UK and the Euro Zone are poised to follow their lead.
Running in conjunction with this is the path of Brexit negotiations. Here, the bank communicated that:
Projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.
To the Bank of England, Brexit is a cloak which provides the perfect diversion from their own actions. Already the likes of ex BOE chairman Mervyn King and former head of the European Commission, Romano Prodi, have said that failure to agree a trade deal between the UK and the EU by 2019 would result in economic calamity.
As rates start to rise, expect the scapegoat of Brexit to dominate the political discourse.
- The Bank’s rate-setting committee voted by 6-2 to leave official borrowing costs at their all-time low of 0.25%. But they hinted that rates would have to rise over the coming year to keep inflation in check.
- The Bank appeared to send a clear message to businesses and households that they should not expect borrowing costs to stay at their record low for much longer.
- The meeting minutes noted that if the economic picture evolved as the Bank was predicting, interest rates could be raised by more than financial markets are currently pricing in.
- The UK needs a “credible fallback” in case no EU trade deal is reached during Brexit negotiations, former Bank of England governor Mervyn King has said.
- Lord King said British negotiators needed to show Brussels the country has an alternative over a bad trade deal post-Brexit.
- He said the government “probably wasted a year” on its contingency plans.
- “It cannot succeed without a credible fallback position and that is something which I think is a practical thing that the civil service ought to be taking a lead on.”
- Mark Carney said Brexit is casting the biggest shadow over the U.K.’s economic outlook, as his confidence in an orderly departure from the European Union starts to fade.
- “The assumption of a smooth transition to a new economic relationship with the EU will be tested,” Carney said at a press conference Thursday, speaking after the announcement to keep rates at a record low. Of the all the factors determining the economy’s fate, “the most important is the outcome of the Brexit negotiation,” he said.
- The BOE’s predictions continue to assume an orderly Brexit and are based on a rate hike fully priced in by the third quarter of 2018. Carney said that at the moment, the bank does “not see any material evidence” that businesses “think that the transition would be anything but smooth.”
- The U.S. economy continued a strong summer, adding 209,000 jobs in July while the unemployment rate fell to 4.3 percent, the lowest since March 2001, according to a government report Friday.
- Economists surveyed by Reuters had expected the report to show growth of 183,000; the unemployment rate met expectations. A more encompassing rate that includes discouraged workers and the underemployed was unchanged at 8.6 percent.
- In addition to the strong July report, June’s 222,000 gain was revised up to 231,000 though May was cut from 152,000 to 145,000.
- If there was a blemish in the month’s numbers, it came from the distribution of jobs to lower-income sectors. Job creation was strongly titled to part time, which gained 393,000 positions, while full time fell by 54,000.
- New car registrations fell 9.3% in July from a year earlier, according to the Society of Motor Manufacturers and Traders (SMMT).
- The trade body said the market was falling – for the fourth month in a row – amid “growing uncertainty” over plans for Brexit.
- About 162,000 vehicles were sold last month.
- So far this year, 1.56 million cars have been sold, down 2.2% from a year earlier.
- Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices.
- “The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”
- He warned that the low rate environment can’t last forever and will have severe consequences once it ends.
- “I have no time frame on the forecast,” he said. “I have a chart which goes back to the 1800s and I can tell you that this particular period sticks out. But you have no way of knowing in advance when it will actually trigger.”
- One point he did make about timing is it likely will be quick and take the market by surprise. “It looks stronger just before it isn’t stronger,” he said. Anyone who thinks they can forecast when the bubble will break is “in for a disastrous” experience.”
- Tracking geopolitical and fiscal developments over the past several years is a bit like watching a slow motion train wreck; you know exactly what the consequences of the events will be, you try to warn people as much as possible, but, ultimately, you cannot reverse the disaster. The disaster has for all intents and purposes already happened. What we are witnessing is the aftermath as a forgone conclusion.
- This is why whenever someone asks me as an economic and political analyst “when the collapse is going to happen,” I have to shake my head in bewilderment. The “collapse” is here now. It is done. It is a historical fact. It’s just that not many people have the eyes to see it yet, primarily because they are hyper-focused on all the wrong things…