Mixed day for European markets
The slump in the pound as the Bank of England hinted any further rate rises were not imminent helped push the FTSE 100 just shy of a new record close.
Sterling continues to suffer, after Mark Carney insisted that future rate rises would be gradual and limited.
It’s currently down 1.8 cents, or 1.3%, against the US dollar at $1.3067 - a very sharp move (especially as interest rates have gone up!)
The pound is dropping after the Bank of England hiked interest rates https://t.co/Czc4ub6XnK pic.twitter.com/281tG7EUwe
— Business Insider SG (@BusInsiderSG) November 2, 2017
Elsewhere the picture was more mixed, with markets undermined by a rising euro. In the US, Wall Street awaited news of the next Federal Reserve chair and the non-farm payroll numbers on Friday. The closing scores in Europe showed:
- The FTSE 100 finished up 67.36 points or 0.9% at 7555.32, less than a point below the all time closing high set in mid-October
- Germany’s Dax dipped 0.18% to 13,440.93
- France’s Cac closed 0.07% lower at 5510.50
- Italy’s FTSE MIB added 0.24% to 23,046.05
- Spain’s Ibex ended down 0.47% at 10,457.8
- In Greece, the Athens market lost 0.6% to 762.49
On Wall Street, the Dow Jones Industrial Average is currently up 23 points or 0.1%.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Updated
Today’s market reaction to the Bank of England’s rate decision shows how difficult it is to judge how events will be received, says Laith Khalaf, senior analyst at Hargreaves Lansdown:
The market has delivered yet another salutary lesson on why not to invest on the basis of macro-economic events like an interest rate rise. Even if you guess the right outcome, predicting the effect on asset prices is a different ball game.
In theory an interest rate rise should be positive for the pound and the banking sector, and negative for gilts and the FTSE 100. Today the pound fell, as did Lloyds and RBS shares, while gilts and the broader Footsie rallied, turning the investment textbook on its head.
This is largely because markets wanted more than a rate rise from the Bank of England today, and were pricing in a more hawkish stance on the future path of monetary policy. As things now stand, it looks like we’re only going to get two rate rises in the next three years.
Markets therefore have had to retrace their steps and pare back some of the price movements we have seen in misplaced anticipation of a more hawkish Bank of England.
Looking forward rates can be expected to rise slowly and gradually, unless there is a very negative, or indeed a very positive, Brexit surprise. That will be supportive of equity markets and continue to offer little protection to cash savers from the ravages of inflation. In other words, not that much has changed.
The Economist Intelligence Unit also expects the next UK rate rise to be delayed:
After today's hike we expect #BoE to go into wait-and-see mode. Even if data is firm, will avoid policy fine-tuning. Expect next one in 2019
— Danielle Haralambous (@DHaralambous) November 2, 2017
Fitch: another UK rate rise unlikely in next 12 months
The UK interest rate rise should not have a huge impact on the economy, and there is not likely to be another increase in the next year, says ratings agency Fitch:
The Bank of England’s (BoE) decision to increase UK interest rates by 25 bp partly unwinds the monetary stimulus it provided last summer, and is unlikely to have a large economic impact. The BoE looks set to tighten policy slowly, but the first UK rate hike in over decade highlights how shrinking output gaps and tighter labour markets are pushing central banks towards interest rate normalisation...
Fitch has for some time been expecting the post-referendum interest rate cut to be reversed, although in our most recent Global Economic Outlook (September 2017), we expected this to happen in early 2018. The MPC summary said that all members agreed that future increases “would be expected to be at a gradual pace and to a limited extent,” and that monetary policy “continues to provide significant support to jobs and activity.”
We think another increase is unlikely in the next 12 months, given the impact of Brexit uncertainty on the outlook for investment. Today’s decision does not alter our UK growth forecasts , which see a net trade boost partially offsetting slower domestic demand this year, enabling real GDP to rise by 1.5%, before slowing to 1.3% next year. But it remains to be seen how firms and households adjust to a shift in the monetary policy stance after such a long period without a rate rise.
Updated
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FTSE closes just shy of new peak
The FTSE 100 has closed, and it didn’t quite make a new record.
The index is up 0.9% at 7555.32, less than a point below its all time closing high set on 12 October.
The fall in sterling of course has provided the support for the index, with the pound down 1.4% against the dollar and 1.7% against the euro.
The pound has been falling on the basis that the Bank of England’s rate rise is a dovish one, and further increases are not likely in the near term.
But Capital Economics believes the markets may be underestimating the situation:
We continue to think that the markets are underestimating how quickly rates will rise in the UK, though, as the economy weathers the uncertainty over Brexit well. Only one further 25bp increase is discounted in the overnight indexed swap (OIS) market between now and the end of 2018, whereas we anticipate that there will be three – taking Bank Rate to 1.25%.
Admittedly, investors might be anticipating rather more tightening next year than is implied by OIS rates. This is because the future overnight rates implied by these financial market instruments include term premiums, which may be negative.
But there is probably still a substantial difference between investors’ and our own expectations for Bank Rate. For this reason we think that UK monetary policy will provide some renewed support to sterling before long.
Sterling likely to recover, as Bank of England proves not so dovish after all. See our Daily: https://t.co/PA6107qWvj
— Capital Economics (@CapEconMarkets) November 2, 2017
The continuing fall in the pound has re-energised the FTSE 100, which is packed full of overseas earners who should benefit from a weaker sterling.
The leading index is now up 0.8% at 7553, and while that is well below the intra-day peak of 7598, it is not far off the record close of 7556. And there is only another half an hour or so of trading to go.
It’s not getting any better for the pound.
It is now at a three and a half week low against the dollar, and on track for its biggest one day fall against the euro in 13 months.
Back with the UK rate rise, and Amit Kara, head of UK macroeconomic forecasting at thinktank the National Institute of Economic and Social Research, said :
The MPC voted 7-2 for a 25 basis points increase in Bank Rate, thereby reversing one of the three stimulus measures injected by the Bank last August in response to the EU referendum result. The economy has performed better than the Bank’s post-Referendum forecast with economic growth stronger and unemployment lower. Inflation however, has exceeded the target and is now set to rise above 3 per cent in October. Although better-than-expected, economic growth overall is subdued compared with history.
The MPC has also signalled a gentle rate hiking path that is similar to our forecast published yesterday. We expect the policy rate to rise by 25 basis points every six months until the Bank Rate reaches 2 per cent in 2021.
Wall Street in mixed start
US markets have made a cautious opening, as investors digest a summary of the Republican’s proposed tax reforms, which include slashing corporate tax rates. More details are due shortly.
There is little else on the economic agenda, although the President’s choice for the next Federal Reserve chair is due to be announced later. Craig Erlam, senior market analyst at Oanda, said:
The BoE’s job may be done for the day but the fun may be just beginning for markets, with details of Trump’s tax reforms and the new Fed Chair announcement still to come. Jerome Powell is expected to be announced as Janet Yellen’s successor late on in the session which will leave another seat available on the Board of Governors for Trump to fill. Certain candidates may have missed out on the position of Chair but with other important roles to be filled, there’s potential for them to join Powell at the top.
The Dow Jones Industrial Average is currently up just 0.05% while the S&P 500 and the Nasdaq Composite have both slipped 0.2%.
Here’s an interesting stat from M&G investment director Ritu Vohora looking at how savings and investments have performed since the last rate hike:
Our calculations show that £1,000 saved into a regular savings account in July 2007, the last time we had an interest rate hike, would be worth just £789 today in real terms, while the same sum invested in the FTSE All Share could have grown to £1,297 after accounting for inflation.
BoE move prompts some banks to lift rates but Lloyds. Barclays and HSBC wait
Some banks have already begun announcing their own rises following the Bank of England’s base rate increase from 0.25% to 0.5%.
Yorkshire Building Society says standard variable rate mortgages will rise by 0.25% to 4.99% but its Accord mortage rates fall from 5.34% to 4.99%.
Savers get the full rate with 0.25% added to all variable rate accounts. Mike Regnier, chief executive at Yorkshire Building Society, said: “It has been a tough few years for savers, so we’re delighted to be able to pass on the full bank rate increase.”
TSB says it will raise rates by the full amount on its variable rate savings, mortgage and base rate linked credit card accounts, putting customers back into the position they were at in August 2016 before the Bank cut rates by 0.25%.
The changes will come into effect on 30 November 2017 for credit card customers, and the next day for mortgage and savings accounts.
But Britain’s largest mortgage lender Lloyds Banking Group said it would review the position but would make no immediate change except on products which track the base rate. It said: “The Bank of England base rate is only one of the many factors that influence the cost of lending.”
HSBC will raise tracker mortgages on Friday in line with the base rate increase, and says it will review other rates “in the light of this [base rate] decision.” A statement from HSBC said: “As tracker mortgages are directly linked to the base rate, these will go up in line with base rate as of tomorrow.
“On average, those with an HSBC tracker mortgage with £100,000 balance would see a monthly increase of £12 per month and an increase of £24 for those with a £200,000 outstanding balance.”
On savings accounts, HSBC said: “While our savings rates are not directly linked to the Bank of England base rate, we will be reviewing these in light of this decision and other factors, and will make our customers aware of changes in savings rates at the earliest opportunity.”
Barclays also said it was reviewing the situation. Meanwhile Nationwide Building Society had already said it would increase savings rates by 0.25% for all members who received a reduction of 0.25% after the rate cut in August 2016.
It had said its mortgage rates would also increase in line with the base rate rise.
Here’s an analysis of the rate rise by our economics editor Larry Elliott:
It’s been a long, long time coming. The last time the Bank of England raised interest rates in July 2007, Sir Mervyn King was in charge at Threadneedle Street, Barack Obama had only recently said he would run to be US president and Gordon Brown had finally replaced Tony Blair as prime minister.
Official borrowing costs are now back to where they were between early 2009 and August 2016, when there was an emergency cut in rates following the Brexit vote. The recession the Bank feared did not materialise and so – with inflation above its 2% target and the unemployment rate at its lowest in more than four decades – there has been a modest tightening of policy.
The Bank was keen to point out that it was still providing help to an economy that has weakened noticeably since the turn of the year, just not quite as much stimulus as hitherto. That’s clearly correct: with the cost of living rising at 3% annually and bank rate at 0.5%, real (inflation-adjusted) interest rates are still negative.
Even so, the monetary policy committee’s decision to raise rates now is not entirely convincing.
His full piece is here:
Sterling slide continues but FTSE 100 off its best levels
Sterling is still on the slide despite the UK rate rise, following the Bank’s comments that any further increases will be gradual and limited.
Against the dollar, the pound is down 0.97% at $1.3116, while against the euro it is 1.45% lower at €1.1233. The sterling index in on track for its biggest one day fall in almost five months, according to Reuters, down 1.3%.
And while the fall in the pound is supporting the FTSE 100 - chock full as it is of overseas earners who benefit from weak sterling - the leading index is off its best levels. With the Bank warning about the economy amid Brexit uncertainty, the index is up 0.3% at 7510 having earlier climbed as high as 7552.
Summary: Mark Carney defends Britain's first rate hike in a decade
Right, a recap is in order.
The Bank of England has raised Bank Rate from 0.25% to 0.5%, a move that was generally expected following recent hints. The rate rise is designed to pull inflation down, protecting households from the rising cost of living.
It means floating-rate mortgages and saving rates should both rise.
But two deputy governors refused to support the move, arguing in vain that wage growth isn’t strong enough.
The moves has already been criticised by the TUC, which says:
“Today’s hike is a hammer blow for those in problem debt, whose repayments will now rise.
“The Bank of England has made the wrong call – but the government must not hide behind it.
Surprisingly, the pound has fallen sharply since the announcement. That’s because the Bank now sounds more cautious about the path of interest rate rises.
Bank of England's trade-weighted sterling index on course for its biggest one-day fall in almost 5 months pic.twitter.com/hGDbgzeGuT
— Mike Dolan (@reutersMikeD) November 2, 2017
The rate rise was accompanied by a stern warning from the BoE that the Brexit vote is now having a ‘noticeable’ impact on the UK economy. It is pushing inflation up and weighing on business investment.
Bank of England governor Mark Carney defended the move at a press conference in London, saying that it was time to ‘take the foot off the accelerator’.
Today’s hike takes borrowing costs back to their level between 2009 and 2016. Carney was pretty clear that interest rates will remain at lowish levels for a while:
“To be clear, even after today’s rate increase, monetary policy will provide significant support to jobs and activity.
“And the MPC continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.”
Carney told reporters that UK households are well-placed to handle a rate increase, as:
“Fully 60% of mortgages are now at fixed interest rates.
Even with this Bank Rate increase, many households will re-finance onto lower interest rates than they are currently paying by around 30 basis points for those moving from an expiring two-year fixed rate deal to around two percentage points for someone refinancing an expiring five-year fixed rates deal.
But Mihir Kapadia of Sun Global Investments, fears trouble ahead:
It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious loop, especially as Brexit woes continue to weigh down on the UK’s economy
Mark Carney also offered the hope that real wages, which are currently shrinking, will rise in 2018. Today’s rate hike is an attempt to pin inflation down, so that people have more spending power.
Carney also refused to respond to criticism from Tory MP Jacob Rees-Mogg, who claimed the governor was an enemy of Brexit.
Carney insisted that the Bank’s goal is simply to get inflation down towards the 2% target, while keeping unemployment low.
Updated
Q: There are forecasts that the City could lost 75,000 jobs though Brexit - so could the banking sector force the Bank of England to rethink its plans if they trigger their own Brexit contingency plans?
Carney sounds relaxed about this possibility.
For one thing, the BoE is concerned about the whole economy, not just the City.
Secondly, that 75,000 figure is plausible, but in the fullness of time -- if there isn’t an agreement with the EU over financial services after Brexit.
And that’s the end of the press conference!
Q: How bad would Brexit have to get before the Bank revises its forecasts downwards?
Mark Carney says that UK businesses are, in general, expecting a transition deal to be agreed between Britain and Brussels.
So what matters is what businesses expect, not whether there is a little more or less progress each month.
Once we know what the deal is, or if there isn’t one, the Bank will reassess the situation, he explains.
Q: Ten years after the financial crisis, are we reaching a point where the downside of loose monetary policy (low interest rates and QE) are outweighing the benefits?
No, Carney replies. He argues that the benefits are still worth it -- and any negative consequences (such as income and wealth inequality) can be tackled through other measures.
Q: Is today’s interest rise partly due to concerns over the pound? Are you trying to prop up sterling to prevent it weakening too much as other central banks change monetary policy?
No, says Carney firmly.
More from Carney on Brexit:
Carney says the Bank can "help make Brexit a success" by targeting inflation at 2% and ensuring the stability of the banking system
— Richard Partington (@RJPartington) November 2, 2017
Even more from Carney: Getting inflation back to 2% will help make Brexit a success https://t.co/G9kDKUk5UR
— ForexLive (@ForexLive) November 2, 2017
Q: How can we boost the UK’s productive capacity? Have you any advice for other policymakers?
Carney bats this question straight over to deputy Ben Broadbent -- perhaps the governor doesn’t want to stir up a row with the government!
Broadbent says it’s very hard to diagnose and cure the UK’s problems in realtime, pointing out that economist still argue about why Britain had a decade of lost productivity in the 1860s
Q: Is the MPC fundamentally split over the path of monetary policy [after today’s 7-2 split], or will you move as one in future?
Impossible to say, Carney replies. The Monetary Policy Committee have a range of views, and the public the media will hear from them in the coming weeks.
Carney defends BoE in face of criticism
Q: The Bank’s estimate of the supply capacity in the UK economy is much lower than independent forecasters. So what do you say to people like Boris Johnson, who say you’re a pessimist, or Jacob Rees-Mogg who calls you an enemy of Brexit?
Let’s not personalise this, Carney shoots back, saying he’ll ignore the last part of the question.
The message to the people of the United Kingdom is that the Bank of England is doing its job..... to bring inflation sustainably back to target while supporting jobs and activity.
Chris Giles of the Financial Times is slapped down by Mark Carney for personalising his question #InflationReport
— Shaun Richards (@notayesmansecon) November 2, 2017
Updated
Q: Are you comfortable with the market forecasts for two more rate hikes during the next three years?
Carney says that on a ‘broad-brush’ basis, it gets the Bank roughly where it wants to be on inflation and growth. That’s a yes, then.
Q: Today’s inflation report doesn’t suggest that the economy has improved, compared to August’s report. So why raise rates right now, rather than waiting to see how the economy performs in the next few months?
Carney says that ‘unit labour costs’ have risen (even if wages haven’t), showing that firms are facing higher costs for employing people.
On a broader level, there is a limit to how long the Bank of England can tolerate inflation being over its target.
We have stretched our targets, and waited a long time, before deciding to tighten policy a little today.
Carney adds that the Bank wants people to trust them to keep inflation under control, and maintain the stability of the financial system, as the UK goes into Brexit.
#Carney why now? "Must pay attention to infl target so there's credibility on inflation as we move into Brexit'. He may come to regret that
— BlondeMoney (@MarketBlondes) November 2, 2017
Q: How high will interest rates rise before the Bank of England starts to unwind its bond-buying stimulus scheme?
Carney declines to give a target, but says the BoE’s plan is to use interest rate changes as their primary tool before turning to QE.
Updated
Deputy governor Ben Broadbent suggests that we’re all getting too excited about today’s rate rise.
Before the crisis, interest rates would move every four months he says.
Q: The last time the Bank of England raised rates (in 2007), it was forced to cut a few months later. So if the same thing happens again, will it be a nimble response or can we say you’ve made a mistake?
Carney leans towards the ‘nimble response’ option (of course!).
.@BenChu_ goes for it, asks Carney if this will be seen as a policy mistake. "Let me reflect on that," he says, to moderate laughter.#BoE
— Tom Porter (@TomPorterEE) November 2, 2017
He then explains that Britain faces uncertain time, due to the EU referendum vote.
The Bank is already balancing the trade-off between inflation and job losses.
Future policy changes (interest rate rises, or falls) will primarily be determined by how the Brexit negotiations play out.
Mark Carney: We expect pay rises to pick up in 2018
Q: Many people will be surprised to hear you say that real wages will start rising soon. Why do you think that?
The UK inflation rate (currently 3%) should start falling in 2018, Carney replies. That means the cost of living will take a smaller bite out of wages.
And on the earnings side, the Bank believes that pay rises (currently 2.1%) will pick up in 2018, as productivity picks up.
So there should be a ‘gradual’ pick up in real wages.
But don’t get excited -- wage growth is still expected to be below historical averages in a couple of years time.
Q: Today’s rate rise follows several interest rate rises in America, with more expected. In Europe, the ECB will slow its stimulus programme in January....
So...are global central banks now moving together to withdraw the stimulus pumped into the world economy since the crisis?
Mark Carney says the global economy is doing very well -- if it were a 12-cylinder engine it would be firing on 11 of them.
So yes, the stance of monetary policy is changing in the face of a synchronised pick-up in global growth.
But Britain is lagging behind in this growth revival, he adds.
'The UK is participating a little less in this global upswing' - BoE Governor Carney
— Chris Bailey (@Financial_Orbit) November 2, 2017
Updated
Carney says weak productivity since the crisis, "reinforced" by Brexit, is constraining the speed limit of the economy before prices rise.
— Richard Partington (@RJPartington) November 2, 2017
Carney says that the Brexit vote has exacerbated Britain’s long-standing productivity problems, by deterring businesses from making new investments.
This is affecting the amount of spare capacity in the UK economy (a key factor on how fast the Bank will raise interest rates).
Carney drops a hint that the Bank will rethink its forecasts if Britain agrees a deal with Brussels:
Carney says the Bank could recalibrate monetary policy if a Brexit deal is agreed.
— Richard Partington (@RJPartington) November 2, 2017
Q: Should banks pass this rate rise onto savers?
We do expect it to be passed on, Carney replies, pointing out that banks passed on last August’s rate cut.
Here’s a video clip of Mark Carney speaking at today’s press conference:
These are not normal times for Britain's economy, Mark Carney says after rate increase https://t.co/SzHlofIBvi pic.twitter.com/dGlLKHrPwp
— Bloomberg (@business) November 2, 2017
Q: Is today’s hike the start of a rate rise cycle?
Mark Carney says the Bank’s forecasts are based on two more rate rises over the forecast horizon (the next three years).
We need those rate rises to get inflation back to target, and prevent the economy running ‘too hot’, he adds.
Deputy governor Sir Dave Ramsden is alongside Mark Carney - but he refuses to say why he voted AGAINST today’s interest rate hike.
Dave Ramsden ducks the opportunity to say why he voted against the Governor - as one of the 2 members to vote for a hold
— Mark Broad (@markabroad) November 2, 2017
Governor Carney is now taking questions.
Q: Why have you raised interest rates today, and pushed up the cost of living for millions of people?
Carney repeats his line about taking the Bank’s foot off the accelerator. He argues that UK growth isn’t subdued (although slower than historic norms) pointing out that employment is at record highs.
Carney also argues that raising rates will bring inflation down, and help protect consumers from falling real wages.
Onto Brexit, and Carney says Britain’s exit from the EU is the biggest factor determining the country’s long-term economic prospects.
He says the Brexit vote has already pushed up prices and weighed on growth.
Mark Carney: "The decision to leave the European Union is already having a noticeable impact." Marked slowdown in the economy #Brexit
— Kamal Ahmed (@bbckamal) November 2, 2017
Carney: Households are well-placed to handle rate rise
Mark Carney insists that UK households are “well positioned” for today’s interest rate rise.
Most mortgages are on fixed-rates, he continues. And many people who refinance their mortgages soon will probably move to cheaper rates than before.
Even after today’s rise, monetary policy is still very loose, Carney continues, and will continue to support the economy and keep unemployment low.
Carney says further rate hikes will be gradual and limited. Says monetary policy will continue to support jobs and activity
— Richard Partington (@RJPartington) November 2, 2017
Mark Carney begins his press conference by confirming that Bank Rate has been raised by 0.25% to 0.5%.
He says that with prices rising, and spare capacity falling, inflation is “unlikely to return to the 2% target” without an increase in interest rates.
But these are not normal times, he continues.
Brexit will redefine the UK’s relationship with Europe, and will have consequences on the movement of goods, services, people and capital, as well as the real incomes of households, he continues.
So, with domestic inflationary pressures building, Carney says:
The time has come to ease our foot off the accelerator.
Mark Carney's press conference
Over at the Bank of England, Mark Carney is facing Britain’s economics journalists to explain today’s interest rate rise.
You can watch it live here.
Future interest rate rises will depend heavily on Britain’s exit from the EU, says Trevor Greetham, Head of Multi Asset at Royal London Asset Management:
We expect the Bank of England to wait and see before making further changes. As the Bank made clear in their statement, Brexit is still the elephant in the room and there are considerable risks to the economic outlook and to sterling, which sold off in the aftermath of the announcement.
“Nearly eighteen months on from the referendum, all options remain plausible. It’s hard to imagine a continued tightening of monetary policy in a disruptive no deal outcome, and in this scenario sterling could easily fall another 10 to 15%. On the other hand, if permanent single market membership becomes likely, or if we see a reversal of the decision to leave the EU, the Bank of England would be comfortable raising rates further. In this case, sterling would probably rise 10 to 15%.
Don’t expect much improvement in “crap” savings rates after today’s rate hike, says moneysavingexpert.com’s Martin Lewis.
“Low interest rates have been a plague for many with savings, especially those who retired and expected to live off the interest. So rate rises are generally good news for them – indeed we’ve already seen rates crawl up in expectation. The top easy access deal is now 1.3%, compared to just 1% a few months ago. This means I doubt we’ll see the top best-buys rise by the full 0.25% over the next few weeks. With a little bit of crystal ball gazing I’d say we’ll see them max out at 1.4% to 1.5%.
“Yet many people have money in savings accounts already paying pitiful, spitworth rates like 0.1%, and they are unlikely to rise. Those in a middling account paying about 0.5% may see an increase over the next few weeks. But if you’re earning less than 1%, it’s a crap account anyway so you should ditch and switch.”
KPMG: Consumers face a hit
Millions of Britain’s homeowners and credit card holders have never experienced an interest rate rise before. So today’s rise could be a nasty shock.
Yael Selfin, chief economist at KPMG UK, explains:
Long suffering savers will rejoice in today’s news of a first rise in UK interest rates in over a decade, but banks and insurers should also beware of the potential impact on their liabilities as their customers feel the strain. Consumers are already under pressure from falling real wages and the rise in consumer debt. So even a mild and gradual course of rate rises is likely to make a bigger impact this time.
“A decade of no rate rises has made many households complacent about the prospects of higher interest rates when considering their finance
Today’s interest rate hike might be the last one for a while, says Jeremy Cook, chief Economist at WorldFirst.
“The all-important guidance for the future is that this may be the only rate rise for a while.
For the Bank to drop the line that ‘rates may need to rise more than the market expects’ is not a supportive move for future rate rise expectations.
MPC couldn’t come out and say ‘this is a one and done hike’ but these minutes are hardly supportive of a ladder in rates from here
— WorldFirst (@World_First) November 2, 2017
TUC: Rate rise is a mistake
TUC General Secretary Frances O’Grady says the Bank of England has blundered by raising interest rates today.
“This is the last thing hard-pressed families need. With living standards falling, the economy needs boosting not reining in.
“Today’s hike is a hammer blow for those in problem debt, whose repayments will now rise.
“The Bank of England has made the wrong call – but the government must not hide behind it.
“Working people are paying the price for ministers’ failure to get wages rising. And for their failure to invest in jobs and services when interest rates were so low.”
Another important point -- the Bank of England has dropped its warning that interest rates might rise faster than the City expected over the next few years.
That reference was included in the minutes of September’s meeting, when the Bank said:
If the economy were to follow a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast than the path implied by the yield curve underlying the August Report.
This hint that City traders were behind the curve has been dropped from today’s minutes.
That helps explain why the pound has fallen so sharply since noon.
This is important
— stewart hampton (@stewhampton) November 2, 2017
*BOE DROPS LINE THAT RATE MAY NEED TO RISE MORE THAN MKT EXPECTS
Bank of England: Brexit vote is hurting
The Bank of England has also warned that Britain’s decision to leave the European Union is having a “noticeable impact on the economic outlook”.
It says:
The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.
And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.
But despite these concerns, it has taken the plunge and raise Bank Rate to 0.5%.
The pound has tumbled
Right, this is important.
The Bank of England says it only expects interest rates to rise gradually over the next three years.
The minutes of today’s meetings make it clear that the MPC is moving cautiously, with its first interest rate rise since Gordon Brown was prime minister.
The Bank says:
“The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target.
All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent,”
That has had an immediate impact on sterling -- the pound has now fallen by one cent against the US dollar, to $1.314.
Any futures UK rate hikes will likely be "at a gradual pace and to a limited extent", says the Bank of England. Sterling falls sharply. pic.twitter.com/asWtLIUHZm
— Jamie McGeever (@ReutersJamie) November 2, 2017
Updated
It’s official:
MPC vote by a majority of 7-2 to raise #BankRate to 0.50% pic.twitter.com/rkVgh6AZyX
— Bank of England (@bankofengland) November 2, 2017
Bank of England split 7-2
Today’s decision wasn’t unanimous.
Two deputy governors, Sir Jon Cunliffe and Sir Dave Ramsden. both voted to leave borrowing costs unchanged.
But they were outvoted by the rest of the MPC.
*BOE'S CUNLIFFE, RAMSDEN DISSENTED, FAVORED NO RATE CHANGE
— Michael Hewson 🇬🇧 (@mhewson_CMC) November 2, 2017
INTEREST RATE DECISION
BREAKING: The Bank of England has voted to raise UK interest rates, for the first time in over a decade.
Interest rates are going up to 0.5%, from 0.25%.
That means the Bank has reversed the rate cut of August 2016, when it eased monetary policy to help Britain’s economy through the aftermath of the Brexit vote.
More to follow!
Stand by your desks, folks, the Bank of England decision is just 60 seconds away....
The Bank of England tweets.....a link to Mark Carney’s press conference at 12.30pm :)
Watch the #InflationReport press conference at 12:30pm today: https://t.co/6rhBj3eMMG pic.twitter.com/DSmonz4hnn
— Bank of England (@bankofengland) November 2, 2017
Tension is mounting in the City (and the newsroom!) as the clock ticks towards noon.
Will they? Won’t they?
Paul Mumford of Cavendish Asset Management says the Bank of England faced a tricky decision this month:
“We’ve known for some time that the zero rate era can’t go on forever. But with continued high levels of debt in the economy and business lending remaining anaemic compared to historic levels, there is a real question mark over how appropriate a rise would be – and that’s not to mention the uncertainties around Brexit.
Rises can harm the economy by killing off consumer spending, so it looks as if the Bank of England has found itself between a rock and a hard place on this one.
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Pound dips as Bank decision nears
Less than 20 minutes to go! And sterling is falling as the City prepares for the Bank of England’s rate decision.
The pound has lost half a cent against the US dollar to $1.319, as jitteriness builds.
GBP losing ground fast into the BoE announcement pic.twitter.com/KgaFyFbhvD
— Guy Foster (@Brewin_Guy) November 2, 2017
UK Pound £ dipping below US $1.32 do they know something ( Bank of England voted yesterday) or just pre announcement nerves? #interestrates
— Shaun Richards (@notayesmansecon) November 2, 2017
Economist Danny Blanchflower was on the MPC the last time it raised interest rates, in July 2007.
Blanchflower voted against (it was a 6-3 split),and he’s also vote against a rate rise today if he got the chance.
Speaking on Bloomberg TV, Blanchflower says the 2007 hike was a mistake, as the UK went into recession in 2008.
He argues that the economic data doesn’t justify a hike today, as Britain’s growth is “horrible” compared to other countries, real wages are falling, and inflation should drop next year as the one-off impact of the weak pound fades away.
Last time BoE hiked in July 07, MPC split 6-3
— Andy Bruce (@BruceReuters) November 2, 2017
👍- @Barker4Kate, Besley, Gieve, King, @asentance, Tucker
👎 - Bean, @D_Blanchflower , Lomax
Updated
Here’s a list of the eight men and one (!) woman who set UK monetary policy, and decide whether interest rates go up today.
Two of them, Michael Saunders and Ian McCafferty, voted for an interest rise in September but were outvoted.
Of the rest, Sir Jon Cunliffe and Sir Dave Ramsden have both sounded quite cautious in recent days.
Governor Mark Carney has been more hawkish, suggesting “some withdrawal of monetary stimulus” will be appropriate soon. His other deputy, Ben Broadbent, has been flying under the radar and not giving any hints (Pythagoras would approve, eh?)
External member Gertjan Vlieghe suggested recently that he could be minded to raise rates soon, while Silvana Tenreyro has said her decision will be determined by the economic data.
Andy Haldane, the Bank’s chief economist, is the wild card in the pack. He had been one of the most dovish members of the MPC, but in September he argued that a rate rise would be ‘good news’, and a sign that the economy was healthy.
Betting firm smarkets tells me there’s an implied probability of 87% that UK interest rates will rise from 0.25% to 0.50% today.
So, the markets could be rather lively if the Bank of England surprises us at noon...
In classical economics, a central bank would raise interest rates when it worried that the economy was rattling along too quickly, pushing inflation too high.
But that’s not the case this time. So some economist are worried that the Bank of England might hike interest rates because it is pessimistic, not optimistic, about the UK’s prospects.
In this scenario, the Bank concludes that Britain has suffered a permanent shock from the 2008 financial crisis; productivity will not recover, so there’s less spare capacity in the economy. Thus, it would be risky to leave borrowing costs so low.
Duncan Weldon, head of research at the Resolution Group has written about this for Prospect. Here’s a flavour:
In the MPC’s view, spare economic capacity has been eroded and inflationary pressures will start to build at a lower rate of growth than in the past.
In effect it used to think the UK economy was capable of motoring along at 70 miles per hour before the vehicle began to shake and the ride became uncomfortable. They now think that persistent engine troubles have lowered that speed limit to around 50 miles per hour and so, despite the fact that we used to drive much faster, they are moving to put their foot on the brake already.
The Bank of England shouldn't raise interest rates, says @DuncanWeldon—here's why https://t.co/6kd0hmX52d
— Prospect Magazine (@prospect_uk) November 1, 2017
After a decade of record low interest rates, British savers should welcome a hike today.
But they shouldn’t celebrate too loudly -- a quarter-point rise in borrowing costs won’t make them much richer.
Richard Theo, CEO of online investment firm Wealthify, explains:
Today’s long-awaited rate rise may seem like welcome news for UK savers, but it will be a double-edged sword for many Brits, giving slightly better cash savings returns with one hand, then taking them away in the form of higher debt repayments, with the other.
Savers should check their sums before celebrating. Assuming all the benefits of the rate rise are passed on to the consumer, which is by no means a given, a 0.25% increase will give a saver with a £20k pot just £50 extra per year in returns.
What a difference a decade makes...
With 90 minutes to go, here are some reminders of how the world was different back in July 2007, the last time UK interest rates rose.
The biggest banks in the world the last time they hiked… #bankofengland pic.twitter.com/mwrM74KQc8
— Bond Vigilantes (@bondvigilantes) November 2, 2017
Number one in the UK the last time they hiked…. #bankofengland https://t.co/pcQ3xOSDvV
— Bond Vigilantes (@bondvigilantes) November 2, 2017
Premier League Champions the last time they hiked… #bankofengland pic.twitter.com/pSoc46pAcB
— Bond Vigilantes (@bondvigilantes) November 2, 2017
How a rate rise would affect mortgages
Any homeowner on a variable-rate mortgage will take an immediate hit in the pocket if the Bank of England raises interest rates today.
But that’s only around one in ten households in the UK, compared to around 20% a decade ago.
That’s partly because more people have fixed mortgages today. It also reflects the generational divide - older people have paid off their mortgages and own outright, while many young adults haven’t been able to get onto the housing ladder at all.
Big trends are 1) less of us own a home 2) more owners own outright (lucky people) 3) there has been a big move towards fixed rate mortgages pic.twitter.com/2t68yUdx3e
— Torsten Bell (@TorstenBell) November 1, 2017
Torsten Bell, director of the Resolution Foundation, has written a blogpost about this, explaining how the short-term impact of a rate rise is limited.
Here’s a flavour (more here):
The combination of these three trends – falling home ownership, growing outright ownership, and the shift towards fixed rate mortgages – means that only around 11 per cent of families have variable rate mortgages in Britain today. And they have smaller mortgage balances than those that have fixed – an average of £70,000 compared to £96,000.
To estimate the overnight mortgage impact of a rate rise, we can look at what happens if we add 0.25 percentage points to the interest rates paid by the 11 per cent of families with non-fixed rate mortgages. The result is an average increase in repayments of families of £6.40 a month (or 1.3 per cent of their existing repayments). Spreading the cost across all mortgage holders, the average repayment increase is just £2.50 a month.
Eventually, a rate rise will feed through to more borrowers as fixed-rate mortgage deals are renewed.
The impact will grow over time as people move off fixes and if rates rise further. Markets expect them to be just over 1% in 2021. pic.twitter.com/U7jw9nQOQA
— Torsten Bell (@TorstenBell) November 1, 2017
But still, raising interest rates from 0.25% to 0.5% certainly isn’t a repeat of Black Wednesday in 1992, when rates were hiked from 10% to 15% (and back again, after Britain crashed out of the exchange-rate mechanism).
Updated
Newsflash: Britain’s building sector returned to growth last month.
That’s according to data firm Markit, whose Construction PMI has risen to 50.8, up from 48.1 in September. Any reading over 50 shows a rise in activity, so this is good news.
But there’s bad news too.... confidence among British construction firms has hit its lowest level since December 2012.
UK construction sector maybe out of a technical recession but this feels little more than mean reversion and confidence remains weak
— WorldFirst (@World_First) November 2, 2017
#UK construction activity rises only marginally in Oct, while optimism falls to
— Markit Economics (@MarkitEconomics) November 2, 2017
lowest in almost 5 years https://t.co/28Zj7xx5ch pic.twitter.com/qntyymeVMP
Updated
Protests outside the Bank of England
A group of demonstrators have gathered outside the Bank of England.
They’re from Positive Money, a group pushing for ‘QE for People’ -- the idea that Britain creates new money to spend on green infrastructure, education or other social benefits.
Fran Boait, Executive Director of Positive Money, warns that an interest rate hike today could be very damaging:
“A decision today to raise rates at a time when real wages are falling risks shortening the fuse on Britain’s ticking household debt time bomb.
The Bank of England needs new policy tools which can deliver a sustainable boost to incomes, such as QE for People.”
Currently, the Bank’s QE (quantitative easing) programme has only bought government and corporate bonds, which has driven up their price and also fuelled the stock market rally.
Central banks claim that their QE programmes have propped up the economy and kept unemployment low, but critics argue that they also increased wealth inequality...and even created the economic conditions that led to the Brexit vote and Donald Trump’s presidency.
Updated
Communication is one of the most important implements in a central banker’s toolbox, as he or she can move the markets with words as well as actions.
But Professor Costas Milas and Dr Mike Ellington of Liverpool University reckons the Bank of England should have listened to Pythagoras, and not dropped so many hints about raising interest rates.
Greek philosopher and mathematician Pythagoras of Samos famously said that “Silence is better than unmeaning words”. This is something that the Bank of England’s Monetary Policy Committee (MPC) members have arguably neglected: they have repeatedly signalled a rise in their rock-bottom policy rate only to fail to delivery such a rise....
Prof Milas also agues that the Bank should NOT raise interest rates today, because it will create pressure to keep hiking until inflation has come down.
Fresh academic research has found that in the presence of rising economic uncertainty, monetary policy tightening becomes less effective. The reason is that elevated uncertainty motivates agents to postpone decisions until more precise information becomes available, and this cautiousness makes them less responsive to changes in the economic environment, including the interest rate. The implication for the UK, where Brexit related economic uncertainty is indeed on the rise, is that an interest rate hike of 25 basis points on Thursday will have a much smaller impact on inflation and GDP growth than conventional wisdom suggests.
This poses a challenging dilemma for MPC members. Do they hike in order to remain credible, or do they continue to ‘wait and see’? If the MPC vote to hike, subsequent hikes will be necessary in order to meet the inflation target over the medium term. This comes at the expense of depressing GDP growth further. Our view is to abstain until the uncertainty cloud of Brexit negotiations starts to clear. The MPC members should take Pythagoras’ advice and only signal with intent.
Updated
Bloomberg’s Peter Hoskins points out that UK borrowing costs have been at historically low levels for the last decade - even lower than in the Great Depression and the second world war.
As @bankofengland is expected to raise rates for the first time in more than a decade, this chart shows just what unusual times we live in. pic.twitter.com/7XQEuZO3Uw
— Peter Hoskins (@PeterHoskinsTV) November 2, 2017
City investors and traders will be desperate for clues from the Bank of England about how interest rate could move over the coming years.
That’s because the long-term path of rates is more important than a mere 0.25% move.
So, the Bank could cushion a rate hike by sounding dovish about its future intentions.
David McNamara of stockbrokers Davy explains:
With a rate hike all but a done deal today, attention will focus on the guidance for the coming year, with markets pricing in one further hike by the end of 2018.
Nonetheless, with the economy slowing and Brexit looming, today’s hike might yet prove a “one and done” event.
Today is a historic day for the Bank of England whether it raises interest rates or not, says Lee Wild, Head of Equity Strategy at Interactive Investor.
A hike will be the first in a decade; another month of stalemate will damage the credibility of both the central bank and Mark Carney as governor.
An overshoot on inflation is almost entirely down to the weak pound, but unemployment at a 42-year low and a slew of improving data reflect an economy more than capable of coping in a higher interest rate world.
But Wild also warns that the Bank must avoid damaging consumer confidence, which already looks fragile:
The timing isn’t great for families struggling with the lag in wages growth to inflation, and who are now beginning to plan their Christmas budgets. Brexit is already causing many to rethink their spending, so rate-setters must tread carefully to avoid a policy mistake further down the line.
The financial markets reckon there’s a 90% chance that UK interest rates are raised at noon today.
Overnight index swaps are pricing in a 90.1% probability that the Bank of England will raise rates later today.
— DailyFX Team Live (@DailyFXTeam) November 2, 2017
That’s thanks to the various hints dropped by members of the Monetary Policy Committee recently, as Labour MP Alison McGovern tweets:
If @bankofengland MPC raises rates today, will this be the most pre-expected news announcement ever?
— Alison McGovern (@Alison_McGovern) November 2, 2017
It also means there will be wild scenes in the City if the Bank surprises us all with another ‘no change’ decision.
The pound is bobbing nervously around the $1.326 mark this morning, as City traders brace for today’s interest rate decision.
Sterling is likely to move sharply at noon. It’ll surely fall if Carney and colleagues leave rates unchanged, but could rally if the Bank hikes and hints at further rate rises down the line.
Incidentally, the pound is still worth around 10% less than before the EU referendum, when it was worth $1.48.
Updated
The Agenda: Will the Bank of England hike interest rates today?
Good morning.
A lot has changed since 5th July 2007. Back then, Gordon Brown had just become prime minister, the financial crisis hadn’t yet struck, and the Bank of England was sufficiently worried about inflation to raise interest rates, to 5.75% - a six-year high.
No-one knew then that the Bank wouldn’t be raising interest rates again for a decade.
So there’s genuine excitement in the City of London this morning, as the BoE prepares to reveal whether it has taken the plunge and hiked borrowing costs at this month’s meeting.
Bloomberg surveyed 60 economists, and found that 52 expect the Bank to raise rates by a quarter of one percent, to 0.5%.
That’s because the BoE has dropped a series of hints in recent weeks that a rise is likely “in the coming months”. Today’s meeting would be a obvious opportunity.
A rise today would reverse the stimulus that was pumped into the economy in August 2016, to help it cope with the Brexit shock. And with inflation over target, at 3%, there is an argument that borrowing costs should be tightened.
It won't be a 25bp hike, rather a reversal of last year's referendum-inspired cut. Not beginning of Fed-like normalisation #boe #gbp
— Mike van Dulken (@Accendo_Mike) November 2, 2017
But...some City experts fear that the Bank could make a serious mistake if it raises borrowing costs too soon.
The UK economy looks quite fragile, with growth lagging behind the eurozone this year. Consumer spending is slowing, and business confidence is being hurt by the uncertainty over Britain’s exit from the EU.
A premature rate hike risks damaging the economy, as well as driving up mortgage costs and hurting those relying on credit to make ends meet.
So the nine members of the Monetary Policy Committee may have felt a little nervous as they weighed up the evidence this month. Each member gets a vote - so it could be a close split, or a decisive 9-0 walkover.
It’s also a massive test for governor Mark Carney, who hinted in September that a rate rise was close. He could firmly cement his reputation as an ‘unreliable boyfriend’ if the Bank doesn’t actually deliver today.
Carney will face the press shortly after the decision is announced at noon, so we’ll hear what he has to say about the state of the UK economy, and Brexit of course.
The agenda
-
9am: Eurozone manufacturing PMI for October. This will show how Europe’s factories fared last month.
-
9.30am: UK construction PMI for October is released. Economists fear that it will show the sector shrank for the second month running
-
Noon: Bank of England’s interest rate decision!!
-
Noon: Bank of England’s new quarterly inflation report released. This will include new growth and inflation forecasts
-
12.30pm: Mark Carney holds a press conference to explain today’s decision.
Updated
