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In what has to be the most disappointing denial of central bank manipulation of a market in recent history, and probably never, the Bank of England today announced that it “has seen no evidence to back media allegations that it condoned or was aware of manipulation of reference rates in the foreign exchange market.” As a reminder, last week we reported, that according to a Bloomberg, “Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms” or, in other words, the highest monetary authority in England, and the oldest modern central bank, explicitly condoned and encouraged manipulation. Fast forward to today when Andrew Bailey, the Bank’s deputy governor and chief executive of the Bank’s Prudential Regulation Authority, told parliament’s Treasury Select Committee on Tuesday it had no evidence to suggest that bank officials in any sense condoned the manipulation of the rate-setting process. In other words, it very well may have… but there just is no evidence – obviously in keeping with the bank’s very strict “smoking manipulation gun document retention policy.”
Then again, such evidence already was presented to UK regulators: “Bloomberg News said on February 7 that the Bank officials told currency traders at the April 2012 meeting that it wasn’t improper to share impending customer orders with counterparts at other firms. A senior trader gave his notes from the meeting to the Financial Conduct Authority, Bloomberg said.”
Hence, Mr Bailey had to modestly revise his statement:
“I should say that we have no evidence yet, and we have not seen the evidence that was in the Bloomberg report,” he added.
He added that the Bank of England review was in close cooperation with the Financial Conduct Authority (FCA), which is also investigating broader allegations of manipulation in the foreign exchange markets.
Which obviously means that should the BOE never be “confronted” with the evidence, and it mysteriously “disappears”, it simply means that one of Mark Carney’s henchmen pulled a few levers at the FCA, and made it disappear: of course, on national security grounds, because should it surface that a central bank is merely a criminal organization, then faith and confidence in the Ponzi system might falter. It would also mean confirm what most people who care about these things know: when it comes to UK governance, the buck stops with Threadneedle. And not only there, but everywhere else too.
The rest of the report is trivial fluff and generic spin:
“The Bank does not condone any form of market manipulation in any context whatsoever,” Bailey told the lawmakers on Tuesday.
“On the evidence we have currently, we have no evidence to substantiate the claim that bank officials in any sense condoned or were informed of price manipulation or the sharing of confidential client information,” Bailey added.
“We’ve released the minutes of that meeting, but obviously there are now allegations that there are different versions of what happened at that meeting,” Bailey said.
Bailey said the claims, which the central bank first heard about last October, were being taken “very seriously” and a full review was now underway, led by the Bank’s internal legal counsel with support from an external counsel.
Perhaps just to confirm how serious the “review” is, Bailey should also release a few photos of the internal and external counsels operating the paper shredders with the passion of 2nd year Arthur Andersen intern.
Economists at Citigroup Inc. and Nomura International Plc say the strongest growth since 2007 will prompt the U.K. to lift its benchmark from 0.5 percent as soon as this year. Money-market futures show an increase in early 2015. That’s at least three months before the contracts indicate Federal Reserve Chairman Janet Yellenwill raise the target for the federal funds rate. European Central Bank PresidentMario Draghi and Bank of JapanGovernor Haruhiko Kuroda are forecast to maintain or even ease monetary policy.
“Carney and BOE officials will be looking at the domestic recovery, and if that is strong enough, then they will feel comfortable increasing rates before the Fed,” said Jonathan Ashworth, an economist at Morgan Stanley in London and former U.K. Treasury official. “Tightening by the major developed central banks will be gradual, and they will be aware of what everyone else is doing.”
The BOE will lift rates in the second quarter of 2015 and the Fed will increase in 2016, Morgan Stanley predicts.
This wouldn’t be the first time Carney, 48, has broken from the pack. As governor of the Bank of Canada, he abandoned a “conditional commitment” to keep rates unchanged until July 2010, citing faster-than-expected growth and inflation. He delivered a rate increase in June of that year, putting him ahead of other Group of Seven central bankers.
The risk of being first this time is that the divergence pushes up the U.K.’s currency and bond yields, threatening to choke off its economic upswing.
Acting before the Fed — now led by Yellen, who was sworn in today as chairman — “would require a very big stomach for having sterling rise,” former BOE policy maker Adam Posen said in a Jan. 8 interview.
While all economists surveyed by Bloomberg News predict BOE policy makers will leave their official bank rate unchanged when they meet Feb. 6, Carney may seek to quell expectations for increases when he releases new economic predictions Feb. 12.
Investors pushed up Britain’s borrowing costs as consumer spending powered the economy back from recession. The pound has already climbed to the highest level in more than 2 1/2 years against the dollar, and the extra yield investors demand to hold 10-year U.K. government bonds over similar maturity German bunds widened to 1.13 percentage points last month, the most since 2005 based on closing prices. Both may undermine growth.
“There’s no immediate need” to raise rates, Carney said on Jan. 25 at the annual meeting of theWorld Economic Forum in Davos, Switzerland. He added that any eventual increases will be gradual.
With Britain expanding 1.9 percent in 2013, matching U.S. growth, money managers are switching their focus to when key central banks will start tightening policy.
The Fed, which has a dual mandate of price stability and full employment, said last week it probably will keep its target rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.
Joblessness dropped to 6.7 percent in December from 7 percent the previous month; part of the reason for the decline is Americans who are giving up on finding work. Prices rose at a 1.1 percent annual pace in December, according to the Fed’s preferred inflation gauge.
The BOE focuses on achieving price stability in the medium term by meeting its 2 percent inflation goal. Last month was the first time since November 2009 (UKRPCJYR) that price growth cooled to that level after hitting 5.2 percent in September 2011.
Weak inflation prompted the ECB to cut its benchmark to 0.25 percent in November, and Draghi said in Davos the central bank would be willing to act against deflation or unwarranted tightening in short-term money-market rates. The ECB’s Governing Council meets the same day this week as the BOE.
In Japan, nineteen of 36 economists surveyed by Bloomberg last month see the central bank expanding already unprecedented stimulus in the first half of this year as officials aim to drive Asia’s second-biggest economy out a 15-year deflationary malaise.
The yield difference between U.K. and German 10-year bonds widened one basis point to 1.06 percentage points as of 11 a.m. London time, after reaching 1.13 percentage points on Jan. 28.
The pound slid for a fifth day against the dollar after a purchasing-management survey showed manufacturing growth slowed last month. ING Bank NV economist James Knightley said the report, by Markit Economics, remains “consistent with very strong growth,” with domestic demand and export orders both improving. The U.K. currency fell 0.6 percent to $1.6341 as of 12:48 p.m. London time. It reached $1.6668 on Jan. 24, the highest level since April 2011.
“The market is pricing in that the BOE will raise rates first, and the Fed will follow three to six months after,” said Jamie Searle, a strategist at Citigroup in London. “The ECB, if anything, is going in the other direction. This will build on the policy-rate divergence that we’ve already seen, which will lead to an unprecedented decoupling in bond rates.”
Such a split has drawn criticism from emerging markets, some of which have been roiled in the past month after the Fed’s announcement of a reduction in its monthly bond purchases combined with signs of a slowdown in China to unnerve investors.
“International monetary cooperation has broken down,” India central bank Governor Raghuram Rajan told Bloomberg TV India on Jan. 30. Industrial countries “can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”
There’s precedent for the BOE to take action ahead of the Fed. The Monetary Policy Committee raised its benchmark in November 2003 and again three more times before the U.S. central bank boosted the rate on overnight loans among banks in June 2004 for the first time in four years. That action helped push sterling up about 9 percent against the dollar.
Between 2007 and 2011, policy makers in London lagged behind their American counterparts in cutting rates and adopting emergency policy measures in response to the financial crisis.
“Traditionally, Fed and BOE policy are quite closely synchronized, but if current trends are maintained, then there will be more than enough data and evidence to justify a BOE increase,” said Stuart Green, an economist at Banco Santander SA in London.
U.K. mortgage approvals rose in December to the highest level in almost six years as a revival in the housing market bolstered the economic rebound. Consumer confidence has improved, and Chancellor of the Exchequer George Osborne hailed signs of a manufacturing pickup in a speech last month.
“The BOE should welcome the opportunity to have a small normalization from an emergency policy setting which isn’t really justified anymore,” Green said.
Carney’s credibility is under pressure after official data show the U.K. jobless rate fell to 7.1 percent in the three months through November from 8.4 percent in the quarter through November 2011. That’s on the verge of the 7 percent he and colleagues identified last August as a threshold that would trigger a discussion about higher interest rates — something they initially didn’t anticipate would happen until 2016.
The BOE governor has signaled he will revise forward guidance next week, when economists say the central bank also will increase its growth forecasts. Among Carney’s options: setting a timeframe for low rates, changing the unemployment threshold, following the Fed in releasing policy makers’ rate forecasts or introducing a broader range of variables to inform decisions.
Simon Wells, a former Bank of England economist, isn’t convinced the BOE will act before the Fed. Unlike the U.S., the U.K.’s output still is below its pre-crisis peak, while workers face cuts in inflation-adjusted pay and are professing sensitivity to the cost of living. An election in May 2015 and the stronger pound also pose obstacles
“There is more willingness to give growth a chance,” said Wells, currently chief U.K. economist at HSBC Holdings Plc., who doesn’t expect the central bank to raise rates before the third quarter of next year.
Carney does have more flexibility now that inflation is back to the 2 percent target. The risk is if unemployment keeps declining, price pressures may re-emerge, especially if joblessness is dropping because of sluggish productivity. Output per hour slid in the third quarter and may leave the economy less inflation-proof.
“We do not believe the MPC can ignore the data and delay,” said Philip Rush, an economist at Nomura in London, who forecasts a rate increase in August. “Surging job creation is lowering unemployment without a commensurate supply-side improvement, so spare capacity is being rapidly used up. This is what matters to the BOE.”
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