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Mark Carney: Bank Of England Can’t Stop UK House Price Inflation

March 16, 2014 8:18 am / 4 Comments on Mark Carney: Bank Of England Can’t Stop UK House Price Inflation

Mark Carney: Bank Of England Can’t Stop UK House Price Inflation.

 

mark carney

Governor of the Bank of England Mark Carney speaks during the bank’s inflation report news conference in central London. | Dan Kitwood/WPA-Rota

Mark Carney has warned that the Bank of England could not directly stop wealthy foreign buyers pushing up house prices by snapping up expensive properties in the capital.

Appearing before the Treasury select committee, the Bank of England governor admitted that the central bank lacked the “tools that would directly affect” cash buyers of property, who are typically wealthy foreigners. He also warned that the rising house prices in the capital could spread to the rest of the country.

“We have to be alive to that possibility,” he said, adding that the Bank’s concerns about the standard of underwriting for mortgages remain “quite high” but “vastly improved relative to pre-crisis levels”.

Carney added: “Our concern is those standards would deteriorate, fed by general improvement in housing market. That’s a pattern of behaviour we’ve witnessed over time so we’re taking steps to ensure that doesn’t happen.”

 

However, the Bank governor refused to be drawn on the effects on the housing market of George Osborne’s Help to Buy mortgage guarantee scheme, insisting that it is “still early days” and Bank officials are “watching closely”.

 

Carney previously warned that about the limits of the Bank of England’s influence on the housing market, telling the BBC last month: “The top end of London is driven by cash buyers. It’s driven in many cases by foreign buyers. We as the central bank can’t influence that.”

 

“We change underwriting standards – it doesn’t matter, there’s not a mortgage. We change interest rates – it doesn’t matter, there’s not a mortgage, etc. But we watch the knock-on effect.”

 

Under questioning by MPs, Carney also defended his decision to change the Bank’s forward guidance from seeing policymakers consider raising interest rates if unemployment rate fell to a 7% threshold to instead considering it based on 18 indicators. Tory MP Brooks Newmark mocked the decision as a “bait-and-switch” for what he called “fuzzy” guidance over interest rates.

 

Carney said: “The key uncertainty around unemployment is the pace of recovery and productivity in economy. The unemployment rate has come down faster than we expected but we were careful to underscore that this was state dependent guidance not a promise of time.”

 

“I have absolutely no regrets that we are sitting here in March with amost half a milion people more in work and inflation at target.”

 

Mark Carney: Bank Of England Can't Stop UK House Price Inflation

March 16, 2014 8:18 am / 4 Comments on Mark Carney: Bank Of England Can't Stop UK House Price Inflation

Mark Carney: Bank Of England Can’t Stop UK House Price Inflation.

 

mark carney

Governor of the Bank of England Mark Carney speaks during the bank’s inflation report news conference in central London. | Dan Kitwood/WPA-Rota

Mark Carney has warned that the Bank of England could not directly stop wealthy foreign buyers pushing up house prices by snapping up expensive properties in the capital.

Appearing before the Treasury select committee, the Bank of England governor admitted that the central bank lacked the “tools that would directly affect” cash buyers of property, who are typically wealthy foreigners. He also warned that the rising house prices in the capital could spread to the rest of the country.

“We have to be alive to that possibility,” he said, adding that the Bank’s concerns about the standard of underwriting for mortgages remain “quite high” but “vastly improved relative to pre-crisis levels”.

Carney added: “Our concern is those standards would deteriorate, fed by general improvement in housing market. That’s a pattern of behaviour we’ve witnessed over time so we’re taking steps to ensure that doesn’t happen.”

 

However, the Bank governor refused to be drawn on the effects on the housing market of George Osborne’s Help to Buy mortgage guarantee scheme, insisting that it is “still early days” and Bank officials are “watching closely”.

 

Carney previously warned that about the limits of the Bank of England’s influence on the housing market, telling the BBC last month: “The top end of London is driven by cash buyers. It’s driven in many cases by foreign buyers. We as the central bank can’t influence that.”

 

“We change underwriting standards – it doesn’t matter, there’s not a mortgage. We change interest rates – it doesn’t matter, there’s not a mortgage, etc. But we watch the knock-on effect.”

 

Under questioning by MPs, Carney also defended his decision to change the Bank’s forward guidance from seeing policymakers consider raising interest rates if unemployment rate fell to a 7% threshold to instead considering it based on 18 indicators. Tory MP Brooks Newmark mocked the decision as a “bait-and-switch” for what he called “fuzzy” guidance over interest rates.

 

Carney said: “The key uncertainty around unemployment is the pace of recovery and productivity in economy. The unemployment rate has come down faster than we expected but we were careful to underscore that this was state dependent guidance not a promise of time.”

 

“I have absolutely no regrets that we are sitting here in March with amost half a milion people more in work and inflation at target.”

 

Godzilla is good for you? | Business Spectator

March 12, 2014 9:00 am / Leave a comment

Godzilla is good for you? | Business Spectator.


3 Mar, 7:15 AM 

Fans of Japanese schlock fiction will be pleased to know that that old mega-favourite Godzillais returning in 2014, to stomp on simulated cities in a cinema near you. And of course, he’s bigger and better: the original Japanese movie had him at about 50-100 metres and weighing 20-60,000 tons; I’d guess he was about twice that size in the 1998 US remake; and by the looks of the trailer for the 2014 movie, he’s now a couple of kilometres tall and probably weighs in the millions.

That’s good: when you want thrills and spills in a virtual world, then as it is with sport (according to Australian comedic legends Roy and HG) too much lizard is barely enough. The bigger he gets, the more he can destroy, which makes for great visual effects (if not great cinema).

But in the real world? The biggest dinosaur known came in at about 40 metres long, weighed “only” about 80 tonnes, and had an estimated maximum speed of eight kilometres an hour. In the real world, size imposes restriction on movement, and big can be just too big. So a real-world Godzilla is an impossibility.

Cinema — especially CGI-enhanced cinema — can overcome the limits of evolution, and therein lie the thrills and spills of Godzilla: the bigger he is, the more terrifying. Godzilla is scary purely because of his scale: a 100 metre Godzilla is scary; the 1 metre iguana species from which he supposedly evolves is merely cute. In Godzilla, there is a positive relationship between size and destructive capacity.

Maybe Bank of England governor Mark Carney should attend the UK premiere, because he clearly needs to learn this lesson and apply it to his own bailiwick. If he can’t learn it from economics, then maybe he can learn it from the movies by analogy: finance is dangerous in part because, like Godzilla, it is too big.

Instead, as Howard Davies — himself an ex-deputy governor of the Bank of England — observed in a recent Project Syndicate column, Carney seems almost to celebrate the prospect that the UK’s financial sector — now with assets four times the size of its economy — might grow to nine times the size of GDP if current trends continue.

“Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050… the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous,” Davies said.

In a speech marking the 125th anniversary of The Financial Times, Carney noted that when the paper was founded, “the assets of UK banks amounted to around 40 per cent of GDP. By the end of last year, that ratio had risen tenfold.” He then noted that if the UK maintains its share of global finance, and “financial deepening in foreign economies increases in line with historical norms”, then “by 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.”

From 40 per cent to 400 per cent of GDP in 125 years, and then from 400 per cent to 900 per cent in another 35: even the Godzilla franchise would be impressed with that rate of growth. And Carney seems to relish the prospect. Though he notes that “some would react to this prospect with horror. They would prefer that the UK financial services industry be slimmed down if not shut down”, he next stated that “in the aftermath of the crisis, such sentiments have gone largely unchallenged”. And he proceeds to challenge them.

After stating that “if organised properly, a vibrant financial sector brings substantial benefits”, he denied any responsibility in determining how big the financial sector should be — either absolutely or relative to the economy:

“It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe,” Carney said.

Oddly, as well as seeing no necessary relationship between size and safety, he also takes a lopsided position on this non-responsibility: while he is not responsible for determining the finance sector’s size, he nonetheless thinks that his role is to make it as big as it can be:

“The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability…”  Carney said.

Herein lies the rub, and the non-sequitur: bigger cannot mean more stable, for the simple reason that the assets of the financial sector are, in large measure, the debts of the real economy to the banks. The bigger the assets of the financial sector, the higher the debts of the real economy have to be. Ultimately, even with near-zero interest rates, servicing this debt is likely to prove impossible to large segments of the economy, leading to a financial crisis.

That logic is what led me to expect a financial crisis back in 2005: when I saw the data for Australia’s and America’s private debt to GDP ratios (figure 1), I was convinced that a crisis was in the offing. That rate of growth of debt compared to GDP could not continue. Figure 1 shows that I was right: the rate of growth of debt turned negative, ushering in the economic crisis that no central bank foresaw (except the Bank of International Settlements, thanks to its Minsky-aware research director Bill White). Debt to GDP levels fell as, for a while, the private sector deleveraged.

Growth is now returning — strongly in the US, meekly in the UK — largely because private debt is rising once more. But rather than seeing danger here, the UK’s central banker happily contemplates a world in which the UK financial sector is more than twice as big as it is now — which would require the liabilities of the non-bank side of the economy to grow to roughly four times GDP.

Figure 1: The UK’s Godzilla is bigger and faster growing than the US Godzilla

 

Graph for Godzilla is good for you?

 

There is a line of thought that blames central banks for causing the crisis — with Scott Sumner being the first to outright blame the 2007 crisis on Ben Bernanke. I don’t blame them for causing the crisis, but rather for letting the force build up that would make one inevitable — by letting bank debt get much, much larger than GDP without batting an eyelid.

Now we’ve had the crisis, and if Carney’s speech is any guide, they’re once again letting private debt levels rip again, because even after the experience of 2008, they can’t see a problem. Given this complete failure of oversight, I expect that the sequel to the economic crisis of 2007 will appear before the next sequel for Godzilla.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of theMinsky software program.

 

Godzilla is good for you? | Business Spectator

March 12, 2014 9:00 am / Leave a comment

Godzilla is good for you? | Business Spectator.


3 Mar, 7:15 AM 

Fans of Japanese schlock fiction will be pleased to know that that old mega-favourite Godzillais returning in 2014, to stomp on simulated cities in a cinema near you. And of course, he’s bigger and better: the original Japanese movie had him at about 50-100 metres and weighing 20-60,000 tons; I’d guess he was about twice that size in the 1998 US remake; and by the looks of the trailer for the 2014 movie, he’s now a couple of kilometres tall and probably weighs in the millions.

That’s good: when you want thrills and spills in a virtual world, then as it is with sport (according to Australian comedic legends Roy and HG) too much lizard is barely enough. The bigger he gets, the more he can destroy, which makes for great visual effects (if not great cinema).

But in the real world? The biggest dinosaur known came in at about 40 metres long, weighed “only” about 80 tonnes, and had an estimated maximum speed of eight kilometres an hour. In the real world, size imposes restriction on movement, and big can be just too big. So a real-world Godzilla is an impossibility.

Cinema — especially CGI-enhanced cinema — can overcome the limits of evolution, and therein lie the thrills and spills of Godzilla: the bigger he is, the more terrifying. Godzilla is scary purely because of his scale: a 100 metre Godzilla is scary; the 1 metre iguana species from which he supposedly evolves is merely cute. In Godzilla, there is a positive relationship between size and destructive capacity.

Maybe Bank of England governor Mark Carney should attend the UK premiere, because he clearly needs to learn this lesson and apply it to his own bailiwick. If he can’t learn it from economics, then maybe he can learn it from the movies by analogy: finance is dangerous in part because, like Godzilla, it is too big.

Instead, as Howard Davies — himself an ex-deputy governor of the Bank of England — observed in a recent Project Syndicate column, Carney seems almost to celebrate the prospect that the UK’s financial sector — now with assets four times the size of its economy — might grow to nine times the size of GDP if current trends continue.

“Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050… the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous,” Davies said.

In a speech marking the 125th anniversary of The Financial Times, Carney noted that when the paper was founded, “the assets of UK banks amounted to around 40 per cent of GDP. By the end of last year, that ratio had risen tenfold.” He then noted that if the UK maintains its share of global finance, and “financial deepening in foreign economies increases in line with historical norms”, then “by 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.”

From 40 per cent to 400 per cent of GDP in 125 years, and then from 400 per cent to 900 per cent in another 35: even the Godzilla franchise would be impressed with that rate of growth. And Carney seems to relish the prospect. Though he notes that “some would react to this prospect with horror. They would prefer that the UK financial services industry be slimmed down if not shut down”, he next stated that “in the aftermath of the crisis, such sentiments have gone largely unchallenged”. And he proceeds to challenge them.

After stating that “if organised properly, a vibrant financial sector brings substantial benefits”, he denied any responsibility in determining how big the financial sector should be — either absolutely or relative to the economy:

“It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe,” Carney said.

Oddly, as well as seeing no necessary relationship between size and safety, he also takes a lopsided position on this non-responsibility: while he is not responsible for determining the finance sector’s size, he nonetheless thinks that his role is to make it as big as it can be:

“The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability…”  Carney said.

Herein lies the rub, and the non-sequitur: bigger cannot mean more stable, for the simple reason that the assets of the financial sector are, in large measure, the debts of the real economy to the banks. The bigger the assets of the financial sector, the higher the debts of the real economy have to be. Ultimately, even with near-zero interest rates, servicing this debt is likely to prove impossible to large segments of the economy, leading to a financial crisis.

That logic is what led me to expect a financial crisis back in 2005: when I saw the data for Australia’s and America’s private debt to GDP ratios (figure 1), I was convinced that a crisis was in the offing. That rate of growth of debt compared to GDP could not continue. Figure 1 shows that I was right: the rate of growth of debt turned negative, ushering in the economic crisis that no central bank foresaw (except the Bank of International Settlements, thanks to its Minsky-aware research director Bill White). Debt to GDP levels fell as, for a while, the private sector deleveraged.

Growth is now returning — strongly in the US, meekly in the UK — largely because private debt is rising once more. But rather than seeing danger here, the UK’s central banker happily contemplates a world in which the UK financial sector is more than twice as big as it is now — which would require the liabilities of the non-bank side of the economy to grow to roughly four times GDP.

Figure 1: The UK’s Godzilla is bigger and faster growing than the US Godzilla

 

Graph for Godzilla is good for you?

 

There is a line of thought that blames central banks for causing the crisis — with Scott Sumner being the first to outright blame the 2007 crisis on Ben Bernanke. I don’t blame them for causing the crisis, but rather for letting the force build up that would make one inevitable — by letting bank debt get much, much larger than GDP without batting an eyelid.

Now we’ve had the crisis, and if Carney’s speech is any guide, they’re once again letting private debt levels rip again, because even after the experience of 2008, they can’t see a problem. Given this complete failure of oversight, I expect that the sequel to the economic crisis of 2007 will appear before the next sequel for Godzilla.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of theMinsky software program.

 

BOE Stress Testing Banks For Property Crash – Risk Of Bail-Ins | www.goldcore.com

February 12, 2014 6:59 pm / Leave a comment

BOE Stress Testing Banks For Property Crash – Risk Of Bail-Ins | www.goldcore.com.

Published in Market Update  Precious Metals  on 12 February 2014

By Mark O’Byrne

 

Today’s AM fix was USD 1,286.50, EUR 942.84 and GBP 778.47 per ounce.
Yesterday’s AM fix was USD 1,282.75, EUR 938.09 and GBP 780.83 per ounce.

Gold climbed $15.30 or 1.2% yesterday to $1,289.90/oz. Silver rose $0.15 or 0.75% to $20.20/oz.


Gold in British Pounds, 10 Years – (Bloomberg)

Gold is marginally lower today in all currencies after eking out more gains yesterday after Yellen confirmed in her testimony that ultra loose monetary policies and zero percent interest rate policies will continue.

Citi Futures are looking for gold to increase by a further 8.5% by the end of March after gold closed above its 50 DMA every day for the last two weeks and closed above its 100 DMA for two straight days. RBC are less bullish but expect gold prices to increase another 10% and surpass $1,400/oz in 2014.

Gold touched resistance at $1,294/oz  yesterday. A close above the $1,294/oz to $1,300/oz level should see gold quickly rally to test the next level of resistance at $1,360/oz. Support is now at $1,240/oz and $1,180/oz.

Yellen confirmed that the U.S. recovery is fragile and said more work is needed to restore the labor market. She signalled the Fed’s ultra loose monetary policies will continue and the Fed will continue printing $65 billion every month in order to buy U.S. government debt.

The dovish take from Yellen’s testimony yesterday should support gold prices. Continuing QE makes gold attractive from a diversification perspective.

Market focus shifts from the U.S. to the UK today and the Bank of England’s quarterly inflation report.

The U.K. has already almost breached the unemployment level that was a target for considering tightening policy, and Governor Mark Carney is widely expected to update the market on interest rate guidance.

Possibly of more importance is the fact that the Bank of England is to test whether UK banks and building societies would go bust if house prices crash. A ‘stress test’ will examine whether banks will need bailing out, or bailing in as seems more likely now, if house prices materially correct again.

Preparations have been or are being put in place by the international monetary and financial authorities, including the Bank of England for bail-ins. The majority of the public are unaware of these developments, the risks and the ramifications.

The test is being drawn up by the Bank’s Financial Policy Committee, whose members include Governor Mark Carney.

A Nationwide Building Society survey just out showed house prices had risen by 8.8% in January over the same month last year. London house prices have all the symptoms of a classic bubble.

Many UK banks are already over extended and the real risk is that many banks would not be able to withstand house price falls. This heightens the risk of bail-ins.

Download our Bail-In Guide: Protecting your Savings In The Coming Bail-In Era(11 pages)

BOE Stress Testing Banks For Property Crash – Risk Of Bail-Ins | www.goldcore.com

February 12, 2014 2:52 pm / Leave a comment

BOE Stress Testing Banks For Property Crash – Risk Of Bail-Ins | www.goldcore.com.

Published in Market Update  Precious Metals  on 12 February 2014

By Mark O’Byrne

 

Today’s AM fix was USD 1,286.50, EUR 942.84 and GBP 778.47 per ounce.
Yesterday’s AM fix was USD 1,282.75, EUR 938.09 and GBP 780.83 per ounce.

Gold climbed $15.30 or 1.2% yesterday to $1,289.90/oz. Silver rose $0.15 or 0.75% to $20.20/oz.


Gold in British Pounds, 10 Years – (Bloomberg)

Gold is marginally lower today in all currencies after eking out more gains yesterday after Yellen confirmed in her testimony that ultra loose monetary policies and zero percent interest rate policies will continue.

Citi Futures are looking for gold to increase by a further 8.5% by the end of March after gold closed above its 50 DMA every day for the last two weeks and closed above its 100 DMA for two straight days. RBC are less bullish but expect gold prices to increase another 10% and surpass $1,400/oz in 2014.

Gold touched resistance at $1,294/oz  yesterday. A close above the $1,294/oz to $1,300/oz level should see gold quickly rally to test the next level of resistance at $1,360/oz. Support is now at $1,240/oz and $1,180/oz.

Yellen confirmed that the U.S. recovery is fragile and said more work is needed to restore the labor market. She signalled the Fed’s ultra loose monetary policies will continue and the Fed will continue printing $65 billion every month in order to buy U.S. government debt.

The dovish take from Yellen’s testimony yesterday should support gold prices. Continuing QE makes gold attractive from a diversification perspective.

Market focus shifts from the U.S. to the UK today and the Bank of England’s quarterly inflation report.

The U.K. has already almost breached the unemployment level that was a target for considering tightening policy, and Governor Mark Carney is widely expected to update the market on interest rate guidance.

Possibly of more importance is the fact that the Bank of England is to test whether UK banks and building societies would go bust if house prices crash. A ‘stress test’ will examine whether banks will need bailing out, or bailing in as seems more likely now, if house prices materially correct again.

Preparations have been or are being put in place by the international monetary and financial authorities, including the Bank of England for bail-ins. The majority of the public are unaware of these developments, the risks and the ramifications.

The test is being drawn up by the Bank’s Financial Policy Committee, whose members include Governor Mark Carney.

A Nationwide Building Society survey just out showed house prices had risen by 8.8% in January over the same month last year. London house prices have all the symptoms of a classic bubble.

Many UK banks are already over extended and the real risk is that many banks would not be able to withstand house price falls. This heightens the risk of bail-ins.

Download our Bail-In Guide: Protecting your Savings In The Coming Bail-In Era(11 pages)

Carney Seen Raising Rates Before Yellen, Draghi – Bloomberg

February 3, 2014 4:49 pm / Leave a comment

Carney Seen Raising Rates Before Yellen, Draghi – Bloomberg.

By Emma Charlton and Simon Kennedy  Feb 3, 2014 11:12 AM ET
Photographer: Chris Ratcliffe/Bloomberg

Mark Carney, governor of the Bank of England.

Related

Investors are betting Bank of England Governor Mark Carney will lead the charge out of record-low interest rates as central banks pivot from fighting stagnation to managing expansions.

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.

First-Mover Risk

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.

Gradual Increases

“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.

Single Mandate

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.

‘Strong Growth’

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.

‘Broken Down’

“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.

Housing Boom

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.

Forward Guidance

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.

Price Pressures

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.”

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Mortgage rise will plunge a million homeowners into ‘perilous debt’ | Money | The Observer

December 29, 2013 7:55 am / 2 Comments on Mortgage rise will plunge a million homeowners into ‘perilous debt’ | Money | The Observer

Mortgage rise will plunge a million homeowners into ‘perilous debt’ | Money | The Observer.

Oxford Street shopping

Around 13 million people paid for their Christmas by borrowing. Photograph: Paul Brown/Rex Features

More than a million homeowners will be at risk of defaulting on their mortgages and losing their properties in the wake of even a small rise ininterest rates, a bombshell analysis reveals. Borrowers who have failed to pay down their mortgages when interest rates have been at record low levels now face being overwhelmed by “perilous levels of debt” when the inevitable hike comes.

Gillian Guy, chief executive of Citizens Advice, warned of a “financial ticking timebomb”: “The rising cost of energy, food and travel has been absorbing any spare income people may have. This means that in some cases there is little or nothing left to cope with larger mortgage repayments.”

According to a new report from an influential thinktank, the Resolution Foundation, even in the most optimistic scenario – in which interest rates rise slowly to 3% by 2018 and economic growth is strong and well-distributed between the rich and poor – 1.12 million homeowners will be spending more than half of their take-home pay on mortgage repayments – this is a widely accepted indicator of over-indebtedness.

If the Bank of England were to raise interest rates more quickly, to 5% by 2018, and growth continues to be slow, around two million households would be plunged into financial trouble – and around half of these would be families with children.

The thinktank’s analysis, based on official Office for Budget Responsibility projections, warns: “Far from being resolved, Britain’s personal debt problem remains a cause for real concern. While record low interest rates have reduced current repayment costs, fewer people than we hoped have used this breathing space to pay off their debts.

“When rates go up, the number in ‘debt peril’ could increase to anywhere between 1.1 million and two million, depending on the speed at which borrowing costs rise and the nature of the economic recovery.”

The warning comes as a survey carried out by Which? reveals that rather than paying off their debts, around 13 million people (25%) paid for their Christmas by borrowing. Overall, more than four in 10 (42%) used credit cards, loans or overdrafts to fund their spending over the festive period, which suggests that Britons have not shed their addiction to debt.

The governor of the Bank of England, Mark Carney, has said he will look at raising the Bank of England base rate, to which lenders hook their mortgages, when unemployment has fallen to 7%.

A recent surge in job creation saw unemployment drop to 7.4% in December, raising expectations that an increase in the Bank’s base rate will come in 2015, and have an impact on lenders’ rates this coming year.

The markets believe the base rate will increase to 3% by 2018, with what the Resolution Foundation describes as “huge social and human cost”. However, the thinktank warns that a hike of just 1 percentage point more than that, to 4% by 2018, would lead to 1.4 million homeowners facing severe financial pressure.

If interest rates rise by two percentage points beyond market expectations – to 5%, still 0.5% below the 2007 base rate – the number of people in substantial and perilous debt would rise to 1.7 million – or as many as 2 million if economic growth continues to be sluggish.

The analysis finds that while people across the social spectrum could be in trouble, lower-income households “look particularly vulnerable”, with one in five of those with debt being in danger.

The thinktank says that while it does not follow that all households in “debt peril” will default on their mortgages, those spending more than half of their income on debt repayments will find their financial position increasingly difficult to sustain.

Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider “locking in” cheap credit for those who are heavily indebted. He added:”Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double.

“But the levels of debt built up by families in the pre-crisis years are such that even relatively modest changes in incomes and borrowing cost assumptions produce significantly worse outcomes.

“This is an alarming prospect, where a large number of families find themselves struggling with heavy debt commitments, especially among the households who are already among the worst-off. As the Bank of England has acknowledged, even small increases in the cost of borrowing could push a significant number of families over the edge and it is most likely to happen to those with the lowest incomes – who are already spending the biggest share of their budget on mortgage repayments.

“Rather than waiting for a repayment crisis to strike, policymakers and lenders should seriously consider acting now while there’s still the chance to help people reduce their exposure to debt.”

The number of repossessions has been dropping for years, with 30,000 expected by the end of this year, down from 75,500 during the 1991 recession.

Yet one in six households are currently mortgaged to the hilt, servicing home loans that are at least four times the size of their annual salary, in further evidence of the intense vulnerability of many homeowners to rate hikes.

 

UK unemployment rate slips to four-and-a-half year low of 7.4% | Business | theguardian.com

December 18, 2013 7:54 am / 3 Comments on UK unemployment rate slips to four-and-a-half year low of 7.43 | Business | theguardian.com

UK unemployment rate slips to four-and-a-half year low of 7.4% | Business | theguardian.com.

Bank of England governor Mark Carney

Under Bank of England governor Mark Carney’s policy of forward guidance, the MPC will not to consider raising rates until unemployment has fallen below 7%. Photograph: Shannon Stapleton/Reuters

Britain’s unemployment rate has slipped to a four-and-a-half year low of 7.4%, edging closer to the “threshold” at which the Bank of England has said it will consider raising interest rates.

The Office for National Statistics (ONS) said that unemployment in the three months to October was 2.39 million, or 7.4% of the working age population, down from 7.6% in the three months to September.

Under the Bank’s policy of forward guidance, governor Mark Carneypromised that borrowing costs would remain on hold at least until unemployment has fallen below 7%.

When the policy was announced in August, the Bank’s monetary policy committee expected that to take three years; but their latest prediction is that it could be as soon as 2015.

“The jobless rate is falling far faster towards the Bank of England’s 7% threshold than policymakers envisaged when establishing the marker back in the summer,” said Chris Williamson, chief economist at City data-provider Markit. “Employment is surging higher and unemployment collapsing in the UK as the economic recovery has moved into a higher gear.”

Sterling jumped after the unemployment data was released, rising by almost a cent against the dollar, to $1.635, as investors bet on an earlier-than-expected rate rise. A stronger pound was one of the concerns of the Bank’s nine-member monetary policy committee at their December meeting, according to minutes also published on Wednesday.

The MPC pointed out that the value of sterling has risen by 9% against the currencies of the UK’s major trading partners since March, and warned that “any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery”.

The minutes suggested the latest evidence pointed to a “burgeoning recovery” in the UK; but one which was unlikely to prove sustainable unless productivity picked up, finally lifting real incomes. The MPC voted unanimously to leave rates on hold at their record low of 0.5%, and the stock of assets bought under quantitative easing unchanged at £375bn.

MPC member Martin Weale suggested last week that if unemployment is falling rapidly at the point when the 7% threshold is breached, he would regard that as a reason to tighten policy.

The details of the jobs data reinforced the view that the labour market has strengthened markedly over the past six months. The number of people employed across the economy has hit a fresh record high above 30 million, while there are more vacancies than at any time since the summer of 2008, before the UK slipped into recession.

On the claimant count, which measures the number of people in receipt of out-of-work benefits, unemployment fell to 1.27 million in November, its lowest level since January 2009.

John Philpott, director of consultancy the Jobs Economist, described the data as “wonderful”. “The quarterly 250,000 net increase in total employment is as big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland, with a sharp rise in job vacancies helping an additional 50,000 16 to 24-year-olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate (72%) below the pre-recession rate (73%) it is a landmark worth celebrating,” he said.

Despite the improving conditions in the labour market, there is little evidence that the prolonged squeeze on wages is easing. The ONS said total pay rose at an annual rate of 0.9% in October, or 0.8% including bonuses. That compares with an inflation rate of 2.2% in the same month, suggesting that on average, living standards are continuing to fall. Frances O’Grady, general secretary of the TUC, said: “These are undoubtedly positive figures, but we should not forget how far we still have to go to restore pre-crash living standrards through better pay and jobs”.

Rachel Reeves, Labour’s shadow work and pensions secretary, said: “Today’s fall in unemployment is welcome, but families are facing a cost-of-living crisis and on average working people are now £1,600 a year worse off under this out-of-touch government.”

 

The Money Bubble Gets Its Grand Rationalization

November 21, 2013 6:54 pm / Leave a comment

 

 

by John Rubino on November 20, 2013 · 12 comments

 

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” Soon, we were told, China and India’s billions would enter cyberspace. And after they were happily on-line, the Internet would morph into versions 2.0 and 3.0 and so on, growing and evolving without end. So don’t worry about earnings; this is a land rush and “eyeballs” are the way to measure virtual real estate. Earnings will come later, when the dot-com visionaries cash out and hand the reins to boring professional managers.

During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.”

Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. They only happen if a country decides to stop depressing interest rates – and why would they ever do that? Here’s an article out of the UK that expresses this belief perfectly:

 

Our debt is no Greek tragedy

“The threat of rising interest rates is a Greek tragedy we must avoid.” This was the title of a 2009 Daily Telegraph piece by George Osborne, pushing massive spending cuts as the only solution to a coming debt crisis. It’s tempting to believe anyone who still makes it is either deliberately disingenuous, or hasn’t been paying attention. 

The line of reasoning goes as follows: Britain’s high and rising public debt causes investors to take fright and sell government bonds because the UK might default on those bonds.

Interest rates then spike up because as less people want to hold UK debt, the government has to pay them more for the privilege, so that the cost of borrowing becomes more expensive and things become very, very bad for everyone.

This argument didn’t make sense back in 2009, and certainly doesn’t make sense now. Ultimately this whole Britain-as-Greece argument is disturbing because it makes the austerity project of the last three years look deeply duplicitous.

If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.

Why? Because the Bank directly controls the interest rate on short-term government debt, so it can vary it at will in line with any given objective. Interest rates on long-term government debt are governed by what markets expect to happen to short term rates, and so are subject to essentially the same considerations.

It doesn’t matter if investors get scared and dump government bonds because this has no implication for interest rates – it is what the Bank of England wants to happen that counts.

If investors do suddenly decide to flee en masse, the Bank can simply use its various tools to bring interest rates back into line.

The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.

Greece and the other troubled Eurozone countries are in a totally different situation. They don’t have their own currency, and have a single central bank, the ECB, which tries to juggle the needs of 17 different member states. This is a central bank dominated by Germany, which apparently isn’t bothered by letting the interest rates of other nations spiral out of control. Investors, knowing this, made it happen during the financial crisis.

On these grounds, the case of Britain and those of the Eurozone countries are not remotely comparable – and basic intuition suggests steep interest rate rises are only possible in the latter.

Britain was never going to enter a sovereign debt crisis. It has everything to do with an independent central bank, and nothing to do with the size of government debt. How well does this explanation stand up given the events of the last few years? Almost perfectly. The US, Japan and the UK are the three major economies with supposed debt troubles not in the Eurozone.

The UK released a plan in 2010 to cut back a lot of spending and raise a little bit of tax money. The US did nothing meaningful about its debt until 2012, and has spent much of the time before and since pretending to be about to default on its bonds. Japan’s debt patterns are, to put it bluntly, screwed – Japan’s debt passed 200 per cent of GDP earlier this year and is rising fast.

But the data shows that none of this matters for interest rates whatsoever. Rates have been low, stable and near-identical in all three countries regardless of whatever their political leaders’ actions.These countries have had vastly different responses to their debt, and markets don’t care at all.

By the same token, the problems of spiking interest rates inside the Eurozone have nothing to do with the prudence or spending of the governments in charge.

Spain and Ireland both had debt of less than 50 per cent of GDP before the crisis and were still punished by markets. France and the holier-than-thou Germany had far higher debt in 2007, and are fine.

The takeaway is that problems with spiking interest rates amongst advanced countries are entirely restricted to the Eurozone, where there is a single central bank, and have no obvious relation to the state of public finances.

So what we have, then, is a disturbingly mendacious line of reasoning . Back in 2010 the Conservative party made a perhaps superficially plausible argument about national debt that was wrong then and is doubly wrong now. They then – sort of – won a mandate to govern based on this, and used it to radically alter the size of the state. The likelihood that somehow this was all done in good faith beggars belief.

Britain has had a far higher proportion of austerity in the form of spending cuts than tax rises relative to any comparator nation. On this basis austerity is a way of reshaping the state in the Conservative image, flying under the false flag of debt crisis-prevention.

If the British public had knowingly and willingly voted for the major changes made under the coalition in how the government taxes, spends and borrows, this wouldn’t be such a great problem.

Instead, they were essentially conned into it by the ridiculous story of Britain as the next Greece.

Some thoughts
What’s great about the above article is that it doesn’t beat around the bush. Without the slightest hint of irony or historical sense, it lays out the bubble rationale, which is that central banks are all-powerful: “If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.”

So this is the end of history. Interest rates will stay low and stock prices high and governments will keep on piling up debt with impunity – because they control the financial markets and get to decide which things trade at what price. Breathtaking! Why didn’t humanity discover this financial perpetual motion machine earlier? It would have saved thousands of years of turmoil.

At the risk of looking like a bully, let’s consider another peak-bubble gem:

“The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.”

The writer is saying, in effect, that the value of the British pound – and by extension any other fiat currency – can fall without consequence, and that the people who might want to use those currencies in trade or for savings will continue to do so no matter how much the issuer of those pieces of paper owes to others in the market. If holders of pounds decide to switch to dollars or euros or gold, that’s no problem for Britain because it can just buy all the paper thus freed up with new pieces of paper.

This illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy. Governments couldn’t stop tech stocks from imploding or home prices from crashing, and when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.

Tagged as: central banks, Dollar, euro, gold, inflation, interest rates, monetary policy, pound sterling,silver, yen

The Money Bubble Gets Its Grand Rationalization.

 

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