Shadow MPC: Eyes on foreign central banks


Rate rises are on hold until at least late 2016 but all eyes will be on what foreign central banks do

Given that the Bank of England is expected to sit on its hands with respect to interest rates until well into next year, most attention will focus on whether, when and to what extent other major central banks will change their policy.

Despite further weakness in global commodity prices, the US Federal Reserve looks set to raise rates for the first time in nearly a decade as domestic price pressures build. In contrast, policy is biased towards more stimulus in other jurisdictions, notably the eurozone but also potentially Australia, Japan  and Sweden. As such, sterling may continue to be caught in the crossfire between the US dollar on the one hand and other major currencies on the other.

With speculation mounting that the monetary policies of the US Federal Open Market Committee and the European Central Bank are set to move in opposite directions in December, the minutes of the ECB’s October meeting – when the possibility of further easing was first discussed – will be heavily scrutinised for any further discussion about alternative options. Additional guidance could come via several speeches from ECB council members as well as president Mario Draghi himself.

UK inflation held at -0.1 per cent in October, with the familiar culprits of lower food and energy costs helping to drag prices down. Inflation is expected to remain near zero until the end of the year.

Retail sales growth continued and the quantity of goods bought was up by 3 per cent on last year. But that does not mean households are spending much more. In fact, spending in shops and online rose by less than 1 per cent. Two-thirds of the growth came from falling prices. That is good news for consumers as the pound in their pocket goes further but it means a squeeze in margins for shopkeepers and keeps their revenue under pressure.

Meanwhile, UK house prices are on the up again, according to the latest figures from the Office for National Statistics. Average prices rose by 6.1 per cent year-on-year, the fastest pace since March. This is no surprise given that the reliable Royal Institution of Chartered Surveyors survey had been pointing to a pick-up starting in Q3. RICS suggests the pick-up will continue into Q1 2016, after which house price growth will start to moderate again.

BoE chief economist Andy Haldane also repeated his case for a possible interest rate cut rather than a rise, given the headwinds in the global economy that have knocked confidence in the UK.

In a speech to the Trade Union Congress, he said there was no need for a rise in the short term, citing a “fizzling” in wage growth – a key indicator for the Bank’s Monetary Policy Committee as it continues to mull the timing on when the country could absorb rising borrowing costs.

Haldane added: “Now more than ever in the UK, policy needs to be poised to move off either foot, depending on which way the data break. My view is that the case for raising interest rates is still some way from being made.”

He made his comments following the release of the BoE’s quarterly Inflation Report in early November, which signalled it was targeting a delay to any rate rise until late next year or early 2017.

While the Bank has outlined its concerns about the economic slowdown in emerging markets affecting activity in the UK, the Fed has eased back on its initial fears about a knock-on effect for the world’s biggest economy. The US economy is more self-sufficient than the UK’s and grew jobs at a rate of knots in October, with wages rising comfortably.

The latest UK employment figures showed that, while the jobless total fell by 103,000 in the three months to September, regular wage rises slowed further in the same period to a rate of 2.5 per cent from 2.8 per cent.

The BoE’s latest assessment of the UK economy painted a rosy picture of domestic prospects. More jobs are boosting incomes and supporting consumption. Firms are investing. Even productivity is finally showing signs of improving.

Emerging markets

But the MPC must look at more than what is going on at home and global factors meant a more pessimistic take on the future. As mentioned, emerging market growth in particular has slowed in the past three months and the Bank thinks this slowdown is here to stay. That weakness weighs on UK growth a bit but, more importantly, means inflation is likely to stay low for longer. And what goes for inflation also goes for interest rates.

If rates are set to remain at their record lows, the Bank may have to use other tools to fulfil the financial stability side of its mandate. But what is the rush? Mortgage lending has picked up this year and house prices are growing more quickly than wages.

The fastest borrowing growth is in credit cards and personal loans. Right now, households do not appear to have over-stretched themselves; debt service ratios have not budged in the past four years. But the Financial Policy Committee intervened last summer to limit the number of high loan-to-income mortgages that lenders could offer. Its next view of risks to the UK financial system will be released in December but there is every chance it will take some policy action before the MPC is tempted to act.

Earlier in the autumn, I predicted we would not see a rate rise until March 2016. I still think this is the earliest that any move will happen, albeit factors away from these shores may force the MPC to rethink its strategy and hold on for a little longer.


Robert McCoy is senior product & communications manager at PMS