Bank of England ‘Rift’ Grows, Steven Mnuchin Talks Up New 50 and 100 Year Bonds, more…


Last week the Bank of England only narrowly preserved interest rates at 0.25%, with three members of the seven strong committee voting for a rise. Chairman Mark Carney has since stated that ‘now is not the time to begin an adjustment‘ given the UK’s ‘anaemic wage growth‘ . However, the Bank’s Chief Economist, Andrew Haldane, thinks otherwise. Said to have seriously considered voting for a rate hike on June 15th, he now believes with inflation running at 2.9% that the environment is sufficient for a rate hike before 2018. 

The bank has four more opportunities to raise rates this year – August, September, November or December. Elements of the media are now beginning to discuss openly the possibility of rates rising over the next six months.  With the U.S. being the first major Western power to begin a course of rate hikes, I believe the trend will continue with the UK putting up rates this year.

The apparent dissension we are witnessing at the Bank of England is a side show to what has been a carefully cultivated narrative of ‘normalising’ monetary policy in the West. A similar scenario is currently playing out in both the U.S. and in Europe. Minneapolis Fed president Neel Kashkari went on record last week as saying that economic data was not supporting the Fed’s mandate for increasing interest rates. Opposing views have also been expressed over the past six months between Mario Draghi at the European Central Bank and Jens Weidmann at the German Bundesbank. Draghi has long supported the ECB’s ‘ultra loose monetary policy‘, to which Weidmann is far more skeptical and would like to see curtailed.

Given the language emanating from The Federal Reserve in particular, they remain intent on hiking rates at least one more time in 2017 – September or December appear the most likely targets. It should be said, however, that if inflation were to rise back above 2% and remain there into the Autumn, the Fed could quite conceivably use this and other false fundamental data points e.g. employment, to raise rates two more times. After all, the market is not an accurate indicator of the Fed’s intentions. Less than six weeks before the rate hike in March, mainstream economists rated the chances of a rise at less than 10%.

Central Banks are ultimately vehicles for disseminating monetary policy which is communicated down to them through the Bank for International Settlements (of which all the world’s major central banks are members). Rifts that play out through the media are a distraction from this reality.

The Guardian: Bank of England rift as chief economist ponders interest rate rise

  • Signs of a deepening rift on the Bank of England’s monetary policy committee have emerged after Threadneedle Street’s chief economist revealed he seriously considered opposing the governor, Mark Carney, and voting for an interest rate rise earlier this month.
  • Just 24 hours after Carney said the state of the economy and the uncertainty caused by Brexit meant borrowing costs should stay on hold, Andy Haldane said it would be prudent to tighten policy before the end of the year.
  • Haldane, previously one of the most doveish members of the committee, said the balance of risks had shifted so that the dangers of moving too late outweighed those of raising interest rates too soon.

BBC: Mark Carney says time not right for interest rate rise

  • The time is not right for an interest rate rise, Bank of England governor Mark Carney has said.
  • Wage growth is falling, and the impact of Brexit on the economy is unclear, Mr Carney said in a speech at Mansion House in London.
  • In his Mansion House speech, Mr Carney said: “From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment [rate rises].
  • “In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”

Jens Weidmann: Welcome remarks – “Frontiers in Central Banking – Past, Present and Future”

  • When speculative lending ballooned in the late 1920s, the Fed, in pursuit of its
    mandate, tightened monetary conditions in a situation when inflation rates were already slightly negative. While the Fed could not stop asset prices from soaring, its interest rate moves contributed to an economic downturn.
  • By providing oxygen to the economy, central banks are able to offer vital support. But in the long term, an oxygen supply is no substitute for a healthy heart. The more the central bank safeguards banks against risks and promises them central bank
    funding even in dubious situations, the more they will have an incentive to take on excessive risks.

Reuters: U.S. bank investors hope Fed stress test results lead to big payouts

  • Investors are hoping the Federal Reserve will allow big U.S. banks to put an estimated $150 billion in idle capital toward stock buybacks, dividends and profit-boosting investments in the coming weeks after conducting a regular examination of financial strength.
  • On Thursday, the Fed is scheduled to begin releasing results from its two-part annual stress test, which was adopted in response to the financial crisis, to gauge banks’ ability to weather an economic storm that could threaten the stability of the system. The results will be the first since Republican President Donald Trump took office.

CNBC: Mnuchin Says Ultra-Long Bond Program Wouldn’t Be a One-Off

  • Treasury Secretary Steven Mnuchin said the U.S. government only intends to introduce ultra-long bonds if there’s an audience for regular issuances of the debt.
  • “We’re reaching out to the borrowing community and investors to see what the demand is,” Mnuchin said in an interview on Bloomberg Television at an investment conference near Washington on Tuesday. “What we don’t want to do is to create a program that is a completely one-off program. We want to see if it would be an important part of our borrowing capabilities.
  • Mnuchin in May said that ultra-long bonds “absolutely make sense,” and formed an internal working group to study maturities of 50- and 100-year debt.

Project Syndicate: Brexit In Reverse? (by George Soros)

  • Economic reality is beginning to catch up with the false hopes of many Britons. One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.
  • This worked for a while, because the increase in household consumption stimulated the economy. But the moment of truth for the UK economy is fast approaching. As the latest figures published by the Bank of England show, wage growth in Britain is not keeping up with inflation, so real incomes have begun to fall.

CNBC: Italy is testing the limits of the EU’s bank-bailout system

  • Italy is testing the limits of Europe‘s bank bail-in regime. Regulators are threatening to block Rome’s plan to rescue two small lenders. A scheme to save Monte dei Paschi has also run into trouble. The government may yet have to help in any solution.
  • The European Commission allows governments to inject money into ailing lenders, but only if they are viable and private investors contribute. That’s proving a tricky hurdle for Italy to clear.

Bloomberg: Evans Says Fed Must Convince Public It Sees Low-Inflation Issue

  • Federal Reserve officials need to show a commitment to reaching their goal on inflation, which has generally been running below target since the financial crisis, Chicago Fed President Charles Evans said.
  • “We have to assure the public that we recognize the new low-inflation environment and that we are not overly conservative central bankers who see our inflation target as a ceiling,” Evans said Monday in remarks prepared for a speech in New York.
  • “I believe we need to demonstrate a strong commitment to hitting our symmetric inflation objective sooner rather than later. That is, we need to pursue an outcome-based policy to actually help us achieve our inflation goal.”


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