Bank of England Hold Rates as Inflation Rises, Fed Hike Rates for Fourth Time Since Trump Victory…

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As expected, the Bank of England left interest rates unchanged for December at 0.5%. The minutes following the Monetary Policy Committee’s meeting reinforced what was communicated last month, in that the bank still promotes Brexit as the biggest threat to economic prosperity in the UK. As discussed in past updates, the Brexit process provides a clear path for the bank to follow on from November’s rate hike and continue raising rates in 2018.

The BOE have yet to issue any hints on when the next rise is coming, but one potential clue lies in how they may wish to communicate changes in policy to the public. When they cut rates back in August 2016, it coincided with the bank’s August inflation report. Each publication of these reports (issued every three months) is followed by a press conference which is chaired by the current governor, Mark Carney. It so happened that November’s rate rise also coincided with the latest inflation report and a subsequent press conference.

This same model is being used in the United States. The Federal Reserve have hiked rates five times in the past two years, and each rise has corresponded with a press conference outlining a ‘Summary of Economic Projections‘. As with the BOE’s inflation reports, these projections are published every three months.

The trend of communicating policy adaptations in line with increased press exposure is clear. By conducting changes in this fashion, the central banks are able to engage in the art of perceptual management. The Federal Reserve in particular have been meticulous in how they have communicated policy ‘normalisation‘ to both the markets and the public. Apart from the rise in December 2015 (which led to a temporary downturn in equities come January), all hikes since then have generated no negative reaction. As soon as the Fed began using the media to prepare people for further rises, markets started to ‘price in‘ the probability of it happening. And when it did, there was no adverse response.

This is one of the reasons why I believe geopolitical stress points such as Brexit and Donald Trump came to fruition – as they gradually begin to unravel and create greater levels of uncertainty in the global economy, central banks will position themselves to be responsive to that uncertainty. They will not be looked upon as a cause of it. This way attention is focused on political division rather than monetary policy.

To reinforce this belief, tucked away inside the minutes for the MPC’s December meeting is an extract regarding the impact on policy changes to the public. It reads:

The latest Bank of England/TNS Inflation Attitudes Survey, which had been conducted in the days immediately following the November rate increase, had contained encouraging signs that the general public accepted the case for higher interest rates, and believed that interest rates were likely to rise further.

If we take this to be accurate, then the public are not only tolerant of why rates are going up (as expressed by the Bank of England) but are also expecting more hikes to follow.

The next decision on interest rates in the UK is on February 8th – the same day that the next inflation report is due along with a press conference. Time will tell whether the BOE uses this as an opportunity to raise rates again. If the plan is to hike, then as they did a few weeks before the November rise, the bank will begin using the media in January to prep people for what is about to happen.


BBC: Bank sees boost from Brexit progress

  • In minutes from the latest meeting of the Monetary Policy Committee (MPC), the Bank said that since its previous meeting in early November there had been two “significant events”: the Autumn Budget and progress in Brexit talks.
  • Last week’s agreement between the UK and the European Union would “reduce the likelihood of a disorderly exit, and was likely to support household and corporate confidence,” the MPC said.
  • However, it said the reaction of households, businesses and markets to developments on Brexit talks “remain the most significant influence on, and source of uncertainty about, the economic outlook”.
  • Bank policy makers have also agreed to keep interest rates on hold at 0.5%.

FT: ECB holds course on QE despite strong growth

  • Speaking after a governing council meeting in Frankfurt on Thursday that kept interest rates at record lows, Mario Draghi hailed the “strong pace of economic expansion and a significant improvement in the growth outlook”.
  • But despite his upbeat account on growth, the ECB president said muted domestic price pressures had “yet to show convincing signs of a sustained upward trend”, making it important to maintain the bank’s asset purchase programme, which is a divisive issue among the bank’s top officials.

BBC: Tories and Labour reject second EU referendum petitions

  • Both the Conservatives and Labour have rejected petitions calling for a second EU referendum to be held.
  • MPs held a debate at Westminster in response to four petitions on Parliament’s e-petitions website.
  • Brexit minister Robin Walker said there would be no second referendum and Labour spokesman Paul Blomfield said he understood the “frustration” behind the petitions but ruled one out.

CNBC: Disney to buy 21st Century Fox assets in a deal worth more than $52 billion in stock

  • Disney on Thursday announced a deal to acquire many parts of Twenty-First Century Fox for $52.4 billion in stock. The company will get Fox’s movie studios, networks Nat Geo and FX, Asian pay-TV operator Star TV, and stakes in Sky, Endemol Shine Group and Hulu, as well as regional sports networks.
  • The acquisition values the combined Fox business at $29.54 per share, based on Disney’s closing share price Wednesday. The deal has a total value of approximately $66.1 billion, with Disney assuming $13.7 billion of Fox’s net debt.
  • The acquisition bolsters Disney’s plans to become a dominant streaming service platform, making it a bigger threat to Netflix.

CNBC: Fed raises rates a quarter point, hikes growth outlook for economy

  • The Federal Reserve came through on a widely expected interest rate hike Wednesday following its two-day policy meeting and sharply raised its economic growth forecast for 2018.
  • In their decision, the central bank policymakers mostly followed the script, though they did indicate that one less hike is on the way for 2019. Two Fed presidents voted against the increase — Charles Evans of Chicago and Neel Kashkari of Minneapolis.
  • One of the more notable developments came from the expectations Federal Open Market Committee members set for gross domestic product next year. The committee collectively raised its GDP estimate from 2.1 percent in September to 2.5 percent.

BBC: UK wage growth continues to lag inflation

  • Wage growth fell behind inflation for a seventh month in a row, according to new employment figures.
  • The Office for National Statistics said average weekly wages rose by 2.3% in the three months to October, below inflation at 3%.
  • Real earnings, which take into account the cost of living, fell by 0.4%
  • The number of people claiming unemployment benefits rose by 5,900 to 817,500 in November.

BBC: UK inflation rate at near six-year high

  • Inflation rose to 3.1% in November, the highest in nearly six years, as the squeeze on households continued.
  • The Office for National Statistics (ONS) said that airfares and computer games contributed to the increase.
  • Data also shows that food inflation has picked up, especially prices for fish, oil and fats, such as butter and chocolate.

Reuters: EU sends stark warning to airlines on post-Brexit flying

  • British airlines will lose all flying rights to the European Union if there is no transition agreement after Brexit, the EU executive said on Tuesday, a stark reminder of the risks facing the aviation sector if there is no deal.
  • In a notice to all airlines, the European Commission said UK air carriers would no longer enjoy traffic rights under any air transport agreement to which the EU is a party, meaning they would no longer have the right to fly to the EU and between its member states.
  • They would also lose flying rights under agreements between the EU and third countries, such as the U.S.-EU Open Skies agreement.

Bloomberg: A Caution From the World’s Biggest Shipping Line

  • The world’s largest container shipping line says international freight rates are reversing after climbing for most of this year, raising questions about the sustainability of the global trade recovery.
  • Decade-old oversupply issues swamped demand for containerized sea trade in the third quarter, a senior official at Maersk Line Ltd. said in an interview last week. Over 90 percent of trade is routed through ships, making the industry a bellwether for the worldwide economy.

RT: Russia-China real gold standard means end of US dollar dominance

  • The BRICS counties are considering starting an internal gold trading platform, according to Russian officials. When this happens, the global economy will be significantly reshaped, and the West will lose its dominance, predicts a precious metals expert.
  • In 2016, 24,338 tons of physical gold were traded, which was 43 percent more than in 2015, according to Claudio Grass, of Precious Metal Advisory Switzerland.

Zero Hedge: QE Unwind is Really Happening – Fed Assets Drop To Lowest Level In Over Three Years

  • The Fed’s balance sheet for the week ending December 6, completes the second month of the QE-unwind. Total assets initially zigzagged within a tight range to end October where it started, at $4,456 billion. But in November, holdings drifted lower, and by December 6 were at $4,437 billion, the lowest since September 17, 2014

**Attribution for home page image: Bank of England – Mark Carney, Governor at the August 2013 Inflation Report Conference – https://www.flickr.com/photos/bankofengland/9458940718**

3 comments

  1. […] Whilst the European Central Bank hold press conferences after each meeting of the governing council, this has never been the practice of the Federal Reserve. Should they adopt a similar method, it would suggest they might be preparing for more regular adaptations to monetary policy. Central banks have successfully been keeping markets and investors on side whilst tightening policy. With the geopolitical climate growing increasingly hostile, banks have been utilising the game of perceptual management. Back in December I debated why they are doing this:  […]

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