Two days removed from the Bank of England’s latest inflation report (where they warned that interest rates are set to rise ‘somewhat earlier and by a somewhat greater extent over the forecast period‘), the bank’s Deputy Governor, Ben Broadbent, has begun the process of preparing both markets and the public for a rate hike in May.
Whilst insisting that the bank has ‘no fixed path’ for raising rates, he also stated that,
- “nor do I think if there were to be a couple of 25 basis point rises in a year, that that would somehow be a great shock.
- My guess is what’s happening right now in the first quarter, I think (household real incomes) are starting to rise. The pass-through from higher import prices is probably at its peak right now and we are starting to see wage growth improve.”
The media response to the bank’s ‘hawkish‘ tone has been both misleading and unsubstantiated. Misleading because the Financial Times have taken the position that rising interests rates are far from being a disaster for borrowers. Their reasoning rests on the fact that rates ‘will still be low by historical standards‘. The circumstances from a decade ago cannot with any seriousness be compared to the situation facing the world today. Global debt is now over $230 trillion. At the end of 2007 it was estimated at $142 trillion. In the UK, public sector net debt has risen above £1.7 trillion (resulting in interest payments of over £48.7 billion a year). It has risen by up to a trillion in a decade. Household debt has climbed to more than £1.8 trillion (ten years ago it was £1.5 trillion) with personal debt now over £200 billion.
Even former Bank of England Governor, Mervyn King, warned this week of the growing debt pile around the world. Which is ironic considering it was under his stewardship that the BOE began quantitative easing and the era of cheap money.
What the FT fail to explain to their readership is that the higher debt rises, the less interest rates need to go up to put people and businesses under increased financial pressure. For example, marginal increases of 0.25% have more of an impact if debt continues to grow, which it is doing in perpetuity.
Just this week the BBC ran a story on how personal lending is currently growing four times faster than wages. Christians Against Poverty said January 2018 was their busiest ever month for people seeking debt advice. This situation will become decidedly worse the more interest rates rise.
The international agenda to ‘normalise‘ monetary policy means that higher rates in the U.S. will have the same effect on its debt laden citizens. Small increments of a quarter percent have bred complacency since rates started to rise consistently at the end of 2016. Sudden record point falls in the Dow Jones over the past seven days (put down to worries over rising rates) is an indication that complacency has now turned to concern.
Now we come to an unsubstantiated perspective pushed out by Marcus Ashworth at Bloomberg. In relation to the Bank of England and Brexit, he states that,
- it is tough to see how officials can raise rates if negotiators fail to settle transition talks and start discussions on a trade deal. A delay — or even worse, a collapse — in Brexit talks would scupper the bank’s guidance.
For a start, the BOE are using heightened inflation and decreasing spare capacity in the economy to justify raising interest rates. This is proven from their own communications. The bank has never once indicated that it’s ability to tighten is shackled by the Brexit Process.
As I have recently written about, Brexit is in fact aiding the bank’s cause to ‘normalise‘ rates rather than hinder. There is no evidence to claim that a delay or collapse in negotiations with the EU would force the BOE to change course on rate hikes.
In November last year, Mark Carney told Robert Peston on ITV that in the event of a ‘bad deal’ with the EU, the Bank of England would be unable to respond by cutting rates because of inflationary pressure. The evidence suggests that Carney was being genuine.
Bloomberg’s Ashworth continued by saying:
- If Prime Minister Theresa May, or whoever is in charge next year, winds up with a hard Brexit, or no deal, all these rate-increase bets are off.
- In that case, sterling’s newfound strength and higher gilt yields will be a distant memory.
Ashworth is correct in saying that recent strength in sterling would give way to a devaluation in the event of a ‘hard‘ Brexit or no deal. I would also agree that all bets would be off on the path of interest rates, but not in the way that Ashworth assumes. If the primary response to Brexit negotiations proves to be a notable downturn in the value of sterling, then it is clear that this will be judged as having an impact on the rate of inflation. We saw exactly this scenario after the original referendum. Rising inflation resulted in rising interest rates.
Every indication coming from central banks is that they will respond to inflation by tightening monetary policy. At present, nothing in their outlook runs contrary to that train of thought. Based on that, I believe a ‘hard‘ Brexit or a no deal will result in increased rate hikes rather than a change in policy.
This is Money: The £166 trillion timebomb: Former Bank governor King warns debt will trigger the next financial meltdown
- A worldwide debt binge could trigger the next financial crisis and tip Britain back into recession, former Bank of England governor Lord King has warned.
- King said it was essential to tackle the global debt pile, which stands at £166trillion, according to the Washington-based Institute of International Finance.
- ‘The areas of weakness in the current system are really focused on the amount of debt that exists, not just in the US and UK but across the world,’ King said.
- ‘Debt in the private sector relative to GDP is higher now than it was in 2007, and of course public debt is even higher still.’
- “We have above-trend growth, we have buoyant financial conditions, we still have an easy monetary policy and this is all taking place with a very large tax cut that’s going to provide additional stimulus,” Dudley said in an interview with Bloomberg TV when asked what it would take for him to support a rate rise at the Fed’s next policy meeting.
- “As long as I am comfortable the economy continues to grow at an above-trend pace … I‘m probably going to be supportive of removing monetary policy accommodation,” he said.
- “I‘m open to a March rate increase,” Harker told reporters after a speech delivered at a meeting of the National Association of College and University Business Officers. He added he has “lightly pencilled” in two rate hikes for 2018 and could see a third one depending whether inflation rises further and financial conditions remain loose.
- The economic boost from a major tax overhaul signed into law by President Donald Trump is keeping pressure on the Federal Reserve to raise interest rates, Kansas City Fed President Esther George said on Thursday.
- Speaking in Wichita, Kansas, George said it was unclear how much the fiscal changes would boost the economy but that the stimulus would come as the U.S. labor market appears to be tight, raising the risks of inflation.
- “Because of that, it is important that the [Fed] continues on its current path of policy normalization with gradual increases in the target federal funds rate,” George said, adding that it would be “reasonable” for the Fed to raise interest rates three times in 2018.
- The deal would add a net $320 billion to deficits over a decade, or $418 billion counting the additional interest costs. That’s in addition to the estimated $1 trillion added to the deficit over a decade by the Republican tax cut legislation passed in December.
- The budget measure, H.R. 1892, will temporarily finance the government at current levels through March 23 while lawmakers fill in the details on longer-term spending, which includes raising the caps on defense spending by $80 billion over current law in this fiscal year and $85 billion in the one that begins Oct. 1.
- “In terms of using Bitcoin or some of the cryptocurrencies, we are also looking at it, but I’m told the vast majority of cryptocurrencies are basically Ponzi schemes,” World Bank Group President Jim Yong Kim said Wednesday at an event in Washington. “It’s still not really clear how it’s going to work.”
- Earlier this week, Bank of International Settlements chief Agustin Carstens – the former Governor of the Bank of Mexico – said there’s a “strong case” for authorities to rein in digital currencies because their links to the established financial system could cause disruptions. The desire to protect against this significant, undiversified risk is why credit-card lenders including Capital One, Bank of America, JP Morgan Chase & Co. and others prohibiting users from buying virtual currencies with their credit cards
- Federal Reserve Chair Jerome Powell recently said that “governance and risk management will be critical” for cryptocurrencies.
- Companies have announced $88.6 billion in stock buybacks so far this year, more than double the amount in the same period last year, according to data provided by Birinyi Associates.
- So far this year, 61 companies announced buybacks in a size that dwarfs the $40.3 billion from 58 companies announced last year between Jan. 1 and Feb. 6.
- This year’s total is the second-highest amount announced in the same year-to-date period, going back to 2009, the first year of the bull market. It was topped only by the $104.8 billion in 2016, when 127, more than twice as many companies, announced buybacks during a turbulent stock market sell-off.
- This year’s total includes the very large, $22.6 billion buyback announced by Wells Fargo. Among the largest buybacks in the 2017 period were Comcast‘s $7 billion buyback and $5 billion each from General Motors and Lowe’s Cos.
- December’s 1.3% month-on-month decline for industrial production was the fastest drop recorded by the Office for National Statistics (ONS) since 2012.
- The slump comes after the Forties pipeline, which pumps about 450,000 barrels per day of oil, was shut in mid-December for about three weeks when a crack was discovered.
- However there was better news elsewhere for the UK economy, as the ONS also revealed continued growth in manufacturing and a surprise surge in construction output in December.
- On Thursday, the Bank admitted that interest rates would have to rise sooner and faster than expected if the current rate of expansion is maintained.