The Great Debate UK

The watered down version of Forward Guidance

The new governor of the Bank of England has shaken things up at the Old Lady. Not only has he brought a touch of glamour to the Bank, he is considered a George Clooney look-alike by some, but he has dramatically altered the way that the Bank does things. Since he arrived a little over a month ago we’ve had statements released after meetings and now the Bank has adopted forward guidance.

But has this central banker with a twinkle in his eye run into a brick wall at the BOE? The forward guidance that he announced during the August Inflation Report went down like a lead balloon. The markets immediately challenged the Bank’s pledge to keep interest rates low until 2016, UK Gilt yields at one point rose to their highest level since before he joined as Governor, and the pound also jumped sharply.

Essentially, the BOE’s ambition with forward guidance was to keep interest rates low so that consumers and small businesses feel confident enough to buy that car or employ more staff.  After successfully navigating the Canadian economy through the financial crisis, hopes were high for Carney, so why aren’t markets reacting as he would like?

It’s mostly because they don’t believe him or the rest of the Bank. At the same time as they pledged to keep interest rates low for 3 years, they also revised up their growth expectations. Stronger growth surely means higher interest rates, right?

How will the privatisation of RBS and Lloyds affect gilt supply?

–Sam Hill is UK Fixed Income Strategist at RBC Capital Markets. The opinions expressed are his own.–

The return of RBS and Lloyds to the private sector is moving up the agenda but as the UK government prepares to set out the strategy for privatisation, the spotlight will, once again, fall on the gilt market and the public finances.

Interest rate decision day: no news is bad news

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.-

Whether their problem is narcotics or alcohol or simply junk food, addicts are usually planning to give up… but not yet. In the meantime, there are always plenty of excuses for delay.

UK chancellor has mixed message for gilt investors

– Ian Campbell is a Reuters Breakingviews columnist. The opinions expressed are his own –

The UK sounds Greek again. Britain’s new government is finding skeletons in the fiscal cupboard. George Osborne, the incoming chancellor of the exchequer, is appointing an independent watchdog to check the numbers out. The gilt market perhaps ought to recoil at the revelation that things are even worse than thought. But it’s more likely to look on the bright side: coalition honeymoon, transparency and rectitude to come.
UK government bonds will for now probably continue defying threats that kill in the Aegean. A record peacetime deficit, an inflation rate of 3.4 percent, a plunging pound: no matter, UK 10-year paper has risen in value by about 2 percent this year and yields a miserly 3.8 percent. But while Osborne’s deficit-cutting commitment will reassure, the medium-term risks to gilts remain great.
Gilts’ appeal is largely relative. UK debt levels have worsened appallingly — but are not yet appalling. Britain, like the United States, is rightly judged to have a more adaptable economy than the euro zone’s. The pound can weaken, helping competitiveness and growth and therefore favouring rebalancing of the government’s accounts.
But the growth that can save is not strongly in evidence now. Mervyn King, the Bank of England governor, has warned of possible growth disappointment as fiscal cuts kick in. Ironically this is another factor supporting gilts. Inflation is up, but is expected to be dragged down by economic weakness. That means interest rates will probably remain low, favouring bonds.
Still, gilts investors cannot be complacent. The fiscal deficit is huge but money-printing — quantitative easing — exceeded it in the year to March. Spencer Dale, the BoE’s chief economist, speculated last week that QE had taken about one percentage point off gilt yields. Unless the economy worsens, the BoE is unlikely to resume gilt purchases. And one day it must start selling its gilt mountain.
There are other big risks. The coalition honeymooners may fall out. The economic turnaround will be extremely hard to generate. And Osborne’s fiscal surgery may half kill the patient. For a UK that has much to do to stop its debt spiralling, gilt returns look poor. But the remarkable bonds may smile through the honeymoon all the same.

Eerie calm before Britain’s election

– James Saft is a Reuters columnist. The opinions expressed are his own –

To look at sterling and gilts, you would hardly know that Britain is sailing into a general election which will likely deliver a weaker government with a diminished ability, if not will, to grapple with high debts, an uncertain role in the global economy and an aging population.

Are the markets right to fear a hung parliament?

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-David Kuo is director at The Motley Fool. The opinions expressed are his own -

There is a well-trodden saying that markets hate uncertainty. Elections are inevitably uncertain, so until the votes in the next election are counted we cannot be certain which party will govern the UK.

Currently, there are suggestions that no single party may get sufficient votes to form the next government outright. It is true that the Conservatives have a strong lead over its rivals. However, with a first-past-the post voting system, it only takes a small swing away from the Conservatives to change the complexion of the next parliament.

from Commentaries:

The case for GDP bonds

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Around the world, governments are struggling to drum up buyers for the mountain of bonds they need to sell. And that's especially true for big deficit, low savings countries like Britain and the United States.

The returns they are offering on conventional government bonds are low and there's the risk of inflation eating away at their value. Perhaps it is time for a different approach.

Hike in interest rates a step closer

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menashysmall2- Edward Menashy is chief economist at Charles Stanley. The opinions expressed are his own. -

The Monetary Policy Committee of the Bank of England has kept its key lending rate at a record low of 0.5 percent, last reduced in March 2009 when it indicated that conventional policy had reached its limit and unorthodox measures such as quantitative easing were to be used.

The plight of middle-aged investors

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david-kuo_motley-fool- David Kuo is director at The Motley Fool. The opinions expressed are his own. -

What is the one thing that young investors have but older investors would give their eye teeth?

Middle-age investment challenge

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Stephen Peters

- Stephen Peters is an investment trust analyst at Charles Stanley, covering all closed-ended investment trusts and companies. The opinions expressed are his own. -

With between 5-25 years to go before one retires, the “middle aged” are in a conundrum at the current point in time. Having seen the value of their assets decline sharply in recent years, dreams of an early end to one’s working life have been put on the back burner for a little while.

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