MacroScope

Bank of England, the first mover?

By Mike Peacock
July 10, 2014

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After the European Central Bank kept alive the prospect of printing money and the U.S. economy enjoyed a bumper month of jobs hiring prompting some to bring forward their expectations for a first U.S. interest rate rise, the Bank of England holds a monthly policy meeting.

There is no chance of a rate rise this time but the UK looks increasingly nailed on to be the first major economy to tighten policy, with the ECB heading in the opposite direction and the U.S. Federal Reserve still unlikely to shift until well into next year. Minutes of the Fed’s last meeting, released yesterday, showed general agreement that its QE programme would end in October but gave little sign that rates will rise before the middle of 2015.

The British economy is growing fast and its housing market has been running red hot – prices in London have shot up nearly 26 percent from a year ago – though the BoE says rate rises are not the first tool to deal with that. Britain’s closely-watched RICS housing survey, released overnight, showed signs that some of the heat is starting to come out with its house price balance easing back.

However, Minouche Shafik, who will join the nine-strong group of rate setters next month, said yesterday the Bank was likely to lower its estimate of spare capacity in the British economy. That means incipient inflationary pressure could start to build and indicated that the time to raise interest rates may be approaching.

A Reuters poll of more than 60 economists produced a consensus that UK rates will rise for the first time in the first quarter of next year. But it attached a growing, 40 percent chance to a hike before year-end. Only last year, the Bank was predicting no move until 2016.

Separately, the UK’s independent Office for Budget Responsibility will publish its projections for public finances over the next 50 years. Since no one seems to be able to forecast even a year out with any certainty it will presumably be rather broad brush.

Last night, European Central Bank President Mario Draghi reiterated that the ECB could yet do more to bolster the euro zone economy while urging  euro zone states to respect their joint fiscal rules and extend their cooperation to economic reforms. That jars somewhat with Italian premier Matteo Renzi’s push to treat the rules as flexibly as possible to get growth going.

Greece will probably seal its second shimmy into the bond markets since its double bailout, having hired banks to run a three-year bond syndication with the aim of raising up to 3 billion euros. Ireland will sell up to 500 million euros of 10-year debt despite being under no funding pressure.

Euro zone debt has been selling like hot cakes all year but there are some cracks starting to appear with yields driven down to historic lows.
Most notably, Portuguese borrowing costs have started to come under pressure on the travails of Banco Espirito Santo, the country’s largest listed bank. Yesterday, the bank floated a debt restructuring plan and, while there is no automatic need for the government to bail it out, yields spiked nonetheless.

The next leg of fighting in Ukraine looks imminent. Ukrainian government forces warned separatists in the eastern town of Donetsk that a plan was in place to take back the territory they occupy. The rebels reported a steady flow of new recruits who were ready to fight and are regrouping for stand in a city of one million people.

German Chancellor Angela Merkel and French President Francois Hollande spoke on the phone with Ukrainian President Petro Poroshenko, urging a resumption of talks with separatists that could lead to a ceasefire.

The EU has agreed to add 11 new names to its list of people – largely Russian – hit with asset freezes and asset bans, an incremental move which doesn’t necessarily suggest it is any closer to imposing the wider sanctions that would really hurt. Nonetheless, with capital outflows of $75 billion in the first half of the year and a flatlining economy, Russia is already hurting.

An Israeli air strike killed seven Palestinian civilians early on Thursday, including five children, in the largest death toll from a single attack since the start of a three-day offensive against Hamas militants in Gaza, according to Palestinian officials. Israel media are reporting that Palestinian militant rocket  were shot down over Tel Aviv. Israel says its offensive is intended to halt rocket fire at its cities from the Gaza Strip.

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