MacroScope

Why should the Bank of England hike rates when it can baby-step?

When the Bank of England decides to start hiking interest rates, it may find that its standard 25 and 50 basis point interest rate moves of old are too blunt a tool for Britain’s delicately-poised economic recovery.

Instead, UBS economist Amit Kara suggests the Bank should “test the waters” with rate hikes of 5 to 10 basis points:

After many years of an aggressive ‘shock and awe’ approach, one can reasonably say gradualism is back. To be clear, gradualism in monetary policy setting is not new. Ben Bernanke offered a strong justification for gradualism in a speech in 2004, essentially advocating an incremental approach to rate setting in the face of uncertainty. Another good example, also from the US, is the Fed decision last month to dial back its QE programme. The market was looking for an explicit tapering path, but the FOMC instead delivered a small step and a promise to take further action after one month depending on the data. Our prescription of a 5 basis point rate hike in the UK is analogous to the gradualism delivered by the FOMC.

The still-high level of debt in UK households was one reason why the BoE should opt for a gentle rate hike cycle, said Kara, who suggests this approach would be more convincing than its current forward guidance of “just words”. He also pointed to vulnerability of asset prices and markets to higher interest rates.

He also noted that the scale of changes to the Britain’s base rate has changed over the years: 25 or 50 basis point changes became common in the 1990s. Before that, it wasn’t uncommon for policymakers to move the rate by an entire percentage point or more.

ECB can claim one early victory for forward guidance

The European Central Bank can claim at least one early victory for forward guidance: forecasters have been persuaded by its promise to keep key interest rates low or lower for a long time.

While ECB officials have struggled to talk down rising money market rates that point to an undesirable early tightening of monetary policy, they have had more luck influencing market economists in Reuters polls.

That’s significant because both euro zone central banks and the Bank of England use Reuters polls as a measure of interest rate expectations.

Has dawn broken over Britain’s economy?

Bank of England Governor Mark Carney said on Thursday he was wary of another “false dawn” for Britain’s economy, but economists polled by Reuters are generally more optimistic.

The poll, published on Wednesday and taken ahead of an unexpected fall in unemployment, said the economy would expand a relatively healthy 0.7 percent in the current three month period and then by 0.5 percent per quarter through to early 2015.

And that comes after better than expected 0.7 percent growth in the second quarter.

History suggests rocketing British growth won’t last long

Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.

Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managers’ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.

Recalculating: Central bank roadmaps leave markets lost

Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with traditionBut, as in the Fed’s case, the increased transparency seems to have only made investors more confused.

The latest instance came as something of an embarrassment for Mark Carney, the Bank of England’s new superstar chief from Canada and a former Goldman Sachs banker. The BoE shifted away from past practice saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it said could take three years.

Yet the forward guidance announcement went down with a whimper. Indeed, investors brought forward expectations for when rates would rise – the opposite of what the central bank was hoping for – although the move faded later in the day.

Mervyn King gets a “B” grade from economists… for the time being

As is now customary for retiring central bank chiefs, Bank of England Governor Mervyn King has received a warm – but not a standing – ovation from economists for his time in charge.

But if there’s one thing the last few years have shown, it’s that the legacy of prominent central bankers can sour quickly after retirement.

King received a median 7 out of 10 score for his 10 years as Bank of England governor from 39 economists polled by Reuters this week.

Britain’s Help to Buy unites analysts about its dangers

Even if they can’t agree how much Britain’s Help to Buy mortgage guarantee scheme will boost the housing market, analysts in the latest Reuters poll are united by an understanding of its dangers.

The government’s Help to Buy programme, unveiled in its March budget, is designed to boost mortgage lending and help buyers with small deposits get on the property ladder.

The poll predicts Britain’s house prices will rise at their fastest pace in four years in 2013, and data from Hometrack show London property was snapped up in April more quickly than at any time since October 2007 – adding to concerns Help to Buy might start a new house price bubble.

Beware: UK services PMI is no crystal ball for QE

Take with a pinch of salt economists who say Tuesday’s strong UK services PMI  might persuade the Bank of England to hold off from restarting its printing presses this week.

BoE policymakers been perfectly willing over the last few years to vote in favour of more asset purchases after a rise in the services PMI number.

Only the last decision for more quantitative easing — July 2012 — came after a decrease in the services PMI’s main index. While members of the Monetary Policy Committee rely on the PMIs as a monthly gauge of economic activity, it’s clear the surveys can’t be read as any proxy for policy decisions.

Time already to switch off the sterling printing presses?

A clutch of top UK economic forecasters on Thursday swept under the rug predictions for another 50 billion pounds of gilt purchases they thought would take place starting just in a few weeks.

News that the UK economy bolted ahead at a 1.0 percent quarterly pace in the three months to September – nearly double the consensus prediction in the Reuters Poll and easily more than twice the last measured growth rate in the United States – was probably a good enough reason on the surface.

But most agree the main reason was an extra work day compared with the prior quarter – when the Queen’s Jubilee celebrations left vast swathes of the country idle – along with a spending boost from accounting for tickets for the Olympic and Paralympic Games.

Could the Fed follow the Bank of England into ‘funding for lending’?

Federal Reserve Chairman Ben Bernanke “might have something up his sleeve next week” when he delivers his semi-annual monetary policy report to Congress: he could hint at a “funding for lending” program similar to what the Bank of England announced last month, according to one long-time Fed watcher.

If the Fed wants to ease again, the first lever they pull might not be more quantitative easing where the Fed buys government bonds to help keep interest rates low in the hope that low rates will foster lending and economic growth, says  Decision Economics economist Cary Leahey.

Bernanke is scheduled to testify before the Senate Banking Committee on Tuesday and in front of the House Financial Services Committee on Wednesday.