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.

Financial headcounts stabilize in 2009

After financial firms slashed hundreds of thousands of jobs in 2007 and 2008, the bloodletting slowed in 2009 as major banks rebounded from the financial crisis. Even though firms like Goldman Sachs Group Inc and JPMorgan Chase & Co reported billions of dollars in profit, they still did not announce major hiring initiatives.

Recession layoffs Headcount (end 2008) Headcount (end 2009) Bank of America 45,000 240,202 283,717* Citigroup 75,000 323,000 265,000 Goldman Sachs 4,800 34,500 32,500 J.P. Morgan 23,700 224,961 222,316 Morgan Stanley 8,680 45,295 61,388* UBS 19,700 77,783 65,233 Credit Suisse 7,320 47,800 47,600 Barclays 9,050 152,800 144,200 Deutsche Bank 1,380 80,456 77,053 Santander 2,600 170,961 169,460

* Includes additional employees from Morgan Stanley Smith Barney merger and Bank of America’s merger with Merrill Lynch, both of which were completed in 2009 (Steve Eder and Steve Slater)

Trending down

The global economic crisis has prompted  a number of economists to argue that the world will from now on experience lower trend growth, that is, roughly, that normal growth will be lower. The argument is that the current crisis is structural, not cyclical.

UBS is the latest to latch on to this view. In a client note, the bank’s economists say they have revised their 10-year average global real growth estimates to 3.4 percent from 3.8 percent. They have done the same for most of the big economies. The U.S. economy is now seen averaging 2.3 percent versus about 2.8 percent; China goes to 7.5 percent from 8.0 percent.

Does this matter? In at least one area it does — calculating the needed yield for U.S. Treasuries to be attractive over stocks. The lower the growth rate the lower the needed yield.

from Global Investing:

Zeitgeist check

Some more bits and bobs to capture the current mood among investors:

-- Some stock indexes have started to fall below their 2008 lows, meaning the turn-of-the-year rally has petered out. Dead cat bounce?

-- Analysts are becoming increasingly downbeat about corporate earnings. Seven of the 10 sectors in the S&P 500 are looking at a year-on-year decline in earnings, according to Thomson Reuters proprietary research. That's the highest number of sectors in negative territory since Q4 2001.

-- UBS economists have sharply revised down estimates for 2009 growth in Japan, China, much of the rest of Asia, and the euro zone. They now expect world GDP to grow a paltry 0.4 percent this year.