It’s another one of those central bank days today, with the European Central Bank, Bank of England and not forgetting the TCMB (the Turkish Central Bank) announcing policy decisions this afternoon. Although the last decision to raise rates in the UK was unanimous, and subsequent relatively strong data has supported their decision, today the Bank unanimously decided to hold its policy rate at 0.75% (and may remain the case until after Brexit) signaling continued caution over the near-term uncertainties of leaving the EU.
As eyes are on the US Fed minutes release later today, spare a thought for the Bank of England quietly celebrating (if you can call it that) a decade of dovishness. It may not feel like it has been that long but today marks a decade since the last interest rate rise for the UK. The 12 months prior to this (between 2006 and 2007) saw 5 hikes to a peak of 5.75% on the 5th July 2007. It wasn’t long before the subprime mortgage crisis contaminated global markets with the Bank of England cutting rates 3 times to settle at 5% for a while, only to see an international banking crisis ensue, plunging rates across the world.
As widely anticipated, with just 6 days before the US Presidential Elections and without a scheduled press conference, the FOMC held off raising rates at least until the next meeting on December 13-14. This now means that it will have been a whole year since the last Fed rate hike last December back when markets were pricing in 4 rate rises in 2016. Now there is only a 78% expectation that there will be just one hike, although this is up from the 70% expectation of Fed action prior to the release as ‘the case for an increase in the federal funds rate has continued to strengthen’.
Between today and next week we will hear from a number of central banks on their policy decisions. As we expected, this morning Sweden's Riksbank held rates at -0.5%. Although it highlighted its anaemic inflation concerns adding an upturn will need continued support by way of holding the current repo rate at -0.5%; six month longer than what was assumed in September. It also stated that ‘actions of other central banks’ will affect its ‘decision to extend purchases’ stating its willingness to extend its asset purchase programme in December. Away from inflation, there have been a few economic data prints which have surprised on the upside; unemployment fell in September and October’s consumer confidence read beat market expectations as a result of recent stronger economic growth. Although growth forecasts for 2016 and 2017 have been cut to 3.2% and 2.2% respectively.
On what is another relatively quiet summer’s day in financial markets, the only thing that stands out is the increasing rhetoric over the use of fiscal policy; either in conjunction with, or as a substitute for rapidly diminishing monetary policy options.
The Bank of England stands out as a classic case. Faced with a Brexit scenario, the BoE’s response has been to slice interest rates to a record low 0.25% and expand its quantitative easing programme by £60bn worth of gilts and £10bn of corporate bonds. The decision was thought to be more pre-emptive than reactive (although a meeting later than what was initially suggested), and economic data releases since, although too early to tell, have surprised on the upside.
Yesterday the Bank of England (BoE) found itself unable buy enough long dated gilts as investors continue to cling on to developed government bonds of all varieties. Following the BoE’s decision to cut the UK base rate and expand its quantitative easing programme by £60bn it only managed to receive offers to purchase £1.12bn of gilts with maturities over 15 years versus their target of £1.17bn. At least part of the reason for this shortage of availability is the more illiquid markets over the summ er – indeed the ECB overbought in earlier months in expectation of such illiquidity but the recent post Brexit expansion of QE obviously had no such option. This prevailing shortage, versus demand, of government bonds looks likely to remain a prolonged dilemma for central banks and investors alike.
Tomorrow sees probably one of the most important policy decisions from the BoE in recent history as futures markets have priced in a 100% chance of a cut in rates; to the lowest level on record. The Brexit effect has seen a deterioration in the UK’s economic fundamentals; business confidence now sits near financial crisis levels, manufacturing shrank at its fastest pace in three years in July and construction has rapidly contracted. No doubt the central bank will forecast much lower growth and higher inflation in the UK for the next couple years. In fact, the IMF slashed its growth forecasts for the UK to 1.7% in 2016 and 1.3% for 2017. Interestingly though, despite these being some of the sharpest downgrades, the IMF still expects the UK to expand at a faster rate than Germany and France for example.
Thirty years ago today the Soviets launched the then biggest space station, Mir, and just yesterday some reports suggested that NASA cut the video feed from the International Space Station due to a UFO entering the Earth's atmosphere. If that is the case and martians did come to Earth to visit, they should jump in a helicopter instead, if Cleveland Fed Loretta Mester’s surprising statement is anything to go by.