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Carney changes Bank and deals blow to savers

It's all change at the Bank of England as its new governor Mark Carney warns interest rates will stay low for a long time.


by Gavin Lumsden on Jul 04, 2013 at 17:00

Carney changes Bank and deals blow to savers

(Update) We were promised more guidance from the new governor of the Bank of England and boy did we get it, although it means more uncertainty for savers and investors.

After the monthly meeting of the Bank's monetary policy committee (MPC) this week the Bank of England held interest rates at 0.5% and, as was also expected, did not increase the quantitative easing programme which has created an astonishing £375 billion of new money in the past four years.

But what did surprise markets was the speed with which the MPC, in its first meeting under Carney, took a bold step towards commenting on future interest rate policy.

In particular markets were stunned by the statement's criticism of the recent sell-off in gilts (UK government bonds), sparked by the US Federal Reserve's talk of reducing its bond purchases under QE.

The dumping of gilts had seen yields on 10-year gilts surge from 1.6% at the start of May to a peak of 2.5% on 26 June as investors bet interest rates would start to rise as early as next year.

This alarmed the MPC which fears expectations of higher borrowing costs could stifle the economy's fragile recovery.

It said: ‘The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.’

The pound fell sharply after the announcement, down 1.2% at $1.5079 on Thursday, while the FTSE 100 soared 3% in one day. Gilts rallied with their yields, or market rates, falling to 2.33%.

Economists were divided over what to make of it all. James Knightley of ING Bank said the statement was 'pretty aggressive' and showed Carney was in the 'dovish' camp, ie, minded to keep interest rates low and QE on the agenda for longer.

However, Nick Kounis of ABN Amro believed the balance of risks was 'still tilted towards an earlier move in rates despite the MPC's dovish communication.' 

However, while the MPC's distaste for higher interest rates was clear, economists were also divided on whether it was signalling a further round of QE money 'printing' was imminent. Further purchases of gilts by the Bank would help keep market rates where it wanted.

Philip Shaw of Investec said Carney had given 'a big hint' in the statement that more QE was on the cards. He thinks the MPC will sanction a further £50 billion of gilt purchases next month as the statement forecast inflation would fall below its 2% target and that it may think more stimulus is necessary to shore up the recovery.

But Mark Ostwald of Monument Securities reckoned the market was misreading the situation. His interpretation was that the MPC felt vindicated in the optimism it expressed for the economy in its May Inflation Report and that further QE stimulus would therefore not be required. Gilts could be vulnerable if the next report in August confirmed this view, he warned.

What it means for savers and investors

Alan Higgins, chief investment officer for Coutts, the private bank owned by Royal Bank of Scotland, was clear that Carney meant to keep interest rates near zero and below inflation for longer. That, he said, was bad news for savers who kept their money in cash.

'With UK interest rates likely to remain below inflation for the foreseeable future, cash will generally continue to offer negative real (inflation-adjusted) returns. Modest inflation might not seem to pose much of a threat, but it will erode the value of wealth when combined with low interest rates. At the Bank of England’s 2% target, inflation would erode £100,000 to £66,671 in real terms over 20 years. At 4%, the real value would drop to £44,200, while at 5%, the original £100,000 would be worth just £35,849 after 20 years,' said Higgins.

With bonds looking expensive after all the QE purchases, Higgins said the only alternative for people prepared to take the risk was to invest in shares or funds investing in shares.

'While we don’t see any sudden shift away from defensive stocks, where higher-dividend-paying equities tend to be concentrated, we think some areas have become expensive. As a result, we have adopted a YARP (yield at a reasonable price) approach that favours cyclical stocks – here we see good and growing dividends from materials, financials and some technology companies,' Higgins added.

Watch 'How to fireproof your savings against inflation'

11 comments so far. Why not have your say?

rich banker

Jul 04, 2013 at 13:25

The man from Canada whose currency is known after "The Looney" a bird apparently not a person, is unlikely to work any miracles unless he can get the chancellor Geo "Eton Mess" Osborne (any relation to Ozzy?) to massively CUT down on Public Sector Borrowing, especially LHA which encourages immorality, fatherless families as some call them mistakenly for father lurks in the background living off "immoral earnings" as it were. All courtesy of Labour misgovernment. Why even oil rich Norway stopped it because of the massive increase in bastards as an unwanted side effect.

Also public sector pensions need capping.

Ditto wage increases, capping at 0 that is.

Ditto the culling of dual MP's - bye bye Jocks in Parliament.

Ditto Foreign Aid that is usually stolen when it touches foreign shores.

We cannot afford to borrow any more George so stop it, and NOW

PS Bank Rate needs to stay at 0.05% for many a year yet.

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Jul 04, 2013 at 15:13

I couldn't have put it better myself, rich banker.

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Keith Cobby

Jul 04, 2013 at 16:02

The Government/BoE have lost control of monetary policy. Interest rates are lower than WWII when the nation was in peril. The markets will drive interest rates based on the enormous increase in borrowing and consequent increase in debt interest.

What will they do? Obvious isn't it. They will default by stealth, by financial repression. Do not loan money to banks or the Government - you will slowly lose it.

If none of this works the BoE will cancel the Gilts they have bought from the Treasury.

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Jul 04, 2013 at 16:41

It just shows that the governor of the BOE making announcements is just as much a monetary policy instrument as anything else is. Mark Carney somehow needs to come up with the right words that will keep the pound high and interest on government bond rates low. That way he can print money to his hearts content to fund the government deficit without the pound falling in value and causing massive inflation. Somehow I think the market will come aware and inflation is pretty much a certainty.

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Tom Bayley

Jul 04, 2013 at 22:34

Inflation depends on broad money. Any sign that's increasing yet? Otherwise, it seems to me whatever is printed merely replaces the money that 'disappears' as banks recapitalize, which would not lead to inflation. However, rich bankers are typically in favour of deflation during this phase of the credit cycle, so they can pick up cheap assets. So I understand the concern.

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Jul 05, 2013 at 17:05

Tom Bayley

Inflation depends on more than broad money.

Broad money is currently increasing even faster than narrow money.

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John Griffiths

Jul 06, 2013 at 19:54

No please! No more QE - let the markets settle as the economy picks up. Carney will go on weakening the pound - this neglects that it costs us more in imports which are higher than our exports. Will lead the UK to bankruptcy!

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Tom Bayley

Jul 08, 2013 at 09:07

Jonathan, do you have evidence to support your assertion?

Meantime, you can find figures from the world bank up to 2012 here:

They say our broad money supply shrank 4% in 2011 and grew 0.8% in 2012. These do not seem inflationary numbers to me.

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Tom Bayley

Jul 08, 2013 at 09:31

It's not until you understand that money is CREATED by banks, through issuing loans backed by thin air that any of this makes sense. The banking system does not lend you money they already have, they merely issue an IOU and wait for your drawings to be redeposited by whoever you pay the loaned money to. In practice they don't even have to wait, because most transactions happen instantaneously within the banking system. No real money ever changes hands, only the amounts of credit within bank accounts. However, this accounting trick is the source of the vast bulk of our money, so when it stops (i.e. banks stop 'lending'), the money supply shrinks dramatically. The money literally disappears as loans are repaid.

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Jul 08, 2013 at 11:19

Tom, Broad money has been increasing by about £5 billion per month over the last 6 months.

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Tom Bayley

Jul 08, 2013 at 13:25

Jonathan, thanks for that - a modest rise in the last few months (in comparison with the years leading up to the crunch.) There has to be some growth in M4 to allow for economic growth plus the desired low level of inflation. How do we judge the right level?

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