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Interest Rates: Economic Growth Puts Pressure On Mark Carney

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http://www.theguardian.com/business/2013/sep/05/interest-rates-economic-growth-mark-carney

Interest rates are to be kept on hold as more signs of economic cheer cast doubt over the Bank of England governor's forward guidance strategy.

A raft of exceptionally strong sector surveys this week has pointed to a marked pick-up in growth over the third quarter, reinforcing market expectations for rates to rise sooner than the Bank's new policy suggests.

Experts are pencilling in another possible statement alongside Thursday's midday rates decision as the governor, Mark Carney, battles to win over sceptics of the strategy.

The meeting is the first since the Bank pledged to keep interest rates at a record low of 0.5% until the unemployment rate falls to 7%. But it has so far failed to have the desired effect on the City, with a series of caveats to the announcement prompting market expectations to be brought forward rather than pushed back.

..

The data fuelled hopes that third-quarter growth could beat expansion of 0.7% in the April to June quarter, with Markit suggesting growth of as much as 1.3%.

Although growth at 1.3% isn't going to fix the debt overhang in the UK economy. Plus is this growth delivered by govt spending!

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http://www.theguardian.com/business/2013/sep/05/interest-rates-economic-growth-mark-carney

Although growth at 1.3% isn't going to fix the debt overhang in the UK economy. Plus is this growth delivered by govt spending!

It'll be service sector/ city growth, and yes a HUGE amount of public money has obviously been (is being) flung that way as we keep bailing.

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The most interesting bit from the article is the near the bottom

Capital Economics expert Vicky Redwood said she believed MPC members Paul Fisher and David Miles would resume their vote for more QE as early as this month.

Philip Shaw, chief economist at Investec Securities, was pencilling in no change for QE and said Carney made clear in his recent speech that it was the Bank rate that counted, rather than market expectations.

Carney pointed out that interest rates on 70% of loans to households and 50% of those to businesses were linked to the Bank rate rather than the market.

But fixed-rate mortgages were linked to market rate expectations and Redwood said borrowers may soon start to see a rise in the cost of these loans as swap rates increased.

Some useful data in the bold bit.

Vicky (CCC's favourite economist?) then talking sense as usual.

So 30% of household loans based on market rates i.e. outstanding balance of £400-450bn (more skewed to BTL, MEW and fixed term fixed rates etc?) that is still a pretty large amount which might go up if more decide to fix with fears of rate rises in a year or 2.

Edited by koala_bear

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The most interesting bit from the article is the near the bottom

Some useful data in the bold bit.

Vicky (CCC's favourite economist?) then talking sense as usual.

So 30% of household loans based on market rates i.e. outstanding balance of £400-450bn (more skewed to BTL, MEW and fixed term fixed rates etc?) that is still a pretty large amount which might go up if more decide to fix with fears of rate rises in a year or 2.

Trackers and some SVRs are supposedly collared to the Bank rate, except as the BoI demonstrated 'in exceptional circumstances' rates can be put anywhere the lender sees fit. So, legally and in practice, all loans are linked to the market rate.

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Does anyone feel there is a bit of a "black wednesday" situation developing here ?

Carney saying "rates will not rise" and not doing it, and the markets taking a stand against this position ?

His credibility could get destroyed pretty quickly if enough of the market starts to think seriously about taking this on. As far as I can see it the only thing in his favour at the moment is that we are a couple of years off the election.

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Trackers and some SVRs are supposedly collared to the Bank rate, except as the BoI demonstrated 'in exceptional circumstances' rates can be put anywhere the lender sees fit. So, legally and in practice, all loans are linked to the market rate.

Agreed I was just commenting on the size of the first order linkage (i.e. no court action or MPs complaints encountered) its very easy to hide big numbers using percentages! Carney was implying it was small...

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Does anyone feel there is a bit of a "black wednesday" situation developing here ?

Carney saying "rates will not rise" and not doing it, and the markets taking a stand against this position ?

His credibility could get destroyed pretty quickly if enough of the market starts to think seriously about taking this on. As far as I can see it the only thing in his favour at the moment is that we are a couple of years off the election.

I do - it is happening to India and some of the other EMs as well at the moment. I suspect we are several waves behind so I'm not sure there will be enough momentum by the time it gets to us.

The Canute moment is going to happen at some point.

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I do - it is happening to India and some of the other EMs as well at the moment. I suspect we are several waves behind so I'm not sure there will be enough momentum by the time it gets to us.

The Canute moment is going to happen at some point.

My limited knowledge of game theory suggests he might hold onto his position much longer than he should do in order to try to preserve his credability, and that is a situation that could be exploited.

I think the mistake may be thinking that the BOE can issue "forward guidance" and be capable of sticking to it. It may not be wise to fight the Fed (and therefore their forward guidance carries a lot more weight), but fighting the BOE though, that's another matter...

I have the feeling that this could get quite interesting.

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Would love to see what's happening behind the scenes right now.

They've got to hold this off until as close to election as possible - but if expectations are that it's coming sooner the banks must be getting desperate to get their rates up - or take on less fixed terms.

Wonder what behind-the-scene deals to defer the pain are being done right now - if banks risk loses in 3 years because they deferred rate rises on 5 year fixed now they're going to want some insurance.

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Does anyone feel there is a bit of a "black wednesday" situation developing here ?

Carney saying "rates will not rise" and not doing it, and the markets taking a stand against this position ?

His credibility could get destroyed pretty quickly if enough of the market starts to think seriously about taking this on. As far as I can see it the only thing in his favour at the moment is that we are a couple of years off the election.

Yes, think so - could be wishful thinking of course.

I am hoping that there is some Soros type person preparing to cause a 'run' on gilts or the pound or whatever you would do to test Carney's stance on iRs.

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I am hoping that there is some Soros type person preparing to cause a 'run' on gilts or the pound or whatever you would do to test Carney's stance on iRs.

Suspect this is in progress right now which is why we're seeing:

CBOE Interest Rate 10-Year T-No (^TNX)

UK Govt Bonds 10 Year Note Generic Bid Yield

I imagine the BOE to be something of a duck paddling furiously right now.

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Yes, think so - could be wishful thinking of course.

I am hoping that there is some Soros type person preparing to cause a 'run' on gilts or the pound or whatever you would do to test Carney's stance on iRs.

I guess the rather nebulous nature of the unemployment rate as a target could stop this from happening. It's not exactly what you would call a hard stat. On the other hand there are two positions. One is that you believe the target is hard and you can go against it. The other in which you believe it is soft and therefore worthless.

The way they may juggle the stat in the future in order to provide justification may provide us cynics with some entertainment.

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I guess the rather nebulous nature of the unemployment rate as a target could stop this from happening. It's not exactly what you would call a hard stat.

It was heavily caveated - Pound rises as Carney's guidance comes with caveats

The jobs threshold came with several ‘knockouts’, or caveats, chief of which is if the two-year forecast for inflation looks to be 0.5% higher than the Bank's 2% target. Carney stressed the primacy of the inflation target and said the MPC had put a 40% probability on inflation being this high. This made some market-watchers question the value of the guidance.

If pressure becomes to great they have an escape plan, but it really needs to be some external black swan to get away with that.

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Yes, this is interesting. Carney's comments in July about the market pricing of risk being out of kilter with fundamentals is a red rag to a bull(or a bear).

5, 10 and 30 year yields all on a rising trend, which will do nicely for the time being. Carney and Osborne may feel like a pair of lobsters in a warming pot.

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His credibility could get destroyed pretty quickly if enough of the market starts to think seriously about taking this on.

Yield from British

Government

Securities, 10 year

Nominal Par Yield

IUDMNPY

[a]

01 Aug 13 2.6576

02 Aug 13 2.6861

05 Aug 13 2.7257

06 Aug 13 2.7415

07 Aug 13 2.7296

08 Aug 13 2.7438

09 Aug 13 2.7348

12 Aug 13 2.7317

13 Aug 13 2.8774

14 Aug 13 2.8988

15 Aug 13 2.9529

16 Aug 13 2.976

19 Aug 13 3.0249

20 Aug 13 2.9619

21 Aug 13 3.0007

22 Aug 13 3.0004

23 Aug 13 2.987

27 Aug 13 2.8807

28 Aug 13 2.9139

29 Aug 13 2.8851

30 Aug 13 2.889

02 Sep 13 2.9539

03 Sep 13 2.9963

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