Bank of England’s corporate finance ‘should align with climate goals’

MPs have criticised the Bank of England for providing finance to large businesses without imposing environmental conditions.

The Environmental Audit Committee (EAC) has written a letter to the Governor of the Bank of England, Andrew Bailey, urging the central bank to align its corporate bond purchasing programme with the goals of the Paris Agreement.

Failure to do so could undermine the UK’s diplomatic leadership on climate change ahead of hosting UN climate change conference COP26 in November, the committee argued.

In future the Bank should also require large companies receiving millions of pounds of taxpayer support via its Covid Corporate Financing Facility (CCFF) to publish climate-related financial disclosures, the letter said.

Such disclosures should be in line with the recommendations of the international Taskforce on Climate-related Disclosures (TCFD) and the UK Government’s own Green Finance Strategy.

“We are at a crunch point not only to mitigate the effects of climate change, but to rescue vast swathes of the economy from the impacts of successive lockdowns due to coronavirus,” commented Conservative MP and EAC chairman Philip Dunne.

“It makes sense to tackle both together, offering a ‘reset button’ to design an economy fit for net zero Britain.”

He added: “The Bank’s corporate bond purchases are currently aligned with a catastrophic 3.5 degree temperature rise by 2100 — far exceeding the Paris Agreement goal of limiting global warming to 1.5 degrees celsius.

“We are calling on the Bank to show leadership, once again on climate change, in the year the UK hosts COP26, by ensuring its actions to promote recovery also reduce the UK’s exposure to climate change risk.”

In response, the Bank stressed its commitment to reducing its impact on the climate and said it would reply to the MPs in due course.

BoE survey shows high expectations of inflation

The Bank of England (BoE) has released data showing that public expectations of inflation over the next 12 months are at their highest in five years, according to Reuters.

The proportion of the public anticipating that interest rates will rise has dropped, according to the research.

Brits surveyed in February 2019 said they expect inflation to average 3.2% over the next year, unchanged from November levels which were the highest proportion since November 2013.

The quarterly BoE survey of 4,000 people found 47% of UK citizens expect that interest rates will be raised over the next 12 months, down from 53% in November.

In February, consumer price inflation in Britain grew to 1.9% after a two-year low of 1.8% in January. The BoE forecast is that inflation will rise a little above the target 2% this year.

BoE has warned that a no-deal Brexit would impact these predictions, weakening sterling and making inflation rise sharply.

Bank of England likely to delay interest rate rise

The Bank of England has been put under pressure to delay raising interest rates, according to the Guardian.

The move comes after figures for manufacturing and consumer credit indicated weakness in the UK economy. The Bank of England had been widely expected to approve a further interest rate increase until the figures were released on Friday.

A snapshot of economic performance by the Chartered Institute of Procurement and Supply together with information company Markit indicated that the economy slowed in the first quarter of 2018 and continued to slow in the second quarter.

CIPS/Markit fell from 54.9 in March to 53.9 in April, the weakest rate of expansion in 17 months. Any figure above 50 indicates growth in manufacturing output.

Data from the Bank of England indicated a drop in consumer demand for unsecured borrowing. According to monthly money and credit statistics, lending to consumers stood at £300m in March, the smallest increase since November 2012 and well below the six-monthly average of £1.5bn.

The slowdown in consumer borrowing follows a tightening of rules by the Financial conduct Authority, which aimed to restrict the growth rate of consumer borrowing. This had been rising at 10% or more on average between 2014 and 2017. In March, the rate fell from 9.4% to 8.6%.

Economists do not expect interest rate rise until 2019

A survey of economists has revealed that UK interest rates are not expected to rise until 2019, despite inflation being above the Bank of England’s target.

A BBC survey found that the majority of economists believed the Bank of England Monetary Policy Committee (MPC) would not raise interest rates while Brexit negotiations are ongoing. Inflation is currently at 2.6%, above the official target rate of 2%.

The base interest rate has been at the record low of 0.25% since August 2016. Prior to that it stood at 0.5% since March 2009.

External MPC member Michael Saunders said in August that he thought interest rates should be raised soon to offset inflation. Saunders told a Cardiff conference: “We do not need to be putting the brakes on so much that the economy weakens sharply, but our foot no longer needs to be quite so firmly on the accelerator in my view.”

However, in the August meeting of the MPC, only Saunders and fellow member Ian McCafferty voted for an interest rate rise. The remaining six members voted to retain the current interest rate.

Saunders said that an increasingly constrained labour market, partly due to fewer EU migrant workers coming to the UK, pointed to a need for higher interest rates. In Q2 2017 the proportion of people aged 16-64 participating in the labour market reached a record high.

RBS and and Standard Chartered struggle to pass Bank of England stress test

Seven of the UK’s largest financial service providers banks have been advised to set aside extra capital as a buffer against financial shock, following the latest stress testing by Britain’s central bank, the Bank of England, it was reported on Tuesday.

This is the second year running that the bank of England has carried out stress testing of major lenders in the UK, which measure whether they would survive economic problems. During the latest tests, it was assumed that oil had fallen to $38 per barrel and that the global economy had slumped. The hypothetical scenario also assumed a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test indicated that profits would fall more than they had done during the 2008 banking crisis, but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.

Royal Bank of Scotland and Standard Chartered were found to have the least capital strength, but as each bank had taken steps to raise capital, they were not required to put new measures in place. However, all seven banks were advised that the Bank of England is phasing in a new measure known as a “countercyclical capital buffer”, which requires financial service providers to ensure that extra capital is available that will allow more room in times of economic decline to absorb losses from bad loans and other problems.

Banks are required to allocate more money to protect against lending losses in the UK, but some of this will be brought in from other reserves that the banks already have. The regulator will advise banks when to fill the buffer, setting aside reserves during stable times in the economic cycle.

Bank of England Governor Mark Carney stated at a news conference: “We will not increase capital… the overall level of capital won’t increase in the system. Large capital raisings are off the agenda and banks largely have or have access to the reserves they need”.

Bank of England’s Monetary Policy Committee votes to keeps UK Bank Rate at record low of 0.5%

Britain’s central bank, the Bank of England, announced on Thursday that its Monetary Policy Committee (MPC) has declared that the Bank Rate will be kept at a record low of 0.5% and will maintain the Asset Purchase Programme at GBP375bn.

Monetary policy is set by the MPC, which aims to meet the 2% inflation target in a way that helps to sustain growth and employment. The MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5% at its meeting ending on 6 October. The vote to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn was unanimous.

In August, the twelve-month CPI inflation was recorded at 0%, well below the 2% target rate. According to the Bank of England, about three-quarters of that deviation was reflected in unusually low contributions from energy, food and other imported goods prices, while the other quarter reflects the past weakness of domestic cost growth. Despite an increase in labour costs, these remain lower than would be consistent with meeting the inflation target in the medium term, were they to persist at current rates. Core inflation continues to be subdued at around 1%, which is influenced by restrained labour cost growth and also by muted import cost growth.

As a result of below target inflation and the possibility that spare capacity remains in the economy, the MPC said it intends to set monetary policy so as to ensure that growth is sufficient to absorb any remaining underutilised resources. This policy is necessary to ensure that inflation is on track to return sustainably to the 2% target rate within two years and is expected to support domestic cost growth.

According to the Bank of England, the most recent official estimates and survey data are consistent with a gentle deceleration in UK output growth since a peak at the beginning of 2014. Since the middle of 2013, there have been sharp declines in the unemployment rate, however the rate now appears to have levelled off. The MPC had expected some slowdown in the pace of the expansion and employment growth, as a natural consequence of the economy approaching a balance between its supply capacity and strengthening demand following the UK’s gradual recovery from the financial crisis. But it said there is increasing evidence that capacity pressures are developing in some segments of the economy, especially with a shortage in labour skills. In the private sector, annual regular pay growth has increased and is now more than 3%, but improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation, the MPC added.

Bank of England’s Monetary Policy Committee votes to keep Bank Rate at 0.5%

UK central bank the Bank of England announced on Thursday that its Monetary Policy Committee (MPC) meeting, held on 9 September 2015, the committee voted by a majority of 8-1 to maintain the Bank Rate at 0.5%.

The MPC, which sets monetary policy in order to meet the 2% inflation target and in a way that helps to sustain growth and employment, also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at GBP375bn.

According to the bank, twelve-month CPI inflation rose slightly to 0.1% in July but remains well below the 2% target rate. Unusually low contributions from energy, food and other imported goods prices were reflected in about three quarters of the gap between inflation and the target, while the remaining quarter reflects the past weakness of domestic cost growth and unit labour costs.

Despite a recovery in pay growth since the beginning of 2015, the recent increase in productivity means that the annual rate of growth in unit wage costs is currently around 1%, which is lower than would be consistent with meeting the inflation target in the medium term, if it was to persist.

In addition, the appreciation of sterling since mid-2013 is having a continuing impact on the prices of imported goods. These factors combined has resulted in the average of a range of measures of core inflation remaining subdued, although it picked up slightly in July to just over 1%.

Because of below target inflation, the MPC has collectively judged that there are some underutilised resources in the economy and intends to set monetary policy in order to ensure that growth is sufficient to absorb the remaining economic slack so as to return inflation to the target within two years.

In its August Inflation Report, the MPC said its aim of returning inflation to the target within two years was thought likely to be achieved conditional upon Bank Rate following the gently rising path implied by the market yields prevailing at the time. Private domestic demand growth is expected to be robust enough to eliminate the margin of spare capacity over the next twelve months, despite the continuing fiscal consolidation and modest global growth. In turn, an increase is expected in domestic costs needed to return inflation to the target in the medium term, as the temporary negative impact on inflation of lower energy, food and import prices declines.

The MPC has also noted that the risks to the growth outlook were skewed moderately to the downside, which in part reflects risks to activity in the euro area, as well as to prospects in China and other emerging economies. This has resulted in markedly higher volatility in commodity prices and global financial markets.

However, the MPC expects continued healthy domestic expansion, with domestic momentum being underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence. Also, unemployment rates have dropped by over 2 percentage points since the middle of 2013, although that decline has recently levelled off.

Bank of England to issue plastic five and ten pound banknotes from 2016

UK banknotes will be printed on polymer, a flexible plastic film, instead of cotton paper, the Bank of England revealed on Wednesday.

New GBP5 polymer banknotes will be issued in 2016 and banknotes valued at GBP10 will be available the following year. The design of the Bank of England notes will remain the same, and will still feature a portrait of Her Majesty the Queen and a different historical character for each denomination. The first GBP5 polymer note will feature Sir Winston Churchill and the GBP10 note will feature Jane Austen.

Bank of England notes in current use are larger than international counterparts, which makes the larger denomination notes harder to fit into cash handling technology and less convenient, therefore the Bank has decided to make the new notes slightly smaller than current paper equivalents. However the Bank will continue to increase note size with note denomination. Printing and storage costs will also be reduced with the smaller notes.

The Bank said it carried out a three-year research programme to decide upon the material for the new banknotes. It concluded that the research had shown compelling reasons to move to printing on polymer, which is resistant to dirt and moisture and stays cleaner for longer than paper. Polymer banknotes are also more durable and are said to last at least 2.5 times longer than paper banknotes, therefore the banknotes will be cheaper to produce compared to paper banknotes. Polymer banknotes are also more secure, being more difficult to counterfeit.

A public consultation was also carried out over the course of two months, when the Bank hosted events across the UK in order to give people the opportunity to handle polymer banknotes and learn more about them. The resulting feedback from almost 13,000 individuals indicated that there is overwhelmingly support for polymer notes, with 87% of respondents being in favour of polymer, while only 6% were opposed and 7% were neutral. The Bank added that people who had the opportunity to see and handle the notes were 20% more likely to support polymer than those responding on the Internet. The Bank also consulted with the Royal National Institute of Blind People, which has indicated support regarding the proposed size change.

The Bank of England is currently tendering the contract for printing the new notes from April 2015. The notes will continue to be printed at the Bank’s printing works in Debden, Essex. Also, the Bank expects to enter into a contract with Innovia Security for the supply of the polymer material. If the contract is confirmed, Innovia will reportedly establish a polymer production plant in Wigton, Cumbria, in 2016.

Mark Carney, Governor of the Bank of England, commented: “Ensuring trust and confidence in money is at the heart of what central banks do. Polymer notes are the next step in the evolution of banknote design to meet that objective. The quality of polymer notes is higher, they are more secure from counterfeiting, and they can be produced at lower cost to the taxpayer and the environment.”

Bank of England to link interest rates to job growth

The Bank of England governor Mark Carney stated today that the Bank will not raise interest rates until the high rate of unemployment in the UK has decreased from the current rate of 7.8% to 7%, or below, when the Bank would then re-examine interest rates.

According to Carney, who was appointed as BoE governor last month, about 750,000 jobs would need to be created to achieve this reduction in the unemployment figures, which could take three years. He said the unemployment threshold will hold unless inflation levels threaten to rise too quickly or if it poses a significant threat to financial stability. Also, the Bank would not cut back on its £375bn asset purchase programme, known as quantitative easing (QE), until the threshold was reached.

Analysts reportedly expect unemployment to fall slowly from its current level to an average 7.1 percent in the third quarter of 2016, the end of the forecast horizon.This indicates that the BoE expects to maintain interest rates at the same level until at least then, unless its conditions are broken. However economic data is said to show that the recovery in the UK economy is picking up pace and the jobless rate could fall significantly faster than expected. Recent official figures also revealed that there was an upsurge in manufacturing output during June this year and research has shown that the service sector and housing market is growing. Experts have forecast that UK inflation will fall to 2% in mid-2015.

The Governor commented that: “While job growth has been a relative positive in recent years, unemployment is still high. There are one million more people unemployed today than before the financial crisis; and many who have jobs would like to work more than they currently can. The weakness in activity has also been accompanied by exceptionally weak productivity. It is for these reasons that the MPC judges there to be a significant margin of slack in the economy, even though the extent of that slack, particularly the scope for a productivity rebound, is very uncertain.”

Bank of England keeps rates and QE on hold again

UK interest rates have been maintained at a record-low 0.5% for another month.

The Bank of England announced today that its Monetary Policy Committee had voted not to change the official Bank Rate paid on commercial bank reserves.

With the economy struggling to return to growth since the global financial crisis erupted in 2008, rates have been held at 0.5% for more than four years.

The Committee also voted today not to restart the Bank of England’s asset-buying quantitative easing (QE) programme, with a majority of members voting that it is not necessary to add to the GBP375bn of government bonds purchased between March 2009 and October 2012.

Governor Sir Mervyn King and two other policymakers voted in February and March to increase QE but they were outvoted. Details of today’s vote have not yet been released.

Two weeks ago Chancellor George Osborne gave the Bank of England stronger backing to overlook one-off factors impacting on inflation. Despite the change to its mandate, the central bank is sticking with its current policy – for now at least.

Economists have speculated that further stimulus may be agreed later in 2013 following the arrival of Mark Carney, the current governor of the Bank of Canada, who is due to take over from Sir Mervyn as Bank of England governor in July.

The British Chambers of Commerce welcomed the decision to maintain QE at GBP375bn and hold interest rates at 0.5%. Commenting on the growing pressure for more QE later in the year, the business group’s chief economist, David Kern, claimed that such a move would be “misguided” and likely to “provide only marginal benefits for the real economy while heightening risks of financial distortions, bubbles and higher inflation.”

Stephen Gifford, director of economics at the CBI, agreed that with muted growth prospects and international uncertainty the possibility of further QE will remain open. He added, however, that the persistence of above-target inflation may act as a bar to looser policy on the issue.