Grand Central: BOE Sees Rate Staying Low for a Lot Longer – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Thursday, August 14, 2014:

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The Bank of England’s benchmark interest rate may stay low for a lot longer than we had thought likely.

Releasing its quarterly Inflation Report Wednesday, the central bank indicated it’s likely to start raising its key Bank early next year. And as it has done since February, it repeated its assurance that subsequent increases will be limited and gradual.

Since June, BOE officials have gone further, speculating that the “new normal” for the benchmark rate will be significantly below its historic average of 5.0%–and that’s quite a history, going back to 1694. Again Wednesday, BOE Governor Mark Carney said the Bank rate would “likely remain materially below its pre-crisis average for some time.”

But how long will “some time” last? When the BOE initially suggested rates would remain low, it seemed likely that referred to the period for which it provides forecasts, or three years out. Perhaps not. On page 42 of the Inflation Report, in a section that considers “Influences on policy in the medium term,” it says: “Looking beyond the MPC’s usual forecast horizon, the level of Bank rate needed to…keep inflation close to the target may remain materially below its per-crisis average for some time.”

Since the current forecast horizon is mid-2017, “some time” beyond that sounds a lot like the end of the decade. If that is indeed the way things turn out, a six-year stretch of interest rates at a record low of 0.5% could be followed by a five-year stretch of rates close to 3%.

So what has changed from the previous three centuries? The central bank believes that with the regulatory costs of doing business for banks having increased, the margin between its benchmark rate and the rate at which households and companies borrow will be permanently higher. In other words, in order to raise the cost of borrowing in the economy to a certain level, the BOE in future won’t have to raise its benchmark rate as high as it once did. And since British banks aren’t unique in facing higher costs, policy rates around the world may be low for a long time.

-By Paul Hannon


Fed Officials Suggest Limiting Banks’ Repo Exposure. Senior Federal Reserve officials said Wednesday that the “repo” markets that play a fundamental role in moving money around the financial system remain unstable, raising the specter of further limits on big banks’ role in the markets. Boston Fed President Eric Rosengren and New York Fed President William Dudley said large and opaque markets for repurchase agreements — widely used short-term loans that seized up during the 2008 crisis — could cause instability again absent changes. 

Richmond Fed’s Lacker Says Policy Isn’t Behind the Curve—Washington Post. Richmond Fed President Jeffrey Lacker, in an interview with The Washington Post, said he doesn’t think the Fed is behind the curve in terms of tightening monetary policy.

Euro-Zone GDP Fails to Grow in Second Quarter. The euro-zone economy stalled last quarter after 12 months of weak growth, underscoring concerns that the region is mired in a deep rut of high joblessness and weak consumer prices that could worsen amid tension in Ukraine and the Middle East.

South Korea Cuts Interest Rates. South Korea’s central bank Thursday cut its benchmark interest rate by a quarter percentage point to 2.25%, joining the government’s efforts to boost anemic economic growth at the risk of exacerbating the nation’s heavy household debt burden.  Economists React 

BOE Says It Has Plan for Scotland Independence Vote. In five weeks, voters in Scotland will decide whether to split from the rest of the U.K. — a step that could confuse matters relating to its use of sterling, the currency it shares with the other parts of the union. The BOE’s Mr. Carney on Wednesday said a “contingency plan is in place.”

Little Improvement Seen from China Economic Stimulus. Economic data suggested that recent stimulus measures have done little to improve two weak corners of China’s economy — wariness about lending and a swooning property sector.

Bank Indonesia Keeps Benchmark Interest at 7.50%. Bank Indonesia Thursday kept its benchmark rate unchanged at 7.50% for the ninth consecutive month and in spite of falling inflation and slowing growth. “Despite domestic and global challenges we remain optimistic growth will come within 5.1%-5.5%,” Bank Indonesia Gov. Agus Martowardojo said at a news conference – Dow Jones Newswires.

Banking Lobby Backs Stricter Codes of Conduct for Currency Traders. A lobby group for the biggest banks in the foreign-exchange market is backing tougher codes of conduct for traders, while seeking a cautious approach to tweaking currency benchmarks that are at the center of a yearlong regulatory investigation.


The Bank of England is watching mixed signals as it mulls when to raise interest rates. Fresh forecasts show the BOE expects the U.K. economy to expand 3.5% in 2014 and 3% in 2015, up from 3.4% and 2.9%, respectively, in May. But rate-setters believe that feeble wage growth suggests the U.K. economy is further from its full potential than rapidly falling unemployment implies. 


-Uganda’s central bank releases a policy statement

-Chile’s central bank releases a policy statement


Global Infrastructure Drive May Not Fuel Much Growth. Infrastructure is at the top of the agenda in the world of economic policy as officials try to rev up a nearly idling global growth engine. But will it deliver the long-term growth gains that policymakers claim? History indicates not, according to a new working paper published by the International Monetary Fund. 

Slow-Moving Money a Big Challenge for Bank of Canada. Canada’s central bank has been less successful keeping inflation around its 2% target since the recession than it was in the decade before the downturn. The reason may be that the amount of money circulating in Canada’s economy, and the speed with which it moves, has become less predictable, says the report from the C.D. Howe Institute, the market-oriented think tank.


The specter of stagflation is stalking Japan, William Pesek writes in a Bloomberg View column. “So far, Abenomics has meant lots of stimulus and no deregulation, a recipe that has boosted inflation more than growth or confidence. If Abe doesn’t act faster to reverse this pattern, his tenure may be remembered more for misery than recovery.”


-Spending at U.S. retailers stalled in July, the latest worrisome sign that consumer demand remains fragile despite steady recent improvements in the labor market.

-The Bank of Mexico lowered its 2014 economic growth estimate, saying that while demand for exports of manufactured goods has improved, the domestic market remained lackluster in the second quarter.

-The Bank of Lithuania this week got its first shipment of euro coins. The Baltic nation will begin using them on Jan. 1.

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14 August 2014 | 11:01 am – Source:

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