• Home
  • About
  • 151 IMPACT AWARDS
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

Impact Awards –>
  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

James Bevan: Reflections on an interest rate cut

0
  • by James Bevan
  • in James Bevan · Treasury
  • — 10 Aug, 2016
James Bevan

James Bevan

Following the Brexit vote, it was reasonable to assume that the value of sterling would fall to whatever level was necessary to ensure that UK investment spending beat pessimists’ forecasts, even if this would most likely entail a consumer recession as rising import prices eroded household purchasing power.

Last week, Bank of England governor Mark Carney decided that sterling needed to be even weaker than the market had already decided by cutting rates despite what is still probably a weakening current account balance position (as a result of the “J Curve Effect”).

Unfortunately, we may suspect that the drop in net interest income that this move implies and the further rise in import prices will make the squeeze on household real incomes worse rather than better.

During 2015, the UK household sector benefited from a slight surplus in its net interest payments and a modest drop in import prices but this year both terms appear set to become “headwinds” for the economy.

Potentially, the drop in yields may encourage more consumer borrowing, although experience elsewhere has suggested that ultra-low rates often erode the supply of credit as the banks face profitability concerns even if they succeed in raising the demand for credit.

Household deficit

Moreover, it is not entirely clear that UK households should be endeavouring to move further into financial deficit at this time – households are, after all, expected to save something, and if the economic outlook is really that uncertain at present, we must wonder how Mr. Carney can justify asking households to undermine their own finances by deficit financing of their spending.

The announcement of new QE certainly surprised us and it seems a little strange that this has occurred given just how low bond yields are. At one level we might hope that Carney’s move in the bond markets represents a precursor to the reversal of Osbourne’s austerity-at-all costs.

But we may suspect that it is more likely that the Bank will simply find that it is providing liquidity to those investors that want to exit gilts at an attractive price.

Indeed, given that UK banks currently own a record £140bn of gilts, the BoE may find that its counterparties are other banks, and this situation would undermine any monetary impact from the QE.

We might also wonder if the BoE’s decision is in practice really just a knee jerk reaction, and perhaps connected to the BoE’s pre-Brexit vote stance.

Ostensibly, the BoE’s move has come in response to the recent string of very poor confidence survey results, although these probably themselves were in essence an emotional reaction to the outcome of the vote.

Evidence

Personally, we might have waited for more hard evidence over the state of the economy but with seemingly every other policymaker blaming Brexit for all manner of ills, Carney probably felt the need to be seen doing something.

What concerns us is that most real world contacts that we have spoken with suggest that while the consumer may indeed have been unsettled, business investment was actually holding up but the BoE’s policy decisions may actually make companies stop and think what it is that the BoE (thinks it) knows that they don’t.

Businesses can become more risk averse when central banks appear to panic – and it is not clear that Carney, through his impact on both consumers and the corporate sector, will have done much to support growth and he may even have detracted from it.

Better, we suspect, would have been to outline a medium term plan for stability rather than rush around pulling levers “in case” the situation was as dire as some predicted it would be following a “leave” vote – and there’s the risk that confidence now falls delivering the very downturn that policy was intended to avert.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

*CCLA is a supporter of Room151

Get the Room151 Newsletter

Share

You may also like...

  • Northants moves to bolster confidence over council loans Northants moves to bolster confidence over council loans 21 Nov, 2018
  • Mr Carney’s likely to support low yields but 10yr gilts are at risk Mr Carney’s likely to support low yields but 10yr gilts are at risk 11 Feb, 2013
  • Economic and market briefing: UK household incomes Economic and market briefing: UK household incomes 16 Apr, 2012
  • DCLG faces calls to clarify guidance over borrowing for property investment DCLG faces calls to clarify guidance over borrowing for property investment 23 Nov, 2017

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 10 hours ago

    Impact Awards: Liverpool’s cafe culture and Warrington’s investment in homes: The CCLA/Room151 Impact Awards showcase  finance teams with a direct impact on their local communities and the environment. This week we spotlight Liverpool City Council’s… dlvr.it/RxJsKb pic.twitter.com/dEYpaz6HP0

    Room151 13 hours ago

    Doing something in #localgov #finance for housing or regeneration? Check out the 'Place Shaping' category room151.co.uk/impact-awards/… sponsored by @31tenConsulting in the CCLA/Room151 Impact Awards. #timetoenter !! pic.twitter.com/dU99vE6Wws

    Room151 1 day ago

    Doing something in #localgov #finance for Adult Social Care & Health? Check out the ASC&H category room151.co.uk/impact-awards/… sponsored by Fundamentum Social Housing REIT in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    Doing something in #localgov #finance for the environment? Check out the 'carbon management' category room151.co.uk/impact-awards/… sponsored by @ACSLLP in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    So what are the seven categories for the CCLA/Room151 Impact Awards? Here they are room151.co.uk/impact-awards/… #localgov #finance #outcomes

    Room151 1 day ago

    Why should LGPS be concerned about rising inflation?: The impact of the coronavirus pandemic, lockdown and wider economic uncertainty created  deflationary pressures which raise important considerations for the Local Government Pension Scheme writes… dlvr.it/RxF7Fs pic.twitter.com/JlcjROBIpz

    Room151 2 days ago

    JOB ALERT: LPFA Finance Director vacancy: London Pensions Fund Authority Finance Director and s151 Officer Competitive salary and benefits The largest Local Government Pension (LGPS) provider in London with around £6.5 billion of assets and 135[...] dlvr.it/RxBdJP

    Room151 2 days ago

    Richard Harbord: Further signs that local government finance is failing: The crisis in Liverpool and a fix for education budgets are further indication that local government finance is in need of a root and branch review. Even for those students[...] dlvr.it/Rx9PSV pic.twitter.com/sAanC2gEyu

    Room151 1 week ago

    Impact Awards: Finance helps launch school meals company and support business during lockdown: The CCLA/Room151 Impact Awards will showcase the way finance teams have a direct impact on their local communities and the environment. This week we spotlight… dlvr.it/RwnlF4 pic.twitter.com/AJhne1MVG4

    Room151 1 week ago

    "This work has made a vital, practical contribution to ensuring people have been supported through the pandemic." #impact #151awards #covid #s151 room151.co.uk/treasury/impac… #impactcasestudies #councilfinancemakesadifference

    Room151 1 week ago

    room151.co.uk/impact-awards/ #passiton #localgov #s151 #151awards pic.twitter.com/A0uO0dwBkM

    Room151 2 weeks ago

    Financial pressures loom for 2023 and beyond: Kate Ogden writes the government has addressed most of the short-term Covid-19 financial pressures facing English councils, but problems loom in 2022-23 and the years following. As we enter the[...] dlvr.it/RwfDsz pic.twitter.com/hpv2R09w75

    Room151 2 weeks ago

    Calling all #localgov finance officers and #s151s room151.co.uk/impact-awards/ It's the #151Awards Thanks to the @LGALocalism for helping us get the word out along with all the LA treasury societies. pic.twitter.com/Nkal9BrH1J

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Trevor Castledine: The challenges of pension pooling
  • Next story ‘Sellers strikes’, gilts and QE

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK