New Governor makes his mark
There was no change in monetary policy following Mark Carney's first monetary policy committee (MPC) meeting as Governor of the Bank of England (BoE). But there were important differences. First, we don't normally get statements after a no-change decision, but we did in July. The statement was a direct attempt to talk down market interest rates, which have risen sharply in recent weeks.
The MPC is worried this could hurt the recovery by increasing borrowing costs. Second, the use of forward guidance. The BoE is leaning towards introducing an ‘intermediate threshold’ – probably a commitment not to raise interest rates until unemployment falls below a specified level. This could pave the way for more quantitative easing (QE).
Economic activity strengthens in June
The UK economy continued to see broad improvements in economic activity in June, raising the prospect of stronger second quarter growth. Activity in the services sector accelerated to its highest level since March 2011, while manufacturing activity hit a two-year high, according to the purchasing managers' indices (PMIs).
Not to be left out, construction activity expanded for a second consecutive month – the first time in more than a year. So how do we square these encouraging data developments with the policy innovation at the BoE? We’ll need to see the minutes to the July meeting, but it seems the MPC doesn’t want to take any chances with the recovery.
Changing landscape for UK household credit
Despite the government’s Help to Buy and Funding for Lending schemes, growth in outstanding secured loans to households slowed in May. This continues the same trend since the start of the year. There are a number of interesting changes in household lending.
Building societies and other specialist lenders are starting to move back into the market. At the same time, the mortgage market is increasingly characterised by households paying down mortgages as fast as new ones are being taken out. And as more expensive debt (e.g. credit cards) is paid down faster than mortgage debt, it seems balance sheet repair continues – despite government incentives to boost lending.
Everyone can change
The US Federal Reserve has changed; the BoE has changed; and now even the ECB has changed! They may not have changed monetary policy in July, but ECB has changed its communication strategy, as the Fed and BoE before them.
Using forward guidance, ECB President Draghi stated that monetary policy will remain accommodative for “as long as necessary”, and that “interest rates will remain at present or lower levels for an extended period of time”. This is an historical move as the ECB has always been reluctant to share its view on future interest rates.
Finding stability is hard to do
Activity in the manufacturing and services sectors across the Eurozone continued to contract in June – albeit, at a slower pace. But there are signs of stabilisation as manufacturing output and new orders barely fell. Eurozone unemployment edged slightly higher in May, to 12.2% from 12.1%. While that increase might sound small, the real effects are significant. 67k people lost their jobs in May – equivalent to a full Murrayfield rugby stadium.
The US jobs machines rumbles on
The US economy added 195k jobs in June, the third straight month of near 200k job increases. While this is good news, there is still a huge mountain to climb. With unemployment at 7.6%, we are still a percentage point away from the US Fed's stated threshold for raising interest rates (6.5%).
And as large numbers of people have dropped out of the work force, the last time the employment rate was at 58.7% was in 1983. Nevertheless, June’s jobs numbers will continue the debate about when the Fed will begin to slow the pace of its QE programme.
Sunshine in Japan, clouds over China
The UK isn't the only economy recording much-improved PMIs. A dose of 'Abenomics' is so far doing considerable good for Japan, as manufacturing activity reached its highest level in over two years. Though the services PMI fell from 54.8 to 52.1, by Japan's standards this is still a strong reading. As Japan basks in a little sun, it continues to look a little cloudy in China as manufacturing activity fell for the fourth straight month.
This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.
And not less than four days into his new role did he make his mark, with increased transparency and guidance on future monetary policy. Then it was the European Central Bank. Breaking with its tradition of not ‘precommitting’ to future interest rate changes, they issued their own form of forward guidance. And last but not least, Andy Murray, the first British tennis player to win the men’s title at Wimbledon for 77 years. Congratulations Andy!