While the core message that the Bank is now focusing on unemployment and that it plans to keep rates low for some time sounds very different to the inflation-busting stance people are used to, the reality is that actually very little has changed, as witnessed by the muted reaction of equity and bond markets this week.
The biggest change has been in tone, with the cryptic hints usually hidden in a central bank statement replaced with North American bluntness.
While the tone may have changed at the Bank of England, elsewhere it has very much been business as usual: improving economic data coupled with declining financial markets. This was most prevalent in the US, although the news from Europe was more mixed.
Market performance this week
| FTSE 100 | S&P 500 | Nikkei 225 | Hang Seng | Dax 30 | CAC 40 | Ibex 35 | Brent Crude | Natural Gas | Gold |
|---|---|---|---|---|---|---|---|---|---|
| -1.78% | -0.94% | -5.95% | -2.41% | -1.05% | 0.46% | 1.14% | -2.27% | 0.0262 | -0.17% |
Source: FE Analytics
Here are three developments that the team found particularly interesting this week.
UK: 0.5 per cent base rate linked to 7 per cent unemployment
Mark Carney, governor of the Bank of England, unveiled the policies to be used in the Monetary Policy Committee’s forward-guidance plans: that the base lending rate will remain at its current historic low of 0.5 per cent until UK unemployment drops below 7 per cent.
With unemployment now standing at 7.8 per cent, the BoE does not expect this to be reached until 2016. Also mentioned was the possibility of adding to the current £375bn QE package, should unemployment remain above the threshold.
While this sounds like a rather large change in approach, in reality this has been the policy of the bank for some time. Additionally, the forward guidance was issued with enough conditions attached that the bank could do anything and unemployment is just one thing it will be looking at, much as it ever was – this assessment was matched by the markets, which were mostly unmoved by the announcement.
US: Continued signs of recovery despite poor jobs data
The US Labor Department data put July’s increase in payrolls at just 162,000, behind expectations of 185,000 and far below June’s 195,000 figure. This still helped the unemployment rate fall from 7.6 per cent to 7.4 per cent and ever closer to the Treasury’s 7 per cent target for stopping asset purchases.
Ben Bernanke, chairman of the Fed, also indicated that if the recovery continues, QE tapering is to be expected later this year, with a view to an exit in 2014. Despite the stock market mood being dampened, it is worth noting that jobs are still being created at a reasonable pace.
Additionally, one of the key milestones of a full recovery – a revival of the housing market – also looks as if it is coming closer: the US Treasury announced this week that it now stands to take a profit from Freddie Mac, the bailed-out mortgage finance giant. Having paid $40.9bn in dividends and close to gathering $28.6bn in deferred taxes, the full $72.3bn is not far from being recompensed.
India: Bank governor met with rupee at historical low
Incoming governor of the Reserve Bank of India, Raghuram Rajan, faces a steep task: the nation’s currency has fallen to its lowest ever value against the dollar, having depreciated by 39 per cent over two years – 13 per cent of which has come in the last three months.
This has coincided with $10.5bn of foreign funds flowing out of India during June and July, a trend that could cause lasting harm to the region if left unchecked. While the weak currency could benefit India’s export industry, it will make life much harder at home as the cost of imports and interest payments on foreign debt rises.
While India is not a common investment destination, this news serves as a reminder that China is not the only emerging market country facing difficulties. Even without direct exposure to the Indian market, the slowdown of a nation that boasts over 15 per cent of the world’s population could have a significant impact on the global economy.
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