BBC News - Inside the mind of the Bank of England: how it sets rates

By Szu Ping ChanBusiness reporter

It's decision time. On Thursday, Bank of England policymakers will reveal its interest rate decisions.

How the nine members of the Monetary Policy Committee (MPC) vote will affect households and businesses across the UK.

That's because the Bank of England base rate is used as a reference point for millions of mortgages and savings accounts.

Higher rates would hit borrowers - but benefit savers.

Interest rates are at a record low of 0.25% and there has not been a rise in interest rates in more than a decade.

The Bank's job is to try to keep inflation at about 2%.

The fall in the value of the pound pushed up the Consumer Prices Index to 3% in September - a rate not seen since 2012 - and recent sluggish growth has led to fears of a prolonged slowdown.

The Bank has a supplementary goal of supporting economic growth, which means it has faced a tricky trade-off over the past year.

How rates are set

While there are eight MPC meetings a year, Bank policymakers meet several times before casting their votes.

This includes a designated pre-MPC meeting, where Bank of England economists provide committee members with a whistle-stop tour of the economy a week before the interest rate decision.

During this session, policymakers are shown dozens of charts on all aspects of the economy.

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Martin Weale, who served on the committee between 2010 and 2016, says these meetings sometimes influenced his vote.

The King's College London economics professor says: "I remember when I joined the MPC in July 2010, I wondered how long it would be before I thought I was voting differently through going to the meetings from the way I would have voted had I been looking on from the outside.

"And the answer was that in January 2011, I voted for an interest rate rise because I saw the short-term inflation forecast that the Bank was producing.

"Bank staff suggested that inflation was likely to rise to 5%, which was what it did. Based on historical experience I thought that, as a result, wage growth would pick up and high inflation would become entrenched."

Low interest rates have been good for borrowers but bad for savers

As well as economic data, the MPC is provided with reports from its regional agents, which are described by the Bank as its "eyes, ears and voice" across the UK.

David Miles, an economics professor at Imperial College London who served on the MPC between 2009 and 2015, says these reports were invaluable - especially during the financial crisis.

"In early 2009, everybody knew there had been a major financial event in the UK, the banks had got into terrible trouble in October [when HBOS and RBS were rescued by the taxpayer], but it wasn't yet clear from backward-looking growth data what the impact would be.

"But we were hearing from the agents that sentiment of companies was spectacularly dire.

"And that was why not only were interest rates cut to 0.5% in March 2009, but shortly after, we embarked on asset purchases [quantitative easing],which was bigger than anybody thought."

Following the pre-MPC meeting, policymakers meet for three days to thrash out their arguments.

Both former MPC members describe the committee's debates as "candid, open, lively and active", but Professor Weale insists that meetings were "always cordial - and never heated".

The discussions are chaired by Bank of England governor Mark Carney, while chief economist Andy Haldane circulates talking points agreed by the MPC earlier in the week.

The first day, usually a week before the vote, is used to thrash out initial arguments. Policymakers also agree on economic forecasts if an Inflation Report - or quarterly economic evaluation - is due to be published.

Officials usually hold their first policy meeting on the Monday before the vote. This is transcribed and published with an eight-year lag. The first transcripts will be made public in 2023.

Day three, normally on the Wednesday, is voting day.

Mr Carney puts forward a proposal on interest rates and quantitative easing he believes will command a majority. Anyone who disagrees declares what level of interest rates he or she would prefer.

The result of the vote is published on a Thursday, along with the minutes of the meeting.

BBC News - Brexit: EU bank may not fully repay UK until 2054

Billions of euros of British taxpayers' money could remain locked into an EU bank for more than thirty years after Brexit, the UK has been warned.

Alexander Stubb, vice president of the European Investment Bank - in which the UK is a 16% shareholder - said it would not be fully repaid until 2054.

He described Brexit as a "travesty" but denied the move was a punishment.

"The EIB has leveraged the economy of the UK many, many fold over the years," he told BBC Radio 4's Today.

• EU 'is preparing for no deal Brexit'
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The UK has 3.5bn euros (£3.1bn) of capital at the bank and a House of Lords report said the UK's investment could be worth 10.1bn (£8.9bn) euros taking into account reserves and profits.

Established in 1958, the EIB uses capital provided by EU countries to make loans at low rates, often for major infrastructure projects.

All 28 EU nations are shareholders in the Luxembourg-based bank, with the UK being the largest alongside Germany, France and Italy.

Mr Stubb, a former prime minister of Finland, told the BBC that the UK's money could be tied up for decades in after it leaves the EU in 2019.

"Everyone on both sides of the negotiating table agree that we have to pay back the 3.5 billion euro, basically in cash, and that will happen over a long period, up until 2054, because that's when the loans are amortised."

'Travesty'

He insisted that no-one in the bank wanted to "punish" the UK for leaving and actually wanted to "alleviate the pain" of Brexit.

"I have a British heart pumping, I am married to a Brit, my children have dual nationality and I think Brexit is one of the biggest travesties that we have seen in the modern era," he said.

"So I will do everything in my power to alleviate the pain, but the economic facts are just such that there are no winners in Brexit - apart from perhaps a few lawyers. Unfortunately, we will see this in the coming years."

The BBC's Ross Hawkins said Today had heard how delays in authorising new loans while the UK remains part of the EU could see fewer social homes built.

One housing association, Stonewater, said it may build around 300 fewer homes because its application for £100m to build new properties had ground to a halt.

Its executive director John Bruton told the programme: "The Bank has been waiting for assurances from the UK government before the application can be progressed."

Bloomberg News - EU Starts Brexit Plan B Work in Case of December Failure

By 

Ian Wishart

, 

Tim Ross

, and 

Nikos Chrysoloras

The European Union agreed to start internal preparations for the possibility of Brexit negotiations failing to reach a breakthrough at a crunch December summit, as the former British envoy to the EU said the U.K.’s trade goals were unrealistic.

At a meeting in Brussels on Wednesday, the EU’s 27 governments without Britain approved work to start on their response to the prospect of the U.K. and the EU not making enough progress over the next two months to allow trade talks to begin at the end of the year, four people familiar with the discussions said. At the same time, preparations will begin in case of a more positive outcome.

The next seven weeks are critical to the entire Brexit process as time ticks down to the U.K.’s departure in March 2019. The EU needs to agree there has been “sufficient progress” on the main issues of the U.K.’s departure before negotiations can begin on a transition period and a future trading arrangement.

A gathering of EU leaders last week was initially scheduled to be the moment when talks would advance. Instead the heads of state and government told Prime Minister Theresa May that she first must specify exactly what the U.K. sees as its financial commitments. The EU wants a divorce settlement of about 60 billion euros ($71 billion), and the U.K.’s offer so far is about a third of that.

Separation Issues

The EU’s priority is still to have plans in place so that negotiations with the U.K. on the future can begin immediately in December as long as agreement has been reached on the separation issues of the financial settlement, the protection of citizens’ rights and the Northern Ireland border, one of the people said. The plans include drafting an updated mandate for the bloc’s negotiator, Michel Barnier, to discuss trade and transitional arrangements with the U.K. after it leaves the bloc.

Wednesday’s go-ahead is for preparations on a response only for a lack of progress by December rather than for contingencies in case of a wider breakdown in the talks, the people said, asking not to be named because the discussions were private. They consist of drafting EU summit conclusions in response to continuing deadlock.

In London, Brexit Secretary David Davis said on Thursday that U.K. lawmakers would get a “meaningful vote” on the final Brexit deal, as well as on the future trade agreement with the EU. He said he expects the withdrawal agreement to be struck in good time to allow a vote before the U.K. leaves the bloc.

He was forced to backtrack after suggesting on Wednesday that lawmakers may not be able to vote on the final terms of the country’s divorce from the EU before the split happens in March 2019. Lawmakers had raised concerns that ministers could sideline Parliament after promising both houses a say on the final deal.

‘Hypothetical Scenarios’

On Wednesday morning, Davis predicted negotiations will go to the wire in a high-pressure game of brinkmanship that could deny Parliament the chance to vote on a final deal before it is too late. In the clarification issued in the afternoon, Davis’s office said he had been asked about “hypothetical scenarios.”

During a busy day in Parliament, Ivan Rogers, the man who quit May’s negotiating team over her strategy, outlined a pessimistic scenario for the December summit, saying that the outcome isn’t a foregone conclusion. He envisaged a situation in which talks collapse at the end of 2017, or early in the new year, if May refuses to pay the amount of money the EU demands in return for an offer of a transition period.

An acrimonious collapse in the negotiations could, in the worst-case scenario, “be so bloody by then that both sides are looking to knock chunks out of each other and start a trade war,” said Rogers, Britain’s former envoy to the EU.

He also offered a reality check to British lawmakers expecting to have far better access to EU markets after Brexit than Canada does.

More Generous

Rogers said many European officials think the U.K. will end up with a relationship akin to Canada’s free-trade pact after Britain leaves. But he said it won’t get anything more generous than that. May has said the Canada deal, which is considered the closest accord the EU has ever struck, isn’t ambitious enough for the U.K.

“The jargon in Brussels is Canada or Canada dry; the jargon in London is Canada plus plus plus,” Rogers told Parliament’s Treasury Committee in London on Wednesday. “If you talk to people I know well in Brussels and other capitals about Canada plus plus plus, they regard this as British fantasy land and they say that’s not on offer.”

— With assistance by Viktoria Dendrinou

Reuters News - Exclusive: New Saudi mega-city will be listed publicly, crown prince says

Simon Robinson, Samia Nakhoul, Stephen Kalin
RIYADH (Reuters) - The $500 billion mega-city planned by Saudi Arabia will be floated on financial markets alongside oil giant Saudi Aramco as part of the kingdom’s drive to diversify away from oil, the crown prince told Reuters in an interview late on Wednesday.

Crown Prince Mohammed bin Salman also said Aramco’s initial public offering is on track for next year and the national oil giant could be valued at more than $2 trillion - a sum some investors have said appears unrealistically high.

His surprise announcement about the listing of NEOM, a 26,500-square km (10,230-square mile) zone that will extend into Jordan and Egypt, is the latest and most extraordinary in a slate of privatization programs led by the floating of Aramco.

The futuristic high tech hub looks set to become a flagship of reforms championed by Prince Mohammed to create jobs, encourage entrepreneurs and permit new freedoms among Saudis steeped in religious puritanism and dependence on the state

“The first capitalist city in the world ... this is the unique thing that will be revolutionary,” said Prince Mohammed, heir to the throne of the largest Arab economy, an absolute monarchy.

“Without a doubt, at the end of the day NEOM will be floated in the markets. The first zone floated in the public markets. It’s as if you float the city of New York.”

The 32-year-old spoke on the sidelines of the Future Investment Initiative conference, which has attracted nearly 4,000 delegates from around the world to Riyadh this week.

On Aramco’s IPO, he said: “We are on track in 2018... but the listing (details) are still under discussion ... It will be IPO-ed in 2018.”

Switching between English and Arabic, sometimes in the same sentence, the prince seemed most excited discussing his plans for the new city.

FOCUS ON GROWTH

Adjacent to the Red Sea and the Gulf of Aqaba and near maritime trade routes that use the Suez Canal, the zone will serve as a gateway to the proposed King Salman Bridge, which will link Egypt and Saudi Arabia.

NEOM will be fully owned by Saudi Arabia’s sovereign Public Investment Fund (PIF) until its listing, and will attract investments from companies in renewable energy, biotechnology, advanced manufacturing and entertainment, the PIF has said.

“It won’t be listed in the markets until the idea is mature enough,” Prince Mohammed said. “It might be after 2030, it might be before, but the idea and the strategy is to float it eventually.”

The new city will not follow the rules and regulations enforced in the rest of Saudi Arabia, which imposes sharia law based on a strict Wahhabi interpretation of Islam.

It will offer residents a more liberal lifestyle, allowing musical concerts and entertainment in a remote corner of the desert kingdom. Saudi Arabia has already started to relax some long-standing rules, including what was an effective ban on women driving.

Prince Mohammed said the city could appoint a board of directors and government (chief executive) whose only responsibility will be to stimulate economic activity.

“In New York, the governor is appointed to meet certain needs, including growth, but in NEOM the governor (CEO) doesn’t have to deal with any of those problems. He only has growth in mind.”

He said the name mixed “neo”, meaning new, with M, the first letter of the Arabic word for future.

The new city is part of the crown prince’s ambitious Vision 2030 plan to overhaul the economy of Saudi Arabia, OPEC’s largest producer, and provide jobs for an overwhelmingly young population in the face of a global oil price decline since 2014.

Prince Mohammed has portrayed the reforms as a matter of economic survival, but one challenge for the ruling Al Saud family has been to secure the acquiescence of traditionalist clerics upon whose support the family relies for legitimacy.

Some clergy suspect the bold initiatives conceived by the prince in leisure and tourism presage sweeping reforms in education, a bastion of conservatism where clerical control is believed by Western critics to have encouraged Islamist radicals not just in Saudi Arabia but across the Muslim and Arab worlds.

But the prince has pushed ahead, confident he has the backing of most young Saudis, who make up the bulk of the population.

“I do think there is a desire within significant parts of Saudi society to move away from rigid, old-school Wahhabi control of social behavior and the public sphere,” said Steffen Hertog of the London School of Economics.“So I don’t think the Crown Prince’s statements are just for show. He genuinely wants to harness these sentiments and has undertaken very significant steps, including allowing women to drive and severely curtailing the powers of the religious police.”

Economic growth has slowed and the economy may shrink this year as the government introduces austerity measures.

“The idea is not to restructure the economy as much as to seize the opportunities available that we didn’t address before. We have high capacity and we use only a little,” Prince Mohammed said.

He became next in line for the throne in June after the king, his father, removed a more senior prince from the succession. He has pledged to transform Saudi Arabia economically and socially.

“Vision 2030 is about a lot of big opportunities, so Aramco is one of them, NEOM another opportunity ... We have a lot of huge projects we will announce in the next few years.”

He said the PIF would generate higher returns than other big investment funds. The kingdom had made a 20 percent profit in five months with the SoftBank Vision Fund, the world’s largest private equity fund. “That’s why we established a $50-billion-fund in Blackstone, which is expected to make a 14 pct profit.”

QATAR AND YEMEN

Prince Mohammed also said Saudi Arabia’s dispute with neighboring Qatar had not affected investment.

“Qatar is a very, very, very small issue,” he said.

Saudi Arabia and three Arab allies cut diplomatic and transport ties with Qatar earlier this year over accusations that Doha supported Islamist “terrorists”. Qatar denies the allegations.

Prince Mohammed said the kingdom’s war in Yemen would continue in order to prevent the armed Houthi movement from turning into another “Hezbollah” on Saudi Arabia’s southern border.

“We’re pursuing until we can be sure that nothing will happen there like Hezbollah again, because Yemen is more dangerous than Lebanon,” he said.

Hezbollah, armed and backed by Iran, has become a formidable force in Lebanon and Syria. The Houthis also reportedly receive arms and training from Iran, Riyadh’s arch-rival.

Yemen’s location is crucial, said Prince Mohammed. “It’s next to Bab al-Mandab so if something happens there, that means 10 percent of world trade stops,” he added, referring to the strait at the southern end of the Red Sea.

“This is the crisis.”

Additional reporting by Rania El Gamal; editing by William Maclean/Mark Heinrich

Our Standards:The Thomson Reuters Trust Principles.

BBC News - Growth figures raise chances of rate rise

The UK's economy had higher than expected growth in the three months to September - increasing the chances of a rise in interest rates in November.

Gross domestic product (GDP) for the quarter rose by 0.4%, compared with 0.3% in each of 2017's first two quarters, according to latest Office for National Statistics figures.

Economists said the figures were a green light for a rate rise next week.

If it happens, it will be the first rise since 5 July 2007.

The financial markets are now indicating an 84% probability that rates will rise from their current record low of 0.25% when the Bank of England's Monetary Policy Committee (MPC) meets on 2 November.

Mark Carney and his team meet next week to decide on interest rates

Governor Mark Carney indicated to the BBC last month that rates could rise in the "relatively near term".

UK economist Ruth Gregory, of research company Capital Economics, said the figures "have probably sealed the deal on an interest rate hike next week".

While many economists echo that view, some think the Bank of England will keep rates where they are.

"If all we can muster... is an acceleration in economic growth that's so small you could blink and miss it, the Bank of England could still think better of a rate rise next week," said Ross Andrews from Minerva Lending.

• Economic growth: Five charts that matter
• Is now the time to raise interest rates?

Will interest rates rise next week? Analysis by economics editor Kamal Ahmed

The slightly better growth figures will strengthen the arguments of the interest rate hawks on the Bank of England's monetary policy committee.

Next Thursday, the Bank's rate setting committee meets to decide whether to raise interest rates for the first time in more than a decade.

With inflation at 3%, Mark Carney, the governor, has signalled that an increase is on the cards.

And with economic growth more robust than many economists expected, those who support that direction of travel on the MPC will be emboldened.

To be clear, any rate rise will be small. And future rate rises will be gradual.

But the Bank is sending a clear message - slowly, eventually, the period of historically low interest rates is coming to an end.

The pound rose more than a cent against the dollar and nearly a cent against the euro in the first couple of hours of trading after the announcement.

Chancellor Philip Hammond said: "We have a successful and resilient economy which is supporting a record number of people in employment.

"My focus now, and going into the Budget, is on boosting productivity so that we can deliver higher-wage jobs and a better standard of living."

Shadow chancellor John McDonnell said: "The UK is not growing as fast as many of our trading partners in the EU or the USA.

"The Chancellor cannot keep hiding from the facts, as his approach of carrying on as usual is seriously putting working people's living standards at risk."

The biggest contributor to growth in the third quarter was the service sector, which expanded by 0.4%.

In particular, computer programming, motor traders and retailers were the businesses that showed the strongest performance.

Manufacturing expanded by 1% during the quarter - a return to growth after a weak second quarter.

However, construction contracted by 0.7% in the quarter, accelerating from the 0.5% decline recorded in the previous three months.

Bloomberg News - European Banks Will Have to Share Data With Their Rivals

The castle walls are about to come down.

The new rule will force lenders to share their coveted customer data with fintech challengers.

For years, European banks have been self-contained fortresses that plied their customers with everything from checking accounts to credit cards to mortgages, while stockpiling terabytes of data on their spending habits. Now these institutions are about to open up like never before as lawmakers seek to foster competition.

Starting in January, lenders in the European Union will have to provide rival firms with access to their customers’ accounts and data, as long as clients give their permission. Under the revised Payments Services Directive, known as PSD2, the banks will also be obliged to build digital links with outside firms to speed the flow of information.

Traditional lenders are chafing at sharing with the very financial technology startups that want to poach their customers, setting the stage for skirmishes as the banking industry and regulators hammer out the technical details that will control how data flows between the parties. The law, which stands to benefit consumer-data juggernauts like Amazon.com Inc. and Apple Inc. as well as fintech upstarts, may put as much as 40 percent of the European retail banking industry’s income in play, according to a report from Roland Berger, a Munich-based consulting firm.

“There is no doubt that bank revenues will be hit by PSD2,” said Antony Jenkins, the former chief executive officer of Barclays Plc who leads a fintech startup in London called 10X Future Technologies. “For all the effort they’ve invested in upgrading their technology, banks are just not moving fast enough.”

Five years in the making, PSD2 catches an industry in flux. An explosion of apps now offers consumers myriad ways to pay bills and manage their money, even as many banks, burdened with aging technology and hidebound corporate cultures, struggle to adapt to the changing demands of their customers. While the European Banking Federation, an umbrella group representing 32 national lending associations, publicly supports the law, industry leaders grouse that opening their systems to outsiders may be dangerous.

‘Hackers and Thieves’

“We are not confident that our customers’ data will be protected from hackers and thieves,” said Howard Davies, the chairman of Royal Bank of Scotland Group Plc, on the sidelines of a conference in Washington. “We cannot refuse to hand over data because that’s what the legislation says, but we will have to try to educate people to understand the vulnerability that they will then have.”

Banking chiefs also say PSD2 is imposing burdensome costs at a time when historically low interest rates are squeezing profits and they’re coping with other regulatory requirements like MiFID II, an EU law that will change how banks charge for analyst research.

But in an era when digital connectivity is upending finance, EU policymakers want to modernize and unify the electronic payment systems that crisscross the bloc. They also want to provide consumers with transparency, more choices and lower costs for banking services. PSD2 establishes that account-holders’ financial data belongs to them, not their lender, and that customers can share their information with whatever qualified company they choose. 

Rather than providing one-stop shopping, banks may have to become more like malls hosting a variety of apps and services. That’s a new reality for an industry that’s long deemed their customers and their financial data proprietary assets.

“The banks had all the advantages,” said Michael McKee, a lawyer at DLA Piper in London who specializes in European financial regulation. “The law is designed to challenge the banks’ position and massively increase competition.”

Before PSD2 can usher in this brave new world, the banking regulators in each of the EU’s 28 member states must create standards defining precisely how financial firms should share—and secure—data. To do so, they have to set up “application programming interfaces,” or APIs, that will enable tech firms to plug their programs into the lenders’ systems.

That’s led to friction between banks and fintech firms in the committees that are drafting these rules across the bloc. Entrepreneurs are wary that some industry groups may seek to adopt such onerous requirements they will effectively block access to accounts. 

“Traditional banks still want to turn the wheels backward”

Turning Backward

Earlier this month, European Commission antitrust officials conducted surprise inspections of the Polish Bank Association, the Dutch Payments Association, and the Dutch Banking Association to investigate whether they’re unlawfully preventing rivals from accessing account-holders’ data, even though the customers have given their consent.

“PSD2 is the door opener and that’s why many traditional players are trying really hard to prevent it from happening,” said Roland Folz, the CEO of solarisBank, a Berlin-based startup that makes software for lenders and fintechs. “Traditional banks still want to turn the wheels backward.”

There are other hurdles, too. As part of the rule-making process under PSD2, the European Banking Authority directed lenders to share account balances with outside firms just four times a day, not hourly as fintech firms requested. And the commission proposed banks be permitted to set up “fallback” means of providing access to accounts should they not offer APIs with the reliability called for in the law.

Fallback Fallout

The EBA disagreed with this proposal. Dirk Haubrich, the watchdog’s head of financial innovation, consumer protection, and payments, said backup systems wouldn’t necessarily be more dependable. The measure may allow banks to avoid setting up industry-wide APIs at all, leaving fintechs struggling to adapt to a hodge-podge of systems. 

“This fallback option undermines PSD2 by favoring established players instead of opening the market,” Haubrich said in an interview. “It would create no benefits, just disadvantages.”

Even as regulators iron out such details, banking leaders would be shortsighted to embrace loopholes instead of the innovations reshaping their industry, said Oliver Bussmann, the former chief information officer of UBS Group AG, who now runs his own consulting firm in Zurich. With apps already enabling consumers to make payments more quickly and cheaply than traditional banks, the market is moving ahead of lawmakers in Brussels. 

Account holders at HSBC Holdings Plc, for instance, can use a payment card from British digital bank Monzo to settle their dinner bills at restaurants in Majorca or Paris with no fuss. And a Hamburg-based firm called Deposit Solutions GmbH has partnered with Deutsche Bank AG and other lenders to offer savers a way to shop around different jurisdictions for higher interest rates with just a few mouse-clicks.

Under PSD2, collaboration will no longer be optional. Ultimately, consumer banks may have to cross-sell products created by others, not just themselves. “The relationships banks have with their customers are loosening,” said Bussman.

Pivotal Moment

Yet this doesn’t have to a dismal moment for traditional lenders. With their well-known brands and long-term relationships, banks are well positioned to make sense of this chaotic marketplace. There’s no reason why they can’t be the ones who bring together numerous players and their accounts under one roof and reap fees by orchestrating their services for their customers. They just need to learn how to share.

They’d best not dally. Apple, Amazon, and Alipay, the payment powerhouse owned by Jack Ma’s Ant Financial, can chase this “aggregation” strategy themselves.

“This is a pivotal moment,” said 10X’s Jenkins. “Banks should use PSD2 to aggregate all of their customers’ financial relationships in one place. There is a possibility of others doing that to them.”

By 

Edward Robinson

 and 

Eyk Henning

— With assistance by Marta Waldoch, and Stephen Morris