Not ruling out, not ruling in
A week ago the Bank of England governor refused to rule out the possibility of negative interest rates and sterling was almost unchanged on the day. Yesterday he refused once again and the pound lost ground to every other major currency, falling by an average of 0.7%.
It cannot have been the manner of Andrew Bailey’s refusal. He was talking to Parliament’s Treasury Committee and measuring his words carefully as a central banker should: “We’re not ruling it in, but we’re not ruling it out.” However, there was a striking new context to the governor’s remarks. The government borrowed money at a negative rate of interest.
The Debt Management Office sold £3.8 billion of three-year gilts at a yield of -0.003%. Whoever bought the gilts will be paying the Treasury threepence a year to look after every £100 of their money. It was the first time ever that a gilt auction had achieved a negative yield. Although there is no ineluctable carry-over from government bond yields to short-term interest rates, investors put two and two together to conclude that the Old Lady is bound to take Bank Rate negative. So they marked down the pound.
Inflation slows again
Another context to the negative rate debate had been the sharp fall in UK inflation from 1.5% to 0.8% reported yesterday morning. However Britain’s was only one of three announcements of weakening upward pressure on prices. Euroland and Canada followed suit.
In the euro zone, where rates are already negative, inflation slowed from 0.7% to 0.3% in April. Canadian inflation was even more startling, with the headline rate plunging from 0.9% to -0.2%. It was the first year-on-year decline in CPI since 2009, fuelled by a 39.3% annual fall in petrol prices. The euro was unchanged and the Loonie fell an average of 0.3%.
The minutes of the late April Federal Open Market Committee, more than three weeks out of date, brought nothing new to the table. There was just one anecdotal reference to negative rates: “respondents to [FOMC] surveys attached almost no possibility” to them happening.
Today brings the preliminary purchasing managers’ indices from Britain, Europe and the United States. They are all expected to come in below 40. The UK is pencilled in at 36 for manufacturing and 25 for services. Both would be improvements on the April readings.
The provisional Australian PMIs showed “a further substantial decline in business activity” with manufacturing at 42.8 – probably the strongest reading of the day – services at 25.5 and the composite at 26.4. Non-PMI data today include the CBI’s Industrial Trends Survey, the Philadelphia Fed’s manufacturing survey and Canadian house prices. The South African Reserve Bank is expected to lower its benchmark repo rate from 4.25% to 3.75% after lunch.
Friday’s relatively brief ecostat agenda starts with NZ retail sales in Q1 and leads on to Japanese inflation and UK and Canadian retail sales. The Bank of Japan is likely to leave interest rates unchanged.