Graeme Wearden 

Bank of England split over interest rates amid audio hack row – as it happened

Rolling coverage of the latest economic and financial news
  
  

The skyline of buildings in The City of London is seen from Waterloo Bridge
The skyline of buildings in The City of London is seen from Waterloo Bridge Photograph: Niklas Halle’n/AFP via Getty Images

Finally, the FTSE 100 has ended the day 33 points higher at 7573, up almost 0.4%.

Multinational companies were lifted by the weaker pound, which has lost half a cent to $1.3030 tonight. Mining giant Glencore (+2.3%), pharmaceuticals firm AstraZeneca (+2%) and medical equipment maker Smith & Nephew were among the risers.

Good night!

On a positive note, at least the problems with the Bank of England’s audio feed didn’t lead to any interest rate moves being leaked.

Not that there have been many to leak, as Professor Costas Milas of Liverpool University writes:

The hack of the Bank of England’s press conference audio feed is very serious and the Bank needs to tighten its IT-related security.

Nevertheless, it is arguably a huge exaggeration to believe that (some) traders might have exploited early information with reference to interest rate moves in particular. Indeed, since 2009 (when the interest rate went down to 0.5%) the Bank has cut the interest rate only once to 0.25% (following the Brexit vote in August 2016) and then hiked to 0.5% (in November 2017) and then again to 0.75% in (August 2018). Notice that these three interest rate actions occurred at the same time while new Inflation Reports were released by the Bank.

It is not a secret that the Bank has the “habit” of changing interest rates and explaining their impact on the economy through the accompanying Inflation Reports. In fact, this is part of the Bank’s (successful) communication strategy. Therefore, interest rate decisions, since 2009, have by no means surprised anybody which arguably puts to bed any suggestion that traders benefited as far as interest rate decisions are concerned.

Any City traders who took advantage of the hacked Bank of England’s audio feed might expect a call from the UK’s financial regulator.

Tony Katz, head of Financial Services and Investigations at DPA Piper, explains:

The Bank of England will need to consider whether its information controls were adequate and whether they met the standards they expect of those they regulate.

The FCA will, in all likelihood, be investigating those who have sought to take advantage of potential inside information and will take appropriate action should any evidence be found.”

Updated

Pressure is mounting on the Bank of England’s chief operating officer to resign immediately.

Joanna Place is facing scrutiny over the security breach that gave paying hedge funds early access to Mark Carney’s market-moving press conferences.

My colleague Jasper Jolly reports:

Joanna Place reports directly to Carney, the governor, and has had responsibility for the Bank’s information security since July 2017.

Danny Blanchflower, who served on the MPC until 2009, said Place’s position was untenable after the Bank admitted the breach, first reported by the Times, late on Wednesday night.

“Carney should be absolutely furious,” he said. “The person in charge of the Bank’s security should be quitting within the next hour.

More here:

Economist Shaun Richards has given the Bank of England quite a blast for allowing its audio feed to be hacked, giving some hedge funds an advantage.

He writes:

This is disgraceful on two counts. Firstly in an era of computer driven algorithm driven trading an edge like this is quite something for them as we mull exactly who was more equal than others? To coin a phrase.

Next is the fact that this happened at the ECB several years ago and after such a warning someone should have been dispatched to make sure that it could not happen at the Old Lady. So we can add laziness to the incompetence.

Bank of England: What the experts say

Hinesh Patel, portfolio manager at Quilter Investors, says the BoE is in ‘wait-and-see’ mode, after leaving interest rate on hold.

This familiar holding pattern is likely to continue for some time as we await detail on what the future relationship with the European Union looks like. However, it is clear from the Bank that it is not just Brexit, or the hedge funds, that Mark Carney and co seem to be concerned about.

They have specifically referenced the need to act on interest rates should global growth fail to stabilise and ease to help boost UK GDP and inflation.

Marina Mensah-Afoakwah, Senior Economist at the CEBR, says Carney’s replacement will have a lot on their plate:

“While today’s interest rate decision was widely anticipated, a myriad of factors will be crucial in determining the future path of UK monetary policy. When the new BoE governor takes over in January 2020, he or she will need to consider the risk of falling demand from the UK’s most significant trading partners, the impact of the US-China trade war on the wider global economy and, barring any surprises, the outcome of the long-drawn Brexit process.” –

Dean Turner, economist at UBS Wealth Management, predicts rates will be cut next year:

“After last week’s election result, the short-term clarity we have on Brexit could give a lift to economic sentiment, especially for businesses. A modest fiscal easing in the forthcoming budget could also push things along a little.

“Overall, though, as attention turns to the December 2020 end of transition deadline, the mood will likely remain subdued and growth weak. We expect that the committee will move further towards a rate cut in 2020 and a quarter point easing in May.”

Why Bank's doves pushed for a rate cut

The Bank minutes show that Jonathan Haskel and Michael Saunders believe the UK economy needed an interest rate cut now, to protect it from problems at home and abroad.

The pair, both external members of the committee, argued:

The economy had been a little softer than expected, and there was a modest but rising amount of spare capacity. Core inflation was subdued.

Employment growth was slowing and seemed likely to weaken further given trends in vacancies and firms’ hiring intentions. Downside risks remained to the MPC’s projections from a weaker world outlook and Brexit uncertainties.

With relatively limited space to cut Bank Rate, risk management considerations favoured a prompt response to downside risks at present in order to ensure a sustained return of inflation to the target.

Most members of the Monetary Policy committee remain hopeful that the UK economy will strengthen in 2020.

They anticipate lower uncertainty, easier fiscal policy and somewhat stronger global growth. Boris Johnson’s victory, and the trade truce between the US and China, could help.

But it’s still early days, the BoE points out:

The biggest news since November had been on global trade and domestic policy developments, but it was too early to judge how material that would prove to be for the economic outlook.

Bank: Little sign of growth this quarter

There’s little chance of significant economic growth this quarter, the BoE fears:

UK GDP increased by 0.3% in 2019 Q3 and is expected to rise only marginally in Q4.

Household consumption has continued to grow steadily, but business investment and export orders have remained weak. Financial markets have remained sensitive to domestic policy developments.

But it also points out that the pound, and the stock market, have both rallied in the month:

Since the November Report, the sterling exchange rate has appreciated by 2% and UK-focused equities have outperformed their international counterparts. There is no evidence yet about the extent to which policy uncertainties among companies and households have declined.

The Bank reckons the global economic outlook appears slightly rosier than a month ago.

It says:

Global growth has shown tentative signs of stabilising and global financial conditions remain supportive.

The partial de-escalation of the US-China trade war provides some additional support to the outlook relative to the November Report, although trade tensions remain elevated.

The Bank’s monetary policy committee also voted unanimously to maintain its asset purchase scheme (which currently holds £435bn of government debt and £10bn of corporate bonds)

Bank of England split on rates again

Newsflash: The Bank of England has left UK interest rates on hold, at 0.75%.

But two policymakers, Jonathan Haskel and Michael Saunders, pushed for rates to be cut to 0.5%, echoing last month’s vote.

Sentance: Carney's replacement should change governor's role

The Bank of England’s early-access breach has broader implications for the new governor’s role, according to former rate-setter Andrew Sentance.

Successive governors have taken on greater and greater responsibilities. These range from dealing with intense scrutiny over every word in market-sensitive interest rate announcements to running a large organisation with significant security duties.

Sentance told us that Mark Carney’s replacement, due to be announced soon, should change tack:

“One of the weaknesses of the Bank’s organisation is too much power is concentrated in the governor.

“If I was making a recommendation it would be to act more as a chairman and less as a chief executive.”

The Bank only appointed its first chief operating officer in 2012 to look after the day-to-day running of the Threadneedle Street headquarters and its various regional outposts, but the governor still has overarching responsibility.

Economic responsibilities were formerly more spread between the nine members of the monetary policy committee. When he was chief economist Mervyn King answered most of the monetary policy questions, but he did not then relinquish that responsibility, setting a precedent for the governor to be the public figurehead.

The number of deputy governors has increased to four, but the governor has nevertheless ended up with more work, Sentance added.

“The productivity of deputy governors has not been a good lead to the economy.”

Here’s our news story on this morning’s retail sales shocker:

The Wall Street Journal has a good take on Sweden’s interest rate hike. Here’s a flavour:

Sweden’s central bank, one of the pioneers in wielding negative interest rates, became the first to end that policy Thursday, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure.

In 2009, the Riksbank, the world’s oldest central bank, became the first to charge commercial banks to hold deposits rather than pay them interest. In 2015, it lowered its key policy rate below zero, following a similar move by the European Central Bank the year before.

On Thursday, the Riksbank raised the key rate to zero from minus 0.25%. The bank moved because a majority of its policy makers expect inflation to be close to its 2% target over the coming years. But it signaled caution, indicating it has no plans to raise its key rate further in the coming year.

The WSJ also points out that two Riksbank policymakers, Anna Breman and Per Jansson —opposed the move. They wanted to wait for more proof that inflation was on target.

UK retail sales hit 19-month low

Just in: UK retail spending has slowed sharply, suggesting that nervous consumers cut back ahead of the general election.

Retail sales fell by 0.6% month-on-month in November, the Office for National Statistics reports. That’s much worse than expected.

This dragged annual retail sales growth down to just 1% last month, from 3.1% in October. That’s the weakest since April 2018.

Looking at the last quarter, sales are down 0.4% - again, the worst reading in 19 months.

However..... the ONS’s reporting period doesn’t actually cover Black Friday (which fell on 29th November), so it has adjusted the data to address that.

Updated

Andrew Sentance, a former Bank of England policymaker, says the hack of its press conference audio feed is “unprecedented” for a central bank.

Sentance, who is now senior adviser to Cambridge Econometrics, told us the Bank faces a lot of serious questions:

“Central banks pride themselves on confidentiality and making sure communication is well managed.

There has been an abuse of information here. The question in your mind will be, if this happened what else has happened? Are the Bank’s communications secure?”

Sweden’s interest rate rise is a small but significant milestone as central bankers try to extricate themselves from a decade of loose monetary policy.

Significantly, the Riksbank is ending negative interest rates while still continuing its asset-purchase programme (buying bonds with new money to stimulate growth).

Other banks have suggested that they’d work the other way -- ending QE before risking higher borrowing costs. Clearly the Riksbank felt negative interest rates were too painful to persist with.

Simon Harvey of Monex Europe has tweeted about this:

Sweden ends negative interest rates

Newsflash: Sweden’s central bank has raised interest rates, to the heady heights of ZERO!

The Riksbank has just ended its policy of negative interest rates, by lifting them from -0.25% to 0%. That will please savers and Swedish banks, as negative rates eroded their profitability.

But... the Riksbank also warns that it could cut interest rates back below zero, if the economy performs weaker than expected.

Updated

Markets inch higher in quiet trading

You don’t need to hack the Bank of England to know that financial markets are winding down for Christmas.

The main European indices are inching higher in quiet trading. Germany’s DAX has gained 0.1%, and the French CAC is 0.2% higher.

The UK FTSE is flat, though, with a strengthening pound weighing on some stocks.

Sterling is up almost half a cent at $1.3115, following two days of heavy losses that wiped out the ‘Boris Bounce’.

Stephen Innes of AxiTrader says:

The “ Tory Glory “ election relief rally has given way to the uncertainty of the next stages of the Brexit process. UK-EU trade negotiations, and the tight proposed deadline at the end of the transition period.

Here’s our news story on the Bank of England’s eavesdropping woes:

The Times also reports that these hedge fund clients were paying between £2,500 and £5,000 per press conference for access to the BoE’s audio feed.

You don’t pay that sort of money unless you’re expecting a trading advantage in return.

The BoE insists that none of its decisions have been leaked early -- just the audio feed of its press conferences (which is bad enough!).

It says:

The Bank operates the highest standards of information security around the release of the market sensitive decisions of its policy committees.

The issue identified related only to the broadcast of press conferences that follow such statements.”

The Bank of England has now referred the misuse of its press conference audio feed to the Financial Conduct Authority, Reuters reports.

The FCA is responsible for regulating the City, so will have to decide whether this is a breach of its regulations.....

Introduction: Eavesdropping at the BoE

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The Bank of England is at the heart of a ‘hedge fund hack’ controversy this morning as it prepares to set interest rates for the final time in 2019.

The UK central bank has admitted that some high speed traders have been able to listen in to market-sensitive press conferences before they were officially broadcast.

Astonishingly, one of the BoE’s own suppliers hacked into its systems, allowing it to send an audio feed of, say, governor Mark Carney’s words of wisdom.

This gave certain traders a potentially massive advantage to react to market-moving events before the rest of the City.

It’s a serious blunder - exposed by our friends at The Times.

The Bank itself is clearly fuming, saying:

This wholly unacceptable use of the audio feed was without the bank’s knowledge or consent, and is being investigated further.”

The audio feed was apparently supposed to be a “fallback option” in case the usual video feed (streamed online) went down. Instead, it was pumped out to certain ‘external clients’ -- high-speed trading companies, through a market news service connected to this rogue supplier.

Those clients could potentially have made serious profits, by using high-frequency trading strategies to buy and sell sterling and UK government debt before the rest of the market caught up.

The story comes as the BoE prepares to set UK interest rates for the final time this year. We’re not expecting any changes. However, two policymakers did push for a rate cut at the previous meeting, so it could be another split vote.

The agenda

  • 9.30am GMT: UK retail sales for November: Expected to have risen 0.3% (excluding fuel)
  • 11am GMT: CBI survey of UK retail sector
  • 12pm GMT: Bank of England interest rate decision

Updated

 

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