MPC Meeting

All eyes will be on The Monetary Policy Committee’s (MPC) interest rate setting meeting, which is scheduled for today, August 6. The market is anxiously trying to gauge whether UK interest, which have been held at historic lows of 0.5 percent for the longest period in history, are going to rise either sooner, say towards the end of 2014 or sometime later in 2015. Certainly, yesterday’s release of the UK’s Purchasing Managers Index (PMI) survey, which exceeded all expectations comes as a relief for those traders betting on a rate rise before the end of the year.

Yesterday’s PMI, an economic indicator derived from monthly surveys of private sector companies, was bullish at 59.1 percent, bearing in mind that a figure of 50 percent indicates a cutoff level separating expanding from contracting services. So the latest PMI indicator suggests that the trajectory for UK service industry is both upwards and momentous. Indeed, Britain’s service sector was stronger than expected in July, with activity rising at the fastest rate in eight months according to the Markit/CIPS PMI. 

The service sector amounts to more than 75 percent of UK’s Gross Domestic Product (GDP) and it including hotels, bars, restaurants, IT, transport and business services. Such an upbeat PMI data is further evidence that the UK’s economic recovery is gaining traction. The PMI data follows the UK’s April-June Gross Domestic Product (GDP) which showed GDP expanding by 0.8 percent during that period. Reaction on the foreign exchange markets was predictable with the pound rising against the dollar and the euro after the survey was published. 

Interest rate hawks are now screeching louder for rate hikes. Many investors/traders are now wondering, in view of the recent upbeat economic data, whether these calls for a spike in rates has now finally gained the ears of the MPC. To date the Bank of England’s MPC has unanimously voted for interest rates to remain pegged at 0.5 percent.

However, while the latest PMI figures are upbeat it may actually be a red herring for the MPC when weighing up whether to go with the interest rate hawks and raise rates. It’s worth mentioning that the PMI is merely a survey, which doesn’t amount to any official economic data. Indeed, the survey is not totally comprehensive as it excludes retailing, energy and government-provided services. Moreover, in recent times it also tended to point to rather stronger growth than the official data from the Office for National Statistics (ONS). 

Nevertheless, assuming the MPC weighs heavy on the bullish PMI survey, they may have good reason to do so this time around since it is in harmony with April-June GDP figures showing an expansion of 0.8 percent. But the UK economic recovery is patchy. For example, manufacturing barely registered an increase to just 0.2 percent and construction activity fell to 0.5 percent during the same period. Moreover, both Industrial output and construction are down by 10 percent respectively, since the financial crisis. If MPC decides to set interest rates above 0.5 percent towards the latter part of 2014 the impact on already these struggling sectors would be adverse. Higher interest rate for industrial manufacturing implies higher investment costs as the cost of borrowing is increased. Furthermore, higher interest rates trigger a flight of “hot money,” speculative money into the pound, thereby appreciating its value against a basket of other currencies. The appreciating pound make it increasingly more difficult for UK manufactures to sell overseas, hitting exports as UK manufactured goods become more expensive and less competitive in foreign markets. 

The latest June UK British Industrial Output figure underscores the problems, output for industry as a whole rose 0.3 percent in June, lagging a forecast of 0.6 percent, according to ONS. Industry continues to struggle following the financial crisis 2008 and a further appreciation in the pound, brought about by higher interest rates would further hamper UK exports.

To some extent the bullish PMI survey is a double edged sword for the MPC because it highlights the growing problem of an unbalanced recovery in the UK economy and the complications of implementing monetary policy in such an economic environment. 

On the one hand an excessive lengthy period of low interest rates might be fueling a speculative bubble in equity, bonds and property price creating inflation in certain sectors of the economy, but to raise interest rates now would clobber the already feeble UK industry output. It’s a complicated situation-what is good for the goose isn’t good for the gander.

For too long policy makers have wrongly believed that as advanced economies matured and developed there would be a natural transition from the manufacturing sector to services. Every economic powerhouse today, Germany, USA, Japan, China has manufacturing as the backbone of their economy. It is the manufacturing that should drive the economy, which then results in a demand for services and not the other way around. Outsourcing manufacturing to China has not only resulted in technological transfers, which has directly damaged the manufacturing sector in developed economies, but it has also indirectly damaged the service sector too. As developing economies strengthen their manufacturing sector, they also develop their own service sectors, banking, insurance etc and leave developed economies in the cold. Maybe this is why Former US Treasury Secretary Larry Summers believes that there is a , “long-term, “secular” stagnation of the developed economies.”

MPC will no doubt be gauging the adverse effects that rate hikes could have on UK industry. Perhaps the hawkish screeches for interest rate rises might just be all in vain. Time will tell.

UK's June Inflation

The Office for National Statistics (ONS) had another surprise for the markets on Tuesday, this time it was the Consumer Price Index (CPI), which grew by 1.9 percent in the year to June 2014, up from 1.5 percent in May. The latest June CPI, an official measurement of inflation, is now hovering close to the Bank of England’s (BOEs) annual inflation rate target of 2.0 percent, so all bets are now on an imminent interest rate rise in the UK. Indeed, the market’s reaction to the surprising jump in June’s CPI figures was predictable; there was a flight of hot money into sterling in search of a higher return, thereby pushing the exchange value of the UK pound further against the USD to a session high of $1.7133. The UK pound also appreciated against a basket of other currencies. Moreover, the price of UK bonds fell sharply on the bond market as traders fled UK bonds in anticipation of a rate rise before the end of the year. So markets have now priced in an interest rate increase, from a record low, to 0.5% interest base rate by the end of the year. 

The latest June CPI figure, released by the ONS on July 15, confirmed that British inflation has now surged to a five month high last month. The main reason behind the sharp rise in the May to June inflation rate has been price increases in food & non-alcoholic drinks; however, the figure is now little changed on the year to June. A variety of product groups notably fresh vegetables, bread and cereals, contributed to the monthly inflation rise in foods. Also the price increases in clothing, particularly women blouses and shoes, also added to the rise in June’s inflation figures. The relatively good weather throughout the May-June period could have resulted in retailers deterring price discounts as the sector decided to cash in on the cloth shopping spree, brought about by the fine weather. Air transport also registered a big month to month hike in prices, according to the ONS. Air fares rose between May and June 2014. The movements were primarily driven by changes in fares on European routes, according to the ONS report. The ONO June CPI report also added, that prices in the housing, water, electricity, gas & other fuels sector continue to have the largest upward effect on inflation, which have contributed around a quarter of the total June CPI figure. Alternatively, motor fuels currently have a downward pull on inflation. Average petrol prices were around £1.30 in June this year compared with £1.34 a year earlier.

But the June CPI figure of 1.9 percent did come as a bit of a surprise for the market. A recent poll conducted by Reuters indicated that economist had forecasted a small rise of inflation to just 1.6 percent. However, the question puzzling economist is whether the June CPI figure is just a monthly blip or further evidence of the UK’s upward trajectory for inflation this year, which would also mark the end of Britain’s historic period of low interest rates. "It currently looks a very close call as to whether the Bank of England will raise interest rates at the end of this year or hold off until early-2015. Indeed, there will undoubtedly be many swings in interest rate expectations over the coming weeks and months," said Howard Archer, economist at IHS Global Insight.

Indeed, the common belief that economists can’t agree on anything important is probably more than ever relevant to them forecasting the UK inflation rate and interest rates. One school of thought is that the June CPI figure is merely noise and that reading too much into a monthly set of figures is really a distraction when trying to forecast the UK inflation trajectory. This reasoning may hold water, after all clothing and air fare prices are usually volatile and one month’s inflation data alone cannot completely change the overall trend. Adding support to this view was an official from the ONS who said that there were signs that the good weather last month may have deterred retailers from cutting prices. Elizabeth Martins, an economist with HSBC, also added that the clothing effect was likely to be smoothed out in July's data. 

Moreover, the recent data shows that producer costs continued to fall last month and that there was barely any rise in what they charged customers in the so-called "factory gate prices". There’s also unlikely to be any wage type inflation, as the latest figures on pay are widely expected to show wage rises continuing to lag well behind inflation, in other words falling in real terms. Furthermore, the steady appreciation in sterling since the beginning of the year will be lowering the price of imports, thereby exerting downward pressure on inflation. "In the near-term, inflation is likely to remain subdued with the producer price inflation figures highlighting a lack of pipeline price pressures while remarkably low wage rate numbers also point to little near-term inflation threat. The strength of sterling will also help limit the upside for inflation," said James Knightley, economist at ING Financial Markets.

But not all economists see it that way. Referring to June’s CPI data, Chris Williamson, chief economist at data specialists Markit said, "The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at data specialists Markit. Apparently, Markit’s survey is showing activity picking up.

However, if housing prices cool down in the months ahead, then probably the CPI June figures are just a temporary blip on the radar, meaning that future inflation rates could be within the BOE inflation target of 2 percent and therefore, no interest rate hikes in 2014 would materialize. The likely fall in real wages, the appreciating pound, the spare capacity in the economy and the frail euro zone recovery may put a damper on future inflation figures. So maybe the market has jumped the gun in anticipating pending interest rate rises.

UK Output. What's Going On?

The Office for National Statistics (ONS) raised eyebrows amongst analysts on Monday when it reported a drop in its production index of 0.7 per cent, between the months of April and May. Contributing largely to the fall was a plunge in factory output from April, which represented the largest contraction since January 2013 and the first decline in six months according to a spokesperson from the ONS. The output of 10 manufacturing categories out of a total of 13 declined in May compared to the previous month, informed the statistics office. The biggest contributors to the disappointing output figures were basic metals, which decreased 2.3 percent, and pharmaceuticals, which also slid 3.6 percent during that period. 

The latest ONS production figures took a lot of economists by surprise. Indeed, the median forecast of 25 economists was for a gain of 0.4 per cent, according to a recent Bloomberg news survey. So, May’s slump in UK manufacturing was a bit of a damp squib for the markets. After all, UK domestic consumption remained buoyant during the first quarter of 2014, spurred on by the Bank of England’s expansionary monetary policy, which facilitated cheap and readily available credit. The upshot of a loose monetary policy was a boom for manufacturers, who reported the biggest rise in domestic sales since the survey started in 1989 in the first quarter of 2014. Contributing to this figure were British consumers who splashed out on new cars, at their fastest rate in nine years. A whopping 1.29 million new vehicles were sold in Britain during the first half of the year, which represented a 10.6 per cent increase in sales from the same period last year, according to the Society of Motor Manufacturers and Traders (SMMT). Ford Fiesta, Vauxhall Corsa and Ford Focus were top on the buyers’ list. “Britain's car industry has smashed records going back to 1959 with the longest-ever period of sales growth of new cars,” said Mike Hawes, SMMT chief executive. Car manufacturing in Britain also increased during the first half of the year as foreign owned companies invested in production lines at their UK factory plants. Apparently, this trend is expected to continue with manufacturing output for cars predicted to return to levels not seen since the 1970s where a record 1.92 million vehicles were built in Britain during 1972, according to SMMT. Last year the total was 1.51m cars, which represented a six-year high. 

However, while domestic consumption provided strong tailwind for UK manufacturing, in the first half of 2014, UK exports remain lackluster during the same period. 

The lingering recession in many parts of the Euro zone didn’t help boost UK manufacturing sales. UK exports to the EU fell by £11.5 billion in the month of April 2014, which is a decrease of £2.1 billion (15.8 per cent) compared to last month. It is also a decrease of £0.6 billion (4.9 per cent) compared to April 2013. Certainly, bitter austerity is biting hard in the southern countries of Europe and public health cuts were most probably contributing to falls in UK pharmaceuticals exports to the region. Additionally, Britain’s exports outside the EU declined, the trade deficit rose to £8.92 billion in April, 2014 compared to £8.29 billion in March, representing a decline of 1.5 percent in manufacturing exports, according to a recent Bloomberg article.

Furthermore, the strengthening pound against the euro and dollar could also be a contributing factor providing headwinds for UK manufacturers, which was reflected in May’s dismal manufacturing figures. The appreciating pound is making UK manufacturing exports more expensive and thereby less competitive abroad. Furthermore, the Bank of England’s perceived hasty move to tighten monetary policy could also be strengthening the pound even further, providing more anxiety to UK manufacturing. Underscoring this view Samuel Tombs, an economist at Capital Economics in London said, “The data suggest that the stronger pound might be starting to slow the recovery in the manufacturing sector.” However, on an upbeat note he added that, “Despite today’s disappointing figures, we continue to think that the economic recovery will receive decent support from the industrial sector.”

Michael Saunders, UK economist at Citi also played down May’s disappointing output figures. "We do not regard these data as a sign that the economy's rapid expansion is losing momentum," he said and cited a series of positive industry data to back his support. Manufacturing output has increased 2.3 percent from a year earlier and was up 0.6 percent in the three months through May from the previous quarter. 

However, while the ONS cautions into reading too much into one set of monthly figures, there are some strong headwinds for UK manufacturing in the months that lie ahead. External factors such as a slowing global economy could put a further dampener on UK manufacturing exports. Moreover, the benign climate of low interest may be coming to an end. BOE Governor Mark Carney has said that the time to normalize rates is now “edging closer.” The market is betting that rates, which have been kept at a historic five year low, will rise 25 basis points by February. But higher interest rates would be a double blow for UK manufactures as it would make financing investments in plant and machinery more costly. It would also cause an appreciation in sterling, making UK manufactured exports less competitive abroad. Moreover, the geopolitical situation in Iraq and the Ukraine is resulting in higher energy costs, which is a huge input cost for manufacturing. So rising energy costs could also be a headwind for UK manufacturers. Furthermore, there is the UK future relationship with the EU to consider. As Europe moves closer towards a federal Europe and the UK continues to isolate itself from it, this may deter future inward investment into UK plants and machinery. Large scale foreign investors may be put off making future investments in their UK production plants due to a fear that the UK could decide to exit from the European Union. So there’s a number of compelling reasons to be bearish about future UK production figures and it could also be factor for investors deciding to take risk off the table.

The European Commission Warns on UK Housing

In a review of the UK economy released earlier this week, the European Commission offered advice on the state of the UK housing market, and what should be done to address some of its problems.

Suggestions to cool down the market include adjusting the help to buy scheme and raising council tax on more expensive property. The property tax on smaller properties is significantly higher than larger ones from a relative standpoint. The property roll, which records property tax levels, has not been updated since 1991, and therefore doesn't reflect existing price differentials. Nor does it take into account price increases overall.

The UK was urged to monitor house prices and mortgage indebtedness, and take action as appropriate. To meet increasing demand, the supply of new houses was also encouraged.

This sage advice comes on the back of the latest Nationwide Price Index report showing an 11% price increase in May over the same month last year. According to Nationwide, the continued rise in property prices in areas showing strong economic recovery has not been influenced primarily by Help to Buy. In London only 4% of purchases in quarter 1 of this year were Help to Buy assisted. In fact, the majority of Help to Buy mortgages were granted to those buying in the North of the country, and 45% of those were on properties valued at around £125,000 or less.

Instead Nationwide suggests that continuing low interest rates and an improving economy is driving the boom in house prices. First time buyers are getting on the ladder, accounting for 48% of purchases in March. The same report notes that the ratio of prices to earnings for first time buyers was now at 4.7, which it last reached in 2008. The average house price is now £186,512, at its highest since October 2007.

The first quarter has seen a moderating influence, in the shape of a reduced number of mortgage approvals. According to the Bank of England just under 63,000 mortgages were approved in April, the lowest figure since July 2013. This is credited to lenders changing their criteria in advance of the introduction of the Mortgage Market Review, which came into effect at the end of April.

The Mortgage Market Review (MMR) puts the emphasis on lenders to ensure that applicants take out a mortgage they can genuinely afford. Not only must you prove your income, you also need to confirm your spending and show that you can still make repayments on interest rises up to 7%. Lenders no doubt vary in the amount of detail they want, but a close assessment of 3 months of bank statements seems to be part of the standard criteria going forward. This new and more ruthless assessment of applicants is an antidote to the carefree lending seen not so long ago, and will in all probability dampen the market to an extent. But as the regulation has just arrived, its effectiveness as a 'cooling' agent remains to be seen.

The European Commission's 'interventionist' comments on the state of the UK market led Business Secretary Vince Cable to remark that although the country had a problem with house price inflation, he felt that 'we don't need the EU to tell us what's going on here.' The perception that the Commission is dictating UK economic policy may only fuel the anti EU sentiment so recently demonstrated by UKIP's strong results in the European Parliament elections.

From the Bank of England's perspective the housing market is the highest risk to financial stability, and it is prepared to take action to maintain that stability with all the means at its disposal. This could include introducing even higher capital requirements for mortgages, insisting that the government change Help to Buy, or simply raising interest rates (a debateable option, as it may have a negative impact on other parts of the economy). The Bank's Financial Policy Committee will meet in June, and is expected to discuss tougher mortage criteria along the lines of loan to value and affordability ratios.

What is the government doing to build more houses? Successive governments have failed to address the shortfall in new housing, it's an historical issue. In 2009 only 115,000 new houses were built. You have to go back to the 1920's to find a figure that low. Of course the financial crisis hobbled lending to house builders and exacerbated the situation further.

Now the government is pushing forward with initiatives like the 'Get Britain Building' investment fund. This is a £570 million fund to kick start building on existing development sites and those either stalled or on hold. Surplus public sector land will be sold to make way for another 100,000 new homes. Grants are being made available to local councils to encourage home building, and to bring empty homes back into occupancy. There are reportedly over 250,000 homes in England that have stood empty for more than 6 months. There is also a move to ease building regulations in order to make the house building process a little easier. Bodies like the Chartered Institute of Housing and the National Housing Federation are being actively involved in creating a go ahead housing policy.

Back in 2007 a target of 240,000 new homes per year by 2016 was set. The financial crisis obviously dented this aspiration, and it's only perhaps now as we emerge from the economic doldrums that the numbers can start to climb again. In 2013 a total of 122,590 homes were started, but only 109,370 completed. In the first quarter of this year the homes started comes in at 36,450, and those completed at 27,670. Still some way to go then before we get anywhere near meeting the demand. But until that demand is met, the rules of the market will apply, meaning that scarcity will continue to drive ever higher prices. And I think we could have probably worked all of this out well before the European Commission shared it with us.

European Central Banks Policy Decisions

The long awaited announcement on monetary policy from the ECB this month was made yesterday. In it Mario Draghi announced a package of measures which are designed to defeat the threat of deflation in the Euro Zone and boost growth.

The measures include a cut in the headline rate of interest or the refinancing rate by reducing it from 0.25% to 0.15%. He also announced that the deposit rate will be reduced by 0.10% from zero to -0.10% and that the banks will be given access to €400bn of funds at a low rate of interest provided the funds are used to lend to small businesses. Finally, they will cease sterilising the new funds put into the market. The package is designed to increase liquidity and reduce the currency thereby increasing inflation and boost the economic expansion.

The cut in the refinancing rate to 0.15% was widely anticipated and is really not expected to make a huge amount of difference to economic growth. However, it will put savers under even more pressure in their hunt for good returns and push them towards more risky investments in order to get those returns particularly as Mario Draghi was not able to give them any encouragement for better returns with his prediction that rates will stay low for an extended period of time. His expectation for inflation, which is currently at 0.5%, is for it to be 0.7% this year followed by 1.1% in 2015 and 1.4% in 2016 and suggests that rates will be low for much of that time. The ECB’s target for inflation is 2.0% or under but such low levels will make it difficult for debts to be repaid and for liquidity to improve. What it will do is give businesses the confidence to seek funding for investment in the knowledge that their business plans will not be hit by the increase in their costs from interest payments. This will tend to reduce the returns they need to obtain in order to justify the investment in the first place.

By reducing the deposit rate that the ECB pays on any excess liquidity that banks leave with the Central Bank to -0.10% they hope to encourage them to take the funds back. They can then seek better returns by lending the money on to consumers and businesses at low interest rates. This may, however, entail the banks reducing their liquidity ratios and breeching the Regulators requirements at a time when they are also being subjected to very high fines from those same Regulators which also reduces their liquidity ratios. There will need to be some support from the Regulators for this policy to work. The amount involved is about €120bn which could have a large impact on liquidity ratios but which will only cost the banks €120m in interest charges. Many analysts doubt whether this announcement will have much effect.

The proposal to make €400bn available in what is to be known as targeted longer term refinancing operations or TLTRO may be more effective in improving liquidity as it gives the banks access to additional funds at a low rate of interest provided they are used for the purpose of supporting businesses. These funds will not be required to be repaid for two years and should give a boost to the economy although it has been likened to the Bank of England’s Funding for lending scheme which it is thought has had little impact on the lending conditions for businesses but which was increased with effect from the beginning of this year. The scheme will be launched in September 2014 with an additional tranche in December 2014. This will be followed by further tranches quarterly from March 2015 to June 2016. The total represents 7% of all outstanding loans to businesses and household excluding mortgages. They will all mature by September 2018 and interest will be paid at the time of maturity and will have been fixed when effected. These are very attractive loans for the banks and should make a difference to liquidity. In addition the withdrawal of sterilisation whereby the Central Bank buys back an equivalent amount of loans will give a further boost to liquidity.

In addition the Central Bank has announced that they are working hard on their preparatory plans to buy back asset-backed securities should that become necessary in the future. This is very close to a full scale quantitative easing programme and would only be considered and activated if inflation stays worryingly low.

Mario Draghi was keen to make the point that the ECB was not yet finished with policy actions that could be taken to combat slow growth and very low inflation. He was also keen to stress that it is necessary for countries to continue to put their own house in order and maintain the packages of reforms that they have all agreed upon during the crisis. He may not be happy to hear about the reforms announced by the Spanish government today to boost their economy and Mr Rajoy’s prospects of re-election next year!

The markets had been anticipating this announcement and there were few surprises in the package. One aim was to reduce the Euro against major currencies and thereby increase inflation and the Euro area’s competitiveness. Since May the Euro has fallen from $1.40 to $1.35 so the travel has been effective, however, the package will also lead to European assets becoming more attractive and could lead to a rising currency again as overseas buyers come in. The rise in the stock market that followed the announcement may be an indication of this trend.

Europe is a major global economic bloc and the relatively flat recovery has contributed to the low rate of global economic growth and the stagnation of equity markets this year. A boost to activity provided by this package could lead to better expectations for growth in profits and earnings which, in turn should justify the current valuations of markets and lead to higher forecast growth rates.

The Old Lady on Threadneedle Street

The old lady on Threadneedle Street,” known as the Bank of England (BOE), is scheduled to undergo some far-reaching changes, which are designed to widen its regulatory powers and increase its accountability with the intended aim of waning off any future financial shocks.  

These sweeping changes are scheduled to be implemented on June 1, 2014 by the BOE’s governor, Mark Carney, who was appointed to head the bank in July of last year. Mr. Carney has earned his stripes in the financial world; he was the previous Governor of the Bank of Canada and was credited for shielding Canada from the worse effects of the late 2000 financial crisis. Mr. Carney started his career in Goldman Sachs.

As part of the changes to the BOE, the Financial Services Authority (FSA), a quasi-judicial body responsible for the regulation of the financial service industry in the UK, has been replaced with three new regulatory bodies; the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
A little about all three new regulatory bodies to follow:
The Financial Policy Committee (FPC) focuses on both monetary stability, facilitating economic growth while keeping inflation under wraps, and regulatory authority, upholding the integrity of firms in the financial service sector. In other words, FPC will ensure that the system as a whole is safe and resilient to unexpected developments. FPC will have the power to direct the PRA to adjust banks’ capital requirements.
The Prudential Regulation Authority (PRA), also part of the Bank of England, as the name suggests is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm. The PRA’s two main objectives are to promote the safety and soundness of financial service, thereby making a contribution to the Bank’s core purpose of protecting and enhancing the stability of the UK financial system.
The third regulatory body which has replaced the FSA is the Financial Conduct Authority (FCA). This regulatory body is responsible for regulating the financial service industry in the UK. The FCA aims to protect consumers, ensure that the industry remains stable and promote competition between financial service firms. Additionally, the FCA has rule-making, investigative and enforcement powers at their disposal to protect and regulate the financial services industry.

Impetus for change to the Bank’s structure has particularly come from David Cameron’s Conservative coalition Government who on the Commons Treasury Committee vehemently criticized the previous so called tripartite structure of “being asleep at the wheel,” during the 2008 financial crisis. The tripartite structure consisted of the then FSA, the Treasury and the Bank of England. 
Under the new structure the FPC and the PRA will both fall within the Bank’s domain, which incidentally reverses the changes made to the regulatory system by the former Labour Chancellor Gordon Brown. The changes mark a return of regulatory power to the Bank.  Advocates of the structural changes to the Bank are hoping that it will plug the gap in the previous tripartite system that left no one taking responsibility to monitor risks as a whole in the financial system, such as during the pre-2007 lending boom. George Osborne, current Conservative chancellor criticized the previous system for being "incoherent" and "without clear lines of accountability".
It is now widely recognized by financial regulators around the world that it was the lack of oversight as being the main culprit for the calamity that resulted in excessive lending, which then triggered a subprime mortgage crisis and ultimately a financial meltdown.    Financial regulators are now realizing the need for them to take on board monetary responsibilities to avoid a repeat of the 2008 financial crisis.
The FSA’s inability to rein in the banks; to avoid the collapse of Northern Rock and prevent recent banking scandals such as the Libor interbank rate-rigging affair and mis-selling of payment protection insurance (PPI) and interest rate swaps to small businesses have all been cited by advocates for the need for changes to the regulatory system. It is believed that by granting the Bank more regulatory authority and greater accountability the system will have more teeth.

Indeed with these structural changes in place the Bank’s powers will be wide reaching and comprehensive with the FPC acting as a forte of the new system, taking an all-inclusive view of the financial system. Moreover, the PRA will ensure that banks and insurers have sufficient liquidity to meet their obligations. Furthermore, the FCA will promote a climate of competition and regulate financial firms, thereby protecting consumers.

However, these changes have not come without their critics. There are concerns from some quarters that the Bank will become too powerful, given that already it has complete autonomy over its monetary policy.  The structural changes to the Bank risk jeopardizing its impartiality, according to the former head of Germany’s central bank, Axel Weber.  The Ex-Bundesbank boss “flatly refused” to take on a regulatory remit when he was head of the bank due to concerns over independence.

Additionally, a series of senior level appointments to the Bank will take effect on June 1, 2014. In summary the notable changes are as follows; The creation of a new Deputy Governor-level position for Markets and Banking; there will be an expanded role for the Chief Economist to build the Bank’s research, analysis and data capability; a new Financial Stability Strategy and Risk Directorate; A new International Directorate; A new Director, Banknotes and Chief Cashier, and a new Director for Supervision of Financial Market Infrastructures and an independent evaluation unit will also be established.

Darren Winters