Bank of England Deputy Governor’s Thoughts Bring Worry to Savers

Paul Tucker, the BoE’s deputy governor, brought the plight of savers back into the spotlight last week when he floated the idea of introducing negative interest rates as a way of encouraging banks to lend and so kick-start Britain’s recovery. Whilst his colleague Charlie Bean was quick to point out that it was just “blue sky thinking”, the suggestion sent out a strong message that savers should not expect an improvement in their fortunes anytime soon. All banks keep their reserves with the central bank and are paid a rate of 0.5% – the Bank Rate – which has now been at this historically low level for four years. The BoE appears to have ruled out a further cut in this rate, but could instead levy a charge on some of the cash that banks deposit in reserve accounts. The theory is that the banks would then feel more compelled to lend out the money. Such a move would almost certainly lead to lower savings rates; but whether or not it comes to pass, the implication of such a suggestion is that interest rates are unlikely to rise in the near future.

At the end of the week, sterling slid below $1.50 for the first time in more than two and a half years on news of an unexpectedly sharp drop in UK manufacturing activity in February. Sterling has now fallen 8% against the dollar already in 2013. If the fallout from Moody’s downgrade was less dramatic than Chancellor George Osborne had feared, although it may well add further downward pressure to the exchange rate, news of the contraction in manufacturing came as a grim reminder of the task he faces in returning the UK to sustainable growth. Although the manufacturing activity is just one piece of data – next week’s purchasing managers’ index for the services sector will provide another useful clue – the news added to evidence that it is touch and go whether the UK economy will avoid a triple-dip recession.

In the EZ the action was relatively subdued, with little eco data on the docket, but the euro did drift lower, dropping below the 1.3000 level as the night progressed. The situation in Italy remains unresolved with little prospect of a coalition government as Bersani now tries to focus on forming a ruling minority that will likely be very unstable. Italian yields continue to inch higher as investors grow increasingly nervous as Beppe Grillo muses on the possibility of Italy leaving the Eurozone.

EUR/USD held within a tight range yesterday. Eurozone retail sales, Italian and Spanish Services PMIs as well as revisions to the ‘flash’ estimates will be of interest today. While we could see some volatility in EUR/USD from the data releases Lloyds TSB think EUR/USD will broadly remain range bound. With one eye on Draghi’s press conference on Thursday we think EUR/USD will remain on the back foot as the market remains cautious Draghi may maintain a relatively dovish tone as from last month’s meeting and we see little reason for a test above 1.31.

In the US, Lloyds TSB expect the February non-manufacturing ISM to post a 12-month high of 55.8 from 55.2. This increased optimism would build on the strong improvement seen in the manufacturing sector in February . Ahead of the non-farm payrolls release on Friday, the employment component of the survey will attract particular attention.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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