IMF cuts US growth forecast, as Bank of England tells banks to boost capital - as it happened

Graeme Wearden

from on 2017-06-27 16:09 (#2V1H4)

UK central bank has ordered British banks to set aside more capital, and rushed forwards its consumer credit stress tests

5.09pm BST

And finally (probably), European stock markets have ended the day in the red.

In London the FTSE100 lost 12 points to 7434, despite mining shares rallying, and there were deeper losses in Europe.

#FTSE100 biggest risers: Glencore (+3.61%), Anglo American (+3.34%), Rio Tinto (+3.22%) and Antofagasta Holdings (+3.20%)

#FTSE100 biggest fallers: GKN (-4.39%), Centrica (-2.25%), Admiral Group (-2.25%) and Ashtead Group (-2.17%)

News that the SNP have formally abandoned their plan for a second referendum before the completion of Brexit has helped the pound's ascent, with GBPUSD hitting the highest level in a week.

The IMF cut their outlook for the US economy today, which when considering the negative path of core PCE inflation, makes a September rate hike increasingly unlikely.

3.22pm BST

Newsflash: American consumer morale has jumped this month, despite the IMF's concerns about the US economy.

The Conference Board's consumer confidence index rose in June to 118.9, defying expectations that it would fall to 116.0 this month.

Significant upside beat on Consumer Confidence Index (118.9, f/c 116.0) as job market perceptions led to a 5.7-pt rise in current conditions

"Expectations for the short-term have eased somewhat, but are still upbeat. Overall, consumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating."

2.50pm BST

Howard Archer, Chief Economic Advisor to the EY ITEM Club, is struck by the Bank of England's decision to bring forwards its consumer credit stress tests by a couple of months:

"The risk to financial stability coming from the recent rapid growth in consumer credit would undoubtedly be magnified if there is a near-term interest rate hike. While any interest rate hike would be small with further increases some way off, even small increases could cause problems for some consumers given their high borrowing levels.

"It is notable that the Bank of England is bringing forward its testing of banks' ability to cope with major losses on consumer loans to September from November. Additionally, regulators will in July publish their expectations for lenders in the consumer credit market."

2.36pm BST

Wall Street has opened lower, with the IMF's downgraded growth forecasts dampening the mood in New York.

The main indices are all in the red, with shares in Alphabet (Google) shedding more than 1.2% after it was slapped with a a2.4bn fine by Brussels today.

2.26pm BST

The news that the IMF has downgraded its US growth forecasts and criticised Trump's budget plans, has sent a ripple through the financial markets.

Here's some snap reaction:

.@realDonaldTrump wants four per cent US GDP growth. IMF says it ain't gonna happenhttps://t.co/MPjzegnjjp

IMF Cuts U.S. Outlook, Calls Trump's Growth Target Unrealistic https://t.co/diU2QMfypr via @business

Anyone going to comment on the irony of the IMF calling someone else's growth target unrealistic?

Populism doesn't deliver, IMF implies as it cuts US growth forecast https://t.co/0yZ2gQ9u9e via @FT

Trump's budget cuts will hit the poor & middle class hardest, IMF says: https://t.co/FgiqBfA82h pic.twitter.com/eBMkxF9CuU

2.21pm BST

Here's more reaction to the Bank of England's financial stability report, from Hannah Maundrell, Editor in Chief of money.co.uk:

"The Bank of England is right to flag our debt binge as a big concern. Rock bottom interest rates have made borrowing cheap and we've definitely been making the most of it. The harsh reality is many households would struggle to pay back what they owe if interest rates went up.

Many are just about managing now and have little in savings to fall back on. Banks need to be prepared for this worst case scenario so they aren't on shaky ground if rates go up."

2.17pm BST

Newsflash: The International Monetary Fund has cut its US growth forecasts, and concluded that Donald Trump won't boost economic activity after all.

The IMF now expects US GDP to rise by 2.1% in 2017, down from 2.3% back in April.

The IMF said the Trump administration's latest budget plans would place a disproportionate share of spending cuts onto low-and middle-income households, adding "this would appear counter to the budget's goals of promoting safety and prosperity for all Americans."

Instead, the Fund suggested a tax policy that would improve the federal revenue-to-GDP ratio, more balanced cuts that strengthen the social safety net's efficiency, and efforts to contain healthcare cost inflation.

IMF cuts US GDP f/c - cites lack of detail in Trump budget, as cuts hit low/mid-income households disproportionately https://t.co/QtPSQG9DWP

This is pretty sharp IMF criticism of Trump's economic policy package, though still couched in diplomatic language: https://t.co/FgiqBfA82h pic.twitter.com/XIue7sNJAs

2.15pm BST

It's been an eventful couple of days in Greece, where prime minister Alexis Tsipras has held emergency talks with striking municipal rubbish collectors over demands for expiring short-term contracts to be replaced with permanent jobs.

With the sweltering heat fuelling mounting concerns that mounds of uncollected rubbish could soon become a public health risk, Tsipras invited unionists representing the workers to his office for talks last night.

2.02pm BST

Alex Buttle, director of car buying website Motorway.co.uk, argues that Mark Carney is right to worry about the boom in car loans.

Here's why:

"The growth of Personal Contract Plans over the past few years has been astronomical, and the level of consumer debt this is causing is getting out of hand.

"Despite the many hidden costs, it's hard to resist the temptation of owning a new luxury car without having to find tens of thousands of pounds upfront to pay for it.

2.01pm BST

The pound has inched higher against the US dollar through the day, and is currently 0.3% higher at $1.2764.

However, it is still down 0.5% against the euro at a1.1314, after ECB chief Mario Draghi gave an optimistic view of the eurozone economy.

The FTSE maintained its 15 point drop, the gains in the commodity and banking sectors - the former benefiting from a Brent Crude bounce, the latter from yesterday's Italian bank bailout - failing to counteract the effects of the drop in consumer confidence revealed by YouGov. As for the pound, while it suffered some serious losses against the euro, it still managed to climb 0.2% against the dollar.

1.16pm BST

That wasn't the most illuminating press conference with Mark Carney, but here's what we learned.

We want to move the levels of capital back up to the level they should be -- any time you move into more benign credit conditions there have been fewer defaults.

"Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions."

Carney warns banks to "learn lessons of past" - what happens if underwriting standards on consumer lending weaken. Some evidence they are

Carney: much of UK pick up in debt related to car loans

Mark Carney says that that the Bank is concerned about highly indebted households and how they will fare if economic circumstances change.

BoE's Carney: Brexit Contingency Plans Unchanged On UK Election Results

12.35pm BST

If you're just tuning in, here's Jill Treanor's story about the Bank of England's financial stability report:

12.24pm BST

Final question:

Q: You say you expect to raise the counter-cyclical buffer to 1% in November, but could Brexit force a cut back from 0.5% to 0% (reversing today's move)

12.17pm BST

Q: You say that West End asset prices are 'unsustainable'; when might they return to reality, and what impact would that happen?

Carney reiterates his earlier point that Britain currently have "Very low risk-free rates, and high valuation levels". So either those rates should rise, or asset prices should fall.

12.15pm BST

Q: The report talks about the need for 'consistent implementation' of international standards; are you particularly worried about the Trump administration?

Carney says it is important to have open global standards, and even more important that they are implemented, to avoid another financial crisis.

12.02pm BST

Q: You point out that commercial real estate assets are overvalued, and could unwind if people try to sell them in a rush. That happened after the Brexit vote - has anything changed since?

[explainer: several property funds froze redemptions after the EU referendum, to stop investors cashing out, exposing the dangers of investing in 'illiquid assets' such as shopping centres]

Carney offering coded warning on the value of commercial real estate. Disconnect between growth expectations and asset values.

11.55am BST

Q: Isn't the boom in consumer credit due to you keeping interest rates so low?

Carney insists he's not to blame, and points to the broader context of a UK economy that has grown solidly over the last 12 months (despite slowing in the first quarter of 2017).

Consumer credit growing much faster than household incomes @bankofengland #Carney #FinancialStabilityReport pic.twitter.com/9wg6T9ueNS

11.52am BST

Carney says the boom in car loans is a major factor behind the pick-up in consumer debt recently, but he remains "sanguine" about the banking sector's overall exposure to it.

Carney: much of UK pick up in debt related to car loans

11.49am BST

Q: Your charts show that consumer finance has been growing faster than household income since 2014, so shouldn't you have issued today's warning sooner?

Deputy governor Sir John Cunliffe says consumer borrowing actually picked up in 2013, but overall household lending actually grew slower than the UK economy.

11.45am BST

Q: Are banks misbehaving and gaming the system, and is there a cultural problem?

They're not gaming the system, but they're not learning the lessons of the past, Carney says.

11.44am BST

Q: Which consumer borrowing are you most worried about?

Carney cites the sharp build up in car financing - both in volume, and the move towards 'personal contract purchasing' deals (where buyers pay monthly repayments, and then face a large balloon payment to actually own their car)

Carney: at most including extra capital buffer demanded takes demands on UK banks to 4% leverage ratio. Less than current. (ie did nothing!)

11.36am BST

Q: Has the general election changed your view of how the Brexit talks will evolve, and raised the risks from political instability?

The short answer is no, governor Carney replies.

11.35am BST

Q: How worried are you about the British banking sector's exposure to China?

Risks from China are at the top end of global risks, Carney replies.

11.33am BST

Q: What role are interest rates playing in exaggerating or reining in financial stability risks?

Monetary policy is the 'last line of defence', says Carney, and we don't need monetary policy to do our job of ensuring financial stability, Carney continues.

11.26am BST

First 3 questions to Carney all trying to get him to say consumers should borrow less.

And he's not biting....

11.25am BST

Q: You're telling banks that times are changing, and they should set aside more capital, but shouldn't consumers also recognise that times are changing and rein in our borrowings?

I'm not going to give individual financial advice, says Mark Carney (you're on your own, folks, sorry).

Individuals must take the judgement whether it's the right time to buy a property, or invest in a business, and we're trying to ensure that the financial system is there to help them with that.

11.20am BST

Q: You seem to be blaming lenders, rather than consumers, for the rise in consumer credit - but shouldn't people be more cautious about how much debt they take on?

11.15am BST

Q: How concerned are you that UK consumers are borrowing too much, and will find themselves in difficulties when interest rates rise?

Mark Carney replies that the BoE's message, in good times or bad ones, is that anyone who takes out a loan should consider that they could face adverse conditions in the future, such as weaker growth and higher interest rates.

11.12am BST

On cybercrime, Carney says the Bank is setting out the framework that will be needed to protect the UK financial system from computer attacks.

11.10am BST

On Brexit, Carney says the Bank is making contingency plans for all possible outcomes, and concentrating on those would have the greatest impact on the economy.

That includes the possibility that Britain leaves the European Union without a deal (this is the 'cliff-edge Brexit' that many firms fear).

Mark Carney says that Bank of England is continuing to monitor Brexit and ensure that banks have the right contingency plans in place.

Mark Carney says @bankofengland is contingency planning for "no deal" at end of #Brexit - not saying that will happen, just one of the risks

11.07am BST

Carney says that forcing banks to hold more capital (by raising the counter-cyclical buffer to 0.5% today, and probably to 1% in November) will more protection to losses.

BoE Carney on the wires#gbpusd pic.twitter.com/5QjBDR95RY

11.05am BST

Mark Carney begins his press conference by saying that financial stability has been strengthened since the 2008 crisis.

But the job of tackling financial dangers is "never done, and risks are evolving."

11.02am BST

Mark Carney is facing financial reporters at the Bank of England now, to explain the thinking behind today's financial stability report.

You can watch it live here:

10.59am BST

Google has been handed a record a2.42bn fine by Brussels over alleged abuse of its market dominance.

Google has come up with many innovative products and services that have made a difference to our lives. That's a good thing. But Google's strategy for its comparison shopping service wasn't just about attracting customers by making its product better than those of its rivals. Instead, Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.

What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.

Here's the European Commission statement about its Google fine https://t.co/95R0H29aoT

10.58am BST

City experts are trawling through the Bank of England's financial stability report.

Duncan Weldon of Resolution Group has spotted a chart showing how consumer credit losses rise when unemployment increases.

Good chart in the Bank of England Financial Stability Report - consumer credit losses & unemployment. https://t.co/8eKaE6UiK3 pic.twitter.com/EDixNcI59f

.@bankofengland voices concerns about the housing market. 2+ MILLION first-time-buyers since interest rates were last increased in July 2007 pic.twitter.com/LTFy2tdMzG

Here we go again - Bank of England orders banks to set aside 11 billion to cover potential explosion (my word) in bad debts

10.48am BST

The BoE's financial stability report is online here.

Here's an infographic form the Bank, setting the scene:

10.47am BST

The Bank of England is also boosting its work on cybercrime and continuing its work on Brexit's impact.

That's on top of ordering UK banks to set aside more capital, and rushing forwards its consumer stress tests.

10.42am BST

Another important point: the Bank of England is also bringing forwards its planned stress test on consumer credit lending to September, from November.

That test will assess whether UK banks can handle a jump in consumer credit losses.

10.38am BST

Today's change means that UK banks will have to set aside more than 11bn of extra capital to cover potential losses if the economy weakens:

From the BoE, my colleague Jill Treanor explains:

The Bank of England is to force banks to hold more capital in the face of rapid growth in lending on credit cards, car finance and personal loans.

The intervention by Threadneedle Street, which could amount to banks needing 11.4bn of extra capital in the next 18 months, is one of a number of measures intended to protect the financial system from the growth in consumer finance.

10.34am BST

Here we go! The Bank of England has told Britain's banks to start setting aside more capital to protect themselves from a financial downturn.

That's one of the key lines from the Financial Stability Report.

10.25am BST

Tension is building in the City as traders wait for the Bank of England's financial stability report to hit the wires, in just five minutes.

Upcoming event in 5 min [09:30 GMT] - Bank of England Financial Stability Report () #forex #fx #finance

10.10am BST

The rise in the euro has pushed Europe's stock markets down.

Ever index is now in the red, with the Stoxx 600 losing 0.6%.

Draghi suggested inflation is becoming more sustainable and deflationary forces have been replaced by reflationary forces. Importantly he suggests deflationary forces are external, temporary shocks and the ECB can overlook. That's what happens when you open the taps on a massive stimulus programme. The question is whether the Eurozone would survive without the QE support.

Draghi sounded more circumspect on that front, arguing that he is confident that monetary policy is working but still needs to remain very loose. Again it's a stretch to describe it as hawkish - Draghi is simply affirming that loose monetary policy is working without significant adverse consequences and therefore should be maintained. He's not advocating tightening any time soon.

9.45am BST

The European commission just dropped a loud hint that the Google antitrust fine is coming this morning....

This tweet is from EC press officer Yizhou Ren:

Press conference with Cssr @vestager on an antitrust case, today @ 12h CET - follow online here: https://t.co/5RXFkZgna0

9.43am BST

Mario Draghi's bullish talk has also sent the pound down against the euro, shedding 0.4% to a1.133.

That means one euro buys 88.2p, up from 87.9p on Monday. Good news for eurozone holidaymakers heading to the UK this summer, but a blow to Britons planning a continental jaunt.

The euro zone still needs "considerable" monetary support from the European CentralBank even as its economy recovers steadily and inflation picks up, ECB President Mario Draghi said on Tuesday.

"All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones," Draghi said at the ECB's annual policy forum in Sintra, Portugal.

9.32am BST

Here's a chart showing how the euro spiked as Draghi spoke in Portugal:

9.26am BST

Oooh. The euro is rallying as Mario Draghi tells the ECB Forum that reflationary pressures in the eurozone are building, as the economy recovers.

The single currency has jumped by half a cent against the US dollar, to $1.1235, with Draghi sounding more upbeat and hawkish than expected.

*DRAGHI SAYS CONSIDERABLE DEGREE OF STIMULUS STILL NEEDED >>> downgrade from "very substantial" stimulus still needed

9.16am BST

Not for the first (or last) time, Mario Draghi's message is that his policies are delivering the goods....

Draghi: We can be confident that our policy is working and its full effects on inflation will gradually materialise

Draghi: Our policy needs to be persistent and we need to be prudent in how we adjust its parameters to improving financial conditions

Draghi: Since January 2015 and the announcement of the expanded asset purchase programme euro area GDP has grown by 3.6%

Draghi: Between 2016-2019 we estimate that our monetary policy will have lifted inflation by 1.7 percentage points, cumulatively

9.14am BST

Over in Sintra, European Central Bank president Mario Draghi is giving the keynote speech at the ECB's Forum now. It's being streamed here.

Draghi says there are clear signs of a "strengthening and broadening" recovery underway in the eurozone area.

Follow live coverage of the #ECBForum from 10:00 CET. President Draghi opens today's proceedings https://t.co/4LXrqmHsUc pic.twitter.com/h0m9YumIbb

9.01am BST

The FT's Chris Giles has pulled together a list of key issues to watch for today, when the Bank of England releases its twice-yearly report on financial stability.

Here's a flavour:

UK financial stability report: five things to watch - https://t.co/AZhUB5NCuz

8.30am BST

UK consumer confidence has plunged since June's general election, as the shock of a hung parliament hits households.

It gives the Bank of England a fresh headache as it considers the health of the UK economy, ahead of today's Financial Stability Report.

"The hung parliament seems to have further dampened consumers' spirits, which were already sinking following the continued squeeze on household finances.

"But the real cause for alarm will be the cooling of the property market, as this is one of the key things that has propped up consumer confidence over the past few years."

8.01am BST

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

We're facing central bank overload today, with monetary policy chiefs speaking in London, and the Portuguese town of Sintra.

"The millennials that found a job because of our policy, I'm pretty sure they are okay" [with the ECB's policies] .

"Recessions are not good for anybody, savers or non-savers,

Draghi defends #ECB stimulus saying jobs matter most for equality https://t.co/TWdIRoWxLh pic.twitter.com/cwRML1qh1Z

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