Finance Matters

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The Bank of England is holding the base rate at 0.5 per cent and has decided not to extend its quantitative easing (QE) programme following a £50bn boost to the economy in February.

The UK interest rate has now remained at 0.5 per cent for three years, despite high levels of inflation.

Consumer Prices Index inflation currently stands at 3.5 per cent and has exceeded the government target of 2 per cent for more than two years.

At its April meeting, the Bank of England’s Monetary Policy Committee (MPC) decided not to extend the QE programme because of concerns about inflation.

News that the UK economy has fallen back into recession and deterioration in the eurozone crisis had led to calls for a further round of QE to be implemented.

However, the MPC decided that ongoing high levels of inflation outweighed the risk of a prolonged recession.

Despite the UK economy falling back into recession in the first quarter of 2012, many economists are confident that overall growth will be achieved over the year.

The governor of the Bank of England, Sir Mervyn King, recently said that the bank should have taken stronger action to help prevent the 2008 financial crisis.

At the recent 2012 Today Programme Lecture in London Sir Mervyn said that the bank did try to warn that risks were being underestimated in financial markets but not strongly enough.

It ‘should have shouted from the rooftops,’ he said.

He called for reforms to be implemented to protect the economy from failures in the banking system.

From next year, banks will be regulated by the BoE’s new Financial Policy Committee.

Sir Mervyn said that three reforms will be prioritised – regulation, resolution and restructure.

“The three R’s will be central to the work of the BoE.

“And all of that will come on top of our responsibility for monetary policy to reduce inflation while supporting a gradual recovery of our battered economy.

“It is the biggest challenge the bank has faced for decades,” he said.

The IBEX 35 closed at nine-year lows, finally breaking its lowest value since the financial crisis began—6,817.4 points in March 2009.

The index ended trading today at 6,812.10, after falling 2.78 percent on the day. It had been trading far lower on the day, however, at one point down to 6,733.

This is the lowest value of the index since October 2, 2003, when it closed at 6,762.4 points. This gives the IBEX a value lower than it had on September 16, 1997, the first time it surpassed this level to close at 6,879.90.

Spanish equities have been in free-fall since late March. Around that time, enthusiasm generated by two long-term refinancing operations from the European Central Bank—in which the bank pumped cheap cash to banks—finally began to wear off.

Take a look at the IBEX 35 since May 2, 2000:

NOW READ: This Is Why Germany Has Zero Desire To Fix Anything In Europe >

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The Queen’s Speech has outlined plans to introduce a flat-rate state pension in England, Scotland and Wales and to automatically increase the pension age in line with longevity.

A new flat-rate of £140 will replace the current full state pension, which stands at £107.45 a week, but can increase to £137.35 with pension credit.

The flat rate is designed to eliminate the current problem of people failing to claim pension credit when they are entitled to do so.

It could also benefit self-employed workers and some women who currently may receive a lower state pension under National Insurance rules.

The new flat-rate pension is expected to increase to £155 by 2016 in response to inflation.

It will only be available to new pensioners and will not apply to existing pensioners which means that a two-tier system will operate for some time.

The Queen’s Speech also outlined an increase in the state pension age to 66 for both men and women by 2020, and to 67 between 2026 and 2028, for people who are now aged 52 years or younger.

Further increases will take place automatically in line with changes in longevity, either through a regular official review, or through a formula linking pension age to average life expectancy.

Joanne Segars, chief executive of the National Association of Pension Funds, said: “This is another big step towards a simpler, more generous state pension that no longer penalises people for saving.

“A new system will take millions out of means-tested benefits and will encourage people to take control of their own age by saving towards it.”

Pension experts have warned that the changes could lead to the state pension age increasing at a faster rate than anticipated.

Other changes outlined in the Queen’s speech include measures to break up the banks to protect against a financial crisis.

The Queen said that the government’s first priority was to reduce the deficit and restore economic stability.

Shortly before Mario Draghi started his press conference at the European Central Bank’s meeting in Barcelona on Thursday, his predecessor Jean-Claude Trichet was addressing a more sympathetic audience at the St Gallen Symposium in Switzerland. If anything, Mr Trichet was probably the cagier of the two.

In spite of some robust questioning from the BBC’s Stephen Sackur, the former ECB president came across as unrepentant about the ECB’s role during the eurozone crisis. He argued, for example, that 14 years ago, 99 per cent of observers would have dismissed as impossible that the euro would keep its value amid low inflation – a performance that he said bettered that achieved by the national central banks in the 15 years before the single currency’s birth. “Had I added that this [performance] would be observed after five years of the worst crisis ever, [the sceptics] would have been 100 per cent,” Mr Trichet said. The nearest he came to admitting to flaws in the eurozone project was when he said the financial crisis had been “like an X-ray or scanner that reveals the problem you might have”.

The latest report from the TARP inspector general is out, and the very first paragraph takes aim at the idea that TARP was a money-maker for US taxpayers:

After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost). But the analysis should not be focused alone on money in and money out. TARP’s costs and legacies involve far more than just dollars and cents. Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals and whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry, i.e., TARP 2.0.

You can download the full report here.

(Via Ben White)

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