Yesterday the Governor of the Bank of England thought better of the much touted idea that he would cut interest rates by a further 0.25%.

I am glad he made this decision. I had argued here before the event  that another cut at these tiny levels could undermine  the value of sterling further without doing much positive.

We have got used to Mr Carney’s chronic inability to forecast anything accurately including his own conduct.We had three separate pieces of guidance  from him heralding increases in rates, only for him to change his mind and  ignore his own triggers for raising them. This time he changed his mind on cutting them.

 

It looks as if Mr Carney decided  better of it thanks to the removal of Mr Osborne from office. The  appointment of a new Chancellor less wedded to Project fear and less associated with the absurd gloomy forecast of the pre referendum Treasury may have persuaded him to be more cautious.

The UK economy has just received a monetary stimulus from the devaluation and loosening. It would be an odd time to add to that stimulus by further unusual monetary relaxation.

I am expecting the property market to improve after the strange attempted shake out from open ended commercial property funds. I also expect consumer spending to pick up after a summer and weather induced lull. I see no need for panic measures.

 

The new Chancellor seems to have dumped the world”austerity” and seems to want to promote prosperity. That is exactly  the right approach. Meanwhile share and bond markets continue to prosper. Let’s go for Prosperity, not austerity. Let’s get our contributions back form the EU quickly and spend them on things we want.

As I expected, the rhetoric on the continent is changing. Yesterday the President of the European  Parliament challenged the pre vote rhetoric of the Commission by saying ” The UK should not be treated as a deserter but as a family member who is still loved but has decided to go in another direction”. The EU leaders are urging Mrs May to speed up the UK’s plans for exit, and saying they want to get on with it.

I agree with them. It is in the EU’s interest to sort this out quickly, and definitely in the UK’s interests.  It need not be a difficult negotiation. We have no wish to negotiate over our borders, our money or our laws with 27 other countries. We just need to take back control. They want to integrate their economies and political systems more, to sort out their banking troubles and tackle slow growth in the Eurozone.

There remains one prime outstanding issue. Will the rest of the EU want to carry on exporting to us tariff free, or do they wish to go over to the relatively low average tariffs under WTO rules? The UK will be quite happy not to impose new tariffs, and to continue to accept the rules and regulations over products and services for our trade with the rest of the EU, so we are not seeking any changes to all that despite being in substantial deficit with them.

There is a good case for early exit, early legislation on borders, and early cancellation of our subscription to spend at home. Any changes the other states want to their trade arrangements with us could be debated after we have retaken control of all these other important matters. The UK could live with MFN status as the USA and China do in their very successful trade with the EU, though of course  we think it is in their interest even more than in ours if we continue with current tariff free arrangements.

The EU naturally  would like us to carry on paying money in and accepting free movement. Once they realise this is not on offer, they then have a simple decision to make. How many barriers do they want to trade, up to WTO permitted levels. The sooner they decide that the sooner we can decide whether to accept their proposals or simply walk away. We do not want the Foreign Office telling us the negotiation is difficult, will take time, and requires us to give in over free movement.

Long delay is costly. At £10bn a year net contribution (probably rising)  that would amount to a massive £38bn over the balance of this Parliament which we could spend to good effect at home. Delay in placing sensible controls and a fair system of work permits globally could also lead to substantial additional UK costs to provide the level of housing, transport, health care and education we would want to offer to recently arrived workers on low incomes.

A successful negotiation should be a simple and quick one concentrating on the only area where the EU has a role in future policy, over trade terms.

There is a debate amongst Brexiteers over the quickest way out of the EU. Most are agreed that exit is secured by repeal of the 1972 Act, with the passage of all EU law into UK law coupled with a new border regime and cancellation of our subscriptions.Some also think that we will need to notify them under Article 50 in accordance with the procedures of the Treaty, even though the whole point is we have just voted to renounce the Treaty. With this in mind, the following is a suggested compromise for an early passage of the Bill and an immediate Article 50 notice:

Dear Sirs

The Uk following a referendum has decided to withdraw from the European Union. In accordance with Article 50 we hereby notify the Council of our intention to leave.

Article 50 of the Treaty states clearly that “any member state may decide to withdraw from the Union in accordance with its own constitutional requirements.” In the case of the UK this means passing an Act of Parliament. The UK government has always confirmed when asked about the loss of sovereignty involved in EU membership that the UK Parliament remains sovereign because it can repeal the 1972 Act. The government is introducing a Bill to effect this change, and to transfer all EU law into UK law to provide immediate continuity.

The UK has voted to withdraw from the Treaty. It does so under the Vienna Convention on the law of Treaties by invoking a “fundamental change of circumstances” compared to those when the UK consented to the Treaty.

Yours faithfully

So says our new Prime Minister in her first speech as the new Leader of the Conservative party. In another twist to the incredible plot of the Conservative leadership election, Andrea Leadsom pulled out of the race, allowing Theresa May to inherit the position.

It is curious that all 3 senior Conservatives groomed for prominence in the Vote Leave campaign have now been eliminated from the Leadership contest. Vote Leave chose Boris Johnson, Michael Gove and Andrea LEadsom as their preferred voices and faces from the Conservative side, and gave them the lion’s share of the media to do. Each of them fancied their chances of leadership based on that exposure, but two bowed out of the contest and one was eliminated by MP ballot.

There are now discussions going on about how the new Pm can best keep faith with the UK voter electorate, getting us out of the EU in a timely and successful way. She says she will appoint a Brexiteer as Chief Negotiator. She will also have to make sure the official team are well briefed, confident about the strength of the UK’s negotiating position, and aware that we do not have to do it according to the Treaty rules.

The first main decision the new government has to take is whether to proceed by means of rapid UK Parliamentary legislation, or whether to go for an early notification under Article 50 with a tight timetable for the negotiations. You could even do both together.

The draft Bill is available. It would take back control by repealing the 1972 Act which is the origin of EU power in the UK. It would put into UK law all outstanding EU requirements, to leave in place the tariff free trade and regulations prior to discussions with the rest of the EU about whether they want any changes to that. It would allow early changes to our borders policy and cancellation of our subscriptions.

The negotiation needs to start from the proposition that we are taking back control of our borders and money. These should not be in contention. The only thing the Uk would like is continued tariff free trade. It should not take long to find out if the EU wants to place WTO style low tariffs on us or not. As WTO rules would allow us to place quite high tariffs on French agricultural produce and 10% tariffs on cars it seems unlikely they would want to do that.

Article 50 is not a great basis for the negotiation as it implies all is in the pot for debate and all could take a long time. I would rather trigger it to complete their process after all has been sorted out. If the government refuses to get on with legislating then a poor second would be immediate Article 50 followed by very tough negotiations and a willingness to simply pull out of talks and legislate if they are unrealistic.

Meanwhile, however we do it, the government needs to produce its new migration scheme and tell people coming to our country new rules will apply.

When I pointed out that the large company index the FTSE 100 which people use had gone up sharply post the referendum, the Bank of England and the doom mongers on this site said we needed now to look at the FTSE 250 index of smaller companies with a large UK focus.

So I hope they now recognise that this index too is doing better. Today it is at 16 333, well above the February low of 15 178 recorded before the referendum when the City anticipated a Remain vote, and above the August 2015 low of 16 214.

The FTSE 250 is now at the level it reached in the middle of June pre the vote, following its recovery from the February global sell off which brought down all advanced country stock markets.
The doom mongers are finding it is quite difficult talking some markets down.

Government and the Bank cannot control the level of the pound. The last time they tried to do this in the European Exchange Rate Mechanism it was a disaster, leading to a big devaluation and a recession. We do not want that again.

The Bank and government can, however, influence the level of the pound. In recent weeks the Bank has done its best to encourage devaluation, by talking of the likelihood of a decline, talking about the decline as it happens, and signalling still looser money and lower rates. These policies seem to be designed to drive the pound down further.

I do not have in mind an optimum level of sterling which we then need to hold. I do however think the decline we have seen should not be pushed further by official action or encouragement. We need a sense that the authorities think it has gone far enough. There should be doubt in market minds as to whether or not the authorities might buy pounds in the market. The Bank should not decide in advance to cut rates.

According to the press, and from reading the latest Bank statement, Mr Carney thinks there is a decline in confidence in property and consumer spending which warrants a strong monetary response by cutting rates and printing more cash. This week British Land sold its flagship store on Oxford Street for a remarkable £400 m, on the very low yield of 2.75%. At recent commercial property auctions property has sold well, above guide prices. In response to my consultation on this site several people wrote in to report lively business in residential property in their local areas. There are many people and institutions sitting on the sidelines with cash wanting to buy any bargains that the property funds might offer as they seek to meet redemptions.

Retail sales were remarkably strong in May and could have fallen off a bit in June and early July. However, employment levels are high, and real wages are rising, so there is no obvious reason to expect a medium term drop off in sales. The move from shop to web complicates the picture and needs to be allowed for when looking at individual store group sales.

The economic evidence suggests that the UK economy has just had a stimulus from monetary relaxation and the fall in the pound, which should boost the growth rate next year. It would be wrong of the Bank to take actions now that drive the pound much lower. It is possible to undermine confidence by ostensibly taking action to assist.

We see a whirlwind in the press supporting Theresa May, and on the BBC, of all the negative questions asked of Andrea Leadsom during the MP part of the contest. Readers can see these debated freely elsewhere. In the interests of balance today I will report the more difficult questions asked of Theresa May and her team during the MP meetings and discussions, with a summary of how I understood her answers. I am seeking to be accurate and would be happy if supporters of Theresa wish to add to my understanding of her replies. Not all of these questions were asked by supporters of Andrea Leadsom.

Q: Why during your six years as Home Secretary has net migration risen so high and remained at very high levels, when you were pledged to cut it to tens of thousands in both the 2010 and 2015 Conservative Manifesto?

A: These are difficult and complex matters. The actions taken have reduced the totals compared to what would otherwise have happened. More measures are being considered.

Q: Why will you not reassure people currently legally settled here from other member states of the EU that they can stay following the UK’s exit?

A: It is important to negotiate these matters as part of the total package with the EU, which will take time and will be difficult.

Q: Will you today make an urgent statement saying that future migrants from the rest of the EU will come under new rules which will impose some limits on numbers.

A No

Q Will the Home Office start immediate work on a new system of migration control?

A No

Q What changes would you like to see to taxes, spending and borrowing going forwards?

A The reply made a joke about the individual MP asking but did not give an indication on any of the three possible topics raised

Q How quickly would you seek to get the UK out of the EU?

A Consider options and issues this year. Trigger Article 50 early next year and anticipate 2 years of difficult negotiations about a wide range of issues.

Q Did you deliberately soft peddle campaigning in the referendum for Remain because you were no convinced by their case?

A No. She said she campaigned with full commitment to the Remain cause. She also had to carry on work as Home Secretary. She made the good point that she did not say anything unusual or sensational, so the media did not find her remarks newsworthy.

Q Will you negotiate firmly with a strong wish to leave the EU?

A Yes, she accepts the verdict of the referendum. She will appoint a Brexiteer to a senior role in the negotiations.

There are some who want to talk the property market down.

It is true that institutional investors have decided to bank some profits, all at the same time, in open ended property funds. These funds have to redeem units for cash. They typically hold 20% as a cash reserve on deposit or in easily saleable bonds and REITs. If more than a fifth of unit holders want to cash up at the same time, they are asked to wait while the fund undertakes the slower task of selling some of the underlying properties. They are not anywhere near bankrupt, they are just illiquid and need time to realise their investments.

Meanwhile in the markets for commercial and residential property there are buyers and sellers agreeing transactions post Brexit just as they did before. Agents say to me there are viewings and offers under way again. June’s house prices rose by 1.3% on the month, though it is true most of the month was before the vote. I am not seeing any sudden marked down bargains in local estate agents windows. Property companies are also reporting that planned lettings prior to June 23rd are still going ahead post the referendum. I have also heard some property investors expressing interest in buying, in the hope that some of these funds will accept lower offers in their rush for the door.

Foreign investors in UK property are reported to be more interested. For them UK property is suddenly 10% cheaper, following the fall in the pound. I would be interested to hear from readers what they are seeing in their local areas in the property market.

The UK has just received a major liquidity stimulus, and a stimulus from a lower level of sterling. Bond yields have just fallen sharply and mortgage rates are low or falling. It would be unusual against such a background to see big falls in property prices, and more normal to see new buyers emerge.

Banks in the EU area have Euro 360 billion of bad debts, according to recent figures. The European Central Bank is telling the worst banks to write off more of their losses on difficult loans, and to raise more capital from shareholders or retained profits to improve their balance sheets.

Euro area bank shares have generally been badly hit this year, with renewed worries about their bad loans and capital needs. Their regulator, The European Central Bank, along with its master, the EU, are looking for private sector solutions. Under recently agreed EU rules there should be no state capital or subsidy going into these banks. Where there are large losses, they have to be met out of shareholder funds and through the bail in of bondholders. People and institutions who have lent banks money may find their bond is converted into shares, or they may have to take a cut in the terms on which the money was advanced.

The Italian banking system is the current eye of the storm. Markets are worried about Monti dei Paschi di Siena, which is in the process of cutting its bad debts. The Italian state has encouraged the establishment of the Atlante fund which bought Popolare di Vicenza. There is discussion of a further Euro3-5 billion bank assistance fund. The EU has discouraged the Italian government idea of state aid as a temporary measure, but has allowed the provision of liquidity assistance.

There are problems with banks in Portugal and Spain as well. The Eurozone’s hatred of subsidies and reluctance to share the surpluses from the northern rich countries with the deficit countries of the south and west remain major problems in the way of successful economic and social outcomes.

The weakness of the Euro commercial banking system, the lack if transfer payments fromrich areas to poor, and the rigour of the bank assistance regime are all reasons why the Eurozone will continue to struggle.

The present government is pledged to cut net migration to tens of thousands. This requires something like a two thirds cut in current levels. Vote Leave argued for slower rates of inward migration than now, with a fair system offering the same restrictions on EU migrants as the rest of the world.

Yesterday in the Commons the Opposition proposed a motion to reassure all EU citizens living in the UK but from another EU country that they may stay after Brexit. Vote Leave asked for such an assurance. It is implied by international law. The UK would be rightly scandalised and seeking to mobilise international law and world opinion if one of the other EU states threatened UK people legally settled in their country.

I explained to the whips that I would not help vote down the Opposition motion, and wanted the Home Secretary to accept it. For some unknown reason she seemed to think the future of EU residents in the UK could be a matter for negotation. Parliament duly approved the Labour motion, so I presume she will now have to change her policy.

Meanwhile I have also proposed that she makes a statement telling EU migrants arriving post the referendum vote that we are introducing a new system which they will need to comply with as soon as it is in place. The Home Secretary needs to make clear that we cannot accommodate a rush of people wanting to gain citizen rights, so she needs to get on with changing the law as soon as possible and defining transitional arrangements to give us reassurances.