City Visit notes, questions and MFB answers:

1. What is traded at the Lloyds of London market?

Insurance and reinsurance (property, originally on shipping) now also on life assurance.

2. What influences the price of insurance contracts?

Demand for insurance from business and households and Government on one hand and

Supply from insurance businesses reflecting their costs and profit needs.

3. What is happening (broadly speaking) to the price of such contracts?

Clearly insurance premiums are rising over time. The following graph plots the clear link

between insurance costs (i.e. payouts on policy by providers or suppliers) and premiums

(how much customers pay for their policy) to 2006.

Lloyd's of London (also known simply as Lloyd's) is an insurance market located in

London's primary financial district, the City of London. It serves as a partially mutualised

marketplace where multiple financial backers, known as underwriters, or "members", both

individuals (traditionally known as "Names") and corporations, come together to pool and

spread risk. Unlike most of its competitors in the industry, it is not a company but it is a

corporate body governed by the Lloyd's Act of 1871 and subsequent Acts of the Parliament

of the United Kingdom.

The insurance business underwritten at Lloyd's is predominantly general insurance and

reinsurance, although in 2013 there are five syndicates writing term life assurance. The

market has its roots in marine insurance and was founded by Edward Lloyd at his coffee

house on Tower Street in the 17th century. Today, it is based at the Lloyd's building on Lime

Street. Fidentia (Latin for "confidence") is the motto of Lloyd's.[1]

In 2011, over £23.44 billion of gross premiums were transacted in the Lloyd's market and in

aggregate it made a pre-tax loss of £516 million, driven by a number of significant natural

disasters which gave rise to the highest ever annual level of claims for Lloyd's.[2]

In 2012,

Lloyd's made a pre-tax profit of £2.77 billion on a record £25.50 billion of gross written

premiums.[3]

Lloyds of London: 'Insurance stable during banking crisis'

26 September 2013 Last updated at 11:34 BST

Insurance giant Lloyd's of London made a profit of $1.38bn in the first six months of the year.

The body representing competing insurance syndicates made $1.5bn for the same period in 2012.

However, Lloyd's chairman John Nelson told the BBC that commercial insurance was a growing sector: "Over the last five years, [our returns] have averaged 15%... so that is

attracting capital in".

"One of the great strengths of the insurance industry is that we have maintained real stability and security during some very difficult economic times and the banking crisis,"

he continued.

Source: http://www.bbc.co.uk/news/business-24270736

Bank of England:

1. What is the basis for interest rate decisions at the Bank of England?

Factors considered when setting interest rates

At each of their rate-setting meetings, the members of the MPC consider a

huge amount of information on the state of the economy. Here are some of

the factors they consider when making rate decisions.

a. GDP growth and spare capacity: The rate of growth of GDP and the size of

the output gap. Their main task is to set monetary policy so that AD

grows in line with productive potential.

b. Bank lending and consumer credit figures - including the levels of equity

withdrawal from the housing market and also data on credit card lending

which supports consumer demand

c. Equity markets (share prices) and house prices - both are considered

important in determining household wealth, which then feeds through to

borrowing and retail spending. The monetary policy committee has no

official target for the annual rate of house price inflation but it has been

criticized for not doing enough to prevent the housing bubble in Britain

up to 2008.

d. Consumer confidence and business confidence – confidence surveys can

provide “advance warning” of turning points in the economic cycle. These

are called ‘leading indicators’.

e. Growth of wages, average earnings and unit labour costs - wage inflation

might be a cause of cost-push inflation so the Bank of England looks

carefully at what is happening to wages

f. Unemployment figures - and survey evidence on the scale of shortages of

skilled labour.

g. Trends in global foreign exchange markets – a weaker exchange rate

could be seen as a threat to inflation because it raises the prices of

imported goods and services. A strong exchange rate might bring down

inflation but risk causing a deeper economic slowdown via a fall in

exports

h. International data - including recent developments in the Euro Zone,

emerging market countries and the United States and Japan.

i. The key point is that the Monetary Policy Committee considers many

indicators from both the demand and the supply-side of the economy.

j. They then have to make a judgement about what this evidence says about

inflationary pressures over a two year forecast horizon.

k. Why do they have to look up to two years ahead? Because when interest

rates are changed, it takes time for them to have an effect on aggregate

demand and prices. Uncertain time lags in a world of many external

economic shocks make the handling of monetary policy a difficult job!

2. What is the likeliest impact of an interest rate increase on the economy?

Changes in interest rates affect:

Housing market & house prices:

a. Higher interest rates increase the cost of mortgages and reduce the

demand for most types of housing. This will affect household wealth and

put a squeeze on equity withdrawal (where consumers borrow money

secured on rising house prices) which adds directly to consumer

spending.

Effective disposable incomes of mortgage payers:

a. If interest rates increase, the income of homeowners who have variable-

rate mortgages will fall – leading to a decline in their effective purchasing

power

b. The effects of a rate change are greater when the level of existing

mortgage debt is high as this makes property owners more exposed to

higher costs of repaying debts.

Disposable income of savers:

a. A rise in interest rates boosts the disposable income of people who have

paid off their mortgage and who have positive net savings in bank and

building society accounts

b. But if the rate of interest is lower than the rate of inflation, then the

annual real return on saving will be negative.

Consumer demand for credit:

a. Higher interest rates increase the cost of paying the debt on credit cards

and should lead to a deceleration in retail sales and spending on

consumer durables especially items such as cars and household

appliances which are typically bought on credit.

Business capital investment:

a. Firms often take the actual and expected level of interest rates into

account when deciding whether or not to go ahead with new capital

investment spending

b. A rise in interest rates may dampen confidence and lead to a reduction in

planned capital investment. However, many factors influence investment

decisions other than rate changes.

Consumer and business confidence:

a. The relationship between interest rates and business and consumer

confidence is complex, and depends crucially on prevailing economic

conditions

b. For example, when businesses and consumers are worried about the

recession, an interest rate cut can boost confidence because it reassures

the public that the Bank is alert to the dangers of a slump

c. Some people might take emergency interest rate cuts as a sign that the

wider economy is in difficulty and hard times lie ahead.

Interest rates and the exchange rate:

a. The link between interest rates and movements in the external value of a

currency are important to understand at AS level.

b. Higher UK interest rates might lead to an appreciation of the exchange

rate particularly if UK interest rates rise relative to those in the Euro Zone

and the United States attracting inflows of “hot money” into the British

banking system.

c. A stronger exchange rate reduces the competitiveness of UK exports in

overseas markets because it makes our exports appear more expensive

when priced in a foreign currency leading to a decline in export volumes

and market share.

d. It also reduces the sterling price of imported goods and services leading

to lower prices and rising import penetration. If the trade deficit in goods

and services widens, this is a net withdrawal of demand from the circular

flow and acts to reduce excess demand in the economy.

Key points:

A reduction in interest rates and/or an increase in the supply of money and

credit in an economy is called an expansionary monetary policy or a reflationary

monetary policy

An increase in interest rates and/or attempts to control or reduce the supply of

money and credit is called a contractionary monetary policy or a deflationary

monetary policy

Over the last few decades, monetary policy has been the main policy instrument

for managing the level and rate of growth of aggregate demand and inflationary

pressures

The Bank of England, formally the Governor and Company of the Bank of England, is

the central bank of the United Kingdom and the model on which most modern central banks

have been based. Established in 1694, it is the second oldest central bank in the world, after

the Sveriges Riksbank, and the world's 8th oldest bank. It was established to act as the

English Government's banker, and is still the banker for HM Government. The Bank was

privately owned from its foundation in 1694 until nationalised in 1946.

In 1998, it became an independent public organisation, wholly owned by the Treasury

Solicitor[5]

on behalf of the government, with independence in setting monetary

policy.[6][7][8][9]

The Bank is one of eight banks authorised to issue banknotes in the United Kingdom, but has

a monopoly on the issue of banknotes in England and Wales and regulates the issue of

banknotes by commercial banks in Scotland and Northern Ireland.[10]

The Bank's Monetary Policy Committee has devolved responsibility for managing monetary

policy. The Treasury has reserve powers to give orders to the committee "if they are required

in the public interest and by extreme economic circumstances" but such orders must be

endorsed by Parliament within 28 days.[11]

The Bank's Financial Policy Committee held its

first meeting in June 2011 as a macro prudential regulator to oversee regulation of the UK's

financial sector.

The Bank's headquarters have been in London's main financial district, the City of London,

on Threadneedle Street, since 1734. It is sometimes known by the metonym The Old Lady of

Threadneedle Street or The Old Lady, a name taken from the legend of Sarah Whitehead,

whose ghost is said to haunt the Bank's garden.[12]

The busy road junction outside is known as

Bank junction.

Mark Carney assumed the post of The Governor of the Bank of England on 1 July 2013. He

succeeded Sir Mervyn King, who took over on 30 June 2003. Carney will serve an initial

five-year term rather than the typical eight, and will seek UK citizenship.[13]

He is the first

non-Briton to hold the post.

The Bank of England has left interest rates unchanged at 0.5% and made no change to its

programme of quantitative easing, as had been widely expected.

The decision came as no surprise as the Bank has said it will not consider a rate rise until

the unemployment rate falls below 7%.

The focus will now switch to the Bank's latest inflation report, due next week.

Analysts will examine the report for indications on how strongly the Bank thinks the UK

economy is recovering.

Timing

The Bank of England's Monetary Policy Committee (MPC) has kept interest rates on hold at

0.5% since March 2009.

Analyst David Buik says UK interest rates "cannot remain at that level for an indefinite period of time"

Under the Bank's policy of forward guidance, brought in under new governor Mark Carney, it

has said it will not increase interest rates until the rate of unemployment has dropped below

7%.

When the Bank first announced this, in August this year, it said it did not expect this to

happen until 2016.

However, many analysts believe that the Bank will have to act sooner than that - possibly in

2015 - given the increasing strength of the UK's economy.

The last set of unemployment figures showed the jobless rate had dropped to 7.7% in the

June-to-August period.

The economy grew by 0.8% in the third quarter of the year, and recent economic surveys

have indicated that growth remained strong in October.

"The decision to hold interest rates and QE was expected and correct," said David Kern,

chief economist at the British Chambers of Commerce.

"However, as the pace of economic growth strengthens, it is becoming clear that the first rise

in official interest rates is likely to occur well before the Committee's 2016 prediction, due to

the earlier than anticipated fall in unemployment.

"The MPC must use next week's Inflation Report to move towards a more realistic timetable

for its forward guidance, to maintain business confidence and keep its credibility."

Source: http://www.bbc.co.uk/news/business-24850516

BBC 8th November 2013.

London Metal Exchange.

1. What is traded at the London Metal Exchange?

2. What influences the price of one of the commodity metals at this exchange?

3. What is happening (broadly speaking) to the price of such metals over time?

1. aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy),

cobalt, copper, lead, molybdenum, nickel, steel billet, tin and zinc.

2. Supply and Demand. Supply is a function of global ore exploration, mining and

distribution. Demand is a derived demand based on the needs of manufacturers

particularly vehicles, computers, phones, electronic devices particularly from

Europe, North America, south America and south east Asia.

3. Metal commodity prices are highly vulnerable. This reflects their highly inelastic

price elasticity of demand AND supply. Tiny changes in demand or supply lead to

exaggerated price rises or falls very quickly. Speculation exacerbates this

process. Example below for aluminium: source London Metal Exchange.

The London Metal Exchange (LME) is the futures exchange with the world's largest market in

options and futures contracts on base and other metals. As the LME offers contracts with daily

expiry dates of up to three months from trade date, along with longer-dated contracts up to 123

months, it also allows for cash trading. It offers hedging, worldwide reference pricing, and the option

of physical delivery to settle contracts. In July 2012, LME's shareholders voted to sell the exchange to

Hong Kong Exchanges and Clearing for £1.4 billion.

The LME offers futures and options contracts for aluminium, aluminium alloy, NASAAC (North

American Special Aluminium Alloy), cobalt, copper, lead, molybdenum, nickel, steel billet, tin and

zinc.

Trading Times: 11:40 — 17:00, London Time

Open-outcry is the oldest and most popular way of trading on the exchange. It is central to the

process of price discovery, the way LME official prices are established. Prices are derived

from the most liquid periods of trading; the short open-outcry ring trading sessions, and are

most representative of industry supply and demand. The official settlement price, on which

contracts are settled, is determined by the last offer price before the bell is sounded to mark

the end of the official ring.

There is constant inter-office trading, but a lot of trading is still done by open-outcry in the

Ring. There are a morning and an afternoon trade, where each of the nine metal contracts are

traded in two blocks with a five-minute session for each contract (the sessions last from 11.40

until 13.10 and from 14.55 until 16.15, each session includes a 10-minute break). The second

trading block in the morning is key to setting the Daily Official Exchange rates. After the

official trades of sessions one and two, there are 85 and 45 minutes of "kerb" trading

respectively. Trades are in futures, options and TAPOs (traded average-price options, a form

of Asian options).

The LME is the last exchange in Europe where open-outcry trading takes place.[2]

Contrary to popular belief, the precious metals, gold and silver, are not traded on the London

Metal Exchange, but on the over-the-counter market usually referred to as the London

Bullion Market, by the members of the London Bullion Market Association. Platinum and

palladium are traded on the London Platinum and Palladium Market. Both members of the

LBMA and LPPM trade the precious metals spot market on EBS (Electronic Broking

Systems)—acquired by ICAP in June 2006. Many companies involved in minor metals are

members of the Minor Metal Trade Association.

The LME does, however, provide trade matching and clearing services to the London bullion

market and distributes gold, silver, and gold IRS (interest rate swaps) forward rates on behalf

of the LBMA.