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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England lifts inflation and growth forecasts as it raises interest rates to 4.5% – business live

United Kingdom The Bank of England Interest Rates United States Mark Harper Bank of England Huw Pill Monetary Policy Silvana Tenreyro Swati Dhingra

Afternoon summary

Time for a recap:

The Bank of England has vowed to ‘stay the course’ in tackling inflation, after raising UK interest rates for the 12th time in a row.

The BoEs monetary policy committee voted to raise UK Bank Rate to 4.5% at midday today, up from 4.25%. It takes borrowing costs to the highest level since October 2008, the height of the financial crisis.

The increase means almost 1.5 million homeowners with variable rate mortgages face higher borrowing costs.

Hundreds of thousands more on fixed-rate deals will face more expensive mortgages when their deals expire.

In welcome news, the Bank revised up its forecasts for the UK economy. GDP is expected to expand by 0.25% during 2023, a weak performance, but better than the 0.5% contraction previously expected.

BoE governor Andrew Bailey said that the Bank had expected a long, shallow recession, six months ago – but since then energy prices have fallen and economic activity has been stronger than expected.

The Bank expects inflation to start falling from April, having remained stubbornly high at 10.1% in March. But it now expects inflation at the end of the year to be above 5%, compared with below 4% it forecast in February, due to high food prices and a resilient jobs market.

If the consumer price index does halve by December, as Bailey predicts, that would just mean Rishi Sunak could hit his target of halving inflation this year.

Bailey also criticised his chief economist, Huw Pill, for saying last month that people need to accept they are worse off due to the energy prices shock.

The BoE governor insisted the central bank was very sensitive to the situation facing poorer people, but in a rare rebuke said:

The economics of the hit to national income are clear. But I want it to be very clear that we are very sensitive to the position of all people, but particularly people on low incomes.

I don’t think Huw’s choice of words was the right one in that sense, I have to be honest, and I think he would agree with me.

What I’m afraid we can’t duck is this very big hit to national income, which we have to deal with.

Chancellor Jeremy Hunt said it was good news that the Bank of England is no longer forecasting recession, but added that today’s interest rate rise will obviously be very disappointing for families with mortgages.

Economists are split over whether the Bank will continue to lift borrowing costs, or if interest rates are close to peaking.

Here’s the full story:

Here’s our economics editor Larry Elliott’s analysis:

Some UK households have warned that they will be unable to copy with such high interest rates:

Plus, here’s the rest of today’s business news so far:

BoE'a Bailey hopes UK interest rate peak is close

Bank of England governor Andrew Bailey has told Bloomberg TV that he hopes UK interest rates are now near their peak.

Speaking after the central bank raised borrowing costs for the 12th meeting in a row, Bailey explained:

“We are approaching the point when we should be able to set to rest in terms of the level of rates.”

But, Bailey added that the BoE did not yet have enough economic evidence to know whether it would need to raise rates further.

UK interest rate hike hits families

The sharp increase in UK interest rates over the last 18 months has pushed some families into a precarious position, my colleague Jedidajah Otte reports.

When Rob, 35, from Trowbridge in Wiltshire, and his wife bought their first home for £375,000 in 2021, they were unable to imagine that 18 months later the Bank of England would have raised interest rates to 4.5% – their highest point since 2008.

“We bought a four-bedroom house after a decade of saving, when house prices were rising 10% a year and mortgage rates were tiny,” he says.

“We felt like if we didn’t buy then, we’d start moving backwards as prices were rocketing, and we were tired of renting, particularly as we have two young children.

“As the Bank of England base rate has been virtually flat our entire adult lives, we only fixed for two years, and are just beginning to start looking to remortgage now. I obviously now wish I’d have fixed for longer.”

Here’s the full piece:

Updated

Here’s a video clip of chancellor Jeremy Hunt warning that the cost of living crisis will continue until inflation is tamed.

Asked about the Bank’s higher inflation forecasts for this year (see earlier post), Hunt says there’s ‘nothing automatic’ about the government achieving its goal of halving inflation by the end of this year.

As covered earlier, the Bank’s forecasts suggest the UK could just meet that target, with inflation seen falling to 5% at the end of the year from over 10% at the start of 2023.

Updated

James Lynch, Fixed Income investment manager at Aegon Asset Management, fears that the Bank of England could make a policy error by hiking interest rates too high.

Lynch says the messaging behind today’s interest rate rise was confusing, as the Bank predicts inflation will start falling sharply from April (data due in two week’s time).

He says:

“The BoE raised rates again by 25 basis points to 4.5% in order to bring CPI inflation down to 2% over the medium term. Inflation was revised higher in 2023 from 4% to 5% and GDP was revised higher from -0.5% to +0.25% in 2023.

“In the press conference, Governor Andrew Bailey reiterates the forward guidance of the previous meeting that they would raise interest rates if they saw signs of persistent inflation. Which means they raised rates today because of persistent inflation? No, they reference that inflation is higher because of food and clothing prices, which meant spot inflation is 0.8% higher than their previous forecast – persistent inflation came more or less in line (services CPI).

“What’s also slightly confusing is that the medium-term inflation was revised lower, not higher. CPI in 2025 is due to be 1%. So, if inflation in the short term moved higher due to food and clothing prices – which is not persistent inflation according to the BoE – and inflation is moving below target in the medium term, why do they keep raising rates?

“They are obviously being swayed by the high spot inflation of 10.1% and they clearly put more weight on upside risks to CPI, but it does raise the risks also to a policy error which may result in a greater economic slowdown to come as the lagged effects of previous interest rate hikes work their way through the economy.”

Here’s a video clip of Andrew Bailey, governor of the Bank of England, warning that inflation remains too high, which is why the BoE has raised interest rates to bring it down to 2% and keep it there….

Larry Elliott: Another UK interest rate rise was always nailed on but what happens next?

In truth, today’s increase in interest rates to 4.5% was always nailed on, our economics editor Larry Elliott writes:

With inflation at 10.1% – five times its official 2% target – it would have been a real surprise had the MPC voted for anything other than a quarter-point rise.

The real question is, what happens next to UK interest rates?

And judging by its latest monetary policy report, Larry says, the MPC now wants to take a break from rate rises so that it can see how things develop.

It is aware that only about one-third of the impact of previous rate rises has so far been felt, which is why – despite the biggest upgrade to its growth forecasts since independence in 1997 – growth for the next three years remains sluggish. The Bank believes that in two years’ time inflation will be 1% – comfortably below target.

In the key passage from the monetary policy report on Thursday, the Bank said it would continue to monitor closely “indicators of persistent inflationary pressures”, including job vacancies, labour shortages, wage growth and price increases in the services sector. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” it added.

Clearly, most MPC members are not even considering the prospect of cutting rates, and are leaving the door open for further increases if their forecasts continue to be wrong.

Here’s the full piece:

Over in America, a rise in unemployment claims suggests higher interest rates are hitting the US economy.

Applications for US unemployment benefits rose to the highest level since October 2021, the Labor Department reported.

There were 264,000 new ‘initial claims’ for jobless support, an increase of 22,000, and higher than expected.

UK interest rate rise: what the economists say

Reaction to today’s increase in UK interest rates, to a 15-year high of 4.5%, has been flooding in.

Henry Cook, senior economist at MUFG, predicts the Bank of England will agree another hike in June taking interest rates to 4.75%.

Cook says:

It’s only six weeks until the next policy meeting and we do not think the wage and core inflation data released before then will have eased sufficiently to reach a consensus to press ‘pause’ on this rate hike cycle. The guidance was unchanged: further tightening in policy would be required if there’s evidence of “more persistent price pressures”. Indeed, there were no signs that the BoE is setting the stage for a pause just yet.

The meeting-by-meeting, data-driven with a focus on wage growth and underlying inflation developments will likely continue.

Mike Bell, global market strategist at J.P. Morgan Asset Management, says the Bank of England is in “a tricky position”. Bell predicts that mortgage holders who move onto higher rates will cut back on spending, hitting growth:

By the end of this year 1.4 million fixed rate mortgages will have expired, forcing those households to refinance at much higher rates. Two years ago, households with at least a 25% deposit could fix for about 1.7%. With the cheapest mortgage rates currently at about 4%, when those households refinance many of their mortgage payments will rise by about 35%.

This will probably cause most of those households to cut back on their discretionary spending and hence dampen inflation pressures, while increasing the chance of there being a recession.

“So where does the Bank of England go from here? Personally, I think they should now pause. They can always hike rates further later on if needs be to get the job done but if they keep raising rates before the effect of their prior tightening has been felt, they risk going too far and doing more damage to the economy than is required to bring inflation back to target.”

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, says the markets are pricing in almost two more quarter-point increases in rates this year:

“Forward guidance was unchanged in May, meaning the Bank of England is not signalling a pause as some may have hoped. The BoE continues to guide that if there were to be evidence of more persistent inflation pressure, then further tightening in monetary policy will be required. The BoE has little choice but to leave the door open for further rate increases given that inflation is double that of the US and above the pace in the Eurozone.”

“On inflation, the BoE expects it to slow to 5.1% by the end of 2023, higher than the 3.9% forecasted in February 2023. This shows the BoE judged that inflation is likely to be more persistent due to the tight labour market, this also means that UK prime minister Rishi Sunak’s pledge to halve inflation this year will just be met.”

Looking ahead, Paul Dales of Capital Economics predicts UK interest rates will be cut faster than expected, in the second half of next year:

Today’s 25bps rise in interest rates from 4.25% to 4.50% takes rates to our long-held forecast and may be the last hike, although another hike or two is perfectly possible. We suspect the subsequent holding phase will be fairly long, lasting until the first half of next year.

But we think the following cutting phase will be more aggressive than current market pricing with rates falling to 3.00% by end-2024 rather than to 4.00%.

But in the meantime, high interest rates will hit the economy. Suren Thiru, economics director at ICAEW, says:

“Another rate rise will come as a nasty blow to those people and companies already battling escalating borrowing costs and a multitude of other severe cost pressures.

The Monetary Policy Committee needs to be more forward looking in setting interest rates rather than being overly focused on current inflation given the long-time lag between rate rises and its impact on the broader economy.

“With most of the interest rate rises yet to pass through to households and businesses, the Bank of England risks overdoing the rate hikes, adding to squeeze on our growth prospects and aggravating the cost-of-living crisis.

“Given that the Bank of England is still expecting inflation to fall back, the case for rate setters to pivot towards cutting interest rates is likely to strengthen.”

This is a handy chart showing how inflation has been persistently higher than the Bank of England expected over the last couple of years.

The Bank’s press conference ends with Andew Bailey insisting the Bank needs to tackle inflation, despite the impact on higher rates on mortgage holders.

Bailey says:

These things have serious impacts, we’re very sensitive to this.

If we don’t tackle inflation, it will be worse for people.

Q: Should high earners, such as those at the Bank, refuse pay rises? And should banks be passing rate increases onto savers faster?

Bailey points out that he has already declined a pay rise himself. On the broader point, executive pay is set by companies, it’s not up to the Bank.

And on savings rate, the rate of passthrough to sight deposits (which can be withdrawn at little notice) has been “muted”, Bailey says. But the banks have moved faster on term deposits (where money is locked up for a fixed time).

Bailey says customers should shop around, and that it’s important there is competition in the banking sector.

Here’s a video clip of Andrew Bailey criticising chief economist Huw Pill for saying last month that people have to accept they are poorer due to the inflation shock.

Updated

Q: Why has UK inflation been so much higher than in the US and the eurozone, and so subborn?

Bailey says the mechanics of the UK energy price cap, which used to rise twice a year, means that headline UK inflation has been slower to rise year-on-year.

Deputy governor Ben Broadbent points out that core inflation in the UK is much more comparable to the eurozone, while the US never saw such a large surge in gas prices as Europe.

Bailey criticises chief economist's claim that people must accept being worse off

Q: What does the Bank say to people who are struggling to make ends meet? Do they, as Huw Pill (the Bank’s chief economist) argues, have to accept they are poorer?

Bailey says the Bank is “very conscious” that all inflation is difficult, especially for the least well off.

The current inflation is “particularly difficult” for those on lower incomes, as it is concentrated on the essentials of live – food and energy. We are “very, very conscious” of that, Bailey says.

But, the “difficult situation” is there has been a very substantial hit to national income, due to external shocks, Bailey explains.

Last month, Pill caused quite a stir by telling a podcast that households and businesses “need to accept” they are poorer and stop seeking pay increases and pushing prices higher.

Pill’s point was that the UK has suffered a hit from high imported energy costs, which means that “someone needs to accept that they’re worse off and stop trying to maintain their real spending power” through higher wages or prices.

Today, Bailey says Pill’s choice of words was not correct, saying:

The economics of the hit to national income are clear. But I want it to be very clear that we are very sensitive to the position of all people, but particularly people on low incomes.

I don’t think Huw’s choice of words was the right one in that sense, I have to be honest, and I think he would agree with me.

What I’m afraid we can’t duck is this very big hit to national income, which we have to deal with.

The Bank also has to deal with the risk that leads to “second-round domestic inflation effects”, he insists (where rising wages lead to higher prices).

Updated

Q: How confident can you be that you’re not overtightening by raising interest rates today?

Bailey cites a chart from today’s Monetary Policy Report, which shows that 85% of mortgages are now fixed-rate, rather than on variable rates will will rise immediately.

That means there is more ‘pass-through’ from existing interest rate rises to come, as borrowers’ deals expire and they move onto higher deals.

This is a “very lively subject of debate” on the committee, he reveals.

Bailey: it's 'hindsight' to say Bank failed on inflation

Q: Interest rates have gone up 12 times in a row, inflation is still too high – by any stretch of the imagination, that is a policy failure, our economics editor Larry Elliott.

Isn’t it time for the Bank to own up to its part in this failure, rather than blaming Vladimir Putin or unions trying to negotiate pay rises for workers, and apologise to the households and businesses who face higher borrowing costs?

Andrew Bailey insists the Bank doesn’t use the ‘language of blame’; it is just pointing out the underlying causes of high inflation, such as the Ukraine war.

“There is a level of hindsight” in many of the judgements made about the Bank's performance, Bailey says.

He argues that the Bank would have had to predict the Ukraine war 18 months before it happened, and then hiked interest rates – during the pandemic – to offset the inflationary pressures when the invasion began.

Explanation: That’s because the Bank argues that monetary policy changes take around 18 months to have a full effect.

Economist Tony Yates isn’t impressed by Bailey’s argument, though:

Sir Dave Ramsden points out that the UK has been hit by two ‘once-in-a-century’ shocks within a few years – the Covid-19 pandemic, and then war in Europe.

Andrew Bailey reveals he has visited a number of UK bakeries recently, and learned that they changed their price hedging behaviour after the war in Ukraine (a major wheat producer) began.

Q: Why was the Bank blindsided by the surge in food price inflation – have producers not given honest answers to your agents around the country?

Sighing, Andrew Bailey says this is a good question – the issue is the persistence of the food price inflation.

He points to the impact of high energy costs on the food sector. Businesses are having very different experiences, depending when they agreed their energy contracts, and whether they hedged against high energy costs.

Q: You forecast that inflation will be 5% at the end of this year, and 1% at the end of next year, so do we need to do more or less on interest rates?

Andrew Bailey says the Bank will be guided by the evidence, and isn’t giving any steer on future moves.

But, the Bank will need to act if it sees signs of persistent inflation.

Q: The Bank has persistently underestimated where inflation would be – have the markets been right, while you’ve been wrong?

Bailey agrees that inflation is about one percentage point higher than it expected in February. But that’s mainly due to high food and clothing inflation.

The BoE governor says:

It appears to be taking longer for food price pressures to work their way through the system this time than we had expected. These are very unusual times.

Deputy governor Ben Broadbent denies that the markets have outperformed the BoE for forecasts, pointing out that no-one forecast 10% inflation today a couple of years ago.

Key event

Q: You have announcced the biggest growth forecasts in the Bank of England’s history – what do you say to those who say you have been too gloomy in the past?

BoE governor Andrew Bailey says the positive impact from falling gas prices had not been anticipated. In November, we faced a “very difficult winter” and the possibility of Europe experiencing cuts to gas supplies.

“It all looked very bleak,” Bailey says.

He adds that the measures in the spring budget (in which Jeremy Hunt maintained support for energy bills) have helped, while China’s reopening from pandemic restrictions have had a much more muted impact than expected.

Fourth, the economy has been more resilient than the Bank expected.

But, the forecast growth levels are still very weak, the BoE governor points out.

Q: Have supermarkets been slower to cut prices than to raise them?

Deputy governor Ben Broadbent says ‘aggregate data’ shows there’s not been an increase in profit share in the national income, unlike data from the eurozone (where the European Central Bank is concerned that firms have been pumping up their profit margins).

Onto questions…

Q: Is the Bank failing its biggest test since becoming indepent in 1997, for failing to see the rise in inflation, its stickiness, and the rise in food inflation? Do they affect your credibility?

Governor Andrew Bailey points out that the UK, and the world economy, has been hit by large shocks, including the impact of the “terrible war in Ukraine” on food and energy prices.

He says the test of the regime is how the Bank returns inflation to its 2% target in the medium term. It is setting policy to achieve that target, he insists.

[in the Bank’s new forecasts, CPI inflation drops to a little above 1% at the two and three-year horizons, materially below that 2% target].

Hunt: Good news that recession not expected

Away from the Bank of England, Jeremy Hunt has welcomed the Bank’s new growth forecasts.

Hunt says:

“Although it is good news that the Bank of England is no longer forecasting recession, today’s interest rate rise will obviously be very disappointing for families with mortgages.

But unless we tackle rising prices, the cost of living crisis will only carry on - which is why we need to be resolute in sticking to our plan to halve inflation by the end of the year.”

Andrew Bailey says there are signs of loosening in the UK labour market.

Businesses have told the Bank’s agents around the country that recruitment problems have eased – employees are moving jobs less often, and there are more applicants for vacancies.

[That could lower wage inflation].

Bailey: CPI inflation on course to halve by end of year

“Consumer price inflation is on course to halve by the end of this year,” BoE governor Andrew Bailey tells the press conference at the Bank.

That would mean that Rishi Sunak would hit his target of halving inflation this year, which would be a much-needed boost for the PM.

Bailey explains that falls in energy prices indicate that the average household energy bill will be around £2,100 per year in the last quarter of this year.

That’s still a high number, but around 16% lower than the year earlier – meaning energy would knock around one percentage point off the headline inflation rate, Bailey explains.

Bailey: We're 'acutely aware'of difficulties from high food inflation

We are acutely aware how difficult the rise in food prices is for people, especially those on lower incomes, Andrew Bailey says.

The BoE governor says there are signs that food price inflation will start to slow, such as the drop in global wholesale food prices.

But it may take longer than previously hoped for this to feed through to consumer prices.

There are “good reasons” to think CPI inflation will fall sharply from April, Bailey adds – as the increase in energy bills in 2022 start to drop out of the calculations [as inflation measures price changes over the last year].

The drop in wholesale gas prices has reversed some of the UK’s ‘terms of trade’ which has pushed down real incomes, Andrew Bailey explains.

And he cites strong employment data as evidence that the economy has been more resilient than expected.

BoE governor Andrew Bailey adds that the Bank has to ‘stay the course’, to get inflation down to its target of 2%.

Bailey: no longer expecting a recession

Bank of England governor Andrew Bailey starts today’s press conference by telling reporters that the outlook for growth and unemployment has improved.

Six months ago we were expecting a shallow but long recession, Bailey reminds us. But since then, energy prices have fallen and economic activity has been stronger than expected.

Bailey says:

Today we are forecasting modest but positive growth and a much smaller increase in unemployment.

Inflation is expected to fall sharply over the coming months, starting in April, Bailey adds.

Bank of England press conference - watch it here.

The Bank is holding a press conference now to explain today’s interest rate rise.

You can watch it here.

Inflation to fall slower than hoped

The Bank of England now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices.

Thanks to the drop in energy prices, the BoE expects inflation to drop to 5.1% by the end of this year from 10.1% in March.

But this is less of a decline than the drop to 3.9% it forecast in February and the BoE predicts inflation will not return to its 2% target until early 2025, Reuters reports.

The problem for households, and the BoE, is that ood price inflation is likely to fall back more slowly than previously expected.

Higher forecasts for food prices had added about 1 percentage point to future inflation compared with February, the BoE said.

The Bank of England has made its largest ever upgrade to its growth forecasts – although growth will still be weak this year.

It now expects UK GDP to rise by 0.25% in 2023, up from its February prediction of a 0.5% contraction.

Cheaper energy, the fiscal stimulus measure in Jeremy Hunt’s budget, and improved business and consumer confidence mean a recession is not expected this year.

Overall, the UK economy is expected to be 2.25% larger in three years’ time than the Bank forecast before.

The Bank says it would raise interest rates again in coming months, if it sees signs of ‘more persistent’ inflation pressures.

It explains:

The MPC would continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.

If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

Bank upgrades UK growth forecast

The Bank of England has upgraded its growth forecast for the UK economy this year – and no longer expects a contraction at the start of 2023

The Bank forecasts that the economy will stagnate over the first six months of this year, partly due to industrial action and the bank holiday for King Charles’s coronation.

The minutes of this week’s meeting say:

UK GDP is expected to be flat over the first half of this year, although underlying output, excluding the estimated impact of strikes and an extra bank holiday, is projected to grow modestly.

Economic activity has been less weak than expected in February, and the Committee now judges that the path of demand is likely to be materially stronger than expected in the February Report, albeit still subdued by historical standards.

In February, the BoE had forecast that UK GDP would decline slightly, by 0.1%, in January-March.

Today’ improved outlook reflects “stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households”, the Bank explains.

The Bank says there has been “upside news to the near-term outlook for global activity”, with UK-weighted world GDP now expected to grow at a moderate pace throughout the forecast period.

Significantly, the BoE does not expect much damage from the recent turmoil in the banking sector.

The minute of this month’s meeting say:

Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments.

Headline inflation has been falling in the United States and euro area, although core inflation measures remain elevated.

Bank of England split 7-2 over rate increase

Today’s decision is not unanimous, with two dovish policymakers voting to leave interest rates on hold.

Silvana Tenreyro and Swati Dhingra both favoured leaving UK interest rates on hold at 4.25%.

Tenreyro and Dhingra argued that inflation will fall sharply ovoer 2023, as the effects of the energy price shock and other cost-push shocks unwind.

At the same time, the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through, the pair argued.

But, they were outvoted by the other members of the monetary policy committee – Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine Mann, Huw Pill and Dave Ramsden.

UK INTEREST RATE DECISION

Newsflash: The Bank of England has raised UK interest rates by a quarter of a percentage point to 4.5%, as it battles high inflation.

The Bank’s monetary policy committee has voted for its 12th increase in borrowing costs in a row.

It has raised Bank Rate from 4.25% in an attempt to dampen UK inflation which remains in double digits (at 10.1% in March).

Today’s rise means UK rates are at the highest level since October 2008, when the global economy was in the grips of the financial crisis.

News crews are gathered outside the Bank of England, awaiting today’s decision in just five minutes…..

Tension is rising ahead of the Bank of England’s decision on UK interest rates, due in 30 minutes time at noon, UK time.

As covered in the introduction, the BoE is expected to raise borrowing costs again to their highest level since 2008.

Bank Rate is forecast to rise for the 12th consecutive time, from 4.25% to 4.5%, driving up borrowing costs and hitting mortgages.

But it would benefit savers, if UK banks passed the increase on promptly.

Fiona Cincotta, senior financial markets analyst at City Index, says:

The move comes as the central bank continues to battle inflation which remains in double digits, considerably higher than inflation in the eurozone (7%) and the US (4.9%). The hot inflation comes as food inflation remains elevated, the UK economy has proved to be more resilient than expected and the labour market remains tight.

The central bank is expected to upwardly revise its growth and inflation outlook, which was expected to be at 4% by the end of the year.

The vote split is expected to be 7-2, and the central bank is expected to keep the door open for further hikes, given the sticky inflation.

A hawkish-sounding BoE, could lift the pound further.

Updated

CPI inflation in Ireland dips to 7.2%

Inflation in Ireland dropped last month, and is running notably lower than in the UK.

Ireland’s consumer prices index rose by 7.2% in the year to April 2023, the Central Statistics Office reports, down from 7.7% in the 12 months to March.

This is the nineteenth month running in which Ireland’s annual inflation rate has been at least 5.0%, the CSO reports.

On a monthly basis, prices rose by 0.5%, driven by higher prices for “telephone & telefax services”.

The largest annual increases in the 12 months to April 2023 were Housing, Water, Electricity, Gas & Other Fuels (+20.7%) and Food & Non-Alcoholic Beverages (where prices rose by 13.1%).

CSO statistician Anthony Dawson says:

“The National Average Price of a number of items rose in April 2023.

There were price increases for an 800g loaf of white sliced pan (+23c), an 800g loaf of brown sliced pan (+18c), 2 litres of full fat milk (+44c), and a pound of butter (+66c) when compared with April 2022.”

In contrast, inflation across the UK rose by 10.1% in the year to March (we get April’s data later this month).

UK food and non-alcoholic beverage prices rose by more than 19% over the last year, rather faster than in Ireland, while the annual inflation rate for housing, water, electricity, gas and other fuels in the UK was 11.6%.

UK consumer confidence back in positive territory

UK consumer morale has improved in April following a brief dip into negativity in March.

YouGov and the Centre for Economics and Business Research (Cebr) have reported that their consumer confidence index has jumped by 1.9 points this month, from 99.4 to 101.3 (where a reading over 100 shows a positive score).

People’s view of their household finances improved, as did meaasures of job security and business activity.

The report says:

The most significant jumps were in household finance metrics: those tracking perceptions over the past 30 days jumped from 69.6 to 73.8 (+4.2), while outlook rose even higher, from 70.9 to 75.5 (+4.6).

These are still overall negative scores, but represent a meaningful improvement compared to a year ago, when measures for the past 30 days plummeted to 56.7 and 48.3 respectively. The cost-of-living crisis continues to impact households, but sentiment towards household finances has been gradually improving over the past six months.

UK consumer confidence
UK consumer confidence Photograph: YouGov/CEBR

Pound down against US dollar ahead of BoE decision

The pound has slipped against the US dollar this morning, and is now down half a cent at $1.2586.

Yesterday, sterling hit a one-year high against the dollar at $1.2679 after America’s inflation rate dropped to 4.9% (only half as high as the UK), which could encourage the US Federal Reserve to stop its interest rate increases.

Today, traders are focused firmly on the Bank of England decision, and its new forecasts for inflation and growth.

Victoria Scholar, head of investment at interactive investor, explains:

“The Bank of England is widely expected to raise interest rates by a further 25-basis points at lunchtime today. This would lift the bank rate to 4.5%, the highest level since 2008, marking the twelfth consecutive rate increase. The central bank is also expected to upgrade its economic growth forecasts for this year as the risk of recession subsides. However it is also expected to raise its inflation forecasts for the year.

The outlook for interest rates beyond today is less clear with the Bank of England likely to be closely guided by the speed at which the inflation data improves. Goldman Sachs this week warned that the bank rate may need to continue to increase in 25-basis point increments to 5% by August to combat ‘ongoing inflationary pressures’.

While energy prices have been coming down, the UK is still grappling with food price inflation following extreme weather in Spain and North Africa as well as second-round inflationary effects from higher wages among workers and higher prices passed onto consumers by businesses facing elevated costs.

UK inflation remains stubbornly high, stuck above 10% at odds with the US and Europe which have seen their inflation rates start to come down. Food and non-alcoholic drinks inflation remains particularly high at 19.1% in March.

Cable (GBPUSD) hit the highest level since April 2022 after US inflation fell to 4.9% on Wednesday, the first drop below 5% in two years and in anticipation of today’s Bank of England rate increase. However GBPUSD is giving back some of those gains today, although the pound remains firm against the euro.”

Updated

The Bank of England is perched, delicately, on a see-saw as it tries to squeeze inflation without hurting economic growth, says Joe Nellis, professor of global economy at Cranfield School of Management.

Nellis says a quarter point rise in UK interest rates at noon today seems inevitable.

With inflation still untamed, the Bank of England’s Monetary Policy Committee is straddling a delicately poised fiscal see-saw. The committee must balance how hard to push on inflation against the potential impact on growth for an economy which is languishing in a growth recession.

“The good news is that this should be the last rate rise for a while. I expect inflation levels to naturally fall to between 5-6% by the end of the summer with many households and businesses using less energy as the weather warms, as well as food prices falling due to the increased availability of home-grown crops.

“Yet, the long-term outlook of flat growth remains for the foreseeable future. This is a worrying trend for the Government in the run up to next year’s general election as spending plans and tax revenue expectations have to be moderated, which is a huge challenge for all of us.”

British property surveyors have reported a drop in demand in April as new buyers turned more cautious, an industry survey showed on Thursday.

The Royal Institution of Chartered Surveyors (RICS) said its measure of new buyer enquiries fell to a net balance of -37 in last month from -30 in March, the lowest since January.

That could show that previous interest rate increases have dampened the housing market, even before the Bank of England’s latest move due at noon today.

Simon Rubinsohn, RICS Chief Economist, says:

“Although the newsflow around housing does appear to have steadied over the past month, key indicators from the RICS survey point to a series of challenges in both the sales and lettings space.

“Most notably, buyer demand still appears to be subdued in the face of relatively high borrowing costs, the prospect of at least one more interest rate hike and ongoing affordability challenges.

“Meanwhile, the imbalance between demand and supply in the letting market still remains stark despite the significant increase in rents.

Critical to addressing both areas of the market is the delivery of more supply. However, indicators of the level of new housing starts in the early part of the year suggests that the picture is if anything continuing to soften as housebuilders activity reflects both macro uncertainty and policy developments”.

The number of online job adverts placed by UK companies has dipped, in a sign that the jobs market is cooling.

The total number of online job adverts fell by 1% on 5 May 2023 compared with the previous week and was 18% lower than the equivalent period of 2022, the Office for National Statistis reports.

Eleven of the 12 UK countries and English regions, and 24 of the 28 job categories, showing a decrease in the number of online job adverts compared with a year ago.

Martin Weale (who we heard from earlier) says he would vote to raise interest rates today if he was still on the Monetary Policy Committee.

Professor Weale has told Bloomberg that there is “a real risk” that inflation won’t halved by the end of the year, missing Rishi Sunak’s target, as NIESR predicted today.

Weale points out that inflation has been more persistent than expected a few months ago. Soaring food prices will create more pressure for higher wages, which could lead firms to lift prices.

He says:

Certainly there is a real risk that Sunak’s inflation target won’t be met, and I actually think he would have done better to leave discussions of inflation to the Bank of England.

Updated

A plane taking off from Heathrow Airport.

Heathrow Airport has warned that the growth in passenger numbers since the end of coronavirus restrictions may be “levelling off”.

Demand for air travel surged after the UK’s travel rules were scrapped but has flatlined compared with pre-virus levels in recent months.

Some 6.4 million passengers travelled through Heathrow in April.

The west London airport said in a statement:

“There are early indications that passenger growth may be levelling off, with recovery now stable at 93-95% of 2019 levels across each of the first four months of this year.”

Forecasts for passenger numbers are a controversial issue, with airlines often accusing the airport of downplaying expectations in an attempt to justify higher charges, points out PA Media.

Former IMF economist Mohamed El-Erian, who is president of Queens College Cambridge and an adviser to the insurer Allianz, said he would not be surprised if the BoE raised rates again in June to bring down inflation.

Speaking on BBC Radio 4’s Today programme, he said:

“The case for a rate rise is very simple. Inflation remains too high and there is evidence that inflationary pressures are persistent.

And we have to follow what the Federal Reserve has done [it raised US interest rates last week]. So when you put all that together the Bank of England has no choice but to raise interest rates and that is what the market is priced for.”

Asked why two members of the monetary policy committee are expected to vote against a further rate rise, he said the current situation posed a tricky dilemma for the central bank.

“We see the Bank of England walking a very narrow path. It is a path of financial stability, price stability and growth.

“If it always does the rate increases it tips the economy into recession and causes financial stress, especially for households on the mortgage side. But if it doesn’t do enough [the BoE] falls on the other side of this narrow path whereby inflation gets embedded in the system.”

Asked whether higher interest rates were the only answer, he said the Bank needed help to bring down inflation:

“Whatever the Bank of England does is necessary but not sufficient. We need help from elsewhere. Why is UK inflation twice that in the US? Why is it so much higher than what the European Central Bank is seeing? For three reasons. Our productivity has been lagging. Our labour market is less flexible and we decided to rewire our international relationships after Brexit.

“These are things the BoE cannot do. And it needs a lot more help from other government agencies to make its job easier.”

Updated

Brexit is one factor fuelling the inflationary pressures that are pushing up interest rates, a former Bank of England policymaker has suggested.

Professr Martin Weale told Sky News this morning that it’s impossible to say when rates will start to fall, as inflation has been more resistant than expected.

He cited the high wage pressures, which have only eased very slightly.

The Bank’s Monetary Policy Committee is concerned that with wages rising by near 7% per year, you can’t have 2% inflation, Weale said.

Q: Why are interest rates higher in the UK than in other countries?

Weale points out that inflationary pressures have been higher in Britain than in other parts of the world.

He explains:

That may be because of the effects of Brexit limiting inflation.

It may also be because a lot of people dropped out of the labour market in the aftermath of the pandemic, Weale adds.

Yellen warns of risks of US default

US Secretary of the Treasury Janet Yellen speaks during a news conference prior to the start of the G7 Finance Ministers and Central Bank Governors meeting in Niigata, northern Japan, today.
US Secretary of the Treasury Janet Yellen speaks during a news conference prior to the start of the G7 Finance Ministers and Central Bank Governors meeting in Niigata, northern Japan, today. Photograph: Kimimasa Mayama/EPA

Anxiety over the deadlock over the US debt ceiling is looming over the financial markets today.

Earlier today, US treasury secretary Janet Yellen warned that failure to avoid a looming federal government default would undermine Washington’s ability to provide international leadership and defend US national security.

Speaking at a meeting of G7 finance ministers in Japan, Yellen warned that a default “would spark a global downturn” and “would also risk undermining US global economic leadership and raise questions about our ability to defend our national security interests.”

Yellen told reporters in Tokyo:

“The notion of defaulting on our debt is something that would so badly undermine the U.S. and global economy that I think it should be regarded by everyone as unthinkable.

America should never default.

The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as social security, Medicare and the military.

It is currently $31.4tn, and the US risks defaulting from early June if Congress does not raise it.

President Joe Biden is calling on lawmakers to raise the federal government’s self-imposed borrowing limit without conditions, but the Republican party which has a narrow majority in the House are demanding spending cuts as part of a deal.

Yesterday, Biden warned that millions of jobs were at risk if the debt ceiling was not raised, and accused Republicans of holding the economy hostage.

If, as expected, the Bank of England raises interest rates today, it could be the last hike in the current cycle.

So argues Professor Costas Milas, of the Management School at the University of Liverpool, who tells us:

Faced with (much) lower inflation than the UK, both the Fed and ECB have raised interest rate.

It will therefore be very surprising if the MPC does not raise the Bank’s policy rate by 0.25 percentage points to 4.5%. Financial stability worries, however mean it will be a surprise if UK interest rates go up to 5% by the end of the year.

In my view, the MPC is underestimating the strength of monetary tightening already in place. Divisia money, which predicts very well both GDP growth and inflation, has contracted rapidly in 2023 Q1.

As things stand, this, in my view, suggests that today’s interest rate rise should be the last one for 2023…

Updated

Sunak Will Struggle to halve UK Inflation in Half, NIESR warns

Ahead of today’s Bank of England decision, economic forecaster have warned that Rishi Sunak is at risk of missing his flagship target to halve inflation this year

The National Institute of Economic and Social Research said the soaring price of food and other basic essentials meant inflation was on track to remain persistently high for the rest of this year.

Sunak pledged to halve inflation in January, when the rate stood at 10.1%, but the latest figures from March showed it was still at 10.1%. NIESR is forecasting a decline, but it warned on Thursday the rate would remain “persistently elevated”, only falling to 5.4% by the end of 2023.

NIESR also said the combined impact of the Covid pandemic and the ongoing fallout from the cost of living crisis meant Britain’s poorest households would be about £4,000 a year worse off as a result – significantly higher than for richer households. More here.

The resilience of the UK economy at the start of this year, alongside still uncomfortably strong inflation and wage growth, keeps pressure on the Bank of England to keep raising rates, says Lee Hardman, senior currency analyst at MUFG Bank.

Hardman writes this morning:

The pound is continuing to benefit from the paring back of investor pessimism over the outlook for the UK economy at the start of this year.

According to Bloomberg, the economic surprise index for the UK is currently at its highest level since the middle of 2021 with incoming data releases continuing to ease fears over recession in the UK. It stands in contrast to the economic surprise indices for the euro-zone and US.

TransPennine Express taken under state control after catalogue of failings and poor service

Newsflash: TransPennine Express is to be run by the state after ministers announced that the failing rail company would not have its contract renewed.

Transport secretary Mark Harper said that the northern rail network will be run by the state-owned operator of last resort after disruption, cancellations and a huge decline in the service.

The First Group-owned TPE’s contract expires on 28 May. Passengers and politicians across the north had called for change.

Harper warned it would not fix the service overnight and blamed the drivers’ union Aslef for some of the issues.

Harper said:

“In my time as transport secretary, I have been clear that passenger experience must always come first.

“This is not a silver bullet and will not instantaneously fix a number of challenges being faced, including Aslef’s actions which are preventing TransPennine Express from being able to run a full service – once again highlighting why it’s so important that the railways move to a seven-day working week.”

Updated

The Bank of England could give the pound a boost today if it hints at further interest rate increases in the coming months,

Matthew Ryan, head of market strategy at global financial services firm Ebury, explains:

“We expect the Bank of England to push ahead with another 25bp rate increase on Thursday, with policymakers to maintain a hawkish bias that points to at least one more hike beyond this week’s meeting.

“In light of fading recession risks and sky-high UK inflation, we are again pencilling in a 7-2 voting split, with Tenreyro and Dhingra likely to remain the two sole dissenters in favour of no change. There is a risk that one or two additional members join the doves, which would clearly be bearish for sterling, though this is not our base case scenario.

“Investors will also be paying close attention to the updated macroeconomic projections. An upward revision to the 2023 inflation forecast would no doubt raise expectations for the terminal UK rate, and could trigger a fresh move higher in the pound. Markets are eyeing up almost three additional 25bp rate increases from the MPC this year, so any indication that this week’s hike may be the last would be seen as a major disappointment.

We do not, however, expect this to be the case, and see risks to GBP as skewed to the upside heading into the meeting.”

The pound is trading around $1.26 this morning, having hit a one-year high of $1.2679 on Wednesday.

Economists will be looking for signals as to whether the Bank of England is close to ending its run of interest rate increases soon, after today’s decision.

Ellie Henderson, from Investec Economics, said the “clock is ticking” on the Bank’s monetary policy tightening cycle, and an increase on Thursday could be the last.

Henderson said:

“As things stand and considering the sharp downward influences on inflation in the coming months, namely from energy but also from cooling food and goods price inflation, we suspect that this could be the last hike by the Bank of England in this cycle.”

Klaus Baader, the global chief economist at French bank Societe Generale, agreed that while a 0.25 percentage point is expected from the Bank, “what is less certain is what it will do afterwards”.

He said it is likely policymakers will no longer predict a recession, having previously anticipated the UK would dip into a short and shallow recession during the first quarter of the year.

Introduction: Bank of England expected to raise rates again today

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

UK borrowers should brace for highest interest rates today, as the Bank of England prepares to set monetary policy at midday today.

With inflation still in double-digits (10.1% in March), the BoE is widely expected to raise interest rates for a 12th consecutive time, as it tries to restrain price rises by cooling demand.

The financial markets indicate that a quarter-point rise in Bank Rate, from 4.25% to 4.5%, is nailed-on – at around a 98% chance.

This would be the 12th increase in interest rates in a row, in an aggressive tightening cycle from the BoE, and would take borrowing costs to the highest level since October 2008.

But, the nine members of the Monetary Policy Committee (MPC) may be split, with two policymakers – Swati Dhingra and Silvana Tenreyro – expected to oppose another hike, and vote to hold rates. We’ll find out at noon.

The Bank’s mandate is to keep inflation at 2%, a target they are badly missing following the surge in energy prices following the Ukraine war, which has led to soaring food prices too.

The markets are also pricing in at least one more interest rate rise before the end of the year, before rates start to drop in 2024.

A hike today would be an immediate blow to homeowners with variable rate mortgages, while those whose fixed-rate deals expire in coming months also face higher borrowing costs.

As my colleague Phillip Inman writes:

Almost 1.5 million homeowners with variable rate mortgages face higher borrowing costs with the Bank of England expected to push up interest rates on Thursday to 4.5%.

Another 1.5 million households with fixed-rate mortgages will see their annual bills spiral by an average £3,000 when they re-finance their loans this year, afterthe average two-year fixed rate jumped from below 2% to 4.75% over the past 18 months.

The Bank of England will also release updated projections for inflation, as well as their view on the outlook for the UK economy, in the latest Monetary Policy Report.

Six months ago they warned the UK risked being plunged into the longest recession in 100 years, but the economic outlook has improved since – by February the Bank expected a less severe recession.

As RBC Capital Markets told clients this morning:

The MPC is likely to exhibit a relatively hawkish tone and retain optionality over the direction of policy going forward, including avoiding any reference, explicit or otherwise, to pausing its tightening cycle.

The economy is performing better than expected, the labour market shows little sign of loosening and (perhaps most importantly) inflation is not falling as quickly as expected.

In a speech last month, chief economist Huw Pill urged British households to restrain pay demands and businesses from hiking prices, saying they “need to accept” they are poorer.

Pill said a game of “pass the parcel” was taking place in the economy – as households and companies try to pass on their higher costs…..

The agenda

  • 9.30am BST: Realtime data on economic activity and social change in the UK

  • 12pm BST: Bank of England interest rate decision and Monetary Policy Report

  • 12.30pm BST: Bank of England press conference

  • 1.30pm BST: US PPI index of producer prices for April

  • 1.30pm BST: US weekly jobless

Updated

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