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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England chief economist says there’s still ‘some work to do’ fighting inflation – as it happened

Hamas Israel United States Antony Blinken Asia Joe Biden Sam Woods the Middle East Eurogroup Gaza
Chief Economist and Executive Director for Monetary Analysis and Research at the BOE, Huw Pill.
Chief Economist and Executive Director for Monetary Analysis and Research at the BOE, Huw Pill. Photograph: Suzanne Plunkett/Reuters

Closing post

Time to wrap up… here are today’s main stories:

Sam Woods: Last 12 months have been a rough ride

Sam Woods, the head of the Bank of England’s Prudential Regulation Authority, will tell City bigwigs tonight that it has been “a rocky year” for the banking sector.

The last 12 months have seen the failures of Silicon Valley Bank and Credit Suisse, Woods will tell attendees at a banquet at Mansion House tonight,

But Woods will also argue that the past 15 years of financial reform have been “a success story”.

He will argue:

We have built a regime that can withstand shocks including bank failures without falling over.

Nonetheless we must learn as we go along and there remains much to be done – and I hope I have managed to explain how our various reform strands fit together. These are about completing the mission we were set after the 2008 crisis, rather than fundamentally re-thinking regulation.

Looking ahead, we must remain alert. It’s been a rough ride over the last 12 months but we come through it stronger.

Here’s an interview we conducted with Woods last month, where he talked about the intensity of recent times.

After a choppy day, European stock markets are now showing small gains again.

Both the UK’s FTSE 100 and Germany’s DAX are up around 0.2% in afternoon trading, as investors watch developments in the Israel-Hamas war (where Israel is to evacuate residents within a 2km zone next to Lebanon).

Speaking of the Middle East…. Capital Economics have predicted that Saudi Arabia will have the weakest GDP growth in the Gulf this year.

They predict that the Kingdom’s cuts to oil production (to support crude prices) will hit economic activity, saying:

Saudi Arabia’s economy is in a recession and, with oil output cuts extended until the end of this year at least, GDP will contract further. We think that the economy will shrink by 1.3% this year which is towards the bottom of the consensus range and would be the worst performance among the Gulf economies in 2023.

Nonetheless, this weakness is being driven by lower oil output. The non-oil economy has performed well. And with the government committed to sustaining its loose fiscal stance over the coming years, economic growth will pick up over 2024-25.

Updated

Eurozone finance ministers have been arriving in Luxembourg for their monthly Eurogroup meeting, where they’ll discuss the economic outlook with US Treasury Secretary Janet Yellen:

The US stock market has opened higher, despite anxiety over the situation in the Middle East.

The Dow Jones industrial average has gained 247 points, or 0.75%, to 33,918.

Most of the 30 stocks on the Dow are up, with chipmaker Intel (+1.5%) leading the way, along with insurance group Travelers (+1.6%) and footwear and clothing firm Nike (+1.4%).

The tech-focused Nasdaq Composite has gained 0.5%

Over in New York, shares in Manchester United have fallen over 11% at the start of trading.

The selloff comes after Sheikh Jassim bin Hamad al-Thani withdrew from the process to buy the club, viewing the current owners’ valuation as highly unrealistic.

This leaves businessman Sir Jim Ratcliffe in the driving seat to secure a deal, with the club’s board expected to vote on Ratcliffe’s bid to buy a 25% share in the club for about £1.3bn in the coming days.

UK withdraws draft rules on additional reporting requirements for companies

The UK government has withdrawn draft regulations that would have added new reporting requirements for large private and publicly listed companies.

Those regulations would have included an annual resilience statement, distributable profits figure, material fraud statement and triennial audit and assurance policy statement.

But the plan has now been ditched, with the governmans saying it will “cut red tape for businesses”.

The u-turn follows a consultation with businesses, the Department for Business and Trade says.

The Business Secretary has now decided to withdraw these regulations, and will be setting out options to reform the wider framework shortly to reduce the burden of red tape on businesses, the department adds.

Nomura’s European economist George Moran has three ‘takeaways’ from Huw Pill’s discussion at OMFIF this morning:

  • The BoE’s commitment to hold rates high for longer may be flexible if there is a shock or the data no longer suggest it is necessary.

  • The signal from official wage data has weakened and instead Pill favours looking at broader measures of wage growth.

  • The BoE may become less reactive to data in the short-term if Mr Pill’s approach to focus more on the medium-term outlook is adopted more broadly. Any individual print also carries less weight by Pill as he favours an “eclectic” view of the data.

US Treasury Secretary Janet Yellen is urging eurozone finance ministers to move ahead with plans for €50bn in fresh aid to Ukraine.

The text of remarks which Yellen will give to the eurogroup meeting today show that she will also pledge that the White House, and a majority in Congress, will “fight” to provide new US assistance for Ukraine.

Yellen, who is attending the meeting in Luxembourg, will say:

“We cannot allow Ukraine to lose the war for economic reasons when it has shown an ability to succeed on the battlefield.”

Yellen will also repeat her support for the idea of using “windfall proceeds from Russian sovereign assets immobilized in particular clearing houses” to help Ukraine.

She will say:

“Ultimately, we are in it together.

Our assistance is crucial to our collective national security interests and to our shared goal of a free and prosperous Europe and world.”

Empire State manufacturing index falls

Business activity edged lower in New York State this month, according to a closely watched poll of firms in the area.

The Empire State manufacturing survey’s index of general business conditions index fell by around seven points to -4.6 this month, down from +1.9 in September.

That’s better than feared – economists had forecast a fall to -7.

The New York Federal Reserve explains:

The headline general business conditions index fell seven points to -4.6. New orders fell slightly, while shipments were little changed.

Unfilled orders declined, and delivery times shortened. Inventories held steady. Labor market indicators pointed to a slight increase in both employment and the average workweek.

Back in the markets, the surge in the oil price in the last week or so has lifted Shell’s share price to a record high today.

Shares of the company rose as high as £27.63 pence in London on Monday, or three times higher than their low of 878.3p three years ago when oil demand slumped in the pandemic.

Rising energy prices and new CEO Wael Sawan’s stronger focus on the core oil and gas business are attracting investors, reports Bloomberg.

The drop in energy prices compared with summer 2022 has helped the eurozone to post a trade surplus in August.

New data shows that the value of imports to the eurozone fell by almost 25% year-on-year in August, to €214.9bn, down from €285bn in August 2022 when natural gas prices had soared.

Exports to the rest of the world fell by 3.9% to €221.6bn, leaving the eurozone with a €6.7bn surplus in trade in goods with the rest of the world in August 2023, compared with a deficit of €54.4bn in August 2022.

Updated

Yellen: Higher US interest rates may persist

US Treasury Secretary Janet Yellen has predicted today that higher interest rates may persist in the United States.

Yellen also told Sky News that debt costs remain manageable, but that there is a need to be careful with public finances.

Yellen, who is expected to speak with eurozone finance ministers at today’s Eurogroup meeting, said:

“The United States economy is in a good place. In terms of the fiscal situation ... the US federal debt-to-GDP ratio is about 98% at this point and the interest expense, which is a more relevant statistic, still remains manageable.

“Now it is true with higher interest rates - and those higher interest rates may persist, although that’s not clear - we have to be careful about fiscal path.”

Yellen also insisted the US can “certainly” afford wars on two fronts, as the conflict between Israel and Hamas threatens stability in the Middle East and the US continues to support Ukraine’s fight against Russia.

UK expected to avoid recession this year

One piece of good news this morning – the UK economy is expected to avoid recession in 2023.

That’s according to economic forecasters at the EY ITEM Club. They have lifted their prediction for UK growth this year, to 0.6%, from 0.4% in July.

This is based on expectations that UK interest rates have now reached their peak (the top of Huw Pill’s Table Mountain) at 5.25%.

EY ITEM Club says:

A likely end to rate increases at the Monetary Policy Committee’s (MPC) last meeting, combined with falling inflation and a return to real pay growth, should keep the economy from falling into recession.

However, GDP growth expectations for 2024 have been downgraded slightly from 0.8% to 0.7%, as higher interest rates hit the economy.

EY Item Club also forecast that inflation is expected to fall to around 4.5% by the end of 2023, before hitting the BoE’s 2% target in the second half of 2024.

Updated

Back at the OMFIF event, Huw Pill was asked how long UK interest rates may stay at their Table Mountain peak (if that’s how policy plays out).

The length of the top will be “as long as necessary, but not too long”, Pill replies, admitting that this doesn’t give too much guidance.

But, he adds, the world is changing, so the Bank must be responsive to those changes.

Pill explains that the Bank will do what it needs to do – it won’t do too much, and it won’t be perfect, but it will get inflation back to 2% “pretty quickly” he pledged.

A development in the battle to own the Telegraph newspapers……

More households strugging to pay energy bills

Household energy debt has hit a five-year high of £216 ahead of the winter, according to a survey.

The poll, by comparison site Uswitch, also shows the number of homes already owing money to their provider up 11% on last year, even before the winter weather hits.

The average household debt is up 13% on the £190 seen at this time last year, while the number of homes that owe money to their supplier has risen from 2,800,000 to 3,200,000.

More than nine million households have no energy credit going into winter when they should ideally have built up a balance to cover the higher costs of heating over the colder months, the survey suggests.

Asked if the Bank of England has credibility to bring down inflation, Huw Pill insists the central bank is committed to bringing CPI down to 2%.

Pill says the Ukraine war has been the big shock pushing up inflation, and that threat wasn’t something he was briefed about when he joined the bank in September 2021.

He says:

That was a shock. Covid was also a shock. They were big shocks.

So as monetary policy works with a lag of around 18 months to two years, it’s not feasable to argue that the Bank could have prevented the spike in inflation, Pill argues.

He then reiterates that the Bank can’t be complacent, and has work to do.

Q: So, if current events in the Middle East pushed up the oil price, would the Bank of England take action or look through that?

Pill says the Bank will look at shocks to the economy, be it shocks to the labour market or the oil price, and add them to its forecasting models.

The key question is what impact would such shocks have on persistent inflation pressures.

Pill explains:

Is an oil price at $150/barrel, as we have seen in the past, going to raise petrol prices? Does it imply another cost-of-living squeeze, and does that change pricing and wage-setting behaviour in a way that is self-sustaining?

Pill: We'd have to act if UK hit by another shock

Huw Pill is then asked about his recent argument that interest rates should follow a “Table Mountain” profile – remaining at their peak for some time – rather than rising and falling sharply like the Matterhorn.

Q: How likely is that central bankers can stick to their guns, or will something catch you out?

Pill explains that he gave his Table Mountain analogy during a speech in Cape Town, when the mountain was shrouded in cloud.

That also sums up the view from the Bank, he suggests, saying:

One thing that has been confirmed to me during my time on the Monetary Policy Committee is that we do not know what the future holds.

If we were to be hit by another persistent shock….of course, monetary policy and other actors in the economy, will have to respond to that.

Pill also argues that the persistent inflationary pressures within the UK economy need to be met by a persistent monetary policy response.

Huw Pill then warns that it would be a mistake to declare victory in the battle against rising prices too early, just because inflation rates have slowed.

The BoE’s chief economist says:

“It is important that we do not declare victory prematurely, just because movements which are relatively mechanical in headline inflation are working their way through.”

Pill also cautioned that market expectations for future inflation expectations showed the BoE could not be complacent.

Huw Pill says recent official wage growth, of over 8% per year, has been “very high”.

That looks increasingly like an outlier, he warns.

But another economic gauge – KPMG/REC’s jobs survey – shows a slowdown in wage growth for new hires. That seems to be an outlier in the other direction, Pill says, suggesting a cooling in pay inflation.

The key for the Bank’s policymakers, he adds, is what wage growth is in the medium term.

Pill: We're focused on persistent component of inflation

Huw Pill then explains that the Bank of England needs to see evidence that the persistent component of inflation is falling.

This is the parts of inflation that will still be there in 18 months or two years, when the impact of the Bank’s interest rate increases have been fully felt, he says.

He points out that the rise in natural gas prices drove up inflation, while recent falls have helped to bring the headline rate down again.

Pill says the Bank has “done a lot” – raising interest rates by over five percentage points (from 0.1% in autumn 2021 to 5.25% at present).

Q: So, are you preparing the markets and the public for possible tough action ahead?

Pill says it depends what you mean by ‘tough action’.

But he reiterates that the key issue is the ‘persistent’ component of inflation, which is associated with “domestic pricing decisions, domestic cost dynamics and domestic wage-setting behaviour”.

[In other words – the extent to which firms raise prices, and workers achieve pay rises to protect the from inflation.]

Pill says:

Will that unwind on its own accord, as we’ve seen with the reversal of gas prices?

History would tell you that’s less likely to reverse on its own accord, or if it does it will be a slower process.

BoE's Pill: More work needed to bring inflation to 2%

The chief economist of the Bank of England is warning this morning that the BoE has more work to do to meet its inflation target.

Huw Pill is speaking at an event organised by the thinktank OMFIF (the Official Monetary and Financial Institutions Forum).

And he begins by insisting that the BoE is committed to achieving its mandate to bring UK inflation to 2%.

UK inflation was 6.7% in August (we get September’s reading on Wednesday), which Pill points out is still well above the Bank’s target.

And although headline inflatiion has fallen from the 40-year highs seen last autumn, Pill hints that the Bank may take further action to bring it sustainably to 2%.

He tells his audience:

We still have some work to do, in order to get back to 2%.

And we probably have some work to do, to ensure that when we get back to 2% we do so in a way that is sustainable through time.

The fact headline inflation is now falling, is “certainly not sufficient” for us to be able to say that the job is done, Pill adds.

Updated

European stocks in the red

After a positive start, European stock markets have now turned south.

The pan-European Stoxx 600 index is down 0.35%, with Germany’s DAX and France’s CAC both losing 0.5%.

The FTSE 100 is now flat in London.

Market sentiment remains under pressure, reports Pierre Veyret, technical analyst at ActivTrades, who adds:

Risk aversion still seems to prevail as investors wait for further geopolitical developments in the Middle East, hoping the military conflict will not escalate further or directly involve other nations.

Updated

European government bond yields are rising this morning, as traders consider how long inflation will remain high.

Germany’s 10-year bond yield, the benchmark for the euro area, has gained 4.5 basis points (bps) to 2.78%.

Yields measure the rate of return on the bond, and rise when price fall.

Over the weekend Joachim Nagel, the head of Germany’s Bundesbank, warned that the European Central Bank can’t declare that its fight against inflation is over just yet.

Nagel, a member of the ECB’s governing council, said the ECB will make sure interest rates are “sufficiently high for sufficiently long,” adding:

“The inflation beast has to be tamed.”

UK house prices rise at slowest post-summer rate since 2008 crash

There are fresh signs today that the UK’s housing market is cooling, under the weight of high interest rates.

Rightmove has reported that asking prices are rising by the weakest amount for this time of year since the 2008 financial crisis.

The average new asking price rose by 0.5% in the month to 7 October to £368,231, its data shows. However, the price of houses being sold dropped by 0.8% in the 12 months to early October, with the number of agreed house sales down by 17%.

Here’s the full story:

Victoria Scholar, head of investment at interactive investor, says,

14 consecutive rate increases from the Bank of England have taken their toll on mortgage appetite and house prices while sellers are less incentivised to list their properties online.

The shortage of available housing supply and sky-high rental costs means that the number of buyer enquiries per listed property remains elevated at 8% above pre-covid levels.”

Updated

Polish stocks and zloty rally after exit poll

Over in Poland, shares are rallying after an exit poll suggested a coalition of opposition parties could be heading to power after last weekend’s election.

The poll suggested the ruling Law and Justice (PiS) party had won the most votes, but that a combined opposition coalition led by former prime minister and European Council president Donald Tusk could form the next government.

Tusk was quick to declare victory last night, claiming:

“It’s the end of the evil times, it’s the end of the PiS rule, we made it,”

Poland’s WIG 20 equity index jumped as much as 4.9%, before settling 2.6% higher.

The zloty has also strengthened on the foreign exchange markets:

Bartosz Sawicki, market analyst at Conotoxia fintech, explains why the markets like the sound of a Tusk win:

Forming a pro-European government that would prioritize the rapid unlocking of funding for the National Recovery Plan worth €35bn would reduce the political risk premium.

The weak growth of Poland’s main trading partners and the gradual recovery of consumption point to an inevitable shrinking of the current account surplus.

An increased flow of EU funds would help the economy regain traction and cement a favourable balance of payments dynamics. A rapprochement with Brussels would be undeniable, but a potential presidential veto could hamper a breakthrough in reforming the judiciary system.

The similarities between 1973 – the year of the Yom Kippur war – and 2023 are “not exact”, our economics editor Larry Elliott writes.

He cautions, though, that “the idea that the world could again be on the brink of something nasty is inescapable”.

Having spent last week in Marrakech with the International Monetary Fund, and top finance ministers and economists, Larry warns:

It would be wrong to say that the IMF, the World Bank and the rich countries that dominate them are not worried. They are. The problem is they are not nearly worried enough.

Here’s the full piece:

Updated

European stock markets have opened a little higher, with the pan-European Stoxx 600 index rising 0.3% at the open.

The FTSE 100 index has gained 21 points, or 0.3%, to 7621.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says investors are in a defensive mood:

“As risk-off sentiment has been spreading, investors have been seeking more defensive positions amid fears of conflict escalating in the Middle East. The FTSE 100 looks set to benefit from higher energy prices with oil and gas prices dipping back but remaining at elevated levels, having jumped sharply over supply concerns.

Investors are braced for volatility ahead amid fears that Hezbollah militants could attack Israel over its operations in Gaza as forces ready for invasion. US Secretary of State Antony Blinken has been on a whistle stop tour of countries around the Middle East, stressing that all leaders want to see the conflict contained, but there is clearly still concern about the risks of contagion.

Although gold prices have dipped back a little, they remain a near month-long highs demonstrating the desire for safe haven assets. The Israeli Prime Minister’s vow to demolish Hamas is also helping keep the dollar strong, as investors desert riskier positions.

There are a few potential “pressure points” which the markets are sensitive to, reports Kyle Rodda, senior financial market analyst at Capital.com.

He suggests three potential scenarios which would escalate the conflict and cause volatility in the markets:

  • A potential ground invasion: volatility on Friday was set off by news that Israel is amassing troops on the border in preparation for a possible ground attack. There is uncertainty about whether this is a credible threat or if it represents posturing. On top of that, the scale and strategic intent of such an attack are unclear. Any attack would mark a significant escalation, which could prolong this major flare-up in tensions between Hamas and Israel.

  • The involvement of Iran: an unanswered question is still to what extent Iran supported and enabled the attack on Israel last weekend. The latest intelligence suggests that the Iranian regime was aware of an upcoming attack several months ago. However, there’s a lack of credible public information regarding whether Iran provided resources, participated in planning, or even directly participated in the attack, above and beyond their typical support for Hamas. If Iran is fingered, it raises the odds of more significant financial and trade sanctions; worse, it could spark military retaliation from Israel, which could embroil other actors.

  • Conflict on Israel’s Northern Border: Israel’s other adversaries may be emboldened by last week’s attack and look to take advantage of a weakened and distracted Israel. In particular, there have been reports of heightened activity around Israel’s border with Lebanon, with fears Hezbollah, in particular, could attempt to escalate its conflict with the country. Such an event would also raise the risk of broader regional hostility that draws in allies and adversaries on both sides.

Updated

Introduction: Global markets brace for more volatility amid Israel conflict

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

Concerns over further escalation in the Middle East are keeping investors cautious, more than a week after Hamas’s devastating attack on Israel.

Global markets are bracing for more volatility, as Israel prepares for a likely ground offensive into Gaza, and hundreds of thousands of Gazans move to the southern part of the Gaza Strip.

Fears that the Israel-Hamas war will develop into a regional conflict have pushed up energy prices over the last week.

Brent crude oil is trading over $90 per barrel this morning, up from $85 per barrel on 6th October, the day before Hamas’s attack.

Oil has climbed on concerns of supply disruptions, with Israel having temporarily closed its Tamar gasfield last week.

Chris Weston, head of research at Pepperstone, explains:

The focus has been rerouting that gas from the Leviathan gasfields in the north of Israel – if the market feels this gas field could be impacted then could see a spike in EU natural gas.

Many energy experts see the risk of a supply event here as fairly low, but should developments escalate on various fronts, then the market will increase the possibility of a disruption.

Most Asia-Pacific stock markets have fallen today, as risk sentiment is hit by concerns over the Israel-Hamas war.

Japan’s Nikkei has lost over 2%, while China’s CSI 300 index is down 1.1%, and South Korea’s Kospi 200 is 0.7% lower.

Reports that the US is planning to tighten sweeping measures to restrict China’s access to advanced semiconductors and chipmaking gear are also hitting shares in Asia.

Traders are edgy, rather than panicking, about the situation in the Middle East, noting that the US secretary of state, Antony Blinken, said yesterday that Arab states have a “determination” that the conflict doe not spread.

There are also reports that American and Israeli officials are discussing the possibility of a visit to Israel soon by US President Joe Biden.

Jim Reid, strategist at Deutsche Bank, says:

In the overnight session there has been some relief that a ground offensive hasn’t begun yet in Gaza and that diplomatic channels seems to be open for now.

President Biden is considering a trip to Israel in the next week which will be an important event.

John Velis, foreign exchange and macro strategist at investment bank BNY Mellon, predicts geopolitical tensions will push up the US dollar, telling clients:

Given rising geopolitical risk in the Middle East, we see the dollar’s safe-haven bid returning and so sideline our more fundamental-based reservations about limited dollar upside.

Also coming up today

European finance ministers will discuss the economic outlook when they meet for a Eurogroup meeting today. US Treasury Secretary Janet Yellen is expected to attend, too.

Sam Woods, deputy governor of Prudential Regulation at the Bank of England, will speak at the City Banquet, at London’s Mansion House.

The agenda

  • 9am BST: Italian inflation report for September

  • 9.30am BST: Bank of England chief economist Huw Pill speaks about the ‘the current economic outlook.

  • Today: Eurozone finance ministers hold a Eurogroup meeting

  • 9.10pm BST: Sam Woods, CEO of the Prudential Regulation Authority, gives speech at the City Banquet, Mansion House

Updated

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