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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

ECB’s Lagarde says some firms have taken advantage of inflation to lift profit margins, after raising interest rates – as it happened

Shell United States British Petroleum United Kingdom Oil ECB European Central Bank Gas Prices Greenpeace Unite

Closing post

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

Western Alliance, the US lender, has now issued a firm denial to the Financial Times’s claim that it was exploring a potential sale.

In a statement disputing the FT’s article, Western Alliance says:

The Financial Times’ report today that Western Alliance is considering a potential sale of all or part of its business is categorically false in all respects. There is not a single element of the article that is true. Western Alliance is not exploring a sale, nor has it hired an advisor to explore strategic options.

It is shameful and irresponsible that the Financial Times has allowed itself to be used as an instrument of short sellers and as a conduit for spreading false narratives about a financially sound and profitable bank.

We are considering all of our legal options in response to today’s article.

Shares in Western Alliance had been suspended earlier, but are now trading again – down around 38% today.

According to the FT, shares of Western Alliance were trading down 25% before the Financial Times reported the potential sale and were 45% lower after the article was published.

The FT had earlier reported that “Western Alliance is exploring strategic options including a potential sale of all or part of its business, according to two people briefed on the matter…”

FTSE 100 closes down 1.1%

After a choppy day’s trading, Britain’s blue-chip sharae index has closed at its lowest level in almost a month.

The FTSE 100 shed 85 points, or 1.1%, to close at 7702 points, its weakest close since 5 April.

The turmoil in the US banking sector hit shares in London. Wealth manager St James’s Place was the top FTSE 100 faller, down 6.5%.

It was followed by mining giant Glencore (-6%) and conference organiser Informa (-4.4%).

Rate hikes and banking woes dominated investor sentiment today, as Danni Hewson, head of financial analysis at AJ Bell, explains:

“It doesn’t matter how close to the end of this rate hike cycle we might be, the reality of now is something investors can’t ignore. Hot on the heels of the Fed, the ECB has followed the same script and upped rates by a quarter of a percentage point.

“Inflation is still proving unpredictable and intractable and with central bankers all chasing after that 2% target even that most anticipated pause can’t be fully priced in until the mood music really does change key.

“And whilst there is growing optimism that shift is imminent, there is also growing concern that the rapid pace of this upshift has undermined the foundations of those mid-sized US banks. Hardly household names with global investors until the last few months, now every ear is straining to catch the sector’s next distress call.

“Banking stocks have taken another beating today as markets worry that PacWest might be the next domino to fall. Even if this alarm proves to be a false one, the implications for the global economy could be huge. Reluctance to lend from a nervous sector which is battening down the hatches could mean that dreams of a softish landing become recession-filled nightmares.

Speaking of banking turmoil…. US lender Western Alliance Bancorp denied a report that it’s exploring strategic options including a possible sale of all or part of its business.

“This story is absolutely false, there is no truth to this,” Stephanie Whitlow, a representative for the Phoenix-based bank, said in an email reported by Bloomberg.

The Financial Times had earlier reported that Western Alliance was exploring strategic options including a potential sale of all or part of its business, citing two people familiar with the matter.

Oxford Economics: What 200 crises tell us about bank failures

The experts at Oxford Economics have crunched through 150 years of bank failures, and concluded that the fall-out from recent stress in the banking system is likely to be contained.

They have analysed around 200 episodes in which a major institution, or several banks, failed, and concluded that there is only a limited, short-lived impact on GDP when stress in the banking system stress reaches the levels seen in recent weeks.

In a new report, they say:

The banking stress seen so far falls far short of that typically required to generate a sizeable GDP hit.

While an intensification of recent strains remains a key risk, the experience of recent decades is consistent with prudential policy reducing the likelihood of a very severe crisis.

Oxford Economics also point out that the fall in bank stocks since March is relatively limited from a historical perspective:

A graph showing bank equity declines following bank failures

They add, though, that it would not be historically unusual for banking sector stress to become “much more severe”, adding:

Around 20% of episodes of bank failures have resulted in bank equity declines as large as in the global financial crisis, and some 30% have seen comparable GDP impacts. Businesses see a correspondingly high chance of full-blown crisis.

However, recent “prudential” action by policymakers to mitigate the build-up of systemic risk are likely to have lowered the likelihood of severe banking stress, they conclude.

ECB meeting: What the experts say

Signs the eurozone economy is cooling encouraged the ECB to slow its interest rate increases, to a quarter-point hike today, says Katharine Neiss, chief European economist at PGIM Fixed Income:

“The ECB Governing Council did not surprise at its latest policy meeting, with a step down in the pace of interest rate increases, while retaining a hawkish tone with regards to too-high inflation. The increase in rates reflects the fact inflation remains uncomfortably high.

“In contrast to the US Federal Reserve, the ECB is not pausing. That said, the step down in the pace of interest rate rises is a signal the ECB does not want to risk overdoing it, is seeing some signs the economy is starting to cool and is mindful of spillovers from US banking sector fragilities to European credit conditions.

“Perhaps more notable in today’s announcement was the expectation the ECB expects to discontinue the reinvestments under its asset purchase programme as of this coming July. This is a somewhat faster pace than suggested by the ECB’s latest survey of market participants. While the impact of balance sheet runoff is likely to be marginal relative to the increase in interest rates, it is contributing to tighter financial conditions and should help cool the economy to bring inflation back to target.”

Paul Diggle, chief economist at abrdn, expects at least one more ECB interest rate hike, on top of today’s increase:

“The ECB’s step down to a smaller 25bps hiking increment reflects growing evidence of the lagged impact of cumulative monetary policy tightening on credit conditions and lending data.

“That said, with inflation still far too high, the ECB “is not pausing” and will hike at least once more in this cycle.

“Where we differ more substantially from consensus expectations, is in anticipating a meaningful rate cutting cycle during 2024, amid a US downturn that also takes Eurozone growth negative and weighs heavily on inflation.

“Finally, an important detail that shouldn’t get lost today is that, with the ECB moving to full run-off of maturing APP assets, it can no longer “tilt” corporate bond reinvestments towards issuers with better climate credentials. This had been the ECB’s first foray into greening monetary policy. The ECB may therefore explore other green monetary policy tools, such as differential haircuts in collateral operations based on climate scores or adjusting capital requirements on bank lending based on climate criteria.”

Sandra Holdsworth, head of rates at Aegon Asset Management, also expects further rate increases….

“The ECB hiked interest rates again today but this time it was by only 0.25% a smaller increment than in recent meetings.

They continue to signal that rates are likely to rise further and were at pains to point out that it is too early to suggest that they are near a ‘pause’.

Rates have now been increased by 375 bp since summer 2022 and Madame Lagarde admitted that higher interest rates were beginning to take effect on the economy.

The ECB also made changes to the pace of decrease of the size of their balance sheet via changes to their reinvestment policy applied to some of the bonds that are held.

The balance sheet is expected to contract by around €25bn per month on average which remains a much lower pace than that at the US Federal Reserve where the balance sheet is reducing by $95bn per month.”

Q: Can the ECB continue to lift interest rates once the US Federal Reserve stops its hiking cycle?

Christine Lagarde insists that the ECB is independent; it looks at what other central banks are doing around the world, and aims to hit its own target.

Whatever the Fed decides, we will be “riveted to our objectives”, Lagarde insists. “We’re not Fed-dependent”.

Lagarde: Profits pushed up inflation in 2022

Q: Is the worst of food inflation in the eurozone over?

Christine Lagarde tells today’s press conference that food prices are hurting people, especially the most vulnerable as they spend a bigger proportion of their income on food than the better off.

Lagarde says food price inflation has come down, to 13.6% in April, compared with 15.5% in March.

But she warns that it may not continue to fall, and reiterates concerns that firms are boosting their profit margins (see earlier post), while higher wages are also lifting inflation this year.

Lagarde says:

We have also flagged the fact that profit last year, in particular in 2022, have contributed to inflation.

This year 2023, what we see of 2023, we see more wage increases contributing to inflation.

We would hope that through a good social contract, these drivers of inflation do not active each other in what i have called in other places a tit for tat.

That ‘tit for tat’ involves workers saying they want more wages, while firms refuse to give up on their profits, she explains, adding:

Then you are at risk of something which is much more difficult and would lead us to have to take more active measures in monetary policy.

Developments in the Ukraine war will also affect food inflation, she points out.

Updated

Here’s a clip of Christine Lagarde’s opening statement at today’s press conference, warning that inflation is too high:

De Guindos: European banks have outperformed the US

Back on the banking crisis…. and Luis de Guindos, the ECB’s vice-president, reiterates that European banks have been quite calm, despite the turmoil across the Atlantic.

In what hopefully won’t be a hostage to forture, de Guindos says:

Clearly now the conclusion is that the European banking industry has been clearly outperforming the American one in terms of the tension, included in these kind of indicators, and the potential stress in financial markets

Lagarde then reveals that some policymakers were tempted towards a larger, half-point, increase in interest rates today.

She says:

There was a variety of views. Some governors suggested maybe 50 was appropriate, others also believed 25. I didn’t hear anybody suggest that zero was appropriate.

This is a hiking journey that we are on. And it will continue to be so.

Q: On interest rate increases, are we in the middle of the journey, or on the home stretch?

Christine Lagarde cites the famous quote from Ralph Waldo Emerson that life is a journey, not a destination.

She reiterates that the ECB has “more ground to cover”, but doesn’t estimate exactly how much ground…..

Q: How concerned is the European Central Bank about the US banking sector?

Luis de Guindos, the ECB’s vice-president, points out that the US banks who have hit difficulties are medium-sized, regional, with an ‘idiosyncratic’ business model that has left them exposed to higher interest rates.

European banks, though, are resilient, he insists, and well-capitalised with quality liquid assets.

An increase in interest rates is positive for European banks, he insists, as the increase in profit margins makes up for potential losses in the value of the bonds they hold (which is what blew up Silicon Valley Bank).

De Guindos says digital banking and social networks have speeded up the ace of bank runs.

Lagarde: We are not pausing

“We are not pausing. That’s very clear… We know we have more ground to cover,” Lagarde declares firmly.

A clear signal that the governing council expects to raise interest rates at future meetings.

Lagarde: the mood was determined

Onto questions….

Q: Why did the ECB slow the pace of its interest-rate increases today, to 25 basis points? (a quarter-point hike).

Lagarde explains that the mood at this month’s meeting was “determined” and “very focused”.

She adds that all members of the governing council are determined to “fight inflation, tame inflation”, and return it to 2% in the medium term.

So much for today’s decision being a ‘dovish hike’, as some economists though!

Lagarde says firmly that the ECB is not ready to halt its interest rate increases yet, saying:

Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target, and will be kept at those levels for as long as necessary.

Lagarde: Firms hiked profit margins on back of high, volatile inflation.

ECB president Christine Lagarde then warns that some firms have taken advantage of high inflation to pump up their profit margins.

She tells today’s press conference that wage pressures have strengthened, as workers recoup some of the purchasing power they have lost due to inflation.

And she then adds:

Moreover, in some sectors, firms have been able to increase their profit margins on the back of mismatches between supply and demand, and the uncertainty created by high and volatile inflation.

This practice, dubbed greedflation, is a growing concern among economists and central bankers.

Price pressures in the eurozone remain strong, Christine Lagarde adds, as past energy cost increases are passed through.

She points out that food price inflation remains elevated, at 13.6% in April, down from 15.5% in March, while services inflation rose in April.

Lagarde: government should roll back energy support measures

Christine Lagarde then calls for eurozone governments to roll back their support packages which are keeping down energy bills.

She says that otherwise, the ECB would have to raise interest rates higher.

Lagarde says:

As the energy crisis fades, governments should roll back the related support measures promptly and in a concerted manner.

This would avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response.

The eurozone economy is diverging, Christine Lagarde warns.

Manufacturing is working through a backlog of orders, but its prospects are worsening, she explains. But the services sector is growing, benefiting from the relaxation of Covid-19 restrictions.

Lagarde adds that eurozone unemployment fell to a historical low of 6.5% in March., but average hours worked remains below pre-pandemic levels.

Updated

Onto economics, and Lagarde points out that the eurozone economy grew by 0.1% in the first quarter of this year, according to early estimates.

Lower energy prices, the easing of supply bottlenecks and fiscal policy support for firms and households have supported economic resilience, she says.

But, private dometic demand, and consumption, remains weak.

Lagarde adds that business and consumer confidence have risen in recent months, but remain weaker than before Russia’s “unjustified war against Ukraine and its people”.

Updated

Lagarde adds that the ECB will stop reinvesting cash from maturing debt in its €3.2trillion Asset Purchase Programme (part of its recent stimulus programme) from July.

She says:

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities.

The decline will amount to €15 billion per month on average until the end of June 2023. The Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

Christine Lagarde begins her press conference by reading out the statement released half an hour ago.

She says:

The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.

Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting.

Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

She adds that the ECB will “continue to follow a data-dependent approach” to determine the appropriate level of interest rates, and how long they stay at those levels.

ECB press conference begins: watch live

ECB president Christine Lagarde has arrived for a press conference to discuss today’s interest rate increase.

You can watch it here (and at the top of this blog).

Updated

Today’s interest rate increase is a ‘dovish hike’, says Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors.

“The ECB delivered a dovish 25 basis points (bps) hike today, in line with current market pricing. The first drop in the core inflation reading since June last year, as well as the latest quarterly bank survey showing the most tightening of credit standards since the region’s debt crisis in 2011, appeared to have swayed the decision.”

“In the end, downshifting to 25bps was the path of least resistance, allowing the ECB to continue to show resolve in the fight against inflation while keeping one eye on financial stability risks. Arguably, this 25bps hike gives the Bank the optionality they need going forward given the dual risks of growth and inflation.”

Kassam suggests that today’s decision was perhaps the most ‘in the balance’ since the ECB’s current hiking cycle began.

We saw some persistence in inflation – with the headline number moving back up on the latest read and services inflation remaining sticky – as well as recent data showing that rather than easing as anticipated, the labour market appeared to have tightened again, making any increase in unemployment in the short term very uncertain.

In the end, lingering concerns on the variable and lagged effects of previous actions, as well as continued issues around the banking sector (although still focused on the US), led to the more dovish 25 bps increase.”

The euro has fallen against the US dollar since the ECB’s decision was announced.

The euro is down almost half a cent at $1.102.

Traders will have noted that the ECB has not explicitly committed to furter increases in interest rates, saying that future decisions will be “data-dependent” (see earlier post).

Updated

ING: ECB is in final stage of tightening cycle

Today’s decision signals that the ECB has entered the final stage of its current tightening cycle, predicts Carsten Brzeski, global head of macro at ING.

Brzeski argues that any future interest rate rises could be a mistake:

As expected, the central bank increased its main policy interest rates by 25bp, bringing the deposit rate to 3.25%. Since July last year, the ECB has hiked interest rates at every single policy meeting, by a total of 375bp. This is by far, the most aggressive monetary policy tightening cycle since the start of the monetary union.

While today’s hike is the seventh increase in a row, it is the smallest in the current cycle, suggesting that the ECB has entered the final stage of this tightening cycle. Although recent data has confirmed that underlying inflationary pressure is stickier than expected, weak credit growth and the latest results of the Bank Lending Survey have indicated that the rate hikes so far are leaving clear marks on the economy. And these effects have been stronger and materialised faster than the ECB probably expected.

In fact, at current levels and given the lagged impact of monetary policy tightening both in the eurozone and the US, the risk is high that every single additional rate hike from here could turn out to be a policy mistake further down the road.

The European Central Bank’s interest rate tightening cycle is the fastest in the history of the ECB, says Pictet Wealth Management’s Fred Ducrozet:

The ECB says any future interest rate increases will depend on the inflation outlook, underlying price pressures and the effectiveness of monetary policy transmission.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s policy rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

Today’s ECB rate rise comes 10 months after the eurozone central bank made its first rate hike in 11 years.

The ECB says today that its earlier interest rate rises are having an impact on financial conditions:

Headline inflation has declined over recent months, but underlying price pressures remain strong.

At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

Updated

European Central Bank lifts interest rates by 25 basis points

Newsflash: The European Central Bank has lifted interest rates again, as it battles inflation.

The ECB’s governing council has voted to raise borrowing costs by a quarter of one percent, as expected.

It says:

The inflation outlook continues to be too high for too long.

In light of the ongoing high inflation pressures, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.

This lifts the interest rate on the ECB’s main refinancing operations (MRO), which provide the bulk of liquidity to the banking system, to 3.75% from 3.50%.

The rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem, is going up too – to 3.25% from 3%.

The rate on the marginal lending facility, which banks use to borrow overnight from the ECB, has gone up to 4% from 3.75%.

This latest rate hike, the seventh in a row, comes after eurozone inflation rose to 7% in April, up from 6.9%, after months of declines.

Updated

Key event

Tension is rising in the markets as investors await the European Central Bank’s decision on interest rates, in 10 minutes.

The ECB is widely expected to raise its benchmark rates by a quarter of one-percent, as Joel Kruger, market strategist at LMAX Group, explains:

“The Euro has already been feeling better in the aftermath of Wednesday’s Fed meeting with the Fed opening the door to the possibility of pause on rate hikes. In terms of the ECB decision, the broad consensus is that the ECB will raise rates by 25 basis points but, unlike the Fed, will hold to a more hawkish leaning outlook, highlighting more rate hikes ahead. Core inflation is simply still too high to ignore and given what we’ve been hearing from ECB officials in recent weeks, we suspect this will indeed be the message.

“The less likely outcome is that the central bank would go ahead with another 50 basis point hike, though we have a hard time seeing this play out as we don’t believe the ECB will want to rock the boat too much - especially considering the message will already be hawkish, as the ECB alludes to the possibility for more rate hikes and considering the latest Fed mood.

“One final possibility is that the ECB raises 25 basis points and follows the Fed, leaning more dovish, perhaps offering no new willingness to commit to additional rate hikes. While this is possible, we have a hard time seeing it play out given how focused the ECB has been on battling inflation.

On net we believe today’s decision should produce a 25 basis point hike, along with a willingness to continue to raise rates going forward. Should this play out we suspect it will be supportive of the Euro. Though depending on just how much everyone is expecting the scenario, the Euro could sell off on the fact.

Pound hits 11-month high against US dollar

Sterling has hit its highest level against the US dollar since June last year, as traders anticipate further Bank of England rate hikes in the months ahead.

The pound hit an 11-month high of $1.2593 against the dollar today, up almost a third of a cent, extending its recent recovery.

The pound vs the US dollar over the last year
The pound vs the US dollar over the last year Photograph: Refinitiv

Investors suspect that last night’s rise in US interest rates could be the last in the current cycle, given concerns over America’s banking sector and a looming recession.

As Philip Shaw of Investec told clients:

We maintain our view that US rates have peaked following 10 consecutive hikes from the FOMC. Also barring major upside inflation surprises, our baseline forecast is still that the committee will begin to loosen policy towards the end of the year.

How tight credit conditions become and the manner in which the economy reacts seem set to become key policy determinants over the coming months.

The Bank of England is expected to raise UK interest rates again next week, to 4.5%, with at least one more increase priced in by the end of this year.

Factories across the eurozone have cut their prices, as cost pressures eased.

Industrial producer prices fell by 1.6% in the euro area during March, and by 1.5% in the wider EU, statistics body Eurostat reports.

That could feed through to consumers in coming months, easing inflation.

But, producer prices were still 5.9% higher in the eurozone than a year ago, and 7.0% higher in the EU compared with March 2022.

Lunchtime reading! With the Coronation just two days away, our economics editor Larry Elliott has looked into the differences – and similarities – between the Britain of 2023 and the one of seven decades ago.

He explains:

Double-digit inflation prompted by a regional war. Essential goods in short supply in the shops. Shortages of workers. In some respects the economy when Charles III is crowned king this week has distinct echoes of his mother’s coronation 70 years ago.

In other respects, Britain is an entirely different place. In 1953, the retreat from empire was under way, the welfare state was in its infancy and membership of the European Economic Community was two decades away.

But while people are richer, and live longer, taxes are higher, house prices have surged while the number of new properties being build has fallen.

Here’s the full piece:

Updated

TD Bank shelves $13bn takeover of First Horizon

More banking news: Canadian lender Toronto-Dominion Bank has called off its deal to acquire First Horizon, the US bank, for $13.4bn on Thursday.

The news has sent First Horizon’s shares down over 50% in premarket trading.

TD and First Horizon mutually decided to end the deal because there was no clarity on when they would get regulatory approvals, the two banks said in a statement.

The termination was solely related to TD, which was unable to get approvals, and it had nothing to do with the ongoing banking crisis or with First Horizon, a spokesperson for the U.S. bank said.

The deal, which was first announced in February last year, has faced months of regulatory uncertainty and recently came under pressure from TD’s investors after the U.S. regional banking crisis.

Updated

UK firms still face ‘challenging’ business conditions, the latest realtime survey of the economy shows.

The Office for National Statistics reports:

Latest results suggest business conditions continue to remain challenging, but estimates show small signs of positive improvement for some measures; examples include a stable proportion of businesses reporting they were able to get materials, goods and services from within the UK, and more businesses reported having fewer concerns for their business.

Full story: Shares in California lender PacWest plummet amid fears of new US banking crisis

The California lender PacWest has sought to calm markets and said it is in talks with several potential investors as its shares plummeted as much as 60%, reigniting fears about a US banking crisis.

PacWest shares plunged in after-hours trading after Bloomberg News reported it was considering strategic options including a sale or fundraising round. It is the latest US regional bank to seek a lifeline after First Republic Bank was sold to JP Morgan after talks over the weekend.

The Los Angeles-based PacWest sought to reassure investors by saying it had not experienced out-of-the-ordinary deposit flows.

The bank added:

“Recently, the company has been approached by several potential partners and investors – discussions are ongoing,”.

UK consumers increased their spending on credit cards in March, while also running down their savings at banks and building societies.

The Bank of England reports that consumers borrowed an additional £1.6bn in consumer credit in March, up from the £1.5bn borrowed during February.

That could show that households had to rely more on credit to make ends meet, given inflation remained in double-digit levels.

Households withdrew £4.8bn from banks and building societies in March, compared to net deposits of £2.6 billion in February.

Breakdown of households’ deposits (Household M4)
Breakdown of households’ deposits (Household M4) Photograph: Bank of England

Households moved £3.5bn into National Savings and Investment (NS&I) accounts during March, up from £2.0bn.

NS&I has been lifting its interest rates in recent months, such as on its Green Savings Bonds.

Ashley Webb, UK economist at Capital Economics, says the decline in bank deposits doesn’t look like a bank run:

March’s money and credit data showed that the collapse of the US bank SVB and the takeover of Credit Suisse in early March triggered a small withdrawal of funds from the overall UK banking system. Meanwhile, higher interest rates were a further drag on lending growth in March.

Total UK bank deposits fell by £18.1bn in March. Within that, deposits held by households fell by £4.8bn and businesses’ deposits fell by £5.8bn. Households’ deposits in instant access accounts fell by a further £5.1bn, but that was offset by a £6.5bn increase in deposits in higher interest-bearing time deposits. Households also increased their holdings in National Savings and Investment accounts by £3.5bn (which is outside of the banking system).

While total UK bank deposits fell in March as concerns over the banking sector rose, this is not big enough to constitute a bank run.

The pick-up in mortgage approvals could push up house prices this spring, predicts Charlotte Nixon, mortgage expert at Quilter.

Nixon explains:

Net mortgage approvals for house purchases have shown resilience in the face of these issues, increasing to 52,000 in March from 44,100 in February. This increase could be linked to a modest rise in consumer confidence, as individuals grow accustomed to mortgage rates around 4.5% and a predicted path to a base rate peak of 5%. This is also likely a result of the usual uptick in house purchases in spring.

However, with a base rate hike likely on the cards next week this new found optimism for buyers might be quickly dampened. Whether these increases are enough to completely rain on a usually more buoyant market in the spring and summer months is yet to be seen.

Today’s jump in mortgage approvals shows that the UK housing market continues its convincing rebound following the chaos of the mini-Budget, says Tom Bill, head of UK residential research at Knight Frank:

Price declines appear to be bottoming out and transactions clearly hit their low-point in January. Buyers have accepted the new normal for mortgage rates as stability returns to the lending market.

Boosted by savings accumulated during the pandemic, record levels of housing equity and a strong jobs market, we expect sales activity will be solid without being spectacular this year.

Properties that tick all the right boxes will hold their value but some of the “pandemic froth” is disappearing so asking prices will come under pressure, Bill says, adding:

After a general election, successive lockdowns, a stamp duty holiday and the mini-Budget, the UK housing market should have its most predictable year since 2018. Next year’s general election may shake things up again so switched-on buyers and sellers are acting while the backdrop is relatively uneventful.”

Updated

UK mortgage approvals jump to five-month high

UK mortgage approvals have risen to their highest since the aftermath of the mini-budget chaos last autumn.

UK lenders approved 52,000 new mortgages in March, up “significantly” from 44,100 in February, the Bank of England reports.

That suggests demand for property has picked up, after a sharp slowdown following the rise in UK interest rates and the turmoil in the bond markets.

That’s the highest number of new mortgage approvals since last October, although still lower than the 69,777 signed off a year earlier, in March 2022.

But net mortgage lending to individuals, which reflects mortgage approvals a month earlier, dropped to almost zero after net flow of £700m in February.

The Bank’s data also shows how borrowers are facing higher interest payments, following the rise in mortgage rates.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 17 basis points, to 4.41% in March, the BoE says.

Jason Tebb, chief executive officer of property search website OnTheMarket.com, says:

“With approvals for house purchases, an indicator of future borrowing, continuing to rise in March, stability and confidence is returning to the market after the upheaval of the autumn and the fallout from the mini-Budget.

While the base rate may rise again at this month’s Monetary Policy Committee meeting, there’s a growing expectation that we’re near the end of the increases and that the plan to reduce inflation is on track.

As the traditionally busier spring months kick into gear, it feels as though we’re getting back to where we were pre-pandemic, before the stamp duty holiday and race for space distorted the market. As more people get on with the business of moving, sellers who take advice from experienced agents and price realistically will be best placed to secure a buyer.”

UK service sector posts best growth in a year

Britain’s service sector has posted its strongest growth in a year, as the economy picked up pace last month.

Data firm S&P Global reports that business activity growth regained momentum during April, fuelled by the strongest upturn in new orders since March 2022.

With demand resilient, and business optimism rising, firms also took on more staff, their survey of purchasing managers says.

This has lifted the S&P Global / CIPS UK Services PMI to 55.9 in April, up from 52.9 in March, showing the fastest rise in service sector business activity for 12 months.

Firms reported stronger consumer spending, particularly in the travel, tourism and leisure sub-sectors.

Company costs also increaased, with many blaming higher wages.

The PMI report says:

Higher salary payments were by far the most cited reason for increased business expenses in April, followed by elevated energy prices.

Around 48% of the survey panel reported a rise in input costs, while only 3% signalled a fall. Moreover, the overall rate of input price inflation accelerated for the first time since last November.

Tim Moore, economics director at S&P Global Market Intelligence, explains:

A strong rate of service sector growth meant that the UK economy started the second quarter of 2023 in positive fashion. Overall private sector output expanded at the fastest pace for one year, despite another fall in manufacturing production during April.

Service providers experienced the steepest upturn in new work for 13 months as resilient consumer spending combined with a turnaround in demand for business services to boost overall order books. Survey respondents often cited an improvement in clients’ willingness to spend, helped by greater confidence with regards to the near-term economic outlook.

UK car sales rise, but electric car forecast cut

UK car sales have risen for the ninth month running, as easing supply chain problems helped autuo dealers to get hold of stock.

There were 132,990 new cars registered in the UK in April, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT). That’s an 11.6% increase on April 2022, but still 17.4% below 2019’s volumes.

So far this year, car sales are 16.9% higher than in 2022, which has prompted the SMMT to lift its forecast for sales this year, for the first time since 2021.

It now expects 1.83m new vehicle to be sold, up from 1.79m predicted before, as supply chain disruption eases.

But, the SMMT has cut its forecast for growth in battery-powered electric cars, saying:

The sector is, however, less optimistic about growth in demand for BEVs, downgrading their expected 2023 market share from 19.7% to 18.4%, with high energy costs and insufficient charging infrastructure anticipated to soften demand.

Mike Hawes, SMMT chief executive, says:

The new car market is increasingly bullish, as easing supply chain pressures provide a much-needed boost.

However, the broader economic conditions and chargepoint anxiety are beginning to cast a cloud over the market’s eagerness to adopt zero emission mobility at the scale and pace needed.

To ensure all drivers can benefit from electric vehicles, we need everyone – government, local authorities, energy companies and charging providers – to accelerate their investment in the transition and bolster consumer confidence in making the switch.

We have another interest rate hike…. in Norway.

Norges Bank has just raised its policy rate by 0.25 percentage points to 3.25%.

And based on the “current assessment of the outlook and balance of risks”, the policy rate will most likely be raised further in June, Norges Bank adds.

European markets drop amid US banking worries

European stock markets are losing ground this morning, as investors worry about the jitters in the US banking sector.

Last night, shares in California lender PacWest tumbled by over half, as traders worried that it could become the next victim of the banking panic.

PacWest then revealed it was looking at “all options to maximize shareholder value”, and had been approached by potential partners and investors.

After the takeover of First Republic by JP Morgan this week, PacWest is the latest midsize bank under firm pressure.

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

PacWest is the latest lender to fall victim to the turmoil in the US mid-cap banking sector with worried investors either cutting their holdings or adding to short positions which has punished its share price.

PacWest has a heavy focus on commercial real estate lending, which has suffered on the back of the Fed’s aggressive rate hiking path after the longstanding punchbowl of cheap money was removed.

Neil Wilson of Markets.com says it’s “all hands to the pumps” for PacWest.

Just as Jay Powell, the chairman of the Federal Reserve, was proclaiming the US banking system was “sound and resilient”, news was breaking that another embattled midsize lender was close to the edge.

After the Fed’s decision to raise rates by 25bps, reports emerged that PacWest Bancorp was exploring “strategic options”, including a possible sale. Shares in the bank tumbled 50% after-hours to take its YTD loss to almost 72%. Shares in Western Alliance, another embattled regional lender, slumped a further 22% in after-hours trading. KBW will open lower later after sliding almost 2% yesterday.

It’s all hands to the pumps now for PACW, which issued a statement saying it is looking at “all options to maximize shareholder value”. It also stressed that deposits are OK - core customer deposits have increased since March 31st with $28 billion in total deposits as of May 2nd, whilst the level of insured deposits has increased from 71% to 75%. You can’t ask JPM to come to the rescue again. “I think it’s probably good policy that we don’t want the largest banks doing big acquisitions,” Powell said.

No but that is what happened because it was the ‘best’ outcome for the banking system and FDIC…unintended consequences. The quicker the Fed gets to a point of cutting rates the better for these midsize banks but there is a lot more time and likely a lot more pain before we get there.

The prospect of another hike in eurozone interest rates this lunchtime is also hitting the mood on trading floors, with the ECB expected to lift borrowing costs by at least 25 basis points later today.

In London, the FTSE 100 has dipped to a near one-month low, currently down 18 points or 0.3% to 7,770 points.

Germany’s DAX and France’s CAC indices are both down around 0.4%.

Shell makes record first-quarter profits of nearly $10bn

Shell made record first-quarter profits of more than $9.6bn (£7.6bn) in the first three months of this year, even as oil and gas prices tumbled from last year’s highs, our energy correspondent Jillian Ambrose reports.

The better-than-expected adjusted earnings topped its previous first-quarter profit record set last year at $9.1bn for the same period, and were well above the $7.96bn predicted by industry analysts.

Europe’s biggest oil and gas company will now offer shareholders $4bn in share buybacks over the next three months.

The Anglo-Dutch energy company said profits rose thanks to its trading teams which were able to mitigate against the falling market price for oil and gas.

Global oil prices averaged $81.7 a barrel in the first quarter of this year, according to Shell, down from $102.2 a barrel in the same period a year earlier, when Russia’s invasion of Ukraine ignited a surge in oil and gas markets.

Shell’s new chief executive, Wael Sawan, said the company had delivered “strong results and robust operational performance, against a backdrop of ongoing volatility”.

More here:

Updated

Shell shares jump

In the City, shares in Shell have jumped by 2% in early trading as investors welcome today’s financial results, and another $4bn share buyback programme.

The $9.65bn profits Shell made in January-March are a record for the first quarter of the year, my colleague Jillian Ambrose points out.

But it’s not an all-time Shell record. Nine months ago, it posted adjusted profits of $11.5bn in the second quarter of 2022, after profiting from the surge in wholesale energy prices in the Ukraine war.

Here’s Victoria Scholar, head of investment at interactive investor, on Shell’s results:

“Shell reported first quarter profit of $9.65bn, beating analysts’ expectations for $8.14bn and higher than its earnings in Q1 2022 of $9.13bn when Russia first invaded Ukraine. The oil giant kept its share buyback programme unchanged at $4 billion over the next three months.

Strong trading amid the volatile price environment in Europe and America helped Shell’s earnings outpacing analysts’ expectations and offset the impact of weaker oil and gas prices and lower refining margins. Its chemicals result also improved on the back of better margins thanks to lower utility and feedstock costs.

Unlike BP, Shell maintained its share buyback programme, returning further cash to shareholders. Over the past year though, shares in Shell are up around 5%, underperforming BP which is up over 18% until Wednesday’s close.

Sky high profits for Shell and BP have raised questions about whether oil giants, which benefitted from last year’s commodity boom following the onset of war in Ukraine, should be paying more windfall taxes to redistribute excess profits towards essential government services. The counter argument is that these profits may not endure, particularly as underlying oil prices weaken amid slowing global demand. During covid for example oil prices fell sharply, resulting in an annual loss for Shell in 2020 of almost $20 billion.”

Updated

Shell’s profits were boosted by strong earnings from its fuel trading arm, which offset the impact of lower oil and gas prices.

Lower natural gas prices in the quarter knocked profits at Shell’s giant integrated gas business down by 18%, to $4.9bn, compared with the last quarter of 2022.

But profits at its chemicals and refined products unit jumped 139% to $1.8bn, from $700m in October-December last year.

Key event

UK union leaders are calling for fresh action on energy company profits, after another quarter of bumper earnings.

Sharon Graham, Unite general secretary said:

“The scale of profiteering displayed today by Shell and earlier this week BP is one of the corporate scandals of our times. And this is practically untouched by Rishi Sunak’s so-called windfall tax.

“Actually it’s time to consider something way beyond a windfall tax. Unite research has found that if the UK had a Norwegian tax take we would be earning at least £30bn more from the North Sea than we are now.

“Not taking any action against “Big Oil” means the profiteering plundering will continue without end.”

And TUC General Secretary Paul Nowak says:

“These sky-high profits beg the question – will the government ever have the backbone to tax the energy giants properly?

“While families across Britain have struggled to heat their homes, Shell have enjoyed a record cash bonanza.

“Our energy market is fundamentally broken. Struggling households shouldn’t be lining the pockets of shareholders and fat cat CEOs.

“We could all have lower bills if government taxed excessive profits, introduced a social tariff and created public ownership of new clean power.

“It’s time to end the energy racket.”

Updated

Greenpeace: Shell bumper profits of $9.6bn are 'obscene'

Shell’s $9.6bn profits for the first three months of this year are ‘obscene’, says Charlie Kronick, senior climate advisor at Greenpeace UK:

“As temperatures soar from Madrid to Mogadishu, Shell is once again posting bumper profits while promising to keep extracting fossil fuels for years to come.

Millions around the world are already feeling the effects of the climate crisis and it’s those who did the least to cause it who are paying the heaviest price.

“It’s time for the oil giants to start feeling the heat. The UK government should stop issuing new oil and gas licences and force Shell and the rest of the industry to start using their obscene profits to pay for the damage that their fossil fuel habit is causing to lives and livelihoods around the world.”

Updated

IPPR: Time for a share buyback tax

Shell’s latest whopping profits have sparked fresh calls for a tax on share buyback schemes – which are used to return cash to shareholders.

With Shell announcing a new $4bn buyback programme this morning, Joseph Evans, researcher at IPPR, says the government must act:

“Shell’s profits soar while households suffer.

To add insult to injury, instead of using the profits productively, like investing in the green transition, they’ve decided to hand this excess cash straight to their shareholders through a £3.18bn buyback programme, adding to the £13.8bn they paid out last year.

“It is time the government finally start taxing excessive payments to shareholders. A share buyback tax could bring in crucial billions to the UK treasury every year.”

Updated

Shell CEO: These are strong results

Shell’s chief executive officer, Wael Sawan, says:

“In Q1 Shell delivered strong results and robust operational performance, against a backdrop of ongoing volatility, while continuing to provide vital supplies of secure energy.

We will commence a $4bn share buyback programme for the next three months as part of our commitment to deliver attractive shareholder returns.”

Updated

Introduction: Shell makes £7.66bn in Q1

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

Oil giant Shell has racked up earnings of $9.65bn (£7.66bn) for the first three months of this year, beating forecasts, as energy producers continue to post eye-watering profits.

Shell’s first quarter adjusted earnings are higher than the $9.13bn it made in the first quarter of 2022 – when oil and gas prices surged after the invasion of Ukraine.

But, profits are lower than the $9.8bn it made in the final quarter of last year, following the recent drop in oil and gas prices from their highs last summer.

Shell says it benefitted from “improved operational performance, lower underlying opex and better results in Chemicals & Products driven by trading & optimisation offsetting the impact of lower oil and gas prices, and higher tax compared with Q4 2022”.

Shell plans to funnel billions of these profits back to shareholders, through a new $4bn share buyback programme announced this morning.

That’s on top of total shareholder distributions of $6.3bn in the first quarter of the year, including an earlier $4bn buyback programme.

This comes on top of a blowout 2022 for Shell. Last year, it made one of the largest profits in UK corporate history, at $40bn (£32bn).

Rival oil giant BP has also made a profitable start to 2023. On Tuesday, BP reported underlying profits of $5bn (£4bn) in the first three months of the year, beating analysts’ forecasts of $4.3bn.

That was BP’s second-best results for the first quarter it has notched up since 2012, when it made $4.7bn, behind last year’s $6.2bn.

Also coming up today

The European Central Bank could raise interest rates again today, as it continues to battle inflation.

Ipek Ozkardeskaya, senior analyst at Swissquote, says:

The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month’s rally in energy prices, hint that a 25bp hike could be more appropriate in Eurozone this week than a 50bp hike.

This being said, ECB Chief Christine Lagarde will certainly not announce the end of the rate hikes in the Eurozone. She will likely stay firm on the ECB’s determination to fight inflation, and insist that the economic data will determine the size of the upcoming ECB actions.

Last night, America’s Federal Reserve raised US interest rates to the highest level since 2007, to a 5%-5.25% range.

The Fed also hinted it could be nearing the end of its rate-hike cycle. Chair Jerome Powell told a press conference:

“There is a sense that, you know, we’re much closer to the end of this than to the beginning.”

But he warned that “future policy actions will depend on how events unfold”.

We also learn how UK and eurozone services companies fared last month, and also get the latest UK car sales data. Preliminary data suggests car sales rose 10% in April….

The agenda

  • 7am BST: German trade balance for March

  • 9am BST: Eurozone services PMI for April

  • 9am BST: UK car sales for April

  • 9.30am BST: UK mortgage approvals and credit approval data for March

  • 9.30am BST: UK services PMI for April

  • 1.15pm BST: European Central Bank interest rate decision

  • 1.45pm BST: European Central Bank press conference

Updated

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