Closing summary: Inflation data shock raises prospect of higher UK rates
Bank of England governor Andrew Bailey does not think the UK is in a wage-price spiral, he said today. But the inflation surprise this morning has given watchers of the British economy plenty to think about.
UK consumer price index inflation dropped to 8.7%, the lowest since March 2022, but that was still higher than the average expectation of 8.2% in a poll of economists. Core inflation – which strips out volatile food, drink, energy and tobacco – actually rose, while food price inflation remained at 19%, near 45-year highs.
That pushed up expectations of further interest rate increases among financial market participants. Interest rate swaps suggested that rates are more likely than not to rise to 5.5% in November.
UK financial markets have certainly adjusted to the prospect of higher rates – which would likely lead to less economic activity and lower profits. The FTSE 100 has dropped by 1.9% today with under an hour of trading remaining, while the FTSE 250 index of mid-sized companies has dropped by 1.6%.
On bond markets, the yield on 10-year gilts (UK government debt) has risen significantly to 4.3%, its highest level since the response to the disastrous mini-budget helmed by Liz Truss and Kwasi Kwarteng.
Andrew Sentance, a senior adviser at Cambridge Econometrics and a former member of the Bank’s monetary policy committee, expects high rates in the UK for a long while yet. He said:
We are still not on top of inflation in the UK, as I have warned for some time. Markets now expecting UK Bank Rate to peak at close to 5.5 percent, but could still go higher if evidence of strong underlying inflationary pressures persists. https://t.co/OPmla75Ukk
— Andrew Sentance (@asentance) May 24, 2023
In other business news from today:
Strong sales of dresses, denim and office wear as well as more affordable food helped lift sales and profits at Marks & Spencer in the past year despite the effects of inflation on its business and customers.
Severn Trent has increased its dividend to more than £260m, despite growing public anger over payments made by water suppliers to their shareholders and executives.
A ballot of Royal Mail workers on a deal struck last month to end a bitter dispute over pay, jobs and working conditions has been suspended as the row between the postal firm and its union threatened to reignite.
SSE has set out plans to invest £40bn in clean energy over the next 10 years as it reported a near-doubling of its annual profits compared with the year before thanks in part to its fossil fuel power stations.
Virgin Orbit, the satellite launch company founded by British billionaire Richard Branson, will permanently cease operations, just months after a major mission failure.
You can continue to read our live coverage from around the world:
In the UK, Boris Johnson claims the publication of the Covid inquiry ruling unfairly implies he is holding back documents
In the US, Ron DeSantis is to kick off well-funded campaign to become the next US president
In our coverage of Russia’s invasion of Ukraine, the Russian ministry of defence says Ukraine made unsuccessful attack on Black Sea fleet reconnaissance ship
The UK is set to win a battle against Spain to attract a new battery “gigafactory” to be built by Jaguar Land Rover owner Tata, the BBC has reported.
Indian conglomerate Tata has been openly weighing up two possible locations for a battery factory to supply Jaguar Land Rover, Britain’s largest carmaking employer, amid lengthy negotiations with governments for support worth hundreds of millions of pounds.
The threat of losing the factory to Spain has prompted the UK government to bow to intense pressure and offer financial support worth £500m for the plant. Many in the auto industry believe the project is vital to retain a meaningful car industry in the UK as it transitions to electric vehicles – although some analysts suggest this is not the case.
Tata’s chairman, Natarajan Chandrasekaran, is scheduled to meet Prime Minister Rishi Sunak mid-next week, the BBC reported. It said:
Sources familiar with the matter say that although the deal has yet to be signed, engagement has moved from negotiations to drafting and choreography of how the landmark agreement will be presented.
A key part of the support on offer for the gigafactory is help with energy costs. Batteries require large amounts of energy to produce, and the UK has higher costs than much of the rest of Europe.
The UK government has already offered Tata, which also owns UK businesses including Tetley Tea, a £300m package to help upgrade and decarbonise its Port Talbot steelworks facility in south Wales.
