Closing summary
It’s been a busy day for business policy chatter, in between this morning’s headlines on the challenges posed by post-Brexit rules for electric car manufacturers, and keynote speeches from Chancellor Jeremy Hunt and Bank of England governor Andrew Bailey at the British Chambers of Commerce annual general meeting in London.
Labour leader Kier Starmer is next to take the stage at the BCC, and you can follow along on our news live blog here:
Here’s a roundup of our other main stories today:
The Financial Times’ economics editor Chris Giles believes Andrew Bailey “has acknowledged for the first time the Bank of England is dealing with a UK wage price spiral” in his speech to the British Chambers of Commerce annual conference.
But is it the first time?
The FT argues that Bailey used novel language when he told business people in London that inflation staying high “reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy,” and that “as headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.”
However, in the Bank of England report last week, the monetary policy committee said there were second round effects already in play, and it was possible they would prolong inflation.
It said:
The Committee continues to judge that the risks around the inflation forecast are skewed significantly to the upside, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices may take longer to unwind than they did to emerge.
The mean CPI inflation profile, which incorporates this risk, is at or just below the 2% target in the medium term.
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HMRC bosses have assured MPs on the Treasury Committee that the tax office is transparent about which groups and individuals they are meeting with who might be trying to lobby them for tax changes.
The public can see the wide range of conversations we have with individuals.
He says this is included in committee and group minutes that he will subsequently share with MPs in the wake of the hearing.
The tax system has become more complex, HMRC’s director of customer strategy and tax design, Jonathan Athow, has told the Treasury Committee.
However, the challenge of trying to make the UK’s tax system simpler is that it can bump up against other policy objective. For example, it could cost money to make those policy changes - or it could unintentionally create “losers or winners” through those changes.
Summary: Bank of England governor gives downbeat view on economy
Bank of England governor Andrew Bailey gave a downbeat speech to the annual conference of the British Chambers of Commerce this morning, telling business people inflation was certain to fall, but possibly not by much before the end of the year.
He blamed the UK economic outlook, which had strengthened in recent months to put more pressure on prices.
The favourite word among City economists to describe inflation is “sticky” and Bailey Bailey avoided using it, he said there was a greater risk of his forecasts being wrong by underestimating inflationary pressures than being wrong because prices plummet.
If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required. Our commitment to the 2% inflation target is unwavering.
Asked by a member of the audience why the central bank bothered with a 2% inflation target when the consumer prices index (CPI) had remained mostly in double digits since last summer, Bailey said it was always better to have a simple, transparent basis for policymaking
The governor said he understood the pressure on business finances from higher interest rates, but it would be worse for them and households if inflation was allowed to become embedded.
Earlier this month, the Bank increased interest rates for a 12th consecutive meeting to 4.5% - the highest rate since 2008 - in an effort to bring down rampant inflation.
The most recent inflation reading was reported at 10.1% for March, ahead of market forecasts.
Bailey’s main message was that he understood the pain higher interest rates caused but there was little he could do about it. The medicine hurt some people, but made everyone fell better in the end, he seemed to say.
His comments contrasted with those of the Bank’s chief economist Huw Pill, who said last month that households and businesses “need to accept” they are poorer and stop trying to claw back their losses through pay increases and higher profit margins.
The UK has 1,180 tax reliefs, 339 of which are designed to encourage a “particular behaviour”, HMRC bosses have confirmed.
MPs on the Treasury Committee will be grilling three HMRC bosses this afternoon:
Jonathan Athow, Director General, Customer Strategy & Tax Design, HMRC;
Philippa Madelin, Director of Wealthy and Mid-Sized Business Compliance, HMRC;
Jane Whittaker, Director of Knowledge, Analysis and Intelligence, HMRC
Next: we’ll be turning our attention to the Treasury Committee’s hearing with HMRC tax chiefs on abuse of tax reliefs in UK’s tax system.
Jeremy Hunt promised business leaders he would work with them to overcome immigration barriers that prevent foreign skilled workers from filling jobs in the UK.
The chancellor told the British Chambers of Commerce (BCC) annual conference in London the government was prepared to adapt policy following discussions with business groups to tackle problems in the “short-term”.
Since we left the single market we have been pragmatic when it comes to immigration requirements. So for example, we put care homes on the shortage occupation list, some construction industry sectors, and we will keep talking to all of you about where there are short-term challenges.
But he emphasised the government’s focus was to support UK workers unable to join the labour force, citing parents excluded from taking up jobs due to the high cost of childcare and people with back problems who have taken early retirement.
Immigration has become one of the most fraught topics within the cabinet, with estimates showing net migration may have hit nearly 1m last year.
Home secretary Suella Braverman argued this week that Brits should be trained to drive trucks, work in the meat industry and gather crops as a way of easing labour shortages, rather than businesses relying on migrant labour. Her comments were seen as a rebuff to cabinet colleagues, including Hunt, who have backed easing visa rules as a way to promote economic growth.
But BCC director general Shevaun Haviland has said said 80% of BCC members looking to hire staff “are facing real challenges” that could not be addressed by domestic training policies alone.
Hunt defended his handling of the economy and public finances on Wednesday, saying he had brought stability to the economic outlook and protected public investment spending.
He said independent forecasters believed the government was on track to meet Rishi Sunak’s targets of halving inflation and growing the economy, but there was “nothing automatic” about controlling rising prices:
There’s a plan, we are going to stick to it. The Bank of England has a role through monetary policy and interest rates, we support them 150% with that.
But we have our role in government, what I do on the fiscal side in terms of tax and spend has an influence and if markets judge that we are not getting our borrowing under control they will punish us with higher interest rates.
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That’s all from Bailey.
The next big speech will come from Labour party leader Keir Starmer at 3:20pm BST.
Final question for BoE governor Andrew Bailey is around central bank independence, which has been thrown into question over the past 12 months.
Bailey says he won’t comment on the politics surrounding the issue.
However, he suggests that the BoE was able to take such swift action around the LDI pensions crisis last September, and around the emergency sale of Silicon Valley Bank UK in March, precisely because it was independent.
We take these actions…rapidly and we have the tools to do it, which is part of our independence.
One audience member has asked whether there’s “any point” in having a target that the Bank of England “rarely meet,” and whether the BoE should have a “more complex mandate.”
Bailey replies that it’s important that the central bank have a “simple and transparent target” and counters the claim that the BoE have failed its current mandate.
Inflation was hovering at around 2% for most of the decade prior to Covid, he explains.
One business executive has challenged Bailey on the level of interest rates, saying it has heaped further cost pressures on firms across the UK.
But Bailey says there are no quick fixes.
I do understand the very difficult consequences of the the economic conditions and the inflation that that we’re facing.
What would be a worse outcome is if we did not get the inflation under control. And I come back to this question about persistence and about second round effects. I’m afraid there’s nothing that is no tool that we have to make the initial shocks go away.
He says what the BoE can do is make sure that the effects of inflation are just temporary. “That’s why we’re raising interest rates,” he explains.
Turning to media questions, Bailey is asked by Bloomberg whether the Bank of England has lost credibility by ‘missing’ the inflation shock, having to raise rates more aggressively than expected, and reversing some earlier forecasts last month.
Bailey notes that BoE forecasts are “always conditional” and have to be adapted, and react to global “shocks” that filter through to the UK economy.
He again pushes back against claims that somehow monetary policy caused, or aggravated inflation, and says the test of BoE credibility will be its ability to bring inflation back to its 2% target going forward.
The test for me is that, we can have these things going on in the world around u,s which are terrible and have very bad effects, and the regime can bring inflation back to target. That’s the test of credibility for me.
BoE's Bailey: Labour market is 'loosening', pay growth to ease later this. year
Meanwhile, Bailey says there are some indications that there is some ‘loosening’ in the labour market, though the number of job openings is still high compared to pre-pandemic levels.
Andrew Bailey says some evidence that shock to the size of labour force - reducing it post pandemic through early retirement and long term sickness - may be beginning to reverse.
— Simon Jack (@BBCSimonJack) May 17, 2023
Bailey explains:
There are signs that the labour market is loosening a little. There has been some recovery in labour market participation, especially amongst younger workers, and the number of vacancies has come down from very high levels.
The ratio of the number of vacancies to the number of unemployed, a key measure of labour market tightness, has fallen as a result.
He said business are reporting fewer recruitment difficulties, and that there are fewer job moves. Employers are also receiving more job applications for their openings.
But the easing of labour market tightness is happening at a slower pace than we expected in February, and the labour market remains very tight. The number of vacancies remains significantly higher, relative to the number of unemployed, than before the pandemic, and employment figures have been strong.
On pay, meanwhile, he says nominal pay growth has “fallen back slightly” and could ease further later this year.
BoE's Bailey: People in the UK "can rely on their banks"
Despite the failure of three US banks and Switzerland’s Credit Suisse, Bailey has said UK consumers – and businesses – shouldn’t fear.
I should note that overseas bank failures have resulted in asset price volatility recently, and spreads on UK banks’ wholesale funding rose for a while.
But this was short-lived, implying little impact on the interest rates facing households and companies. The UK banking sector remains resilient, with robust capital and strong liquidity positions, and it continues to have the capacity to support the economy.
People in the United Kingdom can rely on their banks.
He adds that the interest rate-setting monetary policy committee has not had to shift course as a result of the banking turmoil, “nor should it.”
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Perhaps in an effort to try ensure the Bank of England seems more in touch following its chief economist’s faux pas last month, Bailey has said he understands the pressures facing those worse off during the cost of living crisis.
Bailey says he visited a food bank in Exeter yesterday, where it was “clear that many people face difficult choices and have had to cut back. even on essentials.”
It comes weeks after BoE chief economist Huw Pill faced criticism for saying that British households and businesses “need to accept” they are poorer and stop seeking pay increases and pushing prices higher.
And while rising interest rates make it harder for households too, he says it’s a necessary tool that the BoE have to use.
Bailey says:
We know that higher interest rates make things hard for many people too. But we’re conscious that high inflation always hits the least well-off the hardest. Our job is to make sure inflation is low and stable, so we have had to raise rates to bring inflation back down.
He adds:
Monetary policy can’t make the impact on real incomes go away I’m afraid. What we have to do is to take action to ensure that inflation falls as the external shocks abate – that inflationary impulses from these external sources do not cause persistent ‘second-round’ effects on domestic wage and price setting that could hold inflation up for longer.
That is why we have increased Bank Rate by nearly 41⁄2 percentage points from December 2021, from 0.1% then to 4.5% now.
BoE's Bailey: Inflation was not exacerbated by 'too loose' monetary policy
Bank of England governor Andrew Bailey is focusing on inflation, and says that while the BoE can help with price pressures, some factors have been completely out of its control.
He pushed back against arguments that the BoE could have done more to prepare itself for the shocks that eventually hit the UK economy (IE pandemic supply chain pressures, and Russia’s invasion of Ukraine), namely by tightening monetary policy earlier.
I’d like to push back strongly against one argument you sometimes hear, which is that inflation is high because monetary policy was too loose in the past.
The headline is that, even if we had had the benefit of full hindsight in the run-up to the war in Ukraine, and ample advanced warning – which for the record we did not, no one did – then in order to keep inflation at around 2%, we would have had to raise the bank rate well into double digits, sending unemployment much higher than it is today, and we would have had to do so in the middle of the worst pandemic in more than a century.
Next up at the BCC annual conference: Bank of England Andrew Bailey.
Katie Prescott from the Times pushes the chancellor on comments from businesses who say they frustrated by “onerous regulation” and other roadblocks to operating in the UK.
She cites e-money firm Revolut that is still waiting to secure a UK banking license (though we understand, through previous reporting, that there may be other factors at play in the delay).
His message? Contact government ministers.
So the first thing I would say is if you have any concerns, come and talk to me. Come and talk to Kemi Badenoch and talk to Michelle Donelan because we want to do everything we can to support those businesses.
In Revolut’s case in particular, I have had a number of discussions and we are introducing a growth duty for our financial sector regulators in the financial services and markets bill that is coming up. And they have been very responsive recently in understanding the need to foster the UK competitiveness and fintech is one of our great success stories.
Turning to audience questions, Simon Jack from the BBC asks about the other story we’ve been following this morning regarding Vauxhall-carmaker Stellantis railing against post-Brexit rules.
They are concerned that the post-Brexit deal will end up taxing manufacturers that have to source parts from outside the UK, despite claims that they have no other option.
Jeremy Hunt agrees that in the UK “we need to have battery making capacity in the UK” and hints more supply may be coming down the line:
We have the ability under the post Brexit trading arrangements to import EV batteries from other EU countries.
But the reality is there is a supply shortage, everyone is trying to develop supply of EV batteries, and so we need to have that supply here in the UK.
The closer it’s located to the factories that are making the rest of the car, the better.
And all I would say is, watch this space, because we are very focused on making sure the UK gets that EV manufacturing capacity.
On Brexit, Jeremy Hunt is pressed by the moderator about the challenge that Brexit has posed for many businesses in the room for the BCC conference this morning.
He’s sidestepped the question a bit, saying that “any change in your trading relations with your biggest trading partner presents challenges” but notes that the surge in energy prices linked to the war in Ukraine have also hampered businesses.
He then goes on to talk about Britain’s successes and opportunities in life sciences, tech and education. “But it’s up to us, as every business person here knows, it’s up to us to make the most of that opportunity.”
Those working from home, take warning: Hunt says remote working should be the exception, not the rule.
While he’s supportive of the policy for those with disabilities and mobility issues, he says business innovation may be hampered by having people working at their kitchen tables, without the opportunity for spontaneous collaboration.
There is nothing like sitting around a table, seeing people face-to-face, developing team spirit, and I worry about the loss of creativity when people are permanently working from home and not having those water cooler moments where they bounce ideas off each other.
And not every great business idea happens in a structured formal meeting. And so I think that’s why increasingly businesses are saying they want people back, unless there’s a reason
I think we will get to a point where the default is with exception of specific categories of work, like for example, call centre work, but I think the default will be you work in the office and so there’s a good reason not to be in the office and gradually we’re getting there.
Hunt: Government will ease immigration for struggling sectors, but only short-term
Hunt is then pressed on Conservative party pressure to lower immigration, all while the UK is facing a skills gap.
Aside from trying to get parents, early retirees, and those struggling with disabilities into the workforce, he says the government will open borders for key sectors struggling with labour shortages – but only in the short-term.
We will, at the margins, always be pragmatic.
So for example, we put care homes on the shortage occupation list, some construction industry sectors, and we will keep talking to all of you about where there are short-term challenges.
What we need to do is to tap into the incredible potential that we have at home at the same time, and as we make that journey to be sensible and pragmatic about the immigration requirements where there are particular pressures.
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Hunt says the government is also supporting businesses though competitive tax policies and investment incentives.
We have got an incredible opportunity in this country to be the most dynamic and innovative economy in Europe. And part of that is to have competitive business taxes.
However, he says the government recognises that there are other concerns plaguing UK business, including recruitment. Hunt explains the government addressed in his latest budget through extra childcare for working parents, as well as support for people with disabilities who are able to work from home because of new company policies.
He also says the government has supported business by allowing for “full expensing” of business investments – a policy which is running for three years, but which he hopes will be made permanent.
We have lagged France, Germany and the United States in terms of our business investment for many years, and that feeds through into our productivity. And we need to increase that and this is one of the ways that we can support additional investment by businesses.
Jeremy Hunt addresses business leaders at British Chambers of Commerce conference
UK chancellor Jeremy Hunt is addressing business leaders at the British Chambers of Commerce conference at in London this morning.
His first message is that cutting inflation – currently at 10.1% - is a priority.
He says there is “nothing automatic” about bringing down inflation and that the Bank of England has strong support from the government in their efforts to bring it back to its target of 2%.
Hunt adds that what he does on the fiscal side, in terms of tax and spending has an influence, but if markets judge that the government is not getting borrowing under control, they will again “punish us with higher interest rates.”
For those worried about levels of taxes, “I agree,” Hunt says. “We have to get business taxes down.” But he stresses that the “worst tax of all is inflation.”
“It’s a tax for which you get nothing back in return,” eating away at consumer spending and confidence, and deterring businesses from investing.
Cutting inflation he says: “has to be the overwhelming priority for this year”.
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Stellantis originally raised its concerns about the weak domestic supply chain for electric vehicle manufacturing in a submission to the the business and trade committee.
You can view that document in full here.
Let’s paraphrase their main points:
There aren’t sufficient battery production supply chains in the UK or Europe. This this is unlikely to change by 2025 or 2030, despite the fact that this is key to meeting the origin rules that require 45% of the value of an electric vehicle to be sourced locally under the post-Brexit Trade and Cooperation Agreement.
Importing parts to the UK will lead to higher costs and potential tariffs under post-Brexit rules. If carmakers source batteries from mainland Europe and China, as currently planned, they will face higher logistics costs since they’ll have to transport the batteries from mainland Europe to the UK, plus additional potential tariff costs if they fail to meet origin rules.
The potential consequences? Stellantis says costs will be passed on to the consumer, and unsustainable operations will eventually close, resulting in job losses.
Stellantis says in the document:
If the cost of EV manufacturing in the UK becomes uncompetitive and unsustainable operations will close.
Manufacturers will not continue to invest and relocate manufacturing operations outside of UK, as seen with previously established UK manufacturers such as Ford and Mini.
The closing of UK manufacturing will see significant job losses, the loss of a skilled workforce and a negative impact to the UK economy.
Brexit tariff rules pose 'existential threat' to UK car industry, academic warns
An economics academic has warned there is an “existential threat to the UK car industry”.
David Bailey, professor of business economics at the Birmingham Business School, told the BBC Today programme that the stricter rules and increased tariffs set to come into force next year would put British manufacturers at a competitive disadvantage:
I think there is a kind of existential threat to the UK car industry.
The rules in the Brexit agreement don’t help the UK car industry either. If they can’t meet those rules, they’ll face a 10% tariff on cars made in the UK and exported to the EU and vice versa. That will put the UK at a competitive disadvantage.
He added:
Car makers have been saying for some time, they can’t meet those rules as they tighten up, and they’re going to potentially be facing tariffs.
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A bit of background about Stellantis, which is the fourth-largest automaker in the world.
Its brands include Vauxhall, Peugeot, Citroën, Fiat, DS, Jeep, Alfa Romeo, Maserati, Abarth and Fiat Professional brands in the UK, and it employs more than 5,000 people in the UK, including at two manufacturing sites: Ellesmere Port and Luton IBC.
Stellantis’ Ellesmere Port site is currently being redeveloped to build its fleet of small electric vans, including the Vauxhall Combo, Citroën Berlingo, Peugeot Partner, and Opel Combo.
The company says it’s moving towards becoming 100% electric, which is why the sourcing of its electric car parts that are affected by the Brexit trade deal, are said to be so important.
Labour party leader Keir Starmer has weighed in, telling BBC Breakfast that the issues being raised by Stellantis are yet another sign that the Brexit trade deal needs to be improved.
Stellantis has said it is unlikely to be able to keep its promise to make electric vehicles in the UK without changes to the trade agreement with the EU.
The Labour leader said there were may “barriers” that needed to be reviewed in any update the the Brexit deal, and said that a future Labour government would aim to “make things here in Britain” to ensure a strong domestic supply chain.
'We need a better Brexit deal'
— BBC Breakfast (@BBCBreakfast) May 17, 2023
Labour leader Keir Starmer spoke to #BBCBreakfast after Stellantis, which makes Vauxhall, Peugeot, Citroen and Fiat, called on the government to renegotiate part of the Brexit deal or risk losing parts of its car industryhttps://t.co/nmGD8WTbpQ pic.twitter.com/NNz7zKB5R6
Starmer said:
Look, we’re not going to re-enter the EU. We do need to improve that deal. Of course we want a closer trading relationship, we absolutely do. We want to ensure that Vauxhall and many others not just survive in this country but thrive.
Because there are jobs bound up, there are families watching this morning either employed by Vauxhall or a similar place who are deeply worried about what this means.
So yes we need a better Brexit deal. We will make Brexit work. That doesn’t mean reversing the decision and going back into the EU but the deal we’ve got, it was said to be oven-ready, it wasn’t even half-baked.
So of course we’ve got to repair that along with all the other things we’ll have to repair if and when we are privileged to come into government.”
Vauxhall-maker to meet UK minister amid Brexit rule concerns
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We kick off the day with news that UK business secretary Kemi Badenoch is set to meet with bosses from Stellantis – the maker of Vauxhall, Peugeot, Citroen and Fiat – amid concerns that the car industry will struggle to meet new Brexit rules over where parts are sourced, due to in part to a weak domestic supply chain and surging inflation.
The carmaker has the rules could force it to shut some of its UK operations, putting hundreds of jobs at risk.
Those rules, which come into force next year, state that, unless manufacturers source 45% of the value of electric car parts from the UK or EU, their vehicles will be subject to a 10% tariff.
But Stellantis says carmakers are struggling to source those parts within the UK and EU.
That is due in part to a lack of UK battery plants and a strong domestic supply chain, while there have been speedier developments elsewhere. They are also being hit by a surge in the costs of raw materials.
Stellantis bosses have said that the prospect of not meeting those origin rules, and being hit with 10% tariffs, will make the industry uncompetitive.
So what to do? The company is set to discuss the matter with Badenoch later today to explore some solutions, which could include reviewing arrangements for manufacturing parts in Serbia and Morocco.
There may be a push to influence ministers ahead of plans to renegotiate the trade deal in 2025, which was part of the original pact between the UK and the EU signed by Lord Frost in December 2020.
Elsewhere…we’ll be keeping an eye on the British Chambers of Commerce Annual Conference, where we’re expected to hear from chancellor Jeremy Hunt, Bank of England Andrew Bailey and Labour leader Keir Starmer.
Stay tuned!
The agenda
10am BST: Eurozone CPI (final) for April
13.30pm BST: US housing starts for April
2.15pm BST: Treasury committee to question HMRC tax chiefs on abuse of tax reliefs in the UK tax system
AGMs: Deutsche Bank, Greggs, and Aston Martin
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