BoE economist sees interest rates rising higher; retail sales bounce despite inflation – as it happened | Business

The Bank of England will intensify its squeeze on the economy over the coming months as it seeks to bring down the highest inflation rate in 40 years, its chief economist has warned.

Noting that Threadneedle Street was facing its toughest challenge since being granted independence in 1997, Huw Pill said “further work needs to be done” to bring the annual inflation rate back to the government’s 2% target.

Inflation soared to 9% in April as the rising cost of gas and electricity pushed household energy bills to record levels and the escalating cost of food and transport also contributed to the surge in the cost of living.

The Bank’s nine-strong monetary policy committee has raised borrowing costs at its last four meetings but Pill used a speech in Cardiff to signal further increases were needed to prevent high inflation from becoming embedded in the economy.

“In my view, we still have some way to go in our monetary policy tightening, in order to make the return of inflation to target secure,” Pill said.

Inflation has driven UK consumer confidence down to a record low, even worse than after the 2008 financial crisis:

Joe Staton, client strategy director at GfK, said:

“This means consumer confidence is now weaker than in the darkest days of the global banking crisis, the impact of Brexit on the economy, or the Covid shutdown.”

Former BoE governor Lord King said central bankers had blundered by pursuing money-printing policies, and needed to raise interest rates higher.

They shouldn’t have been printing the extra money; what governments were doing was enough to deal with the consequences of COVID. They’re now worried about inflation, when they weren’t before…

[But] it’s not all the result of the Russian invasion of Ukraine. This was foreseeable, because there was a mistaken diagnosis of what needed to be done with the pandemic.”

Economists have warned that the long-term outlook for the economy is weak, despite a surprise rise in retail sales last month.

Retail sales volumes rose by 1.4%, but the increase was driven by increased spending on alcohol, tobacco and sweet treats at supermarkets, as cash-strapped households stayed at home rather than going out socialising.

Nationwide executives have said they are “highly concerned” about the outlook for inflation, warning that rising costs could harm already struggling customers and drag down house prices.

Rishi Sunak has become the first frontline politician to be ranked among the UK’s wealthiest people, only days after the chancellor warned consumers that “the next few months will be tough” as the cost of living squeeze intensifies.

Sunak, a former hedge fund manager, and his Indian heiress wife, Akshata Murty, were named on the Sunday Times rich list as the 222nd wealthiest people in the UK, with a combined £730m fortune.

China’s central bank has cut its main mortage interest rate to stimulate its economy, cheering markets.

But economists say Beijing must take wide-ranging measure to protect its economy, as lockdowns hit growth and push up inflation.

Costs and delays at Britain’s new nuclear power station at Hinkley Point in Somerset have increased, again. It will start operating a year later than planned and will cost an extra £3bn.

Russia will stop gas flows to neighbouring Finland on Saturday morning, after Finnish state-owned gas wholesaler Gasum refused to pay Gazprom Export in roubles as Russia has demanded.

Shares in THG soared by a quarter on Friday, as investors anticipated a possible multibillion-pound bidding war for the online retailer, including a possible offer from property tycoon Nick Candy.

The digital marketing group Next Fifteen has struck a £310m deal to buy M&C Saatchi, gazumping the tech entrepreneur Vin Murria’s takeover attempt, and ending almost three decades of independence of one of Britain’s most famous advertising agencies.

HSBC is under pressure to fire a senior banker in charge of responsible investing after a speech in which he described warnings about the climate crisis as “unsubstantiated” and “shrill”, made light of major flooding risks, and complained about having to spend time “looking at something that’s going to happen in 20 or 30 years”.

Have a lovely weekend, we’ll be back on Monday…GW

Inflation pressures are intensifying in Germany too.

Producer price inflation, which measures what manufacturers charge ‘at the factory gate’, has hit a record 33.5% per year in April.

Prices rose 2.8% in April alone.

Energy prices surged by 87.3% compared to April 2021, and by 2.5% compared to March.

There were some staggering annual price increases for energy, as Destatis explains:

Mainly responsible for the high rise of energy prices were the strong price increases of natural gas (distribution) which was +154.8% on April 2021. Power plants had to pay four times as much as one year before (+307.0%).

Industrial consumers’ prices were up 259.9%, those of resellers 170.0%.

There were also significant price increase on intermediate goods. including metals, fertilisers, prepared feeds for farm animals and wooden containers.

Fertilisers and nitrogen compound prices more than doubled (+111.7 %), while prepared feeds for farm animals increased by 52.8%.

Metals’ prices jumped 43.3%, wooden containers were up 75.0%, industrial gases leapt and prices of sawn timber by 52.3%.

Vincent Ni

With China’s economy struggling, attempts to boost flagging GDP growth are being hindered by several factors –from Covid lockdowns and the Ukraine war to growing tensions with America, our China affairs correspondent Vincent Ni writes.

At a recent online gathering of top Chinese economists, a palpable sense of urgency filled the virtual meeting room. In recent weeks, a slew of reports by Chinese and foreign economists pointed to a deteriorating economy.

Outside the country, talk of China being the engine of global economic growth no longer convinces.

During the meeting Huang Yiping, a Peking University professor and a former central bank adviser, urged Beijing to “do whatever it takes to save the economy”.

Huang was paraphrasing a line from the height of the European debt crises more than a decade ago, when the European Central Bank’s then president, Mario Draghi, said it was ready to “do whatever it takes to preserve the euro”.

Huang suggested:

“Cashflow problems have shown up for many enterprises and households. More direct support is needed for affected companies and people.”

His remarks have resonated with locked-down social media users after reports of the meeting were released on Sunday. “[He’s] a courageous Chinese intellectual,” one wrote on WeChat.

Here’s the full piece:

Today’s cut in mortgage interest rates is a start, but will Beijing go further?

Here’s some reaction to Huw Pill’s warning that monetary policy needs to be tightened to stop the UK’s ‘inflationary momentum’ getting out of hand.

Samuel Gee, director at Bristol-based Manning Gee Investments, says:

“It’s obvious that rates are going to rise further, but the UK economy couldn’t likely cope with quick, sharp-shock increases. They are likely to be more gradual. In the US, the Fed has already countered fears of supersized hikes.

In the UK, so much is at stake. You have people borrowed-to-a-hilt who are starkly at risk, and the Bank of England knows it. Inflation does need to be controlled, but we are coming out of a pandemic and a war in Europe isn’t helping.

We are likely to see more Government and central bank fire-fighting in the months ahead. I wouldn’t say a half-percent increase is off the table.”

Allan Monks, economist at JPMorgan, said Pill’s clear concerns about inflation suggested a majority on the MPC was now “leaning towards a more hawkish interpretation” of the bank’s recent guidance, the Financial Times reports.

Monks added:

“The risk the MPC will need to hike every meeting this year appears greater than it having to go on hold after August”.

Here’s Bloomberg’s says:

Britain’s inflationary shock is likely to be worse than feared, Bank of England chief economist Huw Pill said as he warned price pressures were “substantial” and further interest-rate increases will be needed.

In a speech to the Association of Chartered Certified Accountants in Wales, Pill spelled out the dilemma the central bank faces as soaring inflation threatens both to become embedded in domestic price setting and depress growth by squeezing household incomes.

On balance, Pill said “the balance of risk is tilted towards inflation proving stronger and more persistent than anticipated in that baseline.”

The former Bank of England governor has criticised the UK’s central bank for allowing inflation to surge to its highest in 40 years.

Mervyn King told Sky News that Britons must brace themselves for a “very unpleasant period”, with “considerable” interest rate hikes now needed to prevent a re-run of the 1970s.

Lord King, who ran the BoE during the financial crisis, blasted central bankers for fuelling a rise in inflation by printing hundreds of billions of pounds and dollars during the pandemic.

He said they would have to raise interest rates immediately to prevent an inflationary spiral, following a “failure of the economics profession”, with interest rates kept too low for too long, and too much “quantitative easing” (buying bonds with newly created money).

In a highly critical intervention, King says:

They shouldn’t have been printing the extra money; what governments were doing was enough to deal with the consequences of COVID. They’re now worried about inflation, when they weren’t before…

[But] it’s not all the result of the Russian invasion of Ukraine. This was foreseeable, because there was a mistaken diagnosis of what needed to be done with the pandemic.”

Nationwide: Inflation surge could hit house prices

Kalyeena Makortoff

Nationwide Building Society has warned that the UK’s rocketing inflation could send British house prices into reverse.

Nationwide executives said this morning they are “highly concerned” about the outlook for inflation, a signal that the cost of living crisis could drag down house prices, as customers struggle.

Chief executive Joe Garner told journalists.

“Obviously we are highly concerned about the outlook environment.

And we are very focused on leaning into our members, and really underlining the emphasis of contacting us as early as possible.”

Garner said the building society was ready to offer a range of options to struggling customers, including interest-only payment holidays.

However, the building society, which is the UK’s second largest mortgage lender behind Lloyd’s Banking Group, explained that higher property prices, rising interest rates, and the “steep increase” in the cost of living meant housing had already become less affordable for consumers, so activity is likely to slow.

More here:

Kalyeena Makortoff

A new membership body has been launched as part of efforts to bring people from less privileged backgrounds into senior roles across the City.

The group, which will be known as “Progress Together”, will offer workshops, resources and mentoring schemes to people who might otherwise struggle to reach top-tier positions in financial services.

It comes as a new survey found that employees whose parents did not have professional careers themselves were 30% less likely to reach a senior position in their firms compared with their colleagues. More here.

European stock markets have rallied strongly this morning, after China cut its mortgage lending rate by a record amount (see previous post).

In London, the FTSE 100 index has jumped by 118 points, or 1.6%, recovering most of Thursday’s slide. Asia-Pacific focused insurer Prudential are the top riser. up 5.3%.

Germany’s DAX (+1.4%) and France’sa CAC (+0.8%) are also higher, while China’s CSI 300 index rallied by almost 2% on relief that the government was providing more support.

Pierre Veyret, technical analyst at ActivTrades, explains:

Markets surged higher everywhere from Asian shares to US Futures contracts on Friday, mostly led by Utilities and the Energy sector, as investors welcomed reassuring major monetary news from Beijing.

The “Risk-on” trading mood has registered a solid rebound during the last couple of hours as traders cheered the significantly dovish monetary decision from China after the PBoC cut one of the key interest rates by a record amount. This will provide a fresh boost to the economy, helping small businesses and mitigate the negative impacts of lockdowns in the world’s second-largest economy.

The Bank of England’s chief economist has admitted that the central bank faces its toughest challenge since independence in 1997, and signalled that interest rates need to rise further.

Speaking in Cardiff this morning, Huw Pill said that inflation’s surge to a 40-year high of 9% in April put him in a “very uncomfortable situation”, given the Bank is meant to keep inflation around 2%.

But Pill says this discomfort is ‘as nothing’ compared to the challenges facing poorer familier who are most hit by the current cost of living crisis.

These are difficult times for many people, especially for the less well off, who spend a higher proportion of their income on energy and food, where recent price rises have been most significant.

Current challenges are thus a salutary reminder of the importance of price stability as an anchor for wider economic stability, and a bulwark to sustaining people’s livelihoods, especially for those on lower pay and fixed incomes.

Pill explains that the Bank’s most recent inflation forecast “does not make for pretty reading”, with inflation expected to rise over 10% by the end of the year.

That’s why the Monetary Policy Committee voted to raise interest rates to 1% this month.

And Pill gives a clear sign that interest rates will need to rise further, as the Bank walks a ‘narrow path’. Underlying wage growth is currently strong, he says, but rising inflation will hit disposable incomes, slowing the economy.

Pill says:

On the one hand, headline inflation is clearly too high, the UK labour market is tight, wages are growing at stronger rates than would normally be deemed consistent with the inflation target, and business confidence is resilient, in part in anticipation of being able to re-establish profit margins. In short, inflationary momentum in the UK is currently strong.

On the other hand, significant increases in international energy, food and goods prices over the past year imply a substantial squeeze in UK residents’ real incomes, which will weigh on future demand and employment. Looking beyond the shorter term, UK inflation is set to fall as global commodity prices stabilise, bottlenecks in global supply chains ease, and domestic inflationary pressure dissipates as the real income squeeze opens up a margin of economic slack.

Pill says the Bank must avoid “self-sustaining, expectationally-driven” price rises -taking hold (where current high inflation drives up expectations for wages and prices)

He concludes by saying inflation is now the biggest challence since the Bank of England was given responsibility for setting interest rates, 25 years ago this month.

That celebration has come at a testing time for UK monetary policy, for the reasons I have outlined in my remarks today. With inflation forecast to rise into double digits following the very sharp rise in international energy and goods prices, this is biggest challenge the MPC has faced over the past quarter of a century.

It is in these testing times that the anchor represented by the 2% inflation target comes to the fore. Supported by the independence accorded to the MPC to pursue that target, we are able to take the sometimes tough decisions to bring inflation back to 2% and keep it there sustainably.

It is that commitment that has led me to support a tightening of monetary policy since I joined the Committee last September, and to signal today that this tightening still has further to run.