Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK borrowers should brace for highest interest rates today, as the Bank of England prepares to set monetary policy at midday today.
With inflation still in double-digits (10.1% in April), the BoE is widely expected to raise interest rates for a 12th consecutive time, as it tries to restrain price rises by cooling demand.
The financial markets indicate that a quarter-point rise in Bank Rate, from 4.25% to 4.5%, is nailed-on – at around a 98% chance.
This would be the 12th increase in interest rates in a row, in an aggressive tightening cycle from the BoE, and would take borrowing costs to the highest level since October 2008.
But, the nine members of the Monetary Policy Committee (MPC) may be split, with two policymakers – Swati Dhingra and Silvana Tenreyro – expected to oppose another hike, and vote to hold rates. We’ll find out at noon.
The Bank’s mandate is to keep inflation at 2%, a target they are badly missing following the surge in energy prices following the Ukraine war, which has led to soaring food prices too.
The markets are also pricing in at least one more interest rate rise before the end of the year, before rates start to drop in 2024.
A hike today would be an immediate blow to homeowners with variable rate mortgages, while those whose fixed-rate deals expire in coming months also face higher borrowing costs.
As my colleague Phillip Inman writes:
Almost 1.5 million homeowners with variable rate mortgages face higher borrowing costs with the Bank of England expected to push up interest rates on Thursday to 4.5%.
Another 1.5 million households with fixed-rate mortgages will see their annual bills spiral by an average £3,000 when they re-finance their loans this year, afterthe average two-year fixed rate jumped from below 2% to 4.75% over the past 18 months.
The Bank of England will also release updated projections for inflation, as well as their view on the outlook for the UK economy, in the latest Monetary Policy Report.
Six months ago they warned the UK risked being plunged into the longest recession in 100 years, but the economic outlook has improved since – by February the Bank expected a less severe recession.
As RBC Capital Markets told clients this morning:
The MPC is likely to exhibit a relatively hawkish tone and retain optionality over the direction of policy going forward, including avoiding any reference, explicit or otherwise, to pausing its tightening cycle.
The economy is performing better than expected, the labour market shows little sign of loosening and (perhaps most importantly) inflation is not falling as quickly as expected.
In a speech last month, chief economist Huw Pill urged British households to restrain pay demands and businesses from hiking prices, saying they “need to accept” they are poorer.
Pill said a game of “pass the parcel” was taking place in the economy – as households and companies try to pass on their higher costs…..
The agenda
9.30am BST: Realtime data on economic activity and social change in the UK
12pm BST: Bank of England interest rate decision and Monetary Policy Report
12.30pm BST: Bank of England press conference
1.30pm BST: US PPI index of producer prices for April
1.30pm BST: US weekly jobless
Filters BETA
The resilience of the UK economy at the start of this year, alongside still uncomfortably strong inflation and wage growth, keeps pressure on the Bank of England to keep raising rates, says Lee Hardman, senior currency analyst at MUFG Bank.
Hardman writes this morning:
The pound is continuing to benefit from the paring back of investor pessimism over the outlook for the UK economy at the start of this year.
According to Bloomberg, the economic surprise index for the UK is currently at its highest level since the middle of 2021 with incoming data releases continuing to ease fears over recession in the UK. It stands in contrast to the economic surprise indices for the euro-zone and US.
Newsflash: TransPennine Express is to be run by the state after ministers announced that the failing rail company would not have its contract renewed.
Transport secretary Mark Harper said that the northern rail network will be run by the state-owned operator of last resort after disruption, cancellations and a huge decline in the service.
The First Group-owned TPE’s contract expires on 28 May. Passengers and politicians across the north had called for change.
Harper warned it would not fix the service overnight and blamed the drivers’ union Aslef for some of the issues.
Harper said:
“In my time as transport secretary, I have been clear that passenger experience must always come first.
“This is not a silver bullet and will not instantaneously fix a number of challenges being faced, including Aslef’s actions which are preventing TransPennine Express from being able to run a full service – once again highlighting why it’s so important that the railways move to a seven-day working week.”
The Bank of England could give the pound a boost today if it hints at further interest rate increases in the coming months,
Matthew Ryan, head of market strategy at global financial services firm Ebury, explains:
“We expect the Bank of England to push ahead with another 25bp rate increase on Thursday, with policymakers to maintain a hawkish bias that points to at least one more hike beyond this week’s meeting.
“In light of fading recession risks and sky-high UK inflation, we are again pencilling in a 7-2 voting split, with Tenreyro and Dhingra likely to remain the two sole dissenters in favour of no change. There is a risk that one or two additional members join the doves, which would clearly be bearish for sterling, though this is not our base case scenario.
“Investors will also be paying close attention to the updated macroeconomic projections. An upward revision to the 2023 inflation forecast would no doubt raise expectations for the terminal UK rate, and could trigger a fresh move higher in the pound. Markets are eyeing up almost three additional 25bp rate increases from the MPC this year, so any indication that this week’s hike may be the last would be seen as a major disappointment.We do not, however, expect this to be the case, and see risks to GBP as skewed to the upside heading into the meeting.”
The pound is trading around $1.26 this morning, having hit a one-year high of $1.2679 on Wednesday.
Economists will be looking for signals as to whether the Bank of England is close to ending its run of interest rate increases soon, after today’s decision.
Ellie Henderson, from Investec Economics, said the “clock is ticking” on the Bank’s monetary policy tightening cycle, and an increase on Thursday could be the last.
Henderson said:
“As things stand and considering the sharp downward influences on inflation in the coming months, namely from energy but also from cooling food and goods price inflation, we suspect that this could be the last hike by the Bank of England in this cycle.”
Klaus Baader, the global chief economist at French bank Societe Generale, agreed that while a 0.25 percentage point is expected from the Bank, “what is less certain is what it will do afterwards”.
He said it is likely policymakers will no longer predict a recession, having previously anticipated the UK would dip into a short and shallow recession during the first quarter of the year.
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK borrowers should brace for highest interest rates today, as the Bank of England prepares to set monetary policy at midday today.
With inflation still in double-digits (10.1% in April), the BoE is widely expected to raise interest rates for a 12th consecutive time, as it tries to restrain price rises by cooling demand.
The financial markets indicate that a quarter-point rise in Bank Rate, from 4.25% to 4.5%, is nailed-on – at around a 98% chance.
This would be the 12th increase in interest rates in a row, in an aggressive tightening cycle from the BoE, and would take borrowing costs to the highest level since October 2008.
But, the nine members of the Monetary Policy Committee (MPC) may be split, with two policymakers – Swati Dhingra and Silvana Tenreyro – expected to oppose another hike, and vote to hold rates. We’ll find out at noon.
The Bank’s mandate is to keep inflation at 2%, a target they are badly missing following the surge in energy prices following the Ukraine war, which has led to soaring food prices too.
The markets are also pricing in at least one more interest rate rise before the end of the year, before rates start to drop in 2024.
A hike today would be an immediate blow to homeowners with variable rate mortgages, while those whose fixed-rate deals expire in coming months also face higher borrowing costs.
As my colleague Phillip Inman writes:
Almost 1.5 million homeowners with variable rate mortgages face higher borrowing costs with the Bank of England expected to push up interest rates on Thursday to 4.5%.
Another 1.5 million households with fixed-rate mortgages will see their annual bills spiral by an average £3,000 when they re-finance their loans this year, afterthe average two-year fixed rate jumped from below 2% to 4.75% over the past 18 months.
The Bank of England will also release updated projections for inflation, as well as their view on the outlook for the UK economy, in the latest Monetary Policy Report.
Six months ago they warned the UK risked being plunged into the longest recession in 100 years, but the economic outlook has improved since – by February the Bank expected a less severe recession.
As RBC Capital Markets told clients this morning:
The MPC is likely to exhibit a relatively hawkish tone and retain optionality over the direction of policy going forward, including avoiding any reference, explicit or otherwise, to pausing its tightening cycle.
The economy is performing better than expected, the labour market shows little sign of loosening and (perhaps most importantly) inflation is not falling as quickly as expected.
In a speech last month, chief economist Huw Pill urged British households to restrain pay demands and businesses from hiking prices, saying they “need to accept” they are poorer.
Pill said a game of “pass the parcel” was taking place in the economy – as households and companies try to pass on their higher costs…..
The agenda
9.30am BST: Realtime data on economic activity and social change in the UK
12pm BST: Bank of England interest rate decision and Monetary Policy Report
12.30pm BST: Bank of England press conference
1.30pm BST: US PPI index of producer prices for April
1.30pm BST: US weekly jobless
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2023-05-11 06:19:25Z
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