Newsflash: The Bank of England’s outgoing deputy governor has suggested that UK interest rates could be cut this summer.
Ben Broadbent, the Bank’s deputy governor for Monetary Policy, said in a speech this morning that if the economy evolves as expected, borrowing costs could possibly be lowered this summer.
Broadbent explained that the direct effect on inflation of the Covid-19 pandemic and the Ukraine war have now faded – what matters now is how long the effects of that earlier surge on domestic inflation linger.
Broadbent explains that the nine members of the Bank’s Monetary Policy Committee must assess how those “second-round effects” in domestic prices and wages change.
One argument is that these second-round effects will take longer to unwind than they did to emerge. The alternative view is that firms are less able to pass on higher wages to their customers through increased prices.
He says:
There is a range of views across the Committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.
Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer.
This month, the MPC voted 7-2 to leave interest rates at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for ‘no change’.
The money markets currently indicate that there’s a 57% chance that rates are lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.
Broadbent himself will only get one more chance to vote for a cut, at the June meeting, as he is leaving next month and will be replaced by Clare Lombardelli, the chief economist at the Organisation for Economic Co-operation and Development (OECD), on 1 July.
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One former Bank of England policymaker, Michael Saunders, agrees that the BoE is likely to cut interest rate this summer.
In a new research note just released, Saunders says the choice on whether the first cut comes at Bank’s June or August meetings is “narrowly balanced”.
Saunders, who left the Bank’s monetary policy committee in 2022, argues that the MPC can move ahead of the US Federal Reserve, for a change, as the UK economy has weaker recent growth and rising spare capacity.
He adds:
As a result, and in a departure from practice in recent decades, we think the MPC is likely to ease ahead of the Fed in the summer.
Here’s the key points from Saunders’ note:
Historically, the UK has tended to cut rates slightly after the US central bank. It’s often been tempting – and usually wrong – to argue that “this time is different”. However, we think this time really is different and expect the UK will cut a little before the Fed in coming months, and cut a bit faster over the year ahead.
Unlike the US, UK inflation in recent quarters has undershot the central bank’s expectations and is likely to return to target in the next month or two. What’s more, recent economic growth has been much weaker in the UK than the US, and as a result, labour market tightness has faded faster in the UK. For example, unlike the US, the UK vacancy/unemployment ratio is back to pre-pandemic levels.
To be sure, the UK is sensitive to external monetary policy decisions and prospects. But the Bank of England would not be alone if it eased before the Federal Reserve. The Swiss National Bank and Sweden’s Riksbank have already done so, and the European Central Bank is likely to cut in early June.
We expect the BoE’s Monetary Policy Committee will cut rates soon, with a narrowly-balanced choice between June and August for the first cut and rates falling by 75bps by year end. This is a little earlier than our forecast for US easing, with a first cut expected in September and rates coming down by 50bps by year end.
The latest UK inflation data, due on Wednesday, will help determine when the Bank starts to cutting interest rates.
Economists predict a big fall in the annual inflation rate, down to 2.1% for April from March’s 3.2%. That would mean it had nearly dropped to the BoE’s 2% target.
Energy prices will have a downward impact on the inflation rate, after Britain’s energy price cap was lowered last month, while food price inflation is also slowing rapidly.
James Smith, developed markets economist at ING, says the measure of services inflation will determine whether the first rate cut comes in June or August.
Smith explains:
We think services inflation could come in hotter than expected, and if we’re right, that would favour another ‘on hold’ decision next month.
City economists predict annual services inflation will slow to 5.5% for April, down from 6% in March.
Speaking of not giving China the cold shoulder…..
Sky News are reporting that Sajid Javid, the former chancellor of the exchequer, has been approached about taking a role at Shein, the online fashion giant which is progressing plans for London’s biggest stock market float for years.
They say that Javid is among a number of senior City figures who have held talks with Donald Tang, Shein’s executive chairman, in recent weeks.
Sky News’s Mark Kleinman adds:
City sources said that if the appointment of Mr Javid proceeded, it could see him either join Shein’s board or become an adviser to the Chinese-founded company.
They added that Baroness Fairhead, the former BBC Trust chair, was also on a list of candidates drawn up by headhunters advising Shein.
One person close to the company said the identities of those being approached reflected both the seriousness with which Shein was taking the issue of corporate governance and the extent of its focus on a London listing.
Back at the CityWeek conference in London, the FCA has tried to assure City bosses that the regulator will take time and care in deciding whether to charge ahead with so-called ‘naming and shaming’ proposals, where the regulator would announce who it is investigating, earlier on in the process.
While public notification is common in some other industries, it has caused a stir in the City and backlash from the Treasury.
However, Sarah Pritchard, an FCA executive director in charge of markets and international matters, told the CityWeek conference:
“I know that there have been some concerns around our proposals to announce the fact of some enforcement investigations earlier on in the process where it’s in the public interest to do so.
Now we recognise that this is a sensitive and emotive issue, so we will take time to consider the feedback to engage further with industry and explore thoroughly the concerns and evidence shared with us with the aim of reaching a broad consensus.
Be assured that we do listen. We are evidence led and so will only act when a failure to do so would cause harm to consumers and undermine the integrity of our markets.”
Whether that will do anything to assuage concerns in the City, though, remains to be seen.
Ben Broadbent’s speech makes several interesting points about the UK economy.
He shows how the openness of the UK economy means its more sensitive to global shocks, with a chart outlining how at least 90% of variations in UK growth over the past fifteen years have been caused by “foreign (or at least common) shocks”.
He also outlines how the surge in global trade and openness came to an end well over a decade ago:
And this chart shows how most of the rise and fall in UK inflation can be accounted for by swings in prices of tradeable goods (such as energy products, manufactured goods, and food).
That may mean that there is less inflationary pressure to come.
Broadbent says:
Clearly, the tighter labour market also mattered.
But the vast majority of the inflation seems to reflect the direct impact first of higher core tradeable goods prices following the pandemic, then those of energy and food after Russia’s invasion of Ukraine. In particular, it’s really only in the past year, as those direct effects have fallen back, that any material “second-round effects” on domestic inflation have begun to emerge.
Ben Broadbent’s speech is his thirty-eighth, and last one, since he joined the Bank of England’s monetary policy committee in 2011
He tells his audience at the Bank today that the UK economy was hit by several large, global shocks during those 13 years, which affected supply and costs more than demand.
As Broadbent puts it:
It’s certainly been an eventful time. I joined the Committee in 2011, when the economy was still feeling the effects of the global financial crisis (GFC) three years earlier.
That was then followed by the Euro area debt crisis, which perpetuated the credit squeeze in this country. After a period of relative calm we then went through the EU referendum and the negotiations that ensued, followed at the start of the current decade by the enormous effects of the pandemic and Russia’s war in Ukraine.
He then reminds us that former governor Mervyn King once described the years preceding the GFC as the “NICE” decade (standing for “Non-Inflationary and Consistently Expansionary”).
Broadbent suggests he has lived through a NASTY time, saying:
I’m not sure how one would characterise the period since (“Not-AS-Tranquil Years”?). But, if his description was designed as a warning that we couldn’t expect such stability to last indefinitely, he’s certainly been proved right.
Newsflash: The Bank of England’s outgoing deputy governor has suggested that UK interest rates could be cut this summer.
Ben Broadbent, the Bank’s deputy governor for Monetary Policy, said in a speech this morning that if the economy evolves as expected, borrowing costs could possibly be lowered this summer.
Broadbent explained that the direct effect on inflation of the Covid-19 pandemic and the Ukraine war have now faded – what matters now is how long the effects of that earlier surge on domestic inflation linger.
Broadbent explains that the nine members of the Bank’s Monetary Policy Committee must assess how those “second-round effects” in domestic prices and wages change.
One argument is that these second-round effects will take longer to unwind than they did to emerge. The alternative view is that firms are less able to pass on higher wages to their customers through increased prices.
He says:
There is a range of views across the Committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.
Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer.
This month, the MPC voted 7-2 to leave interest rates at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for ‘no change’.
The money markets currently indicate that there’s a 57% chance that rates are lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.
Broadbent himself will only get one more chance to vote for a cut, at the June meeting, as he is leaving next month and will be replaced by Clare Lombardelli, the chief economist at the Organisation for Economic Co-operation and Development (OECD), on 1 July.
The London Stock Exchange CEO Julia Hoggett has continued the bourse’s campaign for UK companies to offer higher - and what they claim is more globally competitive - executive pay.
Speaking to attendees of the CityWeek conference today, Hoggett praised company board members for sticking their necks out and offering bigger payouts to bosses this year, even if it proved unpopular with some shareholders.
“We’ve also seen a far greater willingness of remuneration committees to sit on what I call ‘the naughty step’ by accepting that some resolutions will gather more than 20% of votes cast against them, thus requiring an explanation from the company under the corporate governance code and inclusion in the IA’s [Investment Association] public register.
This creates an arbitrarily high 80% threshold for resolutions, which is something that CMIT [Capital Markets Industry Taskforce] has called to be removed.
Although we’ve started to see a change in mindset from some very significant asset managers, such that the number of companies with significantly enhanced remuneration packages have, nevertheless, this season received 80% support.”
She also suggested that more companies should be hiking pay - since the consequences of doing so would be less problematic if every boardroom was moving in the same direction:
“It remains my belief, however, that this remains more in our hands than we think. As parents we all know that the naughty step is not a naughty step if everybody’s sitting on it.”
The UK and its financial services sector cannot afford to give the “cold shoulder” to China, the City minister has warned.
Speaking at the CityWeek conference in London this morning, Bim Afolami told attendees that it was “crucial” to engage with strategic competitors like China.
“Like with any bilateral relationship, we don’t agree on everything.
We are very clear that you simply cannot give the cold shoulder to an economy that is home to a fifth of the world’s globally systemically important banks, four of the world’s largest banks, and almost a third of the world’s leading global financial centres.
Therefore, it is in our interest to engage where we can …[and it is ] profoundly in our interest to do so.”
He said of course the UK was taking a “long view” and should only engage where it is “consistent with our interests’.
But, he echoed a warning that he said was made by foreign secretary David Cameron, saying that if UK and business hesitated too much, “our competitors will write our future for us.”
He also said that the UK’s success needed to be reflected in regulation, and repeating punchy comments made earlier this year:
“There is no point in us having the safest graveyard.”
Afolami’s comments come two weeks after it emerged that 270,000 payroll records belonging to nearly all members of Britain’s armed forces have been exposed to Chinese hackers.
The Labour party has said it would launch a “full audit” of the UK’s relations with China, if it wins the next election.
AstraZeneca has announced plans to build a $1.5bn facility in Singapore where it will manufacture anti-cancer products.
The factory, which Astrazeneca hopes to open by 2029, will make antibody drug conjugates (ADCs) – molecules which deliver cancer-killing agents directly to cancer cells through a targeted antibody.
Pascal Soriot, CEO of AstraZeneca, says Singapore is one of the world’s most attractive countries for investment given ““its reputation for excellence in complex manufacturing”.
Png Cheong Boon, chairman of the Singapore Economic Development Board (EDB), says he’s looking forward to a successful partnership with AstraZeneca.
“We welcome AstraZeneca’s decision to establish a manufacturing presence in Singapore for the first time. It will also be a first for AstraZeneca - an end-to-end manufacturing facility for novel antibody drug conjugates that enables precision therapy for cancer.
This greenfield investment is a strong show of confidence in Singapore’s biopharmaceutical manufacturing capabilities and talent, strengthens our ecosystem in supporting the development and manufacturing of precision medicines, and creates meaningful jobs and economic opportunities for Singapore.
The price of both copper and gold have hit record levels today.
Three-month copper traded on the London Metal Exchange rose by 4% at one stage to a new alltime high of $11,104.50.
Fears of supply shortages have pushed up the price of copper – an essential component in renewable energy systems – in recent weeks.
Better-than-expected factory data from China, and Beijing’s efforts to prop up its property sector, have also helped push copper up.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
Fresh Chinese stimulus measures aiming to address the country’s heavily bleeding property market, and the latest – and better-than-expected – rebound in Chinese industrial production also support the rally in commodity prices.
Spot gold has climbed to a new peak of $2,499.89 per ounce, meaning it has gained around 25% since February.
Gold has been rallying amid speculation that the US central bank, the Federal Reserve, will cut interest rates once or twice this year.
Demand for gold has also been pushed up by some central banks, such as the People’s Bank of China, which has been adding to its bullion reserves for months.
Nickel prices are also rising today, up over 4% in China. Last week Nickel hit a near nine-month high after political violence broke out in New Caledonia, which holds some of the world’s biggest nickel deposits.
In the City, shares in video game services company Keywords Studios have surged by nearly two-thirds this morning after confirming it is in takeover talks.
Keywords told shareholders this morning that it is in advanced discussions with European private equity group EQT over a possible cash offer of 2,550p per share.
Dublin-headquartered Keywords also reveals it has turned down four previous offers, which it viewed as too low.
But this new proposal is “at a value that the Board would be minded to recommend” to shareholders, if a firm offer was made, it says.
Shares in Keywords, which provides services to help develop computer games, have jumped by 62% to 2374p, from 1470p on Friday night, close to EQT’s offer.
EQT now has until 5pm on 15 June to make a formal offer for Keywords, or must walk away for six months.
Happily for holidaymakers, flight prices may not rise much this summer.
Budget airline Ryanair says it is “cautiously optimistic” that peak summer fares this year will be “flat to modestly ahead of last summer”.
Ryanair reports that recent pricing has been “softer than we expected”, requiring it to make more cuts to pricing in the last quarter than a year ago to fill its seats.
CEO Michael O’Leary told an investor presentation:
“It is a bit surprising that pricing hasn’t been stronger and we’re not quite sure whether that’s just consumer sentiment or recessionary feel around Europe but we still see peak travel demand certainly through July and August being strong.
“And if we have to discount or cut fares to fill to 94% load factor in April, May and June then so be it.”
The airline has also reported a 34% rise in profits after tax to €1.92bn (£1.64bn) for the year to the end of March, with passenger numbers up 9% despite disruption to Boeing aircraft deliveries (which had been expected to push up flight costs this year).
Ryanair has also added former MP Amber Rudd, the ex-Home Secretary, to its board.
UK rents are also climbing, particularly for tenants who are renewing their rental agreements.
Hamptons has reported that tenants renewing an existing contract in Great Britain saw their rent rise by an average of 8.3% over the last 12 months, outpacing rental growth on a newly let property (6.4%).
But despite that squeeze,tenants who stay put and renew their contract are still paying 13.4% or £178 pcm less on average than someone who moved into a new home.
Aneisha Beveridge, Head of Research at Hamptons, says:
“Many tenants had enjoyed years of no or below-inflation rent increases, particularly when rents weren’t rising much on the open market and mortgage costs were falling. Landlords were often content with a small gap between the market rate for their home and what their tenant was paying. However, over the last two years, strong rental growth on the open market has meant that the gap between market rates and what some tenants were paying rose significantly.
“Tenants fortunate enough to be protected from higher rents by their landlord or longer contracts are increasingly seeing their rents rise. These increases for renewing tenants tend to be lower and stretched over a longer period than for newly let homes, often meaning tenants still pay below market rate. But even so, these hikes can still add up to hundreds of pounds a month.
“The large gap between market rates and what many tenants are paying is a big disincentive for them to move unless they have to. Moving increasingly means getting less home for more money. While time will eventually close the gap between what sitting and new tenants are paying, it may take longer if rental growth on the open market starts picking up again.”
These charts highlight how average asking prices have picked up this spring, after a lull at the end of 2023:
Remarkably, Rightmove also reckon that people hoping to sell their home and move before Christmas (!) should start taking action now.
They report that it is taking 62 days on average to find a buyer before the legal process of selling the house even begins.
And with the average time between agreeing a sale and legal completion currently “a painful five months”, or 154 days, it is taking over seven months on average from a seller coming to market to completing their move.
Rightmove’s Tim Bannister says the “extremely lengthy legal completion process” is a frustrating barrier for home movers to get over.
Bannister explains:
It may seem surreal to be thinking about Christmas in May, but we know that many would-be sellers picture celebrating the festivities in a new home, and to achieve that, now is the time to be coming to market.
One strategy that is still giving some sellers the edge in this price-sensitive market, is working closely with an estate agent to price attractively right at the start of marketing, to give themselves the best chance of finding a buyer quickly.
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The spring selling season is picking up speed in the UK housing market, where asking prices for homes has risen to a record level.
Online property portal Rightmove reports this morning that the average price of property coming to the market for sale hit a new record of £375,131 in the last month, up 0.8% on April.
However, that only leaves average asking prices 0.6% higher than a year ago.
Today’s data shows that activity has picked up this year, with 17% more sales in the first four months of 2024 than in 2023 despite the Bank of England maintaining base rate at 5.25% since last August.
Rightmove reckons that “pent-up demand from would-be buyers” who dropped out of the market last year is now driving the market, even though mortgage rates have remained high for longer than expected.
Asking prices are not the same as selling prices, of course – recent data has shown a drop in sales prices.
Last month, several leading UK lenders raised their fixed-rate mortgage deals, but this has started to reverse with some lenders cutting rates last week.
Rightmove reports that price growth is being driven by the top-of-the-ladder properties, where asking prices are 1.3% higher than last year. These properties tend to be less sensitive to high mortgage rates.
The agenda
9am BST: City minister Bim Afolami gives speech on “realising the benefits of economic sovereignty to reinforce the UK’s capital markets” at CityWeek conference
10am BST: Bank of England deputy governor Ben Broadbent gives speech on “New evidence on the Monetary Transmission Mechanism workshop”
11am BST: Spanish consumer confidence for April
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2024-05-20 11:21:08Z
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