Bank of England’s Pill: Inflation is our biggest challence in 25 years
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.
The new nuclear power station being built at Hinkley Point in Somerset will start operating a year later than planned and will cost an extra £3bn, it has been announced.
The French energy company EDF published the findings of a review into the cost and schedule of the power station taking account of the continuing impact of the Covid-19 pandemic.
The delay means the first reactor unit is now scheduled to start operating in June 2027, a year later than planned, with costs estimated between £25bn and £26bn. EDF said this would not affect the cost to British consumers or taxpayers.
Markets cheered by China mortgage rate cut
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.
Indices Update: As of 07:00, these are your best and worst performers based on the London trading schedule:
FTSE 100: 1.07%
Germany 40: 0.88%
France 40: 0.84%
US 500: 0.60%
Wall Street: 0.43%
View the performance of all markets via https://t.co/2NUaqnUPED pic.twitter.com/fdFC9cd2bH— DailyFX Team Live (@DailyFXTeam) May 20, 2022
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.
While the Bank of England prepares to tighten policy further this year, their counterparts in China have just cut a key interest rate.
The People’s Bank of China cut its main interest rate underpinning mortgage lending by the most on record, as it tries to cushion the economy from the impact of the lockdowns in major cities.
It lowered the five-year loan prime rate from 4.6% to 4.45% on Friday.
The move could boost loan demand in China, where economic growth and confidence has been hit by Covid restrictions. That has added to the downturn in the property sector, where home prices have fallen and several developers have defaulted.
ING’s Iris Pang explains:
We believe that lowering mortgage rates linked to the 5Y LPR is just part of the reason behind the large rate cut. As long-term loans are also usually linked to the 5Y LPR, infrastructure financing should benefit from this rate cut, too.
It should be clear that this rate cut is not designed to help property developers ease their financing needs. Instead, it is aimed at helping individuals to get a mortgage at a lower interest rate.
This could increase sales of residential property, which will help property developers to increase their cash flows from sales and allow them to repay debt. As such, the leverage ratio of indebted property developers should go down.
JUST IN:
China’s central bank cuts the banks’ 5-Y Loan Prime Rate #LPR by 15 bps for the first time since January, 1-Y remained unchanged.
1-year LPR at 3.7% unchanged;
5-year LPR at 4.45% from 4.60%;#PBOC cut policy loan rates and pledged more easing to stabilize the economy. pic.twitter.com/957m3a0BjC— CN Wire (@Sino_Market) May 20, 2022
Bank of England’s Pill: Inflation is our biggest challence in 25 years
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.
David Muir, a senior economist at Moody’s Analytics, warns retail sales will come under more pressure this year:
“Despite the sharp rise in utility bills, retail sales rose 1.4% in April. But with price pressure set to persist through the rest of the year, households are likely to have to pare back discretionary spending, putting the brakes on economic growth.
For the Bank of England, the challenge will be to walk the fine line between bringing inflation down while not tipping the economy into recession.”
Sri and Gopi Hinduja named UK’s richest people, with £28.5bn fortune
Rupert Neate
Sri and Gopi Hinduja have been named the UK’s richest people, with an estimated £28.5bn fortune – the largest recorded in the 34 years of publication of the Sunday Times rich list.
The brothers who run a property-to-industrial conglomerate from London saw their wealth swell by £11.5bn over the past year to put them at the top of the annual wealth ranking ahead of the inventor Sir James Dyson, who is in second place with £23bn.
Sri, 86, and Gopi, 82, Hinduja and their extended family own a wide range of industrial and financial businesses and investments based mainly in the UK, India and Switzerland. They are currently transforming the Old War Office building in Whitehall into a Raffles hotel with 120 rooms, 11 restaurants and 85 serviced apartments.
As Britons face the biggest cost of living crisis in decades, the number of billionaires in the UK hit a record 177, up six on 2021. The combined wealth of UK billionaires hit £653bn, up £59bn or 9.4%.
“While many of us are experiencing the greatest cost of living squeeze we can remember, the super-rich have had another record year,” said Robert Watts, the compiler of the list.
“This year’s Sunday Times rich list again uncovers record wealth and more billionaires than ever before.”
THG shares jump 25% as Candy mulls bid
Shares in online shopping group THG have jumped over 25% at the start of trading, as a venture capital group controlled by property tycoon Nick Candy explores an offer for the beauty and nutrition online retailer.
Candy Ventures said last night that it was in the “very early stages of considering a possible offer” for THG, formerly known as The Hut Group.
THG sells beauty and sports nutrition products through websites including Lookfantastic and Cult Beauty, and also offers technology and logistics expertise to other retailers.
My colleague Mark Sweney explains:
Candy – a Chelsea supporter who was recently linked with a bid for the Premier League club after it was put up for sale by Russian oligarch Roman Abramovich, who has been hit with sanctions since Moscow’s invasion of Ukraine – confirmed the approach but refused to elaborate.
“I can’t talk right now, I am about to go into a premiere,” he said, ahead of the first UK screening of Tom Cruise’s sequel to Top Gun at London’s Leicester Square. “I can’t comment on that anyway.”
Candy Ventures acknowledged the “recent press speculation” about THG attracting bidder interest, which has galvanised his investment vehicle to explore a potential offer.
Last month, Manchester-based THG said it had dismissed “numerous” recent takeover approaches as “unacceptable”.
THG has also rejected an unsolicited offer of 170p per share from Belerion Capital and King Street Capital Management.
Despite jumping to 146p, THG shares are still sharply lower than their 500p flotation price in September 2020.
The bounce in retail sales may mean a severe recession is not inevitable, says James Smith, developed markets economist at ING, if people dip into their savings.
But with consumer confidence at record lows, the UK economy could shrink this quarter:
Today’s consumer confidence figures fell below all-time lows, and that’s especially noticeable when looking at consumers’ outlook for personal finances. Assuming consumers remain more enthusiastic about services spending rather than goods in the near-term, we suspect this cost of living squeeze will be more acutely felt on the high street and among online retailers over the coming months.
So despite the latest bounce in retail sales, we still narrowly suspect the economy will experience negative growth this quarter – though if it happens it will be more down to falling health output and the effect of the extra bank holiday, than the deteriorating consumer story.
A more severe downturn may still be avoided if consumers dip into their pool of savings accumulated through the pandemic, which amount to around 8% of GDP in excess of what we’d have expected had Covid not happened – the major caveat of course being that these are more heavily concentrated among higher-income workers.
Nicholas Farr, assistant economist at Capital Economics, says the economy may have held up better than thought:
The unexpectedly strong 1.4% m/m rise in retail sales in April suggests that the cost of living crisis hasn’t caused consumer spending to collapse and means that the economy may have a little more momentum than we thought.
It also supports our view that a weaker economy won’t solve the issue of sky-high inflation for the Bank of England without interest rates having to rise much further.
The retail sales report also shows the stark impact of inflation, particularly the jump in petrol and diesel.
Shoppers actually spent 4.5% more in April than a year ago, but ended up with 4.9% less stuff.
On a monthly basis, retail sales values (the amount spend) jumped by 1.9%, but volumes (the quantity shoppers bought) were 1.4% higher.
And over the last quarter, people spent 10% more than a year ago, to get 1% more items.
That widening gap between retail sales values and volumes reflects rising prices in the shops, with inflation now at a 40-year high of 9%.
If you strip out fuel sales, the gap narrows – but it’s still there:
Andrew Sentance, senior adviser at Cambridge Econometrics and a former Bank of England policymaker, says it shows consumers are being squeezed.
Retail sales volumes in past 3 months just 1 percent up on a year ago, despite the fact that the value of spending is up 10 percent. The impact of 9pc inflation squeezing consumer spending very clear from these latest retail sales figures.
— Andrew Sentance (@asentance) May 20, 2022
Retail sales: snap reaction
Here’s some early reaction to April’s rise in retail sales.
Keith Church, head of economic modelling at risk consultancy 4most, points out that the wider picture remains subdued:
After falling 1.2% in March, retail sales volumes rebounded by 1.4% in April. But the wider picture is hardly encouraging. pic.twitter.com/OulujZHy9q
— Keith Church (@keithbchurch) May 20, 2022
Suren Thiru, head of economics at the British Chambers of Commerce, also highlights this point:
@ons figures show retail sales up 1.4% m/m in April, from a 1.2% drop in March
Monthly rise largely driven by a 2.8% rise in food store sales
Sales fell by 0.3% in Apr on the 3m/3m measure (a better gauge of the underlying trend), continuing the downward trend since summer 2021 pic.twitter.com/HclqqGePOh
— Suren Thiru (@Suren_Thiru) May 20, 2022
Kate Nicholls, CEO at UKHospitality, agrees that the data suggests people have been staying at home more:
Retail sales volumes increased by 1.4% in April, with the biggest driver coming from food store sales which rose by 2.8%, alcohol and fuel – suggesting people staying at home more https://t.co/6o7UoonR2m
— Kate Nicholls (@UKHospKate) May 20, 2022
Retail sales rise, lifted by supermarket spending
Retail sales have risen unexpectedly, in a sign that squeezed consumers have been staying at home more due to the cost of living squeeze.
Retail sales volumes across Great Britain rose by 1.4% in April, following a fall of 1.2% in March, the Office for National Statistics reports — better than the 0.2% fall economists had expected.
The recovery was driven by a rise in food store sales volumes — up 2.8%, due to higher spending on alcohol and tobacco in supermarkets (supermarket food sales were broadly unchanged).
Sales volumes at alcohol and tobacco stores jumped 8.4% over the month – another sign that more people have been heading to the off-licence instead of the pub.
There was also a jump in clothes sales, which may show people are preparing for summer holidays and events such as weddings. That lifted online shopping.
Fuel sales rose 1.4% after a 4.2% tumble in March when record increases in petrol prices impacted sales (prices have hit new highs this month, though).
But the broader picture is still weak: over the last three months, sales volumes have dropped by 0.3% when compared with the previous quarter. That continues the downward trend since summer 2021, as rising inflation has hit disposable incomes.
April’s retail sales volumes were 4.9% lower than a year ago, when spending was boosted by the relaxation of lockdown rules.
ONS deputy director for surveys and economic indicators Heather Bovill explains:
“Retail sales picked up in April after last month’s fall. However, these figures still show a continued longer-term downward trend.
“April’s rise was driven by an increase in supermarket sales, led by alcohol and tobacco and sweet treats, with off-licences also reporting a boost, possibly due to people staying in more to save money
Introduction: UK consumer confidence at record lows
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The cost of living squeeze has pushed consumer confidence to its lowest on record, adding to concerns the UK could be falling towards recession.
Research company GfK’s UK consumer confidence index fell 2 percentage points to minus 40 in May, its lowest level since records began in 1974, beating the previous record set in the financial crisis.
The survey found that people’s personal financial stituation had deteriorated over the last 12 months, making them less likely to make major purchases. The general economic view had worsened too, as inflation climbed to its highest in decades.
Joe Staton, client strategy director at GfK says:
“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. Consumer pessimism is most evident in depressed sub-measures on the general economy at -63 for the past year and -56 for the coming year.
The Major Purchase Index has decreased for each of the past six months and is now at -35, reflecting the latest dismal set of retail sales figures. Even the Bank of England is pessimistic, with Governor Andrew Bailey this week offering no hope of tackling inflation. The outlook for consumer confidence is gloomy, and nothing on the economic horizon shows a reason for optimism any time soon.”
Bank of England chief economist Huw Pill speech could give his view on the economic outlook, when he pays a visit to Wales today.
Elsewhere, European stock markets are expected to open higher, recovering some of Thursday’s tumble:
Shares in ecommerce group THG could surge, after British property tycoon Nick Candy revealed last night that he is considering a takeover offer for the company.
The agenda
- 7am BST: UK retail sales for April
- 7am BST: Sunday Times rich list published
- 8.30am BST: Bank of England chief economist Huw Pill speech during an agency visit to Wales
- 12.30pm BST: Canadian private sector payrolls
- 3pm BST: Eurozone consumer confidence (flash estimate) for May
