NEW YORK/LONDON, Sept 28 (Reuters) – After tumbling earlier, sterling rallied against the dollar on Wednesday following the Bank of England’s (BOE) purchase of UK government bonds, letting some air out of the greenback’s progress broadly after it had touched a fresh 20-year high.
The BoE said it received 2.587 billion pounds’ ($2.78 billion) worth of offers in its first bond buyback operation aimed at stabilizing the market, and had accepted only 1.025 billion pounds’ worth. The central bank had committed to buying as many long-dated government bonds, know as gilts, as needed between Wednesday and Oct. 14.
As markets tried to digest what the move meant for the pound, the currency whipsawed during Wednesday’s session, jumping as high as $1.09165 and falling as low as $1.05390. It was last up 1.51% at $1.08921.
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The BoE intervention was driving currency trading broadly, according to Erik Nelson, macro strategist at Wells Fargo.
“You had financial stress everywhere. The yields were rising and the dollar was rising. It was sort of feeding on itself. We needed something or someone to stop the financial stress and financial panic that was happening. The BoE stepped in there,” said Nelson. “The easing of the financial stress has helped sterling and other currencies rally against the dollar.”
But the relief for sterling may be temporary as the UK still has to deal with macro trends such as high inflation.
“It’s a currency-negative policy. You’re offering to limit the increase of yields at a time of high inflation,” said Nelson. “The dollar will continue to go up over the next few months. … The U.S. is growing at a much more solid pace, at least for now, versus the UK and Europe, and the U.S. doesn’t have the same kind of energy crisis as the UK and Europe.”
Currency investors have also been monitoring Russia’s war against Ukraine and energy uncertainty in Europe after leaks on Nord Stream pipelines between Russia and Europe spewed gas into the Baltic Sea, said Brad Bechtel, global head of FX at Jefferies in New York. NATO Secretary-General Jens Stoltenberg and others have attributed the leaks to acts of sabotage.
The dollar index , which measures the greenback against a group of major currencies, was last at 112.660 after hitting a fresh 20-year high of 114.78.
While the dollar initially had broad-based gains, the greenback eased sharply as the U.S. trading session progressed, with the euro last up 1.52% at $0.9739 after falling as low as $0.95355 .
The dollar was last down 0.61% against Japan’s yen at 143.955 after touching a high of 144.860 .
The Australian dollar , which is particularly sensitive to swings in investor sentiment, was last up 1.410%.
Elsewhere in Asia, the offshore yuan hit a record low, pressured by expectations of further U.S. rate hikes.
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Reporting by Sinéad Carew in New York, Rae Wee in Singapore and Alun John in London ; editing by Richard Pullin, Kim Coghill, Shri Navaratnam, Gareth Jones and Jonathan Oatis
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IMF does ‘not recommend’ policies like UK growth plan
Moody’s: economic plan is ‘growth negative’
Pound trading down 0.7% to $1.065
Kwarteng meets banking bosses again
LONDON, Sept 28 (Reuters) – The Bank of England sought to quell a fire-storm in Britain’s bond markets, saying it would buy as much government debt as needed to restore order after new Prime Minister Liz Truss’ tax cut plans triggered financial chaos.
Having failed to cool the sell-off with verbal interventions over the previous two days, the BoE announced on Wednesday the immediate launch of its emergency bond-buying programme aimed at preventing the market turmoil from spreading.
The plan delivered by Truss’s finance minister Kwasi Kwarteng on Friday for tax cuts on top of an energy bill bailout, all funded by a huge increase in government borrowing, quickly led to a freezing of mortgage markets, selling of gilts by pension funds and a leap in corporate borrowing costs.
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It also triggered alarm in foreign capitals.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the British central bank said.
It said it would buy up to 5 billion pounds ($5.31 billion) a day of British government bonds of at least 20 years’ maturity starting on Wednesday and running until Oct. 14. read more
The announcement, which represented a sudden reversal of the BoE’s plans to start selling bonds it had amassed since the global financial crisis of 2008-08, immediately pushed down borrowing costs.
The 30-year gilt yield was set for its biggest drop in records going back to 1992.
But sterling fell by about 1% against the dollar and euro, putting it on track for its biggest monthly decline since October 2008, just after Lehman Brothers collapsed.
By 2:48pm (1348 GMT) it was trading down 0.5% at $1.0679, a fall of 12% in the last three months.
The BoE said it would return to its plan to sell bonds and its launch was only postponed until the end of October.
Kwarteng’s plans for deep tax cuts and deregulation to snap the economy out of a long period of stagnation were seen as a return to Thatcherite and Reaganomics doctrines of the 1980s.
But they have caused panic among some investors and disquiet among many lawmakers of the ruling Conservative Party.
RESTORE ORDER
On Monday the BoE said it would not hesitate to raise interest rates and was monitoring markets “very closely”. On Tuesday its Chief Economist Huw Pill said the central bank was likely to deliver a “significant” rate increase when it meets next in November.
But the slide in bond prices continued unabated on Wednesday, prompting the BoE to make its move.
Tourists shelter under umbrellas as they walk through central London, Britain, September 27, 2022. REUTERS/Hannah McKay
“The purpose of these purchases will be to restore orderly market conditions,” it said. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”
Officials in international governments and financial institutions have started to go public with their criticism of UK policy.
In a rare intervention over a G7 country, the International Monetary Fund urged Truss to reverse course. read more
Ratings agency Moody’s said the policy risked structurally higher funding costs that would be “credit negative” for Britain. read more
Spain’s Economy Minister Nadia Calvino was more blunt, calling the policy a disaster and Ray Dalio, co-chief investment officer of the world’s largest hedge fund Bridgewater Associates, said he could not believe London’s mistakes.
“The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand,” Dalio said on Twitter.
Julian Jessop, an economist who provided informal advice to Truss during her leadership campaign, said the economy was at risk of falling into a “doom loop”. read more
MARKET FRENZY
So far the government has refused to budge.
Kwarteng, an economic historian who was business minister for two years and a free-marketeer by conviction, has insisted that tax cuts for the wealthy alongside support for energy prices are the only way to reignite long-term economic growth.
He has said he will publish a medium-term debt-cutting plan on Nov. 23, which the IMF described as an “early opportunity for the UK government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high-income earners”.
The frenzy in markets and the ensuing alarm in the ruling Conservative Party will put huge pressure on Kwarteng and Truss. She was elected by the party’s roughly 170,000 members, not the broader electorate.
Conservative lawmaker Simon Hoare, who backed Truss’s rival Rishi Sunak for the leadership of the party, pointed the finger of blame at the government and Treasury for the policies that sparked the market rout.
“They were authored there. This inept madness cannot go on,” he said.
One area of immediate concern for politicians is the mortgage market, after lenders pulled record numbers of offers and anecdotal reports suggested people were struggling to either complete or change mortgage deals.
A slump in the housing market would mark a major shock in a country where rising house prices have for years conveyed a sense of overall affluence, and where home buyers have got used to more than a decade of rock-bottom interest rates.
The intervention of the IMF holds symbolic importance in Britain: its bailout in 1976 following a balance-of-payments crisis forced huge spending cuts and has long been regarded as a humiliating low point in the country’s modern economic history.
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Writing by Kate Holton; Additional reporting by William James, Dhara Ranasinghe, David Milliken, Sachin Ravikumar, Paul Sandle, Muvija M and William Schomberg in London and Emma Pinedo Gonzalez in Madrid; Editing by Alex Richardson, Catherine Evans, Toby Chopra and William Schomberg
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Kwarteng cuts top rate of income tax in dash for growth
Huge increase in UK government debt issuance planned
Gilts suffer biggest slump in decades
Pound falls to new 37-year low against dollar
LONDON, Sept 23 (Reuters) – Britain’s new finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing on Friday in an economic agenda that floored financial markets, with sterling and British government bonds in freefall.
Kwarteng scrapped the country’s top rate of income tax, cancelled a planned rise in corporate taxes and for the first time put a price tag on the spending plans of Prime Minister Liz Truss, who wants to double Britain’s rate of economic growth.
Investors unloaded short-dated British government bonds as fast as they could, with the cost of borrowing over 5 years seeing its biggest one-day rise since 1991, as Britain raised its debt issuance plans for the current financial year by 72.4 billion pounds ($81 billion). The pound slid below $1.11 for the first time in 37 years.
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Kwarteng’s announcement marked a step change in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to “trickle down” economics.
“Our plan is to expand the supply side of the economy through tax incentives and reform,” Kwarteng said.
“That is how we will compete successfully with dynamic economies around the world. That is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.”
A plan to subsidise energy bills will cost 60 billion pounds just for the next six months, Kwarteng said. The government has promised households support for two years as Europe wrestles with an energy crisis.
Tax cuts – including an immediate reduction in the Stamp Duty property purchase tax plus a reversal of a planned rise in corporation tax – would cost a further 45 billion pounds by 2026/27, he said.
The government said raising Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists think unlikely – would increase tax receipts by around the same amount.
Britain also will accelerate moves to bolster the City of London’s competitiveness as a global financial centre by scrapping the cap on banker bonuses ahead of an “ambitious deregulatory” package later in the year, Kwarteng said. read more
The opposition Labour Party said the plans were a “desperate gamble”.
“Never has a government borrowed so much and explained so little… this is no way to build confidence, this is no way to build economic growth,” said Labour’s finance spokeswoman Rachel Reeves. read more
HISTORY REPEATS?
The Institute for Fiscal Studies said the tax cuts were the largest since the budget of 1972 – which is widely remembered as ending in disaster because of its inflationary effect.
The market backdrop could barely be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency.
Much of the decline reflects the U.S. Federal Reserve’s rapid interest rate rises to tame inflation – which have sent markets into a tailspin – but some investors have taken fright at Truss’s willingness to borrow big to fund growth.
“In 25 years of analysing budgets this must be the most dramatic, risky and unfounded mini-budget,” said Caroline Le Jeune, head of tax at accountants Blick Rothenberg.
“Truss and her new government are taking a huge gamble.”
A Reuters poll this week showed 55% of the international banks and economic consultancies that were polled judged British assets were at a high risk of a sharp loss of confidence. read more
On Thursday the Bank of England said Truss’s energy price cap would limit inflation in the short term but that government stimulus was likely to boost inflation pressures further out, at a time when it is battling inflation near a 40-year high.
Financial markets ramped up their expectations for BoE interest rates to hit a peak of more than 5% midway through next year.
“We are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.
Despite the extensive tax and spending measures, the government had decided against publishing alongside its statement new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog.
Kwarteng confirmed the OBR would publish its full forecasts later this year.
“Fiscal responsibility is essential for economic confidence, and it is a path we remain committed to,” he said.
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Writing by Andy Bruce; Additional reporting by Kylie MacLellan, Kate Holton, Paul Sandle, Sachin Ravikumar, Alistair Smout, William James, James Davey, Andrew MacAskill, Farouq Suleiman, Huw Jones and Elizabeth Piper; Editing by Catherine Evans and Toby Chopra
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Shares of Fortum rose again in early trade Thursday after the Finnish company agreed to sell its 56% stake in German utility Uniper to the German government. The state-owned energy company shifted its stake in a nationalization deal.
French hospitality company Accor saw its shares fall 6.3% at market open after JP Morgan cut its rating on the stock from neutral to underweight. The investment bank expressed concerns the group would not be able to return to its previous level of profitability, saying “our concerns have now exceeded the reasons we like it.”
— Hannah Ward-Glenton
Credit Suisse plans to split its investment bank into three: The FT
Credit Suisse has plans to split its investment bank into three, according to the Financial Times.
The Swiss lender wants to have a separate “bad bank” exclusively for risky assets as it recovers from several years’ worth of scandals and blunders.
New proposals suggest Credit Suisse will sell some of its profitable units as part of the radical reshuffle, with full plans expected to be announced at the bank’s third-quarter results on Oct. 27, the FT reported.
— Hannah Ward-Glenton
Oil prices climb after Fed’s rate hikes, demand fears linger
Oil prices climbed following the Fed’s third consecutive rate hike.
Reuters also reported Chinese refiners are expecting the nation to release up to 15 million tonnes worth of oil products export quotas for the rest of the year, citing people with knowledge of the matter.
Brent crude futures rose 0.45% to stand at $90.24 per barrel, while U.S. West Texas Intermediate also gained 0.45% to $83.3 per barrel.
— Lee Ying Shan
Fed hike likely to keep Asian risk assets under pressure, JPMorgan says
Asian risk assets, especially export-oriented companies, will remain under pressure in the short term following the Fed’s rate hike, according to Tai Hui, chief APAC market strategist at JPMorgan Asset Management.
Tai added that a strong U.S. dollar is likely to persist, but tightening monetary policy in most Asian central banks — with the exception of China and Japan — should help limit the extent of Asian currency depreciation.
The U.S. dollar index, which tracks the greenback against a basket of its peers, strengthened sharply and last stood at 111.697.
— Abigail Ng
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Stock markets are down but the fund managed by Patrick Armstrong at Plurimi Wealth is continuing to deliver positive returns. The fund manager has a number of short positions to play the market volatility.
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Morgan Stanley’s Mike Wilson is staying defensive amid the persistent market volatility this year. He names the key attribute he’s looking for in stocks.
Stocks with this attribute have been “rewarded” this year, with the trend likely to persist until the market turns more bullish, according to Wilson.
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European markets: Here are the opening calls
European stocks are expected to open in negative territory on Wednesday as investors react to the latest U.S. inflation data.
The U.K.’s FTSE index is expected to open 47 points lower at 7,341, Germany’s DAX 86 points lower at 13,106, France’s CAC 40 down 28 points and Italy’s FTSE MIB 132 points lower at 22,010, according to data from IG.
Global markets have pulled back following a higher-than-expected U.S. consumer price index report for August which showed prices rose by 0.1% for the month and 8.3% annually in August, the Bureau of Labor Statistics reported Tuesday, defying economist expectations that headline inflation would fall 0.1% month-on-month.
Core CPI, which excludes volatile food and energy costs, climbed 0.6% from July and 6.3% from August 2021.
U.K. inflation figures for August are due and euro zone industrial production for July will be published.
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Truss to announce energy support plan on Thursday
New PM rules out windfall tax on power firms
Sterling falls to lowest since 1985 against U.S. dollar
Kwarteng says borrowing will be higher
BoE says energy support could help cool inflation
LONDON, Sept 7 (Reuters) – Britain’s new Prime Minister Liz Truss on Wednesday readied the final details of a plan to tackle soaring energy bills, which looks likely to cool inflation but add more than 100 billion pounds ($115 billion) to the country’s borrowing.
On her first full day as Britain’s leader after replacing Boris Johnson, Truss told parliament she would support businesses and households who are bracing for a recession that is forecast to start later this year.
Sterling fell to its lowest level against the U.S. dollar since 1985, in part due to worries among investors about the scale of debt that Britain will have to sell to fund the energy support plan, and the tax cuts that Truss has also promised.
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A source familiar with the situation told Reuters that Truss was considering freezing energy bills in a plan that could cost towards 100 billion pounds, a major turnaround from her rejection of “handouts” during the early stages of the Conservative Party leadership campaign.
Deutsche Bank said the energy price support and the promised tax cuts could cost 179 billion pounds, or about half Britain’s historic pandemic spending push which dealt a blow to the country’s public finances.
Truss ruled out demands by the opposition Labour Party that she fund some of the spending by raising taxes on energy firms.
“I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom,” Truss told lawmakers.
She is due to give details of the energy support plan in parliament on Thursday.
MORE BORROWING
Her finance minister Kwasi Kwarteng, also on his first full day in the job, said borrowing would be higher in the short term to provide support for households and businesses and fund the tax cuts. read more
“We need to be decisive and do things differently. That means relentlessly focusing on how we unlock business investment and grow the size of the British economy, rather than how we redistribute what’s left,” he told business leaders.
The pound sank its lowest level against the dollar since 1985 at $1.1407 and was down almost 1% against the euro too.
While the fall in sterling could add to the inflation pressures in the economy, the expected price freeze plan was likely to help ease the cost-of-living squeeze on consumers which had been shaping up to be the most severe in decades.
BoE Chief Economist Huw Pill said the plan could slow inflation – which surpassed 10% in July – although it was too soon to say what the implications for the central bank’s run of interest rate increases would be. read more
The BoE forecast in August that inflation would exceed 13%, and some economists have said it recently could top 20% if gas prices – pushed up by Russia’s invasion of Ukraine – stay high.
Pill also said the BoE would not allow the surge in government spending to fuel demand in the economy to the point where it pushed up inflation.
Nonetheless, investors scaled back their bets on a 75-basis-point rate hike at the BoE’s next scheduled monetary policy announcement on Sept. 15 to 60% from almost 80% earlier on Wednesday. Two-year British government bond yields also dropped.
Kwarteng met BoE Governor Andrew Bailey and told him that “independence is really a cornerstone of how we see managing the economy,” comments that seemed aimed at reassuring investors that the new government would not pressure the central bank.
Early in the Conservative Party leadership campaign, Truss said the government should set a “clear direction of travel” for monetary policy although she subsequently struck a less interventionist tone.
Kwarteng said he and Bailey would meet regularly, initially twice a week, to coordinate economic support.
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Additional reporting by UK bureau
Writing by William Schomberg
Editing by Hugh Lawson
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BoE may need to raise rates to 7% if inflation persists
Ofgem cap to hit 3,717 pounds in Oct, 5,816 pounds in 2023
BoE forecast inflation to peak in October at 13.3%
LONDON, Aug 22 (Reuters) – British consumer price inflation is set to peak at 18.6% in January, more than nine times the Bank of England’s target, an economist at U.S. bank Citi said on Monday, raising his forecast once again in light of the latest jump in energy prices.
“The question now is what policy may do to offset the impact on both inflation and the real economy,” Benjamin Nabarro said in a note to clients.
Consumer price inflation was last above 18% in 1976.
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The front-runner to become Britain’s next prime minister, Liz Truss, is likely to come up with measures to support households hit by surging energy prices, which might slightly lower the peak rate of inflation, Nabarro said.
Energy regulator Ofgem is due to set out new maximum tariffs for households on Friday, which will take effect in October.
The last tariff increase in April raised the annual bill for a typical household to 1,971 pounds ($2,322) from 1,278 pounds, following a surge in natural gas prices after Russia’s invasion of Ukraine.
The next increases are likely to be steeper still, after a 15% rise in natural gas prices over the past week.
Citi forecasts Ofgem will raise the tariff cap to the equivalent of 3,717 pounds from October, with further increases to 4,567 pounds in January and 5,816 pounds in April 2023.
Energy analysts Cornwall Insight also raised their forecasts for Ofgem’s regulated tariffs to 3,554 pounds for October, 4,650 pounds for January and 5,341 pounds for May.
“It is difficult to see how many will cope with the coming winter,” Cornwall Insight consultant Craig Lowrey said.
In its forecasts at the start of August, the BoE assumed the cap would rise to around 3,500 pounds in October and that energy prices would then stabilise. Consumer price inflation would thus peak at 13.3% in October.
With inflation now set to peak substantially higher, the BoE’s Monetary Policy Committee was likely to conclude that the risks of more persistent inflation had intensified, Citi said.
“This means getting rates well into restrictive territory, and quickly,” Nabarro said. “Should signs of more embedded inflation emerge, we think Bank Rate of 6-7% will be required to bring inflation dynamics under control. For now though, we continue to think evidence for such effects are limited.”
The BoE announced a rare half-percentage-point interest rate increase earlier this month and investors expect another big move when the MPC makes its next scheduled monetary policy announcement on Sept. 15.
Nabarro forecast retail price inflation, which is used to set the return on index-linked bonds, would peak at 21.4%.
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Editing by Catherine Evans
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Venezuela’s President Nicolas Maduro looks on during a meeting with Alejandro Dominguez, president of the South American Football Confederation CONMEBOL, at the Miraflores Palace, in Caracas, Venezuela July 11, 2022. REUTERS/Leonardo Fernandez Viloria
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LONDON, July 29 (Reuters) – London’s High Court has rejected President Nicolas Maduro’s latest efforts to gain control of more than $1 billion of Venezuela’s gold reserves stored in the Bank of England’s underground vaults in London.
The court ruled on Friday that previous decisions by the Maduro-backed Venezuelan Supreme Court, aimed at reducing opposition leader Juan Guaido’s say over the gold, should be disregarded.
It marked the latest victory for Guaido, who has won a series of legal clashes over the bullion after the British government recognised him rather than Maduro as the South American country’s president.
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“I have … concluded that the Guaido Board succeeds: that the STJ (Venezuelan supreme court) judgements are not capable of being recognised,” the judge in the case said.
The Maduro and Guaido camps have each appointed a different board to the Central Bank of Venezuela (BCV) and the two have issued conflicting instructions concerning the gold reserves.
Lawyers for the Maduro-backed BCV board said the central bank was considering an appeal after Friday’s ruling, while Guiado, who has seen some international support falter over the last 18 months, called it an important victory.
The Maduro-backed BCV board said in a statement it rejected the court’s ruling and reserved “all legal action at its disposal to appeal this unusual and disastrous” decision.
Shortly after, the vice president and finance minister Delcy Rodriguez said on state television that “the damage caused to our people is serious” and that the court “has to rectify.”
Maduro’s legal team has said he would like to sell some of the 31 tonnes of gold to finance Venezuela’s response to the pandemic and bolster a health system gutted by years of economic crisis.
Guaido’s opposition has alleged that Maduro’s cash-strapped administration wants to use the money to pay off his foreign allies, which his lawyers deny.
“This decision represents another step in the process of protecting Venezuela’s international gold reserves and preserving them for the Venezuelan people,” Guaido said in a statement.
“This type of honest and transparent judicial process does not exist in Venezuela.”
The British government in early 2019 joined dozens of nations in backing Guaido, after he declared an interim presidency and denounced Maduro for rigging 2018 elections.
Guaido at that time asked the Bank of England to prevent Maduro’s government from accessing the gold. Maduro’s central bank then sued the Bank of England to recover control, saying it was depriving the BCV of funds needed to finance Venezuela’s coronavirus response.
Legal experts have said the latest case has been unprecedented as it has seen one of a country’s highest courts interpreting the constitution of another.
“This is an unfortunate ruling,” said Sarosh Zaiwalla at Zaiwalla & Co, which represented the Maduro-backed central bank, adding it would continue to pursue the case despite Friday’s decision.
“The BCV remains concerned that the cumulative effect of the judgments of the English Court appears to accord a simple statement by the UK Government recognising as a head of state a person with no effective control or power over any part of that state,” Zaiwalla added.
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Reporting by Marc Jones; Editing by Michael Holden, Catherine Evans, Barbara Lewis and Daniel Wallis
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A man wearing a protective face mask walks past the Bank of England (BoE), after the BoE became the first major world’s central bank to raise rates since the coronavirus disease (COVID-19) pandemic, in London, Britain, December 16, 2021. REUTERS/Toby Melville
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Central bank sees economy shrinking in 2023
BoE raises Bank Rate to 1.0% from 0.75%
Rate-setters split over next moves
BoE must balance fast inflation with slowdown worries
MPC will consider gilt sales plan in August
LONDON, May 5 (Reuters) – The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10% as it raised interest rates on Thursday to their highest since 2009, hiking by quarter of a percentage point to 1%.
The pound fell by more than a cent against the U.S. dollar to hit its lowest level since mid-2020, below $1.24, as the gloominess of the BoE’s new forecasts for the world’s fifth-largest economy caught investors by surprise.
They also trimmed bets on the central bank hiking rates aggressively this year. Short-dated British government bond yields slid sharply.
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The BoE’s nine rate-setters voted 6-3 for the rise in Bank Rate from 0.75%, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25%.
Economists polled by Reuters had forecast an 8-1 vote to raise benchmark borrowing costs to 1%, with one policymaker opposing a hike.
Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia’s invasion of Ukraine sent energy prices spiralling.
The BoE said it was also worried about the impact of renewed COVID-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.
But policymakers around the world are also trying to avoid sending their economies into a slump.
“It is a very weak projection, a very sharp slowdown,” BoE Governor Andrew Bailey told reporters.
“There’s a technical definition of a recession it doesn’t meet – but put that to one side – it is a very sharp slowdown in activity.”
On Wednesday, the U.S. Federal Reserve raised rates by a half-point to a range of 0.75-1.0%, its biggest increase since 2000. Chair Jay Powell said more such hikes were on the table.
But Powell said the U.S. economy was performing well, a contrast with Bailey’s more downbeat assessment.
The BoE’s rate rise was its fourth since December, the fastest pace of policy tightening in 25 years.
The BoE said most policymakers believed “some degree of further tightening in monetary policy may still be appropriate in the coming months”. It dropped the word “modest” to describe the scale of rate hikes ahead.
A split emerged, with two members saying the guidance was too strong given the risks to growth.
“The new forecasts, taken together with the increasing division among committee members, suggest the Bank is getting closer to a pause in its tightening cycle,” said ING economist James Smith.
Suren Thiru, head of economics at the British Chambers of Commerce, said the rate hike and deteriorating outlook would cause “considerable alarm among households and businesses”.
British consumer price inflation hit a 30-year high of 7% in March, more than triple the BoE’s 2% target, and the central bank revised up its forecasts for price growth to show it peaking above 10% in the last three months of this year.
It had previously predicted a peak of about 8% in April.
The BoE said British inflation would peak later than in other big advanced economies due to a cap on household energy tariffs. Fuel bills jumped by 54% in April and the BoE now sees a further 40% increase in October, hitting the economy.
Real post-tax household disposable income – a measure of living standards – is forecast to fall 1.75% this year, the biggest calendar-year drop since 2011 and the second-biggest since the BoE’s records began in the 1960s.
Voters in local government elections on Thursday are expected to punish Prime Minister Boris Johnson over the cost-of-living crisis and for breaking his own COVID lockdown rules. read more
Bailey said inflation would most hurt “those with least bargaining power and those who are often least well off”, describing that impact as “a great concern”.
The BoE kept its forecast for economic growth this year at 3.75%, but slashed its forecast for 2023 to show a contraction of 0.25% from a previous estimate of 1.25% growth. It cut its growth projection for 2024 to 0.25% from a previous 1.0%.
While growth in the first three months of this year has been stronger than the BoE predicted, it expects the economy to stagnate in the second quarter, due to an extra public holiday and reduced COVID testing. It sees a nearly 1% fall in GDP in the final quarter as the next energy price rise kicks in.
Those forecasts were based on bets in financial markets that the BoE would increase rates to about 2.5% by the middle of next year, which the central bank signalled was probably too much.
It said it expected inflation would fall to 1.3% in three years’ time, based on market pricing for interest rates, as higher unemployment and the cost-of-living squeeze hit the economy. That would be the biggest undershoot relative to its 2% target since the 2008-09 global financial crisis.
The BoE also said it would work on a plan to start selling the government bonds it has bought since that crisis, which currently stand at just under 850 billion pounds ($1.05 trillion).
BoE staff would update the Monetary Policy Committee on the plan at its August meeting which would “allow the Committee to make a decision at a subsequent meeting on whether to commence sales”.
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Additional reporting by Andy Bruce
Writing by William Schomberg
Editing by Catherine Evans
Our Standards: The Thomson Reuters Trust Principles.
A man wearing a protective mask, amid the coronavirus disease (COVID-19) outbreak, walks past an electronic board displaying various countries’ stock indexes including Russian Trading System (RTS) Index which is empty, outside a brokerage in Tokyo, Japan, March 10, 2022. REUTERS/Kim Kyung-Hoon
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LONDON/TOKYO, March 17 (Reuters) – Europe’s stock markets consolidated strong gains made in Asia on Thursday, after China signalled more support for its spluttering economy and the Federal Reserve had pressed ahead with the first U.S. interest rate rise in more than three years.
Traders remained gripped by the devastating war in Ukraine, but with hopes of possible a peace deal faint but alive they were also watching to see if the Bank of England raises UK interest rates again later too. read more
The EuroSTOXX 600 (.STOXX) was 0.1% lower after an initial rise. Earlier 3.5% leaps by both the Nikkei in Tokyo (.N225) and emerging market stocks (.MSCIEF) meant MSCI’s main world index (.MIWD00000PUS) was still up and more than 6% higher in the last three days, albeit after a torrid start to the year.
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Sanctions-ravaged Russia’s ongoing shelling of Ukraine meant commodity markets continued to gyrate wildly with oil prices back over the symbolic $100 level again. The Kremlin lashed out at U.S. President Joe Biden labelling Russian President Vladimir Putin a war criminal, but said it was putting “colossal energy” into peace talks. read more
Metals markets faced more drama after nickel trading had to be halted again on London Metal Exchange again on Wednesday.
“The reaction both this morning and overnight validates that the markets think the Fed is in line or ahead of the curve and doing the right thing,” by hiking interest rates, Chief Investment Officer of Close Brothers Asset Management, Robert Alster, said.
He added it would also be the “right thing” for the Bank of England to raise its rates later for a third meeting running, back to its pre-pandemic level of 0.75%.
The BoE last month predicted inflation will peak at around 7.25% in April – almost four times its 2% target – but that forecast has been overtaken by seismic shifts in European energy markets following Russia’s invasion of Ukraine.
“The crunch point is that we are all expecting inflation to start coming down after Easter,” Alster added. “But if that doesn’t happen then we all probably need to have a reset.”
The stock market gains had followed a 2.2% surge on Wall Street’s S&P 500 (.SPX) overnight.
Bond markets meanwhile were beginning to settle after Treasury yields had spiked to nearly three-year highs following the Fed’s signal that it also planned to hike rate at every meeting for the remainder of this year to aggressively curb inflation. read more
Ten-year Treasuries were last at 2.12% while Germany’s benchmark 10-year Bund yield slipped back 2 basis points to 0.382% having started the day edging higher, extending the previous session’s gains to hit 0.408%, its highest since November 2018 DE10YT=RR.
The more upbeat sentiment in recent days means there are “fewer excuses for central banks to delay policy tightening,” ING rates strategists said in a note to clients.
UK inflation surging
ASIA RISES
The dollar, though, remained on the back foot in the FX markets. The dollar index , which tracks it against six other major currencies, was slightly weaker at 98.476 after also dropping 0.5% on Wednesday.
Where the dollar showed some strength was against Japan’s currency, standing at 118.82 yen , not too far from the more than six year high of 119.13 reached overnight amid a widening monetary policy gap.
The Bank of Japan is widely seen keeping its vast stimulus programme in place on Friday as the economy there continues to sputter. read more
Meanwhile, concerns about a sharp slowdown in China, which is battling a spreading COVID-19 outbreak with ultra-restrictive measures, were assuaged after its Vice Premier Liu He on Wednesday has signalled more stimulus was on the way.
Hong Kong’s Hang Seng index had surged more than 5% overnight, adding to a 9% leap on Wednesday. Beaten down sectors including tech and real estate soared, with Country Garden Services Holdings (6098.HK) and Country Garden Holdings (2007.HK) climbing about 28% and 26%, respectively.
Online giant Alibaba (9988.HK) leapt 9%, China’s blue chips (.CSI300) gained 2.3%, extending the previous day’s 4.3% rebound while Japan also saw outsized gains, with the Nikkei (.N225) vaulting 3.5% and touching a two-week peak.
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Reporting by Marc Jones; Editing by Toby Chopra
Our Standards: The Thomson Reuters Trust Principles.
BoE’s Bailey says don’t bet on long run of rate hikes
LONDON, Feb 3 (Reuters) – The Bank of England raised interest rates to 0.5% on Thursday and nearly half its policymakers wanted a bigger increase to contain rampant price pressures, which the British central bank warned would push inflation above 7%.
In a surprise split decision, four of the nine Monetary Policy Committee members wanted to raise rates to 0.75% in what would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago.
A slim majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase.
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The pound briefly jumped above $1.36, its highest level since Jan. 20, and touched a two-year high against the euro before falling back after the European Central Bank raised the possibility of a rate hike of its own.
British government bonds sold off, with the 10-year yield at its highest since January 2019.
The BoE, which in December became the first major central bank to raise rates since the pandemic, flagged further modest tightening “in the coming months” even though growth will be hurt by global energy and goods price inflation.
But Bailey told investors not to assume the BoE was embarking on a long series of rate hikes, and said there would have to be a trade-off between strong inflation and weakening growth as many households see their incomes squeezed.
Earlier, finance minister Rishi Sunak detailed measures to help households cope with a leap in energy prices in April, when taxes for workers and firms are due to rise. read more
Bailey said he had a “hard message” for the public.
“We have not raised interest rates today because the economy is roaring away,” he told reporters. “An increase in Bank Rate is necessary because it is unlikely that inflation will return to target without it.”
Britain was facing an “extreme example” of an economic shock that would raise the cost of living for everyone, Bailey warned.
Some analysts said the BoE risked adding to the financial pain.
“We think that they are effectively cracking a supply side nut with a demand side hammer,” Richard McGuire, head of rates strategy at Rabobank, said.
James Athey, investment director at abrdn, said inflation expectations in financial markets were little changed by the BoE’s announcement.
“The Bank seemingly cannot win in such a scenario as the market is essentially saying that if they don’t create a recession then inflation won’t come down far enough,” he said.
Thursday’s move marked the first back-to-back increases in Bank Rate since 2004.
The Bank of England (BoE) building is reflected in a sign, after the BoE became the first major world’s central bank to raise rates since the coronavirus disease (COVID-19) pandemic, London, Britain, December 16, 2021. REUTERS/Toby Melville//File Photo
After the BoE’s announcement, investors priced in Bank Rate hitting 1.0% by May and 1.5% by year-end.
“It would not be surprising if we see a further increase, but please don’t get carried away,” Bailey said.
SPLIT DECISION
The BoE said consumer price inflation – which was 5.4% in December – should peak at around 7.25% in April, which would be the highest rate since the recession-ravaged early 1990s and miles off its 2% target.
High inflation meant post-tax income for working households would fall by 2% this year and 0.5% next year, while weakening demand would push unemployment up to 5% in three years’ time.
The BoE said it will start to unwind its 895 billion pound ($1.2 trillion) quantitative easing programme by allowing the government bonds it holds to roll off its balance sheet as they mature. It will sell its much smaller stock of corporate bonds.
Price pressures look set to persist for much longer than forecast in November by the BoE, which trebled its forecast for wage growth this year to 3.75%.
Inflation in a year’s time is now seen above 5% based on the market outlook for interest rates.
But in a sign the BoE thinks investors have priced in too many rate hikes, it predicted inflation in three years’ time would be below target at around 1.6%.
Bailey, his deputies Ben Broadbent and Jon Cunliffe, Chief Economist Huw Pill and external MPC member Silvana Tenreyro all voted for a 25 basis-point rate hike.
The BoE said they recognised the risks of strong price pressures but also the potential for inflation to fall faster if global energy and goods costs ease as markets expect.
They warned a larger rate hike could have an “outsized impact” on expectations for borrowing costs.
Deputy Governor Dave Ramsden and external members Michael Saunders, Jonathan Haskel and Catherine Mann voted for a half-percentage-point rate rise to reduce the risk that recent pay growth and inflation expectations became more firmly embedded.
BOND SALES
The BoE said the unwinding of its asset purchases would start next month when a British government bond held by the central bank matures. The 27.9 billion pounds of proceeds will not be reinvested, the BoE said – and nor will future gilt redemptions, worth around 70 billion pounds over 2022 and 2023.
The BoE will consider actively selling gilts once Bank Rate hits 1%.
It said it plans to reduce its 20 billion pounds of corporate bond holdings to zero no sooner than end-2023, by not reinvesting maturing bonds and a sales programme.
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Reporting by Andy Bruce; Editing by Catherine Evans, William Maclean
Our Standards: The Thomson Reuters Trust Principles.