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Business

BoE becomes first major central bank to raise rates since pandemic

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  • BoE votes 8-1 to raise UK interest rates to 0.25% from 0.1%
  • BoE is first major c.bank to raise rates since pandemic began
  • UK inflation is forecast to peak at 6% in April 2022
  • Omicron to hurt near-term growth, inflation impact unclear
  • More persistent domestic inflation and job market pressures seen

LONDON, Dec 16 (Reuters) – The Bank of England on Thursday became the world’s first major central bank to raise borrowing costs since the coronavirus pandemic hammered the global economy, as it said inflation was likely to hit 6% in April – three times its target level.

In a second surprise for investors in six weeks, the BoE said it had to act, even as the Omicron coronavirus variant sweeps Britain, because it saw warning signs that underlying inflation pressure might become long-lasting.

“The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures,” the BoE said.

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“Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage.”

Sterling jumped almost a full cent against the U.S. dollar to its highest since Nov. 30, and interest-rate sensitive two-year gilt yields rose by 9 basis points on the day to 0.58%, their highest since Dec. 1.

Most economists polled by Reuters had expected the BoE’s Monetary Policy Committee to keep Bank Rate at 0.1% due to the Omicron variant of the coronavirus which caused a record number of COVID-19 cases in Britain on Wednesday.

“The MPC’s decision to hike Bank Rate today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation and the risk that inflation expectations would de-anchor if it did nothing,” Pantheon Macroeconomics analyst Samuel Tombs said.

The nine-member MPC voted 8-1 to raise Bank Rate to 0.25% from 0.1%, with external member Silvana Tenreyro providing the only dissenting voice.

The MPC pointed to the likelihood of further rate hikes ahead.

“The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably,” it said.

Investors were fully pricing in another rise in Bank Rate to 0.5% by March’s meeting and that it would hit 1% by September.

SHORT-TERM OMICRON HIT SEEN

The BoE cut its growth forecasts for December and the first quarter of 2022 because of Omicron which could lead to “a very high number of infections over a very short period.”

A closely watched survey of purchasing managers published earlier on Thursday showed a hit to hospitality and travel companies this month, sending private sector growth to a 10-month low. read more

But the BoE also said Britain and the world economy were in a “materially different” situation than at the start of the pandemic, with inflation now elevated.

It focused more on “upside risks” around pay trends and said there was little sign of a jump in unemployment after the end of the government’s job-supporting furlough scheme on Sept. 30.

The British central bank also wrong-footed many investors on Nov. 4 when it kept Bank Rate on hold to give itself more time to see the extent of any hit to the labour market from the end of the scheme.

At its December meeting, the MPC voted 9-0 to keep the central bank’s government bond-buying programme at its target size of 875 billion pounds ($1.16 trillion). The BoE has also bought 20 billion pounds of corporate bonds.

Thursday’s rate hike put the BoE ahead of the U.S. Federal Reserve. On Wednesday, the Fed said it was speeding up a phase-out of its bond-buying stimulus, in a first step ahead of possibly three interest rate rises in 2022. read more

The European Central Bank and the Bank of Japan are further away from raising borrowing costs.

The ECB on Thursday cut back its stimulus further on but promised generous support for the euro zone’s economy in 2022.

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Reporting by David Milliken and Andy Bruce; Writing by William Schomberg; Editing by Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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Business

Stocks march towards record highs ahead of ECB, BOE meetings By Reuters

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© Reuters. FILE PHOTO: An electronic stock quotation board is displayed inside a conference hall in Tokyo, Japan November 1, 2021. REUTERS/Issei Kato

By Marc Jones

LONDON (Reuters) – World stocks marched back towards record highs on Thursday as traders waited to see if Europe’s top central banks, the ECB and Bank of England, would match the U.S. Federal Reserve’s upbeat message and cut stimulus.

There was more drama in Turkey as the record low lira plunged another 3% ahead of its own central bank meeting, and Omicron numbers were rocketing globally, but for once it wasn’t infecting the major markets.

The pan-European index jumped 1.4% early on led by the tech and energy sectors. Wall Street futures were also pointing up again, while the bond and currency markets seemed happy with the Fed’s turbo taper plan to end its pandemic-era bond purchases by March.

“If the Fed moves (hikes interest rates next year), it will be okay as long as there is growth,” said Barrow Hanley’s Head of International Equities Rand Wrighton, referring to bets U.S. rates could go up three times before the end of 2022.

He also added that while the rapid spread of the Omicron COVID-19 variant might delay the timing of economic recoveries, it shouldn’t ultimately alter the broader trajectory.

The Fed had laid out a scenario in which the pandemic, despite the Omicron variant, gives way to a benign set of economic conditions, with inflation easing largely on its own, interest rates increasing slowly, and unemployment staying low.

“The economy no longer needs increasing amounts of policy support,” Fed Chair Jerome Powell said.

Attention now turns to the ECB and BOE, which are also trying to balance the need to support economies threatened by the virus with the need to cut money printing to cool surging inflation.

The ECB’s 1245 GMT policy statement is expected to see it dial back its stimulus one more notch. But it is also expected to pledge ongoing support, sticking to its long-held view that inflation will abate on its own.

However, markets have ramped up bets that the BoE, which announces its decision at 1200 GMT, could finally raise rates after data on Wednesday showed British consumer price inflation at a more than 10-year high following another strong surge.

“There is clearly more pressure on the BoE to get along with it and start to normalise policy after having bottled it at the last meeting … though the consensus is the BoE will hold fire and wait until the fallout from the Omicron variant becomes clear,” Tapas Strickland, a director of economics at National Australia Bank (OTC:), wrote in a note to clients.

(Graphic on, Major Central Bank Policy Rates Over 15 yrs: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomrqxmvd/Policy.PNG)

TURBULENT TURKEY

Sterling was up 0.2% to just under $1.33 having peaked for the year back in May at $1.4250. The euro climbed a similar amount to just over $1.13 even though forward-looking euro zone purchasing manager data came in weaker than expected.

Europe is facing a fourth wave of infections and many governments have been encouraging citizens to stay home and avoid unnecessary social contact.

IHS Markit’s Flash Composite Purchasing Managers’ Index, a good indicator of overall economic health, dropped to 53.4 in December from 55.4 in November, its lowest since March and below the 54.0 predicted in a Reuters poll.

That headline number was dragged down by the services PMI, which sank to an eight-month low of 53.3 from 55.9. While above the 50-mark separating growth from contraction it missed the Reuters poll estimate for 54.1.

“The euro zone economy is being dealt yet another blow from COVID-19, with rising infection levels dampening growth in the service sector in particular to result in a disappointing end to 2021,” said Chris Williamson, chief business economist at IHS Markit.

It wasn’t looking like a good Christmas for Turkey either.

The lira dropped to an all-time low beyond 15 against the dollar ahead of another expected interest rate cut by the central bank, which has fallen in line with President Tayyip Erdogan’s risky new economic programme.

“We exited local markets in September – we went to zero,” said Aegon (NYSE:) Asset Management’s head of emerging market debt Jeffery Grills, blaming the direction the country’s economic and monetary policies were now taking.

The lira has halved in value this year.

(Graphic on, Lira volatility gauges sound crisis warning sound: https://fingfx.thomsonreuters.com/gfx/mkt/movanqbbrpa/Pasted%20image%201639470660867.png)

Things were far smoother in the commodity markets however. Oil rose towards $75 supported by record U.S. implied demand and falling crude stockpiles [O/R], while cooper which is highly sensitive to the health of the global economy rebounded 2.2% after falls on Wednesday has taken its losses since October past 11%.

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World

For Britain’s chicken farmers, Brexit and COVID brew a perfect storm

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DRIFFIELD, England, Oct 18 (Reuters) – When Nigel Upson checks the plucked chicken carcasses dangling from a rotating line at his poultry plant in England, he sees cash haemorrhaging out of his business from a collision of events that has distressed every part of the farm-to-fork supply chain.

Like food manufacturers across Britain, Upson was hit this year by an exodus of eastern European workers who, deterred by Brexit paperwork, left en masse when COVID restrictions lifted, compounding his already soaring cost of feed and fuel.

Such is the scale of the hit, he cut output by 10% and hiked wages by 11%, a rise that was immediately matched or bettered by neighbouring employers in the northeast of England.

Increases in the cost of food will surely follow.

“We’re being hit from all sides,” Upson told Reuters in front of four vast, spotless sheds that house 33,000 chickens apiece. “It is, to use the phrase, a perfect storm. Something will have to give.”

The deepening problems at Upson’s Soanes Poultry plant in east Yorkshire are a microcosm of the pressures building on businesses across the world’s fifth largest economy as they emerge from COVID to confront the post-Brexit trade barriers erected with Europe.

In the broader food sector, operators have increased wages by as much as 30% in some cases just to retain staff, likely forcing an end to an economic model that led supermarkets such as Tesco (TSCO.L) to offer some of the lowest prices in Europe.

Following the departure of European workers who often did the jobs that British workers didn’t want, retailers may have to import more.

While all major economies have been hit by supply chain problems and a labour shortage after the pandemic, Britain’s tough new immigration rules have made it harder to recover, businesses say.

Already a driver shortage has led to a lack of fuel at gas stations and gaps on supermarket shelves, while chicken restaurant chain Nandos ran out of chicken.

The Bank of England is weighing up how much of a recent jump in inflation will prove long-lasting, requiring it to push up interest rates from their all-time low.

MOUNTING PRESSURE

For the rural businesses situated near the flat, open fields of Yorkshire, Upson says the situation is dire.

Although he says he needs 138 workers for his plant, he recently had to operate with under 100. Staff turnover is high.

Richard Griffiths, head of the British Poultry Council, says that with Europeans making up about 60% of the sector, the industry has lost more than 15% of its staff.

When numbers are particularly tight Upson gets his sales, marketing and finance staff to don the long white coats and hairnets that are needed on the processing line.

“Three weeks ago the offices were empty, everyone was in the factory,” he said, of a business that supplies high-end birds for butchers, farm shops and restaurants. For the run-up to Christmas, he may look to students.

On difficult days Soanes can only deliver the absolute basics – chickens piled into boxes. They do not have time to truss the birds for retail or put them into separate, Soanes-labelled packaging that commands a higher selling price.

Around 3 tonnes of offal that is normally sold each week is going in the skip due to the lack of staff to process it.

The sudden rise in wages and the drop in output also come on top of spikes in the cost of animal feed, energy and fuel, carbon dioxide, cardboard and plastic packaging.

A worker processes chickens on the production line at the Soanes Poultry factory near Driffield, Britain, October 12, 2021. REUTERS/Phil Noble

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“We’ve just had to say to our customers, sorry, the price is going up,” Upson said, shaking his head. “We’re losing money, big style.” The poorest consumers would be hardest hit, he said.

Business owners have urged the government to temporarily ease visa rules while they do the staff training and automation of processes needed to help close Britain’s 20-year, 20% productivity gap with the United States, Germany and France.

But far from changing course, Prime Minister Boris Johnson says businesses need to cut their addiction to cheap foreign labour now, invest in technology and offer well-paid jobs to some of the 1.5 million unemployed people in Britain.

Upson says there is a shortage of workers in rural communities and with some 1.1 million job vacancies in the country, people can be choosy about which they pick. “Working in a chicken factory isn’t everybody’s idea of a career,” he said.

While 5,500 foreign poultry workers will be allowed to work in Britain before Christmas, and the UK will offer emergency visas to 800 foreign butchers to avoid a mass pig cull sparked by a shortage in abattoirs, the industry says it needs more.

As for automation, the production of whole birds is already highly mechanised, and while it could be used more for boneless meat and convenience cuts, the cost is prohibitive for a small operator.

The National Farmers’ Union and other food bodies said in a recent report that parts of the UK’s food and drink supply chain were “precariously close to market failure”, limiting the ability to invest in automation.

Soanes has an annual turnover of around 25 million pounds ($34 million). In the last three years its owners have spent 5 million on expansion. Now output must fit the size of the workforce.

TOO CHEAP

According to “Chicken King” Ranjit Singh Boparan, founder of the UK’s biggest producer, 2 Sisters, food prices must now rise.

“Food is too cheap,” he said. “In relative terms, a chicken today is cheaper to buy than it was 20 years ago. How can it be right that a whole chicken costs less than a pint of beer?”

Upson says he can get a higher price selling bones for pet food than he can for a leg of chicken.

For major producers, the main barrier to higher prices is often the purchasing power of the biggest supermarkets, which have since the 2008 financial crash battled to keep prices down for key items such as fruit, vegetables, bread, meat, fish and poultry.

Sentinel Management Consultants’ CEO David Sables, who coaches suppliers on how to negotiate with British supermarkets, said desperate food producers had already pushed through some price rises, and he expects another round to come in early next year.

With chicken a so-called “known value item”, of which shoppers instinctively know the cost, he said supermarkets would likely push the price rises on to other goods. He described the chicken sector as an “absolute horror show”.

One senior executive at a major supermarket group, who asked not to be named, said retailers were under pressure to “hold the line” on key prices, and that they all watch each other.

“If you see one of the big six move (on price), you can bet your damnedest others will take about 12 hours to follow,” he said.

Back in Yorkshire, Upson and others are praying they do. While he acknowledges Johnson’s desire to move to a “high-wage, high-skills” economy, he said not all jobs fit that bill.

“What skill do you need to put chicken in a box?” he asks. “We can put wages up, but prices will go up.” He is starting to despair. “Normally you can just be pragmatic and say, it will sort itself out. But I’m not sure where this one ends.”

($1 = 0.7277 pounds)

Writing by Kate Holton; Editing by Guy Faulconbridge and Jan Harvey

Our Standards: The Thomson Reuters Trust Principles.

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Business

For bank regulators, tech giants are now too big to fail

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  • Britain, France, United States and EU scrutinising sector
  • Bank cloud tech spending to surge to $85bn by 2025 – IDC
  • Bank regulators want more oversight of cloud risks

LONDON, Aug 20 (Reuters) – More than a decade on from the financial crisis, regulators are spooked once again that some companies at the heart of the financial system are too big to fail. But they’re not banks.

This time it’s the tech giants including Google (GOOGL.O), Amazon (AMZN.O) and Microsoft (MSFT.O) that host a growing mass of bank, insurance and market operations on their vast cloud internet platforms that are keeping watchdogs awake at night.

Central bank sources told Reuters the speed and scale at which financial institutions are moving critical operations such as payment systems and online banking to the cloud constituted a step change in potential risks.

“We are only at the beginning of the paradigm shift, therefore we need to make sure we have a fit-for-purpose solution,” said a financial regulator from a Group of Seven country, who declined to be named.

It is the latest sign of how financial regulators are joining their data and competition counterparts in scrutinising the global clout of Big Tech more closely.

Banks and technology companies say greater use of cloud computing is a win-win as it results in faster and cheaper services that are more resilient to hackers and outages.

But regulatory sources say they fear a glitch at one cloud company could bring down key services across multiple banks and countries, leaving customers unable to make payments or access services, and undermine confidence in the financial system.

The U.S. Treasury, European Union, Bank of England and Bank of France are among those stepping up their scrutiny of cloud technology to mitigate the risks of banks relying on a small group of tech firms and companies being “locked in”, or excessively dependent, on one cloud provider.

“We’re very alert to the fact that things will fail,” said Simon McNamara, chief administrative officer at British bank NatWest (NWG.L). “If 10 organisations aren’t prepared and are connected into one provider that disappears, then we’ll all have a problem.”

RAPID PACE

The EU proposed in September that “critical” external services for the financial industry such as the cloud should be regulated to strengthen existing recommendations on outsourcing from the bloc’s banking authority that date back to 2017.

The Bank of England’s Financial Policy Committee (FPC) meanwhile wants greater insight into agreements between banks and cloud operators and the Bank of France told lenders last month they must have a written contract that clearly defines controls over outsourced activities.

“The FPC is of the view that additional policy measures to mitigate financial stability risks in this area are needed,” it said in July. read more

The European Central Bank, which regulates the biggest lenders in the euro zone, said on Wednesday that bank spending on cloud computing rose by more than 50% in 2019 from 2018.

And that’s just the start. Spending on cloud services by banks globally is forecast to more than double to $85 billion in 2025 from $32.1 billion in 2020, according to data from technology research firm IDC shared with Reuters.

An IDC survey of 50 major banks globally identified just six primary providers of cloud services: IBM (IBM.N), Microsoft, Google, Amazon, Alibaba (9988.HK) and Oracle (ORCL.N).

Amazon Web Services (AWS) – the largest cloud provider according to Synergy Group – posted sales of $28.3 billion in the six months to June, up 35% on the prior year and higher than its annual revenue of $25.7 billion as recently as 2018.

While all industries have ramped up cloud spending, analysts told Reuters that financial services firms had moved faster since the pandemic after an explosion in demand for online banking and emergency lending schemes.

“Banks are still very diligent but they have gained a higher level of comfort with the model and are moving at a fairly rapid pace,” said Jason Malo, director analyst at consultants Gartner.

Reuters Graphics Reuters Graphics

NO MORE SECRECY

Regulators worry that cloud failures would cause banking systems to fall over and stop people accessing their money, but say they have little visibility over cloud providers.

Last month, the Bank of England said big tech companies could dictate terms and conditions to financial firms and were not always providing enough information for their clients to monitor risks – and that “secrecy” had to end.

There is also concern that banks may not be spreading their risk enough among cloud providers.

Google told Reuters that less than a fifth of financial firms were using multiple clouds in case one failed, according to a recent survey, although 88% of those that did not spread their risk yet planned to do so within a year. read more

Central bank sources said part of the solution may be some form of mechanism that offers reassurance on resilience from cloud providers to banks to mitigate the sector’s aggregate exposure to one cloud service – with the banking regulator having the overall vantage point.

“Regardless of the division of control responsibilities between the cloud service provider and the bank, the bank is ultimately responsible for the effectiveness of the control environment,” the U.S. Federal Reserve said in draft guidance issued to lenders last month.

FINRA, which regulates Wall Street brokers, published a report on Monday ahead of potential rule changes to ensure that using the cloud does not harm the market or investors.

Being able to switch cloud providers easily when needed is, however, a task that is more easily said than done and could introduce disruptions to business, the FINRA report said.

‘THE BUCK STOPS WITH US’

Banks and tech firms contest the suggestion that greater adoption of the cloud is making the financial system’s infrastructure inherently riskier.

Adrian Poole, director for financial services in the United Kingdom and Ireland for Google Cloud, said the cloud can be more effective in bolstering a bank’s security capabilities than by building it in-house.

British digital lender Zopa said it had moved 80% of its transactions to the cloud and was working to mitigate risks. Zopa Chief Executive Jaidev Janardana said the company was also deliberately leaning on tech firms’ expertise.

“Cloud providers invest a lot of resources in security at a scale that few individual companies could manage,” he said.

Google’s Poole said the company was open to working more closely with financial regulators.

“We may one day see regulators pulling data on demand from regulated banks with cloud-enabled application programming interfaces (APIs), instead of waiting for banks to periodically push data at them,” he said.

NatWest’s McNamara said the bank was collaborating closely with tech firms and regulators to mitigate risks, and had put alternative services in place in case things went wrong.

“The buck stops with us,” McNamara said. “We don’t put all our eggs in one basket.”

One problem, though, is that not all banks have a full understanding of the risks to resiliency that could come with a wholesale shift to the cloud, said Jost Hoppermann, principal analyst at Forrester, particularly the smaller lenders.

“Some banks do not have the necessary know-how,” he said. “They think doing this will vanish all their problems, and certainly that isn’t true.”

Reporting by Iain Withers and Huw Jones; Additional reporting by Michelle Price in Washington and Francesco Canepa in Frankfurt; Editing by Rachel Armstrong and David Clarke

Our Standards: The Thomson Reuters Trust Principles.

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US

BOE botched NYC mayoral primary results by including ‘test’ run

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The too-close-to-call Democratic primary race that will likely decide New York’s next mayor was thrown into disarray after election officials admitted they accidentally included “test” results in the vote count, resulting in 135,000 extra ballots.

The botching of the city’s first ranked-choice election was first flagged by front-runner Eric Adams, who pointed out that preliminary results from the Board of Elections showed that 941,832 votes were cast for the Democratic mayoral nomination, a huge increase of from the 799,827 that were counted on Primary Day last week.

The BOE clarified their screw-up in a tweet Tuesday night.

“It has been determined that ballot images used for testing were not cleared from the Election Management System (EMS),” the board said of the fiasco.

“When the cast votes were extracted for the first pull of RCV {ranked choice voting} results, it included both test and election night results, producing approximately 135,000 additional records,” the mea culpa continued.

“The board apologizes for the error and has taken immediate measures to ensure the most accurate up to date results are reported.”

Tuesday’s unofficial results, after a total of 11 rounds of ranked-choice counting, had Adams narrowly leading former city sanitation commissioner Kathryn Garcia by 368,898 votes to 352,990 or 51.1 percent to 48.9 percent, with Maya Wiley and 10 other candidates eliminated.

“Today’s mistake by the Board of Elections was unfortunate,” Adams tweeted in response. “It’s critical that New Yorkers are confident in their electoral system, especially as we rank votes in a citywide election for the first time.” 

A total of 219,944 ballots “with no choices left” were listed as “inactive.” But the city still has yet to count more than 124,000 absentee ballots sent by mail.

“New Yorkers want free and fair elections, which is why we overwhelmingly voted to enact ranked choice voting,” Garcia said in a press release. “The BOE’s release of incorrect ranked choice votes is deeply troubling and requires a much more transparent and complete explanation.”

Wiley also blasted the BOE for its latest blunder in a Tuesday night statement.

“This error by the Board of Elections is not just failure to count votes properly today, it is the result of generations of failures that have gone unaddressed,” Wiley said.

“Today, we have once again seen the mismanagement that has resulted in a lack of confidence in results, not because there is a flaw in our election laws, but because those who implement it have failed too many times.”



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