Bank of England deputy governor could vote to cut interest rates if inflation pressures ease – business live


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It’s rare to hear a Bank of England policymaker floating the idea of cutting interest rates.

Back in early 2020, the Bank cut rates to alltime lows of 0.1%. But after inflation started to climb, its monetary policy committee made their first rate increase since the pandemic last December.

It has then steadily raised rates at every meeting this year, as inflation soared to its highest in over 40 years.

This month’s hefty interest rate hike, from 2.25% to 3%, was not unanimous, though – MPC member Swati Dhingra voted for a smaller rise to 2.75%, while colleague Silvana Tenreyro favoured a quarter-point increase to 2.5%.

There are nine members of the MPC, all trying to weigh up the merits of tightening monetary policy when the economy is falling into recession.

Chief economist Huw Pill, for example, has warned there is ‘still more to do’ to curb inflation, so December meeting could see hot debate between the hawkish and dovish members of the committee…..

BoE’s Ramsden: I could consider case for cutting interest rates

A senior Bank of England policymaker has suggested that he could consider voting to cut UK interest rates, if growth and inflation are weaker than expected.

Sir Dave Ramsden, BoE deputy governor, says that while he expects that interest rates will need to rise higher, there are “considerable uncertainties” about the economic outlook.

Giving a speech at the Bank of England Watchers’ Conference in London, Ramsden pledges to take a ‘watchful and responsive’ approach to setting borrowing costs.

Given the uncertainties we face it is important also to be humble about what we don’t know or still have to learn. I favour a watchful and responsive approach to setting policy.

Although my bias is towards further tightening, if the economy develops differently to my expectation and persistence in inflation stops being a concern, then I would consider the case for reducing Bank Rate, as appropriate.

Bank of England inflation forecasts Photograph: Bank of England

The Bank has already raised UK base rate to 3%, up from 0.25% at the start of this year, and the City expects rates to peak at 4.5% next summer.

Ramsden has been one of the hawkish members of the Monetary Policy Committee, pushing a faster pace of tightening earlier this year.

Today, he emphasies the uncertainties inherent in the future path of the economy and in the forecasting process, pointing out that the Bank’s predictions for GDP and unemployment are more pessimistic than many other forecasters.

Economic forecasts for UK GDP and unemployment
Economic forecasts for UK GDP and unemployment Photograph: Bank of England

Ramsden adds that 2022 has been a very challenging year for the UK economy, and that higher interest rates are adding to the strain:

Millions of households and businesses are experiencing great hardship as a result of the cost of living crisis. As a member of the MPC I am acutely conscious that our actions are adding to the difficulties caused by the current situation.

But he concludes by warning that households and businesses will suffer more damage if high inflation persists.

However challenging the short term consequences might be for the UK economy, the MPC must take the necessary steps in terms of monetary policy to return inflation to achieve the 2% target sustainably in the medium term.

By restoring low inflation, consistent with its remit, the MPC can best contribute to securing stability and certainty, the foundations for sustainable growth.

Dave Ramsden looks back over 2022 and reflects on why the economy and path for inflation have turned out differently. Read his speech in full:
👇https://t.co/ivkcK5e6eT

— Bank of England Press Office (@BoE_PressOffice) November 24, 2022

“Hope is back” as German business morale improves

German business morale has improved this month, in a sign that the slump in confidence in Europe’s largest economy may be ending.

The IFO Institute’s business climate index, just released, has risen to 86.3, up from 84.5 in October. Although that’s a low level, it shows the outlook has improved.

The improved outlook follows unexpected economic growth in the third quarter, with Germany having filled its gas storage tanks to help it through the winter.

Carsten Brzeski, ING’s global head of macro, says the data adds to recent glimmers of hope that the German economy might avoid a winter recession.

These hopes are built on the back of several government stimulus packages, filled national gas reserves, a better and faster adaption of businesses and households to reduce gas consumption, and hopes that consumers will simply spend away the energy crisis.

But there are still several downsides hitting the economy, Brzeski adds:

New orders have dropped since February and inventories have started to increase again, a combination that never bodes well for future industrial production.

Despite some relief in global supply chain frictions, early leading indicators from Taiwan and Korea point to a weakening of global trade in the winter. High energy prices are gradually being passed through to consumers, therefore gradually weighing on private consumption.

Stocks subdued as oil dips

In the City, stocks have opened cautiously with Wall Street closed for Thanksgiving.

The blue-chip FTSE 100 index is flat, while the pan-European Stoxx 600 index is 0.2% higher.

Victoria Scholar, head of investment, interactive investor says:

On a quieter than normal day because of the Thanksgiving holiday stateside, European markets have opened tentatively higher except for the FTSE 100, which is trading softer. Vodafone has sunk to the bottom of the UK index after Credit Suisse downgraded the stock to underperform.

The oil price has weakened, with Brent crude down half a dollar at $84.86 after China recorded record high Covid infections.

Scholar explains:

“Oil prices are trading lower after the G7 proposed a price cap on Russian oil that is higher than current market prices, helping to ease concerns about restrictive supply in the market.

Plus, China’s Covid infections hit a record high, also pushing oil prices lower amid expectations of softening demand from the world’s second largest economy. China continues to pursue its aggressive zero tolerance to covid approach, creating a severe headwind for its economic outlook.

To offset this, there are growing expectations that its central bank could cut the reserve requirement ratio (RRR) soon.

Lecturers, teachers and Royal Mail staff on strike today

The UK’s autumn wave of strike action is turning into a winter of discontent.

Royal Mail workers, university lecturers and teachers are walking out on strike today, as workers continue to seek better pay deals to protect them from soaring inflation.

Picket lines are being mounted outside postal delivery and sorting offices, universities and schools as unions edge closer to co-ordinated industrial action, in one of the biggest walkouts of the year.

Around 70,000 members of the University and College Union (UCU) will strike on Thursday and Friday, and again on Wednesday November 30, in a dispute over pay, pensions and contracts.

Up to 2.5 million students could face disruption, in what has been billed as the biggest strike in the history of UK higher education.

Unions have warned of escalated action in the new year if the row is not resolved.

Lecturers and other academic staff have suffered a decade of below-inflation pay rises, with a 3% increase announced in the summer.

UCU general secretary Jo Grady said:

“University staff are taking the biggest strike action in the history of higher education. They have had enough of falling pay, pension cuts and gig economy working conditions – all whilst vice-chancellors enjoy lottery-win salaries and live it up in their grace and favour mansions.

“Staff are burnt out, but they are fighting back and they will bring the whole sector to a standstill.

“Vice-chancellors only have themselves to blame. Their woeful leadership has led to the biggest vote for strike action ever in our sector.

“Students are standing with staff because they know this can’t go on, and they know that a sector which generates tens of billions of pounds each year from tuition fees can afford to treat its staff fairly.

“Further disruption can be avoided if the concerns of staff are addressed with urgency. But the overpaid vice-chancellors killing our sector should be under no illusion – 70,000 dedicated university workers are ready to take even bigger action in the new year.”

Yesterday, unions rejected a pay offer from Royal Mail. As well as striking today and on Friday, they also plan to walk out on 9, 11, 14, 15 and 23 December and on Christmas Eve.

Dr Marten’s profit margins booted by strong dollar

A pair of Dr Martens classic design boot
A pair of Dr Martens classic design boot Photograph: Bailey-Cooper Photography/Stockimo/Alamy

Bootmaker Dr Martens has been hit by the strength of the dollar this year.

Shares in Dr Martens have plunged by over 16% in early trading, after it became the latest retailer to warn that profitability is under pressure.

It blamed weaker-than-expected demand – with ‘direct to consumers’ sales growth slower than expected – and the strength of the US dollar this year, as well as continued investments.

With the key Christmas trading period ahead, the group now expects core earnings margins for the full year to be between 100 basis points and 250 basis points lower than last year. Revenues in the last six months rose 13%, but pre-tax profits fell 5%.

Russell Pointon, director at Edison Group, says:

In spite of the economic headwinds plaguing the retail sector, including rising inflation and the cost-of-living crisis, Dr Martens is maintaining its high teens revenue growth for the remainder of the year, however management now expects the EBITDA margin to be 1-2.5 margin points below the prior year given the strength of the US Dollar.

Hornby hopes for better Christmas

Hornby model railway trainset snow sceneKW71N8 Hornby model railway trainset snow scene
Photograph: Stuart Hall/Alamy

Model railway maker Hornby has reported that shipping costs have dropped – a sign that supply chain tensions are easing as the economy slows.

Last year, Hornby had a bleak Christmas – supply chain problems meant that products only arrived after the Christmas trading period.

Lyndon Davies, Hornby executive chairman, says the company is in a stronger position this year.

The situation has now greatly eased and shipments from our factories are 40% ahead of last year.

We are still suffering with late departure dates, however, as the shipping industry trims capacity by cancelling sailings. Despite this, although costs are not back to pre-Covid levels, container rates continue to fall.

We have also mitigated potential supply disruptions this Christmas by bringing forward the shipping dates on key product lines, which are already available in our warehouse.

Hornby could use a good Christmas. It made a pre-tax loss of £2.9m in the six months to 30 Setpember, compared with a £700,000 loss a year earlier, leaving it with net debt of almost £5m.

A man adjusting a radiator thermostat valve.
Photograph: fotorauschen/Alamy

Home improvement retailer Kingfisher has seen a surge in demand for energy efficient products, as households try to curb their use of gas and electricity.

CEO Thierry Garnier told the City:

While the market backdrop remains challenging, DIY sales continue to be supported by new industry trends such as more working from home and a clear step-up in customer investment in energy saving and efficiency. DIFM and trade activity also continues to be well supported by robust pipelines for home improvement work.

Kingfisher, which owns the B&Q, Screwfix, TradePoint and Castorama Poland chains, grew like-for-like sales by 0.2% in the last quarter, putting them 15% higher than before the pandemic.

Customers have been snapping up items such as smart thermostats, and home insulation.

Cost of supporting households with energy bills to jump

The price that the UK government will have to pay to support households with their energy bills is set to increase from January.

Regulator Ofgem has lifted its energy price cap, which would have meant households faced average bills of £4,279 from the start of 2023, up from £3,549.

However, the government’s support package means average bills will be £2,500 from last month, and rise to £3,000 from April (although there is no cap on the actual bill you could pay).

That means winter energy bills support will cost taxpayers around £1,800 per household.

Here’s the full story:

Weak data = good news for markets.

Markets rallied over the last 24 hours, due to weak economic data and the latest Federal Reserve minutes.

Investors are dialling back the amount of rate hikes they’re expecting from the Fed over the months ahead, which is good for risk assets – and lifting the pound.

As Jim Reid of Deutsche Bank explains, bad news is good news (even if that bad news includes a likely recession).

It may seem paradoxical that weak data is being treated as good news by markets, but in large part it’s because the focus is now so heavily on above-target inflation, which has prompted the most aggressive cycle of rate hikes in decades. So signs of slower growth are seen as bringing fewer inflation pressures and hence fewer rate hikes.

On top of that, since a US and Eurozone recession is now the consensus expectation among economists (and leading indicators are increasingly pointing that way too), contractionary data isn’t as likely to be as surprising to markets as it normally is.

The weaker dollar is also pushing up commodity prices, including gold.

The gold price has risen to $1,755 per ounce, towards the three-month highs set earlier this month.

Tai Wong, a senior trader at Heraeus Precious Metals in New York, says last night’s minutes from the Federal Reserve had cheered markets:

“Gold traded higher in a relief rally after the Fed minutes contained no hawkish surprises, and just about confirmed the pace of hikes would drop to 50 bps in December.

“The financial markets are convinced the Fed is overtightening so it is dovishly interpreting the minutes which contains no real surprises given Fed commentary the past two weeks.”

Introduction: Pound rallies on hopes of more dovish Fed

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

After a rough year against the US dollar, the pound is ending 2022 with a late spurt.

Sterling has hit $1.21 this morning, for the first time since mid-August, lifted by hopes that America’s central bank might slow the pace of its interest rate rises soon.

The pound has now clawed back almost 20 cents since hitting its record low in September after the mayhem caused by the now-ditched mini-budget.

It has strengthened today, on the news that a “substantial majority” of Federal Reserve officials want to slow the pace of interest rate rises soon.

A stronger pound could help cool the UK’s inflation crisis, as it’ll make imported goods like fuel and energy less expensive – although sterling is still down 10% against the dollar this year.

The pound vs the US dollar over the last year
The pound vs the US dollar over the last year Photograph: Refinitiv

Minutes from the Fed’s November meeting, where it hiked its benchmark rate by 75-basis points for the fourth time in a row, suggest that many officials could push for a smaller rise of 0.5 percentage points in December.

The Fed has already raised their target rate to to 3.75%-4%, up from 0%-0.25% at he start of the year, as it tried to stamp out elevated inflation. Consumer price inflation has now slowed, and is expected to keep dropping.

So with the global economy weakening, officials are wondering whether they can be less aggressive now.

As the minutes put it:

“A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability.

Government bonds have also strengthened in recent weeks, as the tough spending cuts and tax rises outlined by chancellor Jeremy Hunt reassured the markets.

Sterling and gilts build head of steam – pound hits highest since August vs $ and 3-week high vs euro; 10 and 30-year gilt yields slide to lowest since early Sept pic.twitter.com/1WLXbx1WiB

— Mike Dolan (@reutersMikeD) November 23, 2022

The Bank of England is expected to raise its own interest rates by another 50 basis points in December too, from 3% to 3.5%.

And a surge in people quitting the British workforce because of ill health or early retirement could force the BoE to further increase interest rates.

Chief economist Huw Pill warned last night that the departure of more than half a million workers from the jobs market since the Covid pandemic risked stoking inflationary pressures, long after the shock from sky-high energy prices is likely to fade.

But with the UK falling into recession, it may be hard for the pound to climb much higher.

Marios Hadjikyriacos, senior investment analyst at XM, says:

The latest business surveys suggest the UK economy is already in recession, on pace to contract 0.4% this quarter, which will likely deepen further considering the sharp drop in forward-looking indicators such as new orders.

With the economy rolling over just as the government tightens its belt, it’s difficult to be optimistic on the pound, especially considering its close links to global risk sentiment.

The UK central bank may move the pound later, as it holds its Bank of England Watchers’ Conference. Deputy governor Dave Ramsden, chief economist Huw Pill and external MPC maker Catherine Mann are all due to speak.

We also get the latest healthcheck on UK factories, and Germany’s business climate, plus results from DIY chain Kingfisher.

The agenda

  • 9am GMT: German IFO business climate index for November

  • 9.30am GMT: Latest weekly UK economic activity and social change data

  • 9.45am GMT: BoE deputy governor Dave Ramsden speaks at the Bank of England Watchers’ Conference

  • 11am GMT: CBI industrial trends for November

  • 12.30pm GMT: ECB monetary policy meeting accounts





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