From 16 Jun 2022 12.10 Bank: Inflation will hit 11% in October The Bank of England has raised its inflation forecast again, and now predicts it will hit 11% this autumn, when energy bills rise. It had previously estimated that consumer price inflation would hit 10% – far over its 2% target. This new forecast shows that households face even more pain, with real wages already lagging inflation. Announcing today’s interest rate rise to 1.25%, the Bank says: CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October. The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap. The Bank explains the surge in inflation is partly due to rising global energy – greatly exacerbated by the war in Ukraine – and other tradable goods prices. But there are also domestic factors, including “the tight labour market and the pricing strategies of firms”. Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States. BOE says “CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October” after next energy price cap hike. Wowsers. — Max Colchester (@MaximColch) June 16, 2022
Updated at 13.19 BST
16 Jun 2022 15.20 Nils Pratley: Bank’s rate rise is a couple of sparklers compared with Fed’s fireworks Five interest rate rises in a row from the Bank of England would once have been regarded as strong and determined action to tame inflation, our financial editor Nils Pratley writes: The problem for Threadneedle Street is that the US Federal Reserve rather redefined the definition of decisive measures on Wednesday when it hiked by 0.75 percentage points in one go. Versus that full-on display of fireworks, the Bank’s quarter-point move to 1.25% felt like a case of turning up with a couple of sparklers. It was a bare-minimum move when official forecasts now see inflation at 11% in October when consumers’ energy bills go up again. The inflation forecasts get bigger every time the Bank opens its mouth these days. As recently as February – just before Russia’s invasion of Ukraine – the peak was projected to be 7.25%. The bind, of course, is the weakness of the economy. The minutes of the monetary policy committee’s meeting showed that a fall in GDP in the second-quarter of this year is now almost nailed-on – the new forecast is for a fall of 0.3%. The US, by contrast, is still looking at growth. So there is still a plausible argument that slowing demand in the UK will open up a margin of “slack” in the economy, which would do some of the inflation-fighting work. That, at least, is the case for sticking to baby steps on interest rate increases…. Here’s the full analysis: Bank’s rate rise is a couple of sparklers compared with Fed’s fireworks | Nils Pratley Read more
16 Jun 2022 15.13 The Dow Jones industrial average and the S&P 500 index have both hit their lowest levels since January 2021. US stocks sink 3% as the relief rally that followed the Fed’s decision fizzles out https://t.co/XxMbwKNd7d pic.twitter.com/xxYHyrfqt0 — Bloomberg (@business) June 16, 2022
Updated at 15.13 BST
16 Jun 2022 14.58 Central bankers’ determination to hike interest rates to quell inflation is hitting markets, says Jo Rands, portfolio manager at Martin Currie UK Equity team “The Fed move last night, the steepest since the 1990s, dented investor sentiment this morning and triggered a sea of red across UK equities. Post the MPC announcement, markets continued to see downward pressure across virtually all stocks – even the banks – as recessionary fears rise.” That sinking feeling on the global stock markets after a @bankofengland hint of more rate hikes to come:
FTSE 100 (UK) -2.38%
CAC 40 (France) -2.45%
DAX 30 (Germany) – 3.05%
IBEX (Spain) – 1.61%
FTSE MIB (Italy) 3.18%
Futures on S&P 500 (US) – 2.35% — Victoria Fritz (@VFritzNews) June 16, 2022 🇺🇸 All U.S. listed companies after the opening bell: pic.twitter.com/2cOHDbCNyp — PiQ (@PriapusIQ) June 16, 2022
Updated at 14.59 BST
16 Jun 2022 14.48 London’s stock market has lurched lower too, amid anxiety over the prospects for growth at home and abroad. The FTSE 100 index is now 223 points lower, down 3% today, on track for its worst session since early March (when the Ukraine war rocked markets). The pan-European Stoxx 600 index is down 2%, as a wave of selling hits shares again.
16 Jun 2022 14.36 Back in the financial markets, shares have tumbled at the start of trading in New York. Traders are fretting that the US economy could be dragged into recession by higher interest rates, after the Federal Reserve’s whopping 75-basis-point rise in interest rates last night. DOW JONES DOWN 600.55 POINTS, OR 1.96 PERCENT, AT 30,067.98 AFTER MARKET OPEN
NASDAQ DOWN 295.98 POINTS, OR 2.67 PERCENT, AT 10,803.18 AFTER MARKET OPEN
S&P 500 DOWN 85.54 POINTS, OR 2.26 PERCENT, AT 3,704.45 AFTER MARKET OPEN — First Squawk (@FirstSquawk) June 16, 2022
16 Jun 2022 14.33 The Bank of England has repeatedly underestimated UK inflation since early last year, as this chart from Sky News’s Ed Conway shows: Since the @bankofengland has lifted its inflation forecast AGAIN, time for a reminder of how its inflation forecast has evolved over the past year or so.
The dashed lines are its successive forecasts.
The red line is what actually happened. pic.twitter.com/Ysc1FqUCka — Ed Conway (@EdConwaySky) June 16, 2022 (in the Bank’s defence, it didn’t know about the war in Ukraine – which drove up energy prices drastically – when it made its 2021 forecasts)
16 Jun 2022 14.21 The latest Bank of England base rate rise will place a further squeeze on mortgage borrowers, as Grianne Gilmore, Head of Research at Zoopla, explains: ”This rise in rates will translate into higher mortgage costs for those looking to buy a home. For buyers with a 30% deposit buying an average priced home (£250k) in the UK, a quarter point rise in mortgage rates this will add hundreds (£264) to their annual mortgage bill. Most homeowners will be protected from the current raft of interest rate rises as three quarters of those with outstanding mortgages are on fixed-rate deals.
16 Jun 2022 14.13 Rate hike is “latest signal that UK house prices will cool” Rising UK interest rates will dampen the housing market, making it more expensive to repay a mortgage. Tom Bill, head of UK residential research at estate agents Knight Frank, says today’s rate hike is the is latest signal that UK house prices will cool: “The latest interest rate rise will accelerate the process of normalisation taking place in the UK housing market. “Unlike other parts of the economy, we don’t expect decades-old records to be broken in the property market and prices will continue to drift back down to earth after the distortions of the pandemic.” A graph of UK mortgage rates and house price growth Photograph: Knight Frank Knight Frank says there was an increase in house sellers in May, with some people keen to get their house on the market before the market peaked.
16 Jun 2022 14.06 The Bank of England has highlighted the weakness of sterling — pointing out it has fallen 2.5% since its last meeting in early May. The minutes of its meeting explain: Sterling had been particularly weak against the US dollar. According to market participants, the recent movements had in part reflected the rising yield differential between shorter-term government bond yields in the United States compared to those in the United Kingdom, and perceptions of the UK growth outlook. A weaker currency pushes up cost of imports, such as fuel, as Simon Nixon of The Times highlights: Extraordinary stat in BoE minutes: the sterling effective exchange rate is down 2.5 percent since last MPC meeting *five weeks* ago. No wonder it’s raised inflation forecast to 11 percent. Makes decision to hike by just 0.25ppt, a day after Fed hike by 0.75ppt look even odder. — Simon Nixon (@Simon_Nixon) June 16, 2022 Extraordinary stat via #WATO: in 2008, when oil prices peaked at $144/barrel, no one in Britain paid more than 120p per litre of petrol. Today, oil price is $113 but pump prices 186p litre. Difference is collapse in sterling from $2 to $1.20. Welcome to the Brexit. — Simon Nixon (@Simon_Nixon) June 16, 2022
16 Jun 2022 13.57 Rupert Harrison, an economist and portfolio manager at financial services company BlackRock, has warned the UK may already be in recession and the situation “may get worse” in the autumn. He spoke with the BBC’s World At One programme following news that the Bank of England had raised interest rates to 1.25% from 1%, the highest since January 2009. Mr Harrison, who was also an adviser to George Osborne during his time as Chancellor, said (via PA Media): “I think that for the Bank of England, I have a lot of sympathy for them, they face a very acute and difficult trade-off. “We may already be in recession in the UK. It’s very very likely now that the second quarter is going to see negative growth [as the Bank predicts]. “We may get some mechanical bounce back in the third quarter, partly for complicated reasons due to the Jubilee holiday. “But effectively growth is around zero and may get worse as we head into the autumn, particularly with energy prices going back up.” I’ll be on @BBCr4today World at One just after 1pm, talking to @Sarah_Montague about interest rates and the economy
I wouldn’t tune in if you’re looking to boost your mood tbh… — Rupert Harrison (@rbrharrison) June 16, 2022
16 Jun 2022 13.53 Hetal Mehta, senior European economist at Legal & General Investment Management (LGIM), also thinks UK interest rates could leap to 1.75% in August. By the August meeting, the Bank of England will have new economic forecasts for growth and inflation, plus a scheduled press conference to outline its thinking. Mehta writes: “The Bank of England finds itself between a rock and a hard place. The rock comes in the form of other central banks accelerating their plans in the face of high inflation, while the hard place is the deteriorating growth backdrop, with UK GDP growth at or below zero over the last 3 months. “With this context in mind, it is our view that the Bank will hike rates by 50 basis points at its next meeting, when the change in gear can be communicated via updated forecasts and the press conference.
16 Jun 2022 13.26 Full story: Bank of England raises interest rates to 1.25% Richard Partington The Bank of England has raised interest rates for a fifth time in succession to tackle an inflation rate that is heading towards 11% amid soaring household energy bills, our economics correspondent Richard Partington writes.
In a move widely expected by City economists, the Bank’s monetary policy committee (MPC) voted by a majority to increase its key base rate by 0.25 percentage points to 1.25% in response to living costs rising at the fastest annual rate for four decades. It also said it was ready to “act forcefully” if required, signalling further rate rises in the coming months. In a downbeat assessment as the central bank attempts to navigate a narrow path between flatlining economic growth and surging inflation, Threadneedle Street now expects the economy to shrink in the second quarter while a further rise in household energy bills is expected to push inflation above 11% in October. In a split decision, a minority of three members of the nine-strong MPC pushed for a larger, 0.5-point rise, amid growing unease over persistently high inflation as central banks around the world launch aggressive rate hikes to combat the rising cost of living. The US Federal Reserve announced a 0.75-point rate rise on Wednesday – the largest single rise since 1994. Reflecting fears about the rising cost of living as the Covid pandemic and Russia’s war in Ukraine drive up global energy prices, the MPC said it was ready to launch a tougher response to inflation remaining above its target rate of 2%. The committee would be particularly alert to indications of more persistent inflationary pressures, and would, if necessary, act forcefully in response. Here’s the full story: Bank of England raises interest rates to 1.25% Read more
Updated at 13.38 BST
16 Jun 2022 13.17 ING: Bank could raise by 50 basis points in August ING Developed Markets Economist James Smith predicts that the Bank of England could raise interest rates sharply in August. He says it’s ‘entirely possible’ that the MPC lifts rates by 50 basis points, to 1.75%, at its next scheduled meeting. That would be twice the typical rate rise of 25 basis points, and the biggest increase since 1995. ING’s Smith writes that while the hawks at the Bank were outvoted 6-3, they have secured a noticeably more hawkish policy statement, including the pledge to act forcefully if cost pressures become more persistent. “It’s pretty clear that the hawks are nervous about the 8% fall in the pound versus the dollar we’ve seen so far this quarter. Big picture, this is unlikely to change the inflation story dramatically, but the hawks know this is one of the few things the Bank can influence in an environment of rising dollar input prices. “That means a 50bp move is still entirely possible in August. That’s what markets are pricing, and by then we’re likely to have had another 75bp hike from the Fed, both of which might just be enough to tip the balance narrowly in favour of the hawks.
16 Jun 2022 13.12 The Bank of England has estimated that Rishi Sunak’s £15bn cost of living support package could boost GDP by around 0.3% and raise CPI inflation by 0.1 percentage points in the first year. But there are ‘upside risks’ around these estimates given the targeted and front-loaded nature of some of the measures.
Updated at 13.12 BST
16 Jun 2022 13.01 The Bank of England has an increasingly difficult balancing act, as it tried to get a grip on inflation without causing more damage to the economy. Oliver Blackbourn, portfolio manager, Janus Henderson says:
While central banks are clearly struggling to deal with inflation surges around the world, the Bank of England looks in a particularly tricky situation. Just as [Fed chair] Jay Powell has all but admitted that the Fed will likely cause a recession, the BoE has been much more open about this in its economic forecasts. The UK looks more “stagflatory” than other major regions, with higher current inflation, expectations for a more prolonged surge in prices, and weaker forecasts for economic growth over 2023. There has been a collective global policy mistake from central banks but, despite reacting sooner than most, the UK looks to be in one of the worst positions. Markets continue to expect a series of larger moves over the next few meetings. However, with one of the committee’s biggest hawks, Michael Saunders, leaving in August, predictions over voting will likely become more muddied after the next meeting unless others become more vocal in their opinions.
Updated at 13.01 BST
16 Jun 2022 12.58 Charles Hepworth, investment director at GAM Investments, says the Bank’s commitment to act “forcefully if necessary” is “a little laughable”. The necessity is already here, with inflation expected to peak at 11%, but the Bank knows that growth is slowing, so they cannot act as forcefully as they may proclaim.
Updated at 13.02 BST