Bank of England demands consumer credit vigilance; construction growth slows - as it happened

The Bank of England has given lenders a deadline to prove they are adequately protected against credit risks

• BoE warns credit companies to raise their game
• Car finance and 0% credit card deals are big worries
• Construction growth slows as uncertainty mounts

Earlier:

• Bank policymakers split over interest rates (again)
• FTSE 100 falls after North Korea missile test

3.01pm BST

With Wall Street closed for the Independence Day holiday, it looks like a quiet afternoon lies ahead.

So here's a quick recap.

3.01pm BST

Just in: The European Union has approved Italy's bailout of the world's oldest bank, Monte dei Paschi.

Banca Monte dei Paschi di Siena won formal European Union approval to receive a a5.4bn ($6.1bn) capital injection from the Italian government in return for further restructuring of the world's oldest bank.

The European Commission has approved Italy's plan to support the bank's recapitalization under EU rules, "on the basis of an effective restructuring plan," the authority said in a statement, clearing the so-called precautionary recapitalization of a lender that needs state help to survive even though it's been declared solvent by banking supervisors.

LATEST: The world's oldest bank wins formal approval for a $6 billion rescue https://t.co/HMk8NB28Uz pic.twitter.com/GCR7ahNodP

2.28pm BST

Over in Rome, the ECB's chief economist has added his voice to the cacophony of central bank policymakers offering guidance about how, and when, monetary policy might change.

As the economic prospects brighten, higher expected returns on business investment will make borrowing conditions increasingly attractive. This, in and of itself, will reinforce accommodation and make sure that inflation sustainably converges towards our objective of below, but close to, 2% over the medium term.

But our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data. The euro area's economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared.

We need to be persistent, because the baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.

2.23pm BST

Alarm bells are ringing over in Athens after foreign lenders signalled Greece would not received promised bailout funds before further prior actions - or reform measures - are taken.

1.12pm BST

Let's get back to the slowdown in the UK building sector last month (see 9.36am for the data).

Mike Chappell, global corporates managing director for construction at Lloyds Bank Commercial Banking, says political uncertainty hurt the sector:

"This month's reading may not come as a surprise as the industry has grappled with the outcome of the general election, particularly civil engineering firms dependent on steady pipelines.

"The headwinds prompted by the EU referendum a year ago continue to challenge the sector. Input price inflation is still an issue and there remain concerns about how the UK's exit from the EU will affect construction firms, given their reliance on European labour.

"This data is entirely consistent with conversations we are having with construction companies across the spectrum. While house building continues to grow, there are significant issues around securing labour and the rising cost of materials.

"At this mid-point in the calendar year, construction firms will be taking stock of their order book for 2018. If this isn't in good shape - especially for those relying on major infrastructure projects - and the forecast looks less than positive, it will dampen confidence. To combat this, the government must take decisive action on such projects, including the nuclear sector. However, with the spectre of another general election still looming, there is an unhelpful amount of uncertainty in the market at present."

"Migrant workers are the lifeblood of the sector and while the plan to provide more than three million EU citizens permanent residence is a good start, the ongoing movement of labour within the bloc is still a huge issue. Its loss will have a profound impact across the industry's supply chain and profitability, so it's unsurprising to see construction businesses urging the government to secure a transition deal with the EU at the very least.

UK #PMI surveys for both #manufacturing & #construction showed weaker growth in June, as well as a slide in optimism about the future pic.twitter.com/NEEObM9Zgt

12.43pm BST

Takeover fever has hit the City today, as FSTE-100 listed Worldpay revealed it has received two separate approaches.

Shares in Worldpay, which is the UK's largest payments processor, have soared by almost 25%. This has driven its market capitalisation up to 8bn, from 6.4bn last night.

Related: Worldpay takeover battle looms as rivals signal intent

11.27am BST

Bloomberg's John Glover says the Bank of England is turning up the heat on UK lenders today:

The Bank of England told U.K. banks to prove that their policies on credit cards, personal loans and other types of consumer lending won't leave them weaker in a downturn.

The BOE's Prudential Regulation Authority said on Tuesday that firms need to show that they're not underestimating the risks of consumer credit given the current "benign economic environment."

The Bank of England stopped short of tightening consumer borrowing controls on Tuesday but ordered banks to show they are addressing concerns about the growing riskiness of their lending.

Following a review of 20 lenders, the BoE's Prudential Regulation Authority has raised concerns that some are being too complacent in their assessment of potential losses in their lending portfolios.

Officials at the Bank are worried that debt is growing at an extraordinary pace, which can only be achieved if lenders are taking more and more risks and giving out loans to households that are less able to afford the burden.

Ultra-low interest rates could also have lulled banks into a false sense of security, as customers can afford their debts right now but might get into trouble when rates rise.

11.13am BST

UK consumers should take heed of the Bank of England's concerns, says Hannah Maundrell, Editor in Chief of money.co.uk.

She predicts that lenders will now tighten their terms, meaning higher costs for borrowers:

"The regulators are worried we won't be able to repay the money we've borrowed because lenders weren't careful enough about making sure we could afford to pay them back if times get tight. They're right to be concerned; it's shocking to think some lenders may have been lax with their affordability assessments, pricing and risk profiling because this could land them and us in hot water if the economy takes a downturn.

"In a worst case scenario this could be the beginning of the end for widespread availability of very cheap loans, long term unsecured lending and lengthy 0% deals. Lenders will be left with little choice but to up their pricing and tighten their lending criteria if they can't make the numbers add up.

10.35am BST

There are a few interesting charts in today's announcement from the Bank of England.

This one shows how credit card write-offs are creeping higher, but much lower than after the financial crisis broke.

10.17am BST

My colleague Jill Treanor has emerged from the Bank of England, where selected media have been briefed about the consumer credit move.

She writes:

The Bank of England is stepping up its scrutiny of banks and other lenders on credit cards, personal loans and car purchases amid fears they are being lulled into a false sense of security by the current economic backdrop.

Threadneedle Street is writing to the firms it regulates after reviewing the consumer credit sector, where lending is growing at 10.3% a year - outpacing the 2.3% rise in household income.

Bank of England steps up scrutiny of lenders https://t.co/W6G6vA1mxg

10.07am BST

Effectively, the Bank of England is firing a warning shot over the bows of the consumer credit industry today.

It is demanding that all firms with "material exposures to consumer credit" provide evidence that they are lending sensible, rather than enforcing tougher rules today.

Firms are the first line of defence against the risk of losses on these exposures.

9.58am BST

The Bank of England has singled out some key areas of concerns in the credit market.

Where new business on 0% interest credit cards is only marginally profitable, it implies that firms will be facing losses if model assumptions turn out to be optimistic.

PCP creates explicit risk exposure to the vehicle's residual value for lenders, who typically offer a guaranteed future value (GFV) for the vehicle.

Gross GFV exposure is estimated to be around 23 billion across the industry, and GFVs are typically set in the range of 85-95% of the vehicle's expected future value (with a minority higher than that). PCPs written at the high end of this range are particularly exposed to a significant downturn in the used car market, possibly outside historic experience (used car prices fell by up to c.20% in the crisis, before recovering).

9.52am BST

Newsflash: The Bank of England has launched its crackdown on risky consumer lending, by ordering British banks and other lenders to prove that they're not taking too much risk.

The BoE's Prudential Regulatory Authority is tightening thing up, following concerns that some lenders have been too gung-ho when offering credit to consumers.

In an environment of rapid growth in consumer credit, interest margins have fallen and there was evidence of weakness in some aspects of underwriting, so lenders are more vulnerable to losses in stress.

Overall, the PRA judges that the resilience of consumer credit portfolios is reducing, due to the combination of continued growth, lower pricing, falling average risk-weights (for firms using internal-ratings based models2), and some increased lending into higher-risk segments.

9.36am BST

Newsflash: Growth in the UK building sector slowed last month.

That's according to Markit's construction PMI, which has fallen to 54.8 in June, from 56.0 in May.

"Survey respondents commented on renewed caution among clients, in response to heightened political and economic uncertainty. Fragile business sentiment led to delayed decision-making on large projects and greater concern about the outlook for workloads during the next 12 months.

While construction firms remain upbeat overall about their near-term growth prospects, the degree of confidence fell to its lowest so far this year.

9.22am BST

The pound is hovering around the $1.293 mark this morning, unchanged on the day.

McCafferty and Vlieghe's divergent comments on interest rates have basically cancelled each other out.

Gertjan Vlieghe makes the dovish case that hiking too soon is worse than hiking too late, Ian McCafferty is quoted on news wires restating his view that to tighten would be appropriate.

Meanwhile, the slow deterioration of the economy continues against a backdrop of equally slow-moving Brexit negotiations. The road to EUR/GBP 0.90 and beyond will be rocky and slow, but we're on it all the same.

9.13am BST

As predicted, European stock markets have all dropped at the open.

The FTSE 100 has shed 22 points, or 0.3%.

North Korea claims successful test of intercontinental ballistic missile https://t.co/6jyiiRYlNu

8.45am BST

The takeover battle for UK modelmaker Hornby chugs on this morning.

The Hornby Directors believe that the Offer does not reflect an adequate premium for control and significantly undervalues Hornby and its prospects.

Hornby deal derailed? Hornby's directors advise its shareholders to reject takeover offer from Phoenix UK Fund.

8.25am BST

Despite the consumer slowdown, supermarket chain Sainsbury has beaten City forecasts with its sales growth for the last three months.

Strong sales of fresh fruit and veg and a dash for paddling pools, summer clothes and fans helped Sainsbury's and Argos deliver a big jump in sales growth.

Sales at stores open more than a year, excluding fuel, rose 2.3% in the 16 weeks to 1 July, up from 0.3% in the previous three months partly thanks to the warm start to the summer.

Related: Summer sunshine spurs sales surge for Sainsbury's

8.13am BST

Another day, another division among the Bank of England's team of interest rate setters.

"We made the last interest rate cut from 0.5% to 0.25% last August after the EU referendum decision when it was felt that a stimulus was needed. Since then the economy has not slowed to the extent we feared it would last summer and meanwhile inflation has been high.

"I feel on the balance of monetary policy that there is a need for change. I think this would be justified and would be the prudent thing to do at this stage."

"This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late.

"I think the consumption slowdown is here, it's not over. I don't think there's going to be a sufficient offset from investment and net exports to compensate for that."

8.02am BST

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

Related: UK banks ordered to hold more capital as consumer debt surges

The BoE said last week that a targeted review by its banking supervisory arm, the Prudential Regulation Authority (PRA), had found weaknesses in some aspects of underwriting credit and a reduction in the resilience of banks.

On Tuesday, the PRA will make a statement on its first set of specific actions or "expectations" from the banks it regulates regarding credit to consumers. It will look at a wide range of credit, including the financing of car purchases - though banks now account for a much smaller portion of this than in the past.

Homebuilders like Persimmon, Redrow, Bovis Homes and Taylor Wimpey will also be sensitive to the UK construction data.

The house builders have benefitted from the Bank of England's loose monetary policy, and should that policy change, we could see a reversal of fortunes for the sector.

In a 'special announcement' on KCNA, North Korea claims its first successful test of an ICBM. @NBCNews pic.twitter.com/HtC6VLdUP3