Bank of England could signal shift towards stimulus withdrawal – business live

Julia Kollewe

from on 2021-06-24 14:11 (#5KF5R)

3.11pm BST

The Bank of England kept its main interest rate at a record low of 0.1%, and its quantitative easing programme unchanged at 875m, as expected.

However, it acknowledged that inflation had been higher than it had expected (it rose to 2.1% in May, above its 2% target), and said inflation would peak above 3%. It regards this as a temporary rise, and warned against premature tightening" in policy.

3.01pm BST

Chief executives from the UK's largest insurers have joined forces with the Prince of Wales to launch a new sector-wide taskforce aimed at tackling the climate crisis, writes our banking correspondent Kalyeena Makortoff.

The Sustainable Market Initiative Insurance Taskforce - comprised of bosses from 17 firms including Legal & General, Allianz, Hiscox and Axa - has pledged to support the transition to a less carbon-intensive economy by expanding insurance coverage for projects such as offshore windfarms, and partnering with governments to provide better disaster protection cover in countries facing serious risks like extreme weather caused by global heating.

2.59pm BST

The Bank's June meeting showed a measured response to stronger data, says Allan Monks, economist at JPMorgan. He says about the Bank's warning against premature tightening":

We read this as a signal that the BoE is not yet prepared to vindicate market pricing which has recently seen expectations for the first hike creep into the first half of 2022.

While the MPC viewed the coming inflation overshoot as transitory, it did shift the dial in a more hawkish direction and indicated that forecast upgrades would be made in August.

2.52pm BST

Michael Pearce, senior US economist at Capital Economics, has looked at the US durable goods orders, which came in weaker than expected, as well as the the latest trade data.

The 2.3% m/m rise in durable goods orders last month was driven by another big increase in commercial aircraft orders reflecting the recovery in air travel, with underlying orders weaker than expected.

The latter is not too concerning, however, given how far orders are above their pre-pandemic trend, while the continued strength of shipments suggests that business equipment investment is on track for another strong gain in the second quarter.

2.46pm BST

The UK mobile operator EE said it will bring back mobile roaming charges in the EU for new customers and those upgrading from 7 July - bad news for travellers who have saved millions of pounds since the charges were abolished in 2017.

The company, which is owned by BT, had previously pledged not to reintroduce roaming charges following Brexit. Customers will be charged 2 a day for roaming in 47 European destinations. Customers signing new contracts will pay the fees from 7 July.

2.39pm BST

On Wall Street, US stocks have opened higher.

1.55pm BST

Durable goods orders in the United States rose by 2.3%, or $5.7bn, to $253.5bn in May from April, data published by the US Census Bureau showed. This was weaker than analysts' expectations for an increase of 2.7%, and followed a 0.8% decline recorded in April.

Excluding defence, new orders increased 1.7%. Transportation equipment, up following two consecutive monthly decreases, led the increase, $5.2bn or 7.6%, to $74.2bn.

1.47pm BST

And the US economy grew by 6.4% in the first quarter from the previous quarter, according to the final estimate - the same as previously reported.

1.39pm BST

Initial claims for jobless benefits in the US fell to 411,000 last week, from 418,000 the previous week, against expectations of a drop to 380,000.

BREAKING:

*U.S. JOBLESS CLAIMS FALL TO 411,000; EST. 380,000 pic.twitter.com/Ph0uftANdg

1.00pm BST

Ambrose Crofton, global market strategist at J.P. Morgan Asset Management, reckons that inflation will continue to rise faster than the Bank off England anticipates, so it may have to scale back its stimulus more quickly than other major central banks.

Today the Bank of England delivered a modestly dovish surprise as it acknowledged that despite recent growth and inflation surprises to the upside, these are still expected to be transitory...

Our own view is that inflation will continue to rise well above the Bank of England's target in the coming months and that not all of this will prove transitory. We expect current signs of tightness in the labour market to persist. While this speaks to the furlough scheme having been a success we also expect persistent upward pressures on wages which will support medium-term inflation momentum.

12.54pm BST

James Smith, developed markets economist at ING, also expects the first rate hike in 2023.

The Bank of England's latest statement is a little more upbeat than might have been expected, but crucially offers no new clues on rate hike timing. We're still expecting the first rate rise in early 2023, on the assumption inflationary pressures ease through the middle of 2022.

On the QE side, despite Andrew Haldane's vote, we very much doubt the Bank will curtail the programme early. The BoE remains on track to actively stop expanding its balance sheet at the end of the year - having tapered the pace of purchases last month. Unexpectedly, ending the scheme early would potentially set a precedent in the eyes of investors, and risks limiting the potency of future QE programmes.

12.50pm BST

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says the minutes suggest that the first rate hike won't happen until 2023.

The vast majority of current MPC members continue to expect the upcoming bout of above-target CPI inflation to be fleeting, despite recent upside surprises to GDP, employment and inflation.

While the committee stated that the number of furloughed employees had dropped faster than it expected-suggesting that it will rise down its forecast for the peak rate of unemployment at its next meeting, from May's 5.8% forecast-it remains concerned that labour market slack will increase when the CJRS (coronavirus job retention scheme) is wound down at the end of September.

12.44pm BST

It was Andy Haldane's last meeting, and (like in May) he was the lone dissenter on the MPC, voting to reduce the QE programme by 50bn. The Bank's chief economist is leaving to become chief executive of the Royal Society for Arts think tank.

Bank of England voted 9-0 to hold to maintain bank rate at 0.1%. Voted 8-1 to keep bond buying plan unchanged at GBP875bn. BoE says inflation likely to rise >3% but insists #inflation surge is temporary. pic.twitter.com/h6KYWJbNiO

12.36pm BST

The FTSE 100 index has advanced 0.5%, a gain of 36 points, to 7,110. The Bank of England lifted its forecast for inflation to rise further above its 2% target, saying it was likely to peak above 3% with the economy also picking up, but added that it would be for a temporary period".

Sterling fell 0.4% against the dollar to $1.3907 and 0.5% against the euro to 85.9p as the Bank kept interest rates at a record low of 0.1%.

12.30pm BST

The MPC concluded:

Policy should both lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions.

The committee did not intend to tighten monetary policy at least until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

12.24pm BST

The Bank has also lifted its growth forecast.

Bank staff have revised up their expectations for the level of UK GDP in 2021 Q2 by around 1.5% since the May Report, as restrictions on economic activity have eased, so that output in June is expected to be around 2.5% below its pre-Covid 2019 Q4 level.

This recovery in activity has been most pronounced in the consumer-facing services for which restrictions were loosened in April. Output in a number of sectors is now around pre-Covid levels, although it remains materially below in others. The housing market remains strong, and indicators of consumer confidence have increased.

12.21pm BST

Policy makers have raised their inflation forecast, but said the rise would be short-lived.

Consumer price index (CPI) inflation rose to 2.1% in May from 1.5% in April, above the Bank's 2% target and 0.3 percentage points higher than in the May inflation report. Core inflation has also jumped, to 2% from 1.3%, the MPC noted. Minutes of today's meeting said:

CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period.

The committee's expectation is that the direct impact of rises in commodity prices on CPI inflation will be transitory. More generally, the committee's central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back.

12.16pm BST

The Bank of England has left interest rates on hold at an historic low despite concerns that inflation will accelerate this year as the economic recovery gathers pace, reports our economics writer Phillip Inman.

Policymakers on Threadneedle Street's monetary policy committee (MPC) said rates should remain at 0.1% until it was clear how quickly the economy will recover and how much pressure there will be on firms to raise prices.

12.02pm BST

The Bank of England has kept its benchmark interest rate at 0.1% and left the size of its bond-buying programme unchanged.

Its monetary policy committee voted 8-1 to keep the quantitative easing programme at 875bn, and voted 9-0 to keep Bank Rate unchanged and to leave its 20bn progarmme of corporate bond purchases unchanged.

11.26am BST

European shares are holding on to their gains, with the pan-European Stoxx 600 up 0.6%, lifted by retail, bank and technology stocks. The move higher comes after losses yesterday, as mixed messages from the US Federal Reserve has left investors uncertain about central banks' approach to tapering the stimulus programmes introduced during the pandemic, as inflation rises.

The FTSE 100 index in London is 23 points ahead at 7,096, a 0.3% gain. Investors are somewhat nervous ahead of the publication of the Bank of England's policy decision and minutes at midday. We are not expecting any changes to interest rates or the bond purchase programme, but the minutes will be scrutinised for any signals of a shift towards stimulus withdrawal.

11.00am BST

Dr Jonathan Pearson-Stuttard, partner & head of health analytics, at the investment management firm Lane Clark & Peacock (LCP), welcomes the news:

The biggest driver of obesity is the structural environment which shifts the balance towards health harming behaviours. Today's announcement to introduce a 9pm watershed for junk food advertising is a bold and necessary step towards redressing that balance and making the healthy choice the easy choice.

The pandemic has made the links between public health and prosperity abundantly clear - the announcement today should be part of a comprehensive package that repositions the nation's health as an asset.

10.58am BST

Some reaction to the junk food advertising ban online and on TV before 9pm...

If junk food ads are banned before 9pm, it seems like a racing certainty that gambling ads will go the same way in the government's review of the sector.

That's not me expressing a wish, it just seems like the obvious logical conclusion.

shutting the stable door after the horse has bolted

TV adverts for junk food to be BANNED before 9pm from 2023, No10 confirms"

No one under 35 and over 10 I know watches TV at all
After 9pm the binge drinking, wine o'clock" 50-90 yr olds still quaff TV so fat 50s here we go

10.48am BST

Shaw adds:

Another relevant point is that current MPC [monetary policy committee] guidance considers the evolution of the labour market and the effect of the end of the furlough scheme on underlying wage pressure to be a key piece in the jigsaw. It looks as though the autumn will be a critical point in the monetary policy conjuncture, with the effects of the winding down of the CJRS providing a clearer line of sight on pay trends and therefore on whether inflation pressures are transitory or longer-lasting.

A final point is on the timing of tightening moves. The Bank of England review on sequencing appears to be ongoing. Our working assumption is that the MPC begins to unwind some of its QE before it raises rates. We have based this view on Governor Andrew Baileys comments several months ago, which appeared to favour this order, in contrast with the 2017/2018 period when the Bank rate was raised but the stock of asset purchases left alone.

10.47am BST

Turning back to the Bank of England's monetary policy decision and minutes, to be published at noon, Philip Shaw, chief economist at Investec, is expecting no change to the Bank rate, at 0.1%, and the asset purchase programme of 875bn.

The main point of interest from the perspective of markets will be the minutes from the meeting, published alongside the decision. We would expect members to acknowledge the positive activity data since early May. They may also conclude that the risks to this year's GDP forecast of 7.25% lie to the upside, despite the four-week delay to Step 4 of the relaxation of the Covid restrictions. Meanwhile the discussion on inflation may reveal some differences among members. CPI inflation was firmer than the MPC expected in May, at 2.1%. Staff forecasts in last month's Monetary Policy Report suggested that the targeted measure would not surpass the 2% target until August. Indeed a US-style situation may be developing, where inflation rises more rapidly than the central bank is forecasting.

Is inflation a longer-term problem? Typically inflation builds up when economies reach capacity during periods of rapid growth. While the pace of activity is indeed robust currently, significant economic slack remains. For example, unemployment stands at 4.7%, around 1% point above its trough in 2019. The firm global energy price background has of course been one source of the higher inflation figures domestically. Meanwhile, although the current burst of domestic demand is causing price pressures too, it is mainly inventory levels, not production capacity limits being reached, that are the problem.

10.41am BST

The government has confirmed it is to introduce a pre-9pm ban on junk food advertising on TV and tighten restrictions online, as first reported by the Guardian on Wednesday.

The new restrictions, which come into force from the end of next year, have been branded as draconian" by the advertising industry, writes our media business correspondent Mark Sweney.

10.27am BST

Here is our full story on the property developer St Modwen. It has accepted an increased offer from US investor Blackstone that values the company at 1.3bn, in the latest example of a private equity swoop for a mid-sized British firm.

As major shareholders in St Modwen, we are supportive of the board and we intend to vote in favour of the revised offer from Blackstone.

10.22am BST

Russ Mould, investment director at the stockbroker AJ Bell, has looked at the markets today.

The Bank of England will provide its latest view of inflationary pressures today. It is unlikely to make any drastic changes to its current policy at this stage, but market watchers will be looking for any signs as it when it could start reducing quantitative easing and raise interest rates.

Mining, industrials and financials were the key sectors catching investors' attention on the UK market, with Rio Tinto, Ashtead and HSBC among the top movers.

9.41am BST

More reaction to the strong Ifo reading. Katharina Koenz, economist at the consultancy Oxford Economics, says:

The strong pick-up in retail sentiment is particularly encouraging, where conditions have improved by more than any time since the German reunification in 1990. And although the current situation in the hospitality sector remains subdued, growing optimism bodes well for the near-term outlook.

The improved sentiment data along with strong improvements in high-frequency mobility data supports our view that the German economy is picking up speed with GDP likely to jump by 2.5% quarter-on-quarter in Q2 and expand by 3.7% y/y in 2021.

#Germany's Ifo Index hits highest level since 2018 as lockdowns ease. Jumps to 101.8 in June from 99.2 in May, beating estimates of 100.7. Current assessment component in particular beat w/99.6 vs 97.9 exp. Ifo Expectations Component surged to 104, highest in more than a decade. pic.twitter.com/avQOYjF3t5

9.29am BST

Another strong Ifo reading sets the bar for German growth even higher - Germany's leading indicator reflects almost unstoppable optimism about the economic outlook, and the only thing that's missing is for the hard data to catch up," says Carsten Brzeski, global head of macro at ING.

Right now, the sky is the limit for confidence indicators in Germany and indeed, the entire eurozone. The end of lockdowns and the reopening of economies has clearly boosted expectations. In the case of Germany, despite anecdotal evidence, particularly in the automotive industry, of supply chain disruptions affecting activity, the impact apparently has not been strong enough yet, to dent growing optimism.

Looking ahead, the general outlook for the German economy has improved. The vaccination programme has picked up speed and with currently more than 50% of the population having had a first jab, the reopening of the economy has gained momentum, too. New variants of the virus, however, could still spoil the reopening party.

9.24am BST

The German economy is shaking off the coronavirus crisis, said Ifo president Clemens Fuest.

In manufacturing, the index rose to its highest value since April 2018. Companies were notably more satisfied with their current business. Their expectations were somewhat less optimistic. Developments were generally very good across all industries, but especially for manufacturers of machinery and equipment and for the electrical and electronics industry. Many companies are concerned about increasing bottlenecks in intermediate products (which are used to make other goods).

In the service sector, the business climate index jumped higher. The indicators for the current situation and for expectations both rose appreciably. The logistics sector and IT service providers reported particularly good business. Service providers are expecting strong sales growth, even in the crisis-stricken hospitality industry.

9.06am BST

German business confidence has also improved, and is better than expected.

The closely-watched index from the Ifo institute in Munich jumped to 101.8 in June from 99.2 in May. Optimism improved as Germany's vaccination campaign picked up pace and new Covid infections eased.

German IFO Business Climate (Jun) comes in at 101.8, exp: 100.7, prev: 99.2

8.44am BST

In France, confidence among businesses has reached its highest level since mid-2007.

The business climate index from Insee climbed 5 points to 113, above its pre-Covid crisis level of 105 and its long-term average of 100. The improvement was driven by higher confidence in the service industries.

French business confidence hits its highest level since 2007 https://t.co/UIIljKWZKB via @WHorobin pic.twitter.com/zs4J3KBEt8

8.37am BST

Spain's economy shrank slightly less in the first quarter of this year than previously thought. GDP declined by 0.4% from the previous quarter, following a stagnation in the fourth quarter, according to official figures. The statistics agency INE had previously estimated a 0.5% decline.

On an annual basis, Spain's GDP fell by 4.2% instead of the 4.3% drop previously estimated.

8.27am BST

Stock markets have opened higher, supported by banking and retail stocks such as France's Carrefour, which rose after announcing plans to restructure its foreign divisions. The French CAC and Italy's FTSE MiB are 0.4% ahead while Spain's Ibex rose 0.6% in early trading.

The German Dax climbed 0.5% ahead of the closely watched Ifo survey (out at 9am BST) that is expected to show a further improvement in business confidence. The pan-European Stoxx 600 index climbed 0.5%, with retail and banking stocks up 0.7% and 0.9% respectively.

8.05am BST

House builders have done well out of the government's stamp duty holiday and the help to buy programme. Business at Crest Nicholson is booming.

The Surrey-based builder, which constructs houses and flats in southern England, has swung to a half-yer profit before tax of 36m for the six months to 30 April from a 51m loss a year earlier, as it completed 1,017 homes, up 31% year-on-year.

Crest had a tougher 2020 than most of its peers, but it has now had the jab and the vaccine is working. In the half-year, its home sales are up 31% and profit after tax up 700% and the outlook for the full year looks just as healthy. Crest has used the lockdowns to its advantage focusing on internal issues and as lockdown eases it has emerged all the better for it.

8.03am BST

The US private equity giant Blackstone has upped its takeover bid for the property regeneration specialist St Modwen by 40m to 1.27bn. It raised its offer to 560p a share from 542p.

The St Modwen directors are unanimously recommending that shareholders accept the offer. The Leavesley family, who hold a 4.85% stake, are backing the takeover and in total, Blackstone has received irrevocable undertakings in favour of the deal from investors holding 11.4% of the shares.

7.33am BST

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

Most Asian markets have dipped today following a disappointing day of trading on Wednesday in Europe, which fell for the first time this week as inflationary pressures weighed heavily on companies. Wall Street also proved lacklustre, although the Nasdaq hit a fresh record high. In Asia, the Nikkei was flat and the Australian market lost 0.27%, while Hong Kong's Hang Seng rose 0.17%.

We see a roughly even chance that the BoE could surprise markets today by signalling that it will end its planned asset purchases in August, instead of December as previously announced. While such a change would not have major economic consequences, it could take bond markets by surprise. Any commensurate jump in gilt yields could trigger a temporary correction in equity markets.

So far during 2021, the BoE has consistently surprised markets by being slightly more hawkish than expected. After furnishing marketing expectations during 2020 that it could reduce its main policy rate below zero, the BoE changed its tune by squashing such expectations at its February 2021 meeting. Then in May, the BoE surprised markets by starting an immediate tapering of its asset purchases.

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