Bank of England not ruling out negative interest rates as inflation drops to 0.8% - as it happened

Graeme Wearden

from on 2020-05-20 16:27 (#53PB0)

Rolling coverage of the latest economic and financial news, as UK central bank tells MPs it is keeping its lower bound' under review

5.26pm BST

Time for a recap

The governor of the Bank of England has refused to rule out introducing negative interest rates in the UK. Andrew Bailey told MPs that his views have changed in the light of the coronavirus pandemic - the BoE is reassessing all its tools, as it tries to fight the worst downturn in centuries.

4.52pm BST

Optimism that the world economy will start to recover from the Covid-19 recession soon has lifted shares across Europe.

The main indices have closed around 1% higher tonight, as global markets hit their highest levels in 10 weeks.

The Dow Jones was keen to rebound on Wednesday, shaking off the Moderna vaccines doubts that plagued it on Tuesday.

Rising close to 400 points, the Dow returned to 24600, pretty much reversing the losses incurred last night thanks to some solid earnings, persistent optimism regarding a vaccine and the hopes of some more Fed stimulus down the line. That meant the Dow ignored Donald Trump's latest inflammatory comments towards China, the President claiming it was the incompetence' of Beijing that caused the virus to spread.

4.35pm BST

And finally.... Treasury committee chair Mel Stride returns to the issue of negative interest rates, which governor Andrew Bailey refused to rule in or out.

Q: What criteria need to be met for the Bank to go for negative rates?

4.28pm BST

Conservative MP Steve Baker has challenged the Bank of England over its QE programme.

Isn't it quite extraordinary" that we have one major borrower (the UK government), and one major buyer (the Bank) in the market, giving bond traders the confidence to buy gilts because they know they can sell them onto Threadneedle Street?

3.46pm BST

Q: What impact will Covid-19 have on the UK property market?

Elisabeth Stheeman, a member of the BoE's Financial Policy Committee, replies that commercial property - particularly offices outside London - will be hit as companies reassess how much office space they need.

3.42pm BST

Back at the Treasury committee e-hearing, Bank of England policymaker Jonathan Haskel has warned that self-employed workers, younger people, and those with fewer skills will be most hurt by the recession.

These workers, such as those in the hospitality sector and hotels, will be reliant on a pick-up in aggregate demand in the economy, Haskel adds.

3.38pm BST

Breaking away from the Bank of England hearing... a former US Green Beret soldier and his son have reportedly been arrested over Carlos Ghosn's shock escape from Japan last December.

Reuters has the details:

U.S. authorities on Wednesday arrested a former special forces soldier and another man wanted by Japan on charges that they enabled the escape of former Nissan Motor boss Carlos Ghosn out of the country.

Former U.S. Green Beret Michael Taylor and the other man, Peter Taylor, are expected to appear by video conference before a federal judge in Worcester, Massachusetts, according to court records.

3.36pm BST

The BBC's Faisal Islam points out that the Bank of England has helped to push UK borrowing costs below zero today.

The BoE has pledged to buy 200bn of gilts through its asset purchase scheme, lifting its QE total to 645bn. That means investors feel confident buying UK gilts, as they can sell them onto the Bank.

Government is funding 10m wages, 1 in 3 jobs at cost of 15bn ish a month...

Govt getting the cash from markets, at low, today negative rates, ie being paid to borrow the money.

Markets can sell these debts directly to the Bank of England, under QE scheme aimed to boost economy

3.21pm BST

Andrew Bailey's comments on negative interest rates are very timely - just hours after the UK borrowed for free for the next three years.

Our economics editor Larry Elliott writes:

Britain has sold a government bond with a negative yield for the first time after plunging inflation raised the prospect of the Bank of England cutting official interest rates below zero.

In a development that effectively means investors have to pay to lend money to fund the government's response to the Covid-19 pandemic, investors bought gilts knowing they would get back less than they paid for them when the bonds mature in three years' time.

3.19pm BST

Deputy governor Ben Broadbent denies that the Bank is anticipating a V-shaped recovery from the pandemic.

He tells MPs that in the Bank's latest scenario, the economy shrinks by around 25% in the April-June quarter, and doesn't return to its pre-crisis levels until 2022.

3.16pm BST

MPs then press the Bank of England on its decision to force UK banks to scrap their dividends back in March.

Andrew Bailey insists this was a sensible business decision, not good politics. It strengthens the banks' balance sheets - and if the economy recovers faster than hoped, they can reassess dividend policy.

3.09pm BST

Andrew Bailey seems to be keeping his options open, on whether to impose negative interest rates on the UK economy in an attempt to stimulate the economy.

Here's some reaction:

Bank of England governor Andrew Bailey gives little away on whether the UK will see negative interest rates: 'We're not ruling it in but we're not ruling it out'

'We are doing work on all those tools and will continue to do it, because we know that we may have to draw on that toolkit at any point'

Asked about whether the Bank of England would contemplate negative interest rates or buying more risk assets - Governor Andrew Bailey says they never rule anything out as a matter of principle - and given what we've had to do in the last weeks it is of course under active review

Not ruling it in, not ruling it out'

GBPEUR springing around on BoE - Bailey saying BoE is not ruling out negative rates; in fact keeping negative rates "under review".

2.59pm BST

The Treasury committee moves onto monetary policy -- and asks whether the Bank of England could cut rates below zero:

We're not ruling it in, and we're not ruling it out.

2.42pm BST

Bank of England governor Andrew Bailey is testifying, remotely, to the UK parliament's Treasury Committee.

He's accompanied" by deputy governors Ben Broadbent and Jon Cunliffe, and external policy members Elisabeth Stheeman and Jonathan Haskel.

2.24pm BST

In a landmark development, investors have paid for the opportunity to lend money to the UK government.

Britain auctioned off 3.75bn of three-year bonds this morning, at an average yield (or interest rates) of -0.003%. That means that investors paid more than the face value of the bonds - meaning they are guaranteed a very small loss if they hold the debt until it matures in 2023.

2/ The UK sold a one-month bill at a negative yield in 2016, but this represents the first time it has sold a conventional longer term bond at yield below zero.

Britain sold a government bond that pays a negative yield for the first time on Wednesday - meaning that Britain's government is effectively being paid to borrow as investors agreed to be paid back slightly less than they lent.

The bond, which matures in July 2023, sold at an average yield of -0.003%.

The UK has sold bonds with a negative yield for the first time, with a fall in inflation heaping further pressure on policymakers to take new action to prop up the economy.

The sale effectively means that investors are paying for the privilege of lending to the UK government, reflecting growing investor expectations that the Bank of England may need to take additional steps to push inflation back to its 2 per cent target.

UK sold bonds with negative yield for 1st time. It effectively means investors are paying for privilege of lending to gov

UK sold 3.8bn of 3-year gilts at yield of -0.003% suggests investors who hold the debt to maturity will get back less than they paidhttps://t.co/17zU7jIiwB

2.07pm BST

Here's my colleague Richard Partington on the WTO's trade slowdown warning:

International imports and exports have fallen to their lowest level for at least four years, according to World Trade Organization figures revealing the economic damage caused by the coronavirus pandemic.

Warning there was little evidence of the downturn ending soon as Covid-19 brings the world economy to an effective standstill, the global authority on trade said it believed import and export activity would fall precipitously" in the first half of 2020.

2.04pm BST

This is the first time Canada's inflation rate has turned negative since the financial crisis over a decade ago:

KABOOM!

Bloomberg Canada@BloombergCA
Inflation goes negative in Canada for the first time since the 2009 recession https://t.co/bzT6Cmtin2 pic.twitter.com/if926i0F65

1.43pm BST

Newsflash: Canadian inflation has fallen below zero as the Covid-19 pandemic continues to grip the global economy.

The annual Consumer Prices index across Canada fell by 0.2% in April, according to Statistics Canada. That's down from a 0.9% year-on-year rise in March.

Compared with April 2019, consumers paid less for transportation (-4.4%), clothing and footwear (-4.1%), and recreation, education and reading (-0.7%). In contrast, the growth in food prices (+3.4%) accelerated in April 2020 and recorded the largest year-over-year increase of any major component.

Inflation Rate YoY
Actual: -0.2%
Expected: -0.1%
Previous: 0.9%https://t.co/ruONg1c4O7

Inflation Rate MoM
Actual: -0.7%
Expected: -0.6%
Previous: -0.6%https://t.co/ruONg1c4O7

12.49pm BST

My colleague Joanna Partridge has travelled to Bushey, near Watford, to meet some of the McDonalds customers keen to buy fast food again:

An hour after reopening for the first time in 8 weeks, a queue of cars containing customers hungry for Big Macs and Happy Meals has formed outside the McDonald's drive-through in Bushey, east of Watford.

A McDonald's employee in a high-vis jacket is marshalling the queue of vehicles as the line stretches beyond the restaurant's waiting area onto the A41. Ruby Hibbitt, 18, and her housemate Paige Bush, 19, had been told by a friend that the restaurant was open and had got straight in the car to buy lunch.

12.29pm BST

The Bank of England's new governor, Andrew Bailey, must write to the UK chancellor to explain why inflation is just 0.8%, far from its target of 2%.

But what might he say? Our economics editor Larry Elliott has some ideas:

He might start by saying that the shuttering of much of the economy meant the April inflation rate had to include a bit of informed guesswork on the part of the Office for National Statistics (ONS) - because the usual field surveys that go into collecting prices were impossible during lockdown - but that the main reason for the drop in inflation was the collapse in oil prices, owing to a mismatch between global demand and supply.

But Bailey will also tell Sunak that underlying inflationary pressures are also weak. Clothing prices fell sharply because retailers were desperate to get rid of excess stock. The cost of travel goods were also down because nobody is travelling.

12.14pm BST

Greece's finance minister has warned that its economy will probably shrink by at least 10% this year.

The Covid-19 pandemic is crushing Athens' hopes of economic recovery in 2020, after years of extremely painful austerity. PM Kyriakos Mitsotakis is expected to outline his plans to revive the economy later today.

Greece's economy may shrink 10 to 13% this year following a lockdown imposed to stem the spread of the novel coronavirus, but the government will take steps to mitigate the impact, the country's finance minister said on Wednesday.

Finance Minister Christos Staikouras told Greek radio Real FM that the economy, which emerged from a decade-long debt crisis and three international bailouts in 2018, can withstand a possible second wave of infections in autumn.

11.32am BST

Fast food chain McDonald's has taken another step towards normality by resuming drive-through services at nearly 40 restaurants in the UK and Ireland.

We are reopening 39 Drive Thru lanes across the UK and ROI. These Drive Thru pilot restaurants were all chosen as they are close to one of our distribution centres as we continue to prepare our supply chain for reopening. pic.twitter.com/HqvctFo63k

10.21am BST

World trade volumes are likely to fall precipitously" in the first half of 2020 as the Covid-19 pandemic batters the global economy.

That's the latest warning from the World Trade Organisation, which says its goods barometer is now flashing red" as trade volumes fall.

The automotive products index (79.7) was weakest of all, due to collapsing car production and sales in major economies. The sharp decline in the forward-looking export orders index (83.3) suggests that trade weakness will persist in the short-run.

Declines in the container shipping (88.5) and air freight (88.0) indices reflect weak demand for traded goods as well as supply-side constraints arising from efforts to suppress COVID-19. Only the indices for electronic components (94.0) and agricultural raw materials (95.7) show signs of stability, although they too remain below trend.

10.13am BST

City analyst Kit Juckes of Societe Generale has spotted some interesting trends in the this morning's UK inflation report:

So.. upward pressure on CPI from games, pizzas and burgers, whisky, lager, cigarettes and balls of wool. Downward pressure from clothes, petrol, electricity, gas, water, and transport services. The way we live.....

10.06am BST

Newsflash: Inflation across the eurozone has slumped to its lowest level in almost four years - just like in the UK.

Consumer prices in the euro area only rose by 0.3% annually in April, Eurostat reports. That's the lowest reading since August 2016, down from 0.7% in March.

In April 2020, a month marked by COVID-19 containment measures in all countries, the euro area annual inflation rate was 0.3%, down from 0.7% in March. A year earlier, the rate was 1.7%.

In April, the highest contribution to the annual euro area inflation rate came from food, alcohol & tobacco (+0.67 percentage points, pp), followed by services (+0.52 pp), non-energy industrial goods (+0.09 pp) and energy (-0.97 pp).

Euro area annual #inflation down to 0.3% in April (0.7% in March) https://t.co/gPzBf1Ixg1 pic.twitter.com/onkUQjK5tu

9.55am BST

My colleague Zoe Wood explains how M&S's sales have deteriorated under the lockdown:

In the six weeks to 9 May, clothing and home sales dropped 75%, while sales in Marks & Spencer's food halls, excluding its restaurants, were down 4.6%.

The company said even though its website had continued to operate, demand for clothing in the initial weeks was very low, although it had begun to improve. Over the last three weeks online sales were 20% higher than last year.

9.37am BST

Just in: UK house prices picked up in March, just before the pandemic forced the housing market to freeze.

The ONS says:

9.26am BST

Here are more details of Marks & Spencer's plan to ride out the pandemic, via the BBC's Emma Simpson.

Some snippets from @marksandspencer results. Like everyone else, can't forecast year ahead. Base case scenario is a 2.1bn hit to sales over the year. Already able to mitigate that by 1bn through cost savings, no dividend pay out and biz rates holiday.

And company stresses it's got plenty liquidity/headroom to weather the storm. Early days, but says it's already 150m ahead. Being prudent.

It's going to introduce guest brands" on the website. Not going down route of rival Next, though. And boss, Steve Rowe, says we don't intend to be an online department store. That's not what we want to do."

And when it launches its grocery home delivery service with Ocado in September, you can buy clothing as well. 1600 clothing and homeware lines over the year. Kicks off with 850 lines from new Autumn collection. Makes perfect sense if they can pull it off!

9.22am BST

Here's our news story on today's inflation report:

9.09am BST

Looking ahead... Tom Stevenson, investment director at Fidelity Personal Investing, warns that inflation could spike once the pandemic is over

He points out that the huge stimulus measures launched by central banks and governments could ultimately push up the cost of living:

The drop in inflation to its lowest level since 2016 reflects a fall in petrol costs as well as the impact of lower end demand on factory gate prices.

In the short term, disinflationary pressures will mount as the economy slows under lockdown, consumers become more cautious and companies start to prepare for life beyond furlough support by reducing their workforces. Further out, there is a growing fear that monetary and fiscal policy choices could lead to higher inflation, perhaps significantly so.

Nice summary of today's UK price inflation figure for April. https://t.co/zWFvqDUTV4 pic.twitter.com/YtcobFEPoe

9.02am BST

High street chain Marks & Spencer has outlined how the lockdown will hurt its business - and it's an alarming picture.

The Covid-19 crisis started to have an impact on the business in the first week of March with reductions in UK Clothing & Home sales which declined by 6.2% and 26.9% the week after.

With the onset of lockdown, the effect on sales, colleagues and customers in both businesses has been dramatic. Clothing sales at the low point dropped to 16% of their level a year ago

8.32am BST

British justice secretary Robert Buckland says the government will try to hep Rolls-Royce and its staff.

Asked about the firm's plan to axe 9,000 job cuts, Buckland replied:

Clearly we will have to go to work with the employer to look at the options.

All of us will be looking not just at Rolls Royce but at the whole sector and the implications of this for the supply chains as well, let's not forget them, to make sure we are doing everything we can in terms of plans and action to support what is a very high skilled part of our economy."

8.15am BST

Grim news: The Covid-19 pandemic is forcing Rolls-Royce to slash 9,000 jobs - or nearly a fifth of its workforce.

Rolls-Royce, one of the jewels in UK manufacturing's crown, is wielding the axe after seeing slumping demand for its jet engines due to the pandemic. With airlines suspending flights and mothballing planes, the Derby-based firm faces a serious crisis.

This is not a crisis of our making. But it is the crisis that we face and we must deal with it.

Our airline customers and airframe partners are having to adapt and so must we.

8.09am BST

Britain's economy has a lot of problems right now, but inflation doesn't appear to be one of them.

With CPI almost halving last month, Equals Group chief economist Jeremy Thomson-Cook says weak economic demand will keep prices low:

With headline consumer inflation at 0.8% and producer price inflation - simply price rises at the beginning of a supply chain - falling 5.1% in April alone courtesy of the recent declines in oil prices, we are more likely to hear concerns about deflation from central bankers.

As we have noted in the past, you need to have demand to create inflation and, for now, there is little demand. Some will return as employees earnings recover and more businesses reopen allowing consumers to spend more on different sectors but, similar to the pace of the economy reopening, is likely to be slow."

The slump in CPI inflation from 1.5% in March to 0.8% in April (consensus 0.9%; CE 0.8%) was the biggest drop since December 2008 and left inflation at its lowest since August 2016. This was largely due to energy effects, as fuel inflation slipped from -2.4% to -12.2% and utility inflation dropped from 3.9% to -6.8% (due to the decline in Ofgem's price cap).

There was a partial offset from food price inflation, which rose from 1.1% to 1.3%, reflecting higher inflation for fresh fruit, meat and fish. The games, toys, hobbies and computer software categories provided also provided further upward pressure.

Talk of negative interest rates has been doing the rounds in recent weeks, but with inflation now trailing expectation, falling from 1.5% to 0.8%, that debate has become very real.

All eyes now turn to the Governor of the Bank of England's comments later today for signs of further action to boost economic activity. The Bank of England does have room to move, if it wishes, and Governor Bailey has already laid out the red carpet for lower interest rates, so we can be sure it's at the front of his mind.

7.52am BST

Did your lockdown takeaway feel a little pricier this month? If so, you're not alone.

Prices at fast food outlets and takeaway services rose last month, the Office for National Statistics reports.

7.47am BST

Although food prices fell slightly, vegetable became pricier - possibly due to a switch to British potatoes.

Food prices overall fell by 0.1% between March and April this year....

The largest upward contribution came from vegetables (including potatoes and tubers), where prices rose between March and April this year but fell between the same two months a year ago. This month's price movements for vegetables could be a consequence of switching from internationally to domestically grown produce.

Inflation: very sharp drop

to 0.8% in April from 1.5% in March

Big deflationary impacts on consumer inflation from:

petrol & diesel
domestic energy

So that collapse in oil prices has fed through to the prices we pay

Food price inflation pretty stable but fresh vegetables up

7.41am BST

The slump in the oil price has also driven down producer price inflation (basically, how much companies charge for their goods charge) to -0.7%.

That means goods at the factory gate are actually cheaper than a year ago, suggesting consumer price inflation will remain low in the coming months.

Factory gate inflation (the price of goods when leaving the factory before any retail profits or additional costs are added) was negative 0.7% on the year to April 2020, down from 0.3% in March 2020 https://t.co/FYV5ElR6ar pic.twitter.com/dMz9CnatEL

7.37am BST

Although overall inflation fell, the cost of games rose in April -- as families scrambled to find interesting things to during the lockdown.

The ONS explains:

There was an upward contribution (of 0.11 percentage points) from games, toys and hobbies where prices for items like computer games consoles, preschool activity toys, craft kits, dolls, construction toys, and sit and ride toys overall rose by 0.5% in the month compared with a fall of 5.8% a year ago.

There were further upward contributions of 0.07 percentage points from data processing equipment, principally computer software, and 0.05 percentage points from recording media, including CDs and DVDs purchased online and music downloads.

7.35am BST

Stock shortages drove up wool prices rose last month -- perhaps due to isolating Brits taking up knitting?

The ONS says:

For other clothing and accessories, most of the upward movement came from balls of knitting wool, where there were recoveries from sales and higher price comparable items as a result of stock shortages in some stores.

7.33am BST

Petrol prices hit their lowest level in four years, today's inflation report shows:

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre.

In comparison, between March and April 2019, petrol and diesel prices increased by 3.8 and 2.3 pence per litre to stand at 124.1 and 133.0 pence per litre, respectively. Petrol prices were last lower in May 2016 (when a litre cost 108.7 pence), and the 10.4 pence per litre drop in petrol prices is the largest monthly fall since the current ultra-low sulphur or unleaded petrol series began in 1990.

7.19am BST

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

Britain's inflation rate has fallen to its lowest rate in over three and a half years last month, due to a drop in energy prices and discounting by shops desperate to sell stock during the Covid-19 lockdown.

For garments, prices overall fell by 2.3% between March and April 2020 compared with a small increase of 0.4% a year ago. There were a greater number of items recorded as being discounted this year, when compared with April 2019, with reductions across a range of women's and men's clothing items.

The larger number of items recorded as being on sale could reflect retailers' efforts to encourage online purchases or potential difficulties as a result of the current economic situation.

Eurozone CPI for April is anticipated to fall from 0.7% in March to 0.4% in April. The core update is anticipated to be 0.9%, and that would be a fall from the 1% registered in March. The figures will be announced at 10am (UK time).

Canadian CPI will be released at 1.30pm (UK time). The report is expected to be -0.1% and that would be a huge drop from the 0.9% posted in March.

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