Bank of England signals ‘modest tightening’ ahead as inflation rises – as it happened

Jasper Jolly

from on 2021-08-05 13:53 (#5MZQF)

Rolling live coverage of business, economics and financial markets as UK car sales fall and construction growth eases

Mike Ashley to hand reins of Frasers to future son-in-law
Regulator again finds Pfizer and Flynn overcharged NHS by up to 2,600%
FTSE 100 flat as investors await Bank of England bond buying signals

2.53pm BST

The Bank of England sat on its hands today, as expected, but there was still something in there for the hawks who spy signs of inflation.

First up, the Bank sees inflation hitting 4% this year, double its 2% target. It has been steadfast in the belief that it is not durable, but pressure to tighten monetary policy will rise as prices do. It is prepared for modest tightening" over the next two years.

The hawkish turn in today's monetary policy report shows that BoE policymakers are a) becoming increasingly confident in the durability of the recovery and b) more concerned about medium-term inflation risks. However, as policymakers remain all talk and no action for now, markets remain largely unfazed by the hawkish tone - upward moves in sterling and gilt yields following the policy announcement were negligible.

2.36pm BST

Back on the stock markets, the FTSE 100 has been barely moved by Andrew Bailey and pals at Threadneedle Street.

London's blue-chip stocks are down 0.1% with just under two hours of the day remaining, at about 7,114 points. That is much where they were before midday.

2.32pm BST

The Bank of England has predicted that UK inflation will hit 4% by the end of this year, as it left interest rates at their historic low of 0.1%, writes the Guardian's Phillip Inman.

Central bank policymakers forecast that UK inflation would rise to 4% in the fourth quarter of 2021, double the Bank's 2% goal, largely due to higher energy and other goods prices. Inflation hit 2.5% in June, and the Bank had predicted in June it would rise above 3% this year.

2.19pm BST

The publisher of the Daily Mail has sold its insurance risk business RMS to Moody's Corporation for 1.4bn, marking the completion of the first pre-condition of Lord Rothermere's plan to take the company private.

We have decided that now is the right time to monetise our investment in RMS. The sale of RMS marks another major milestone in DMGT's transformation.

2.13pm BST

Some experts question whether the rise in inflation can really be seen as temporary.

Ian Stewart, chief economist at Deloitte, an accountancy firm, said:

A supercharged recovery has hit supply bottlenecks earlier than the Bank expected. The pace of growth in inflation is challenging the view that rising prices are a temporary phenomenon.

Given the strength of the recovery it's hardly surprising that the Bank has signalled that some tightening of policy is likely to be needed in the next two years. If there is no other major wave of Covid-19 during the winter and the economy performs in line with the Bank's forecasts, the first rate rise is likely to come in the spring or early summer of next year.

Bank forecasts however now show inflation rising to 4.0% in the fourth quarter of 2021 and remaining above target for longer in 2022. If projections for inflation continue to be revised upwards in the coming months, further MPC members will likely join emerging calls for quantitative easing to be clawed back.

Despite hawkish elements to the MPC's latest policy statement, the case for a wait-and-see' approach remains strong, both in assessing just how temporary higher inflation proves to be and the consequences of the end of the furlough scheme and other government support measures in the autumn.

Given this, the EY Item Club continues to expect no rise in bank rate until late 2022, when the economic impact of the pandemic will hopefully have faded and the economy is returning to its pre-pandemic trajectory.

2.08pm BST

Oh hang on, back for one final question in the Q&A: how will investing for net zero affect inflation?

Bailey says it will require investment. That will affect the supply side of economies, and will be a threat and an opportunity.

2.03pm BST

Let's break off from the press conference to get a bit more expert reaction.

James Smith, a developed markets economist at ING, an investment bank, said:

The big news is that the Bank of England could begin reducing the amount of government bonds it holds once rates reach 0.5% - so potentially in mid/late 2023. The change in threshold is not too surprising, but the finer details possibly hint at a more rapid unwind than might have been expected.

The speed of unwind has the potential to be a little quicker than we might have expected, assuming the Bank were to immediately stop all reinvestments - and indeed ultimately sell bonds back into the market.

2.03pm BST

Bank of England governor Andrew Bailey has criticised a committee of members of the House of Lords for their choice of language in saying the Bank was addicted" to quantitative easing.

I'm afraid I'm going to be very blunt. First of all I think the House of Lords should not use the word addicted'. That is a word that has a very particular and very damaging meaning for people who are suffering. I think it is wrong to use that word loosely. Frankly I think it was a very poor choice of language.

1.47pm BST

Q8. How much of the slowdown in the third quarter of 2021 was to do with the pingdemic'?

Bailey says the slowdown is not due to the so-called pingdemic" first and foremost. It is due to the spread of the Delta variant, he says.

1.45pm BST

Q7. Would a 0.4% rise in interest rates be modest? And was shifting the threshold for unwinding QE lower difficult?

Bailey says there is not a precise definition of modest".

1.43pm BST

Q6. Is there a danger that the Bank is getting complacent on inflation?

Bailey says the Bank is not complacent because it has spent hours talking about inflation.

1.35pm BST

Q5. Should financial markets assume that rates will tighten further because of the inflation forecast?

Broadbent says the Bank does not use inflation forecasts to send signals. Any overshoot in inflation forecasts of the 2% target is small.

1.34pm BST

Q4. Where is the new lower bound for interest rates? Can we assume it's -1%?

Bailey says it isn't useful to think of the lower bound as a single number. Having negative rates in the toolbox allows us to live with an effective lower bound that is negative, but that is conditioned on the circumstances of the time, he says.

1.31pm BST

Q3. The Guardian's Larry Elliott asks why the recovery has less economic scarring than previous recessions? He also asks what the new normal looks like on monetary policy?

Bailey says there is broad literature showing the worst recessions follow financial crises. The financial crisis was an important part of the 2008-09 crash, he says. One of the good things in the past 18 months was the lack of the a financial crisis.

1.26pm BST

Q2. (a) how many members thought conditions were ripe for a rate rise? (b) to what extent does the Bank understand the inflation process given past forecasting errors? (Ouch!)

Bailey says if we look at the underlying drivers of inflation, what is new is the growing number of supply bottlenecks. We are seeing them across quite a range of markets.

1.19pm BST

Q1. How will interest rate movements work together with QE on tightening?

Andrew Bailey says interest rate increases are their active tool in monetary policy, but it is also good to have a predictable path for the stock of assets on the balance sheet.

1.15pm BST

The recovery will be bumpy, says Bailey. The Bank takes rising inflation very seriously, he adds.

There are good reasons to believe the rise in inflation will be temporary, but the MPC will not hesitate to act if that judgement changes, says Bailey in conclusion.

1.12pm BST

At some point the stance of UK monetary policy may need to tighten to achieve its 2% inflation target, Bailey says.

The committee's preference is to use bank rate to try to affect the economy rather than other tools like quantitative easing (QE), he says.

1.09pm BST

There were different views as to whether the conditions for tightening policy had been met, Bailey says.

The committee will not put undue weight on capacity pressures that are frictional and likely to be temporary in nature, he says.

1.07pm BST

Bailey highlights oil prices and supply bottlenecks among the inflationary pressures.

Our view is that the pressures will reduce, Bailey says.

1.05pm BST

Bailey says the challenge of stopping unemployment has been replaced with labour market pressures.

Pay growth appears to have returned to near pre-Covid levels.

1.04pm BST

Bank of England governor Andrew Bailey is speaking now at the press conference.

More updates as he speaks.

12.58pm BST

There was a clear signal from the Bank of England that is will be thinking of how to tighten policy in the coming months. But that does not necessarily mean a move is imminent.

Ruth Gregory, senior UK economist at Capital Economics, said:

We still think it's more likely that the MPC continues to sit tight until the middle of 2023 before tightening policy.

As expected, the Bank used its economic forecasts to convey a more upbeat message about the economic outlook. Indeed, while the economy is still expected to regain its Q4 2019 pre-pandemic peak in Q4, the Bank now thinks that instead of peaking at 5.4% in Q3, the peak in the unemployment rate has already happened.

Most importantly, after stressing since the start of the pandemic that it wasn't even thinking about tightening policy, the committee today said that some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term". In fact, some members of the committee already think that the conditions of the existing guidance had been met fully".

12.53pm BST

A brief interlude as we await the Bank of England press conference: casino consolidation rumours have sparked investor interest.

12.46pm BST

The one dissenter at the Bank of England's meeting who wanted earlier action to tighten policy was Michael Saunders.

12.39pm BST

The pound is basically unchanged against the dollar after the Bank of England's statement.

It has gained 0.2% today to reach $1.3920.

Bank of England Takeaways (for now - update after Bailey)

Not Exceptionally GBP Bullish

#1 BOE Keeps Rates at 0.1%
#2 Votes 7-1 to Keep Bond Buys Unchanged (Saunders)
#3. Plans QE Unwind when Rates at 0.5%
#4 Expects CPI to hit 4% in Q4
#5 No Change to 2021 GDP forecast

My very initial views on today's BoE decision - hard for GBP to price as earlier rate hikes but lower medium-term rate outlook. Gilt curve bear flattening in response to this. pic.twitter.com/ihCa8V28uh

12.35pm BST

Another important clue in the MPC's monetary policy report: it will cut back the stock of its quantitative easing bond purchases only when bank rate has risen to 0.5% - up from 0.1% now.

At first it would do that by not reinvesting the proceeds from maturing bonds, but it could also consider actively selling" some of those bonds. However, don't hold your breath just yet: it won't sell those bonds until bank rate is at least 1%.

12.25pm BST

The Bank of England has shifted its projections for growth this year and next, as well as increasing its inflation forecast.

In its latest monetary policy report the Bank said four-quarter UK GDP growth in the third quarter of 2021 would be 7.7%, slightly lower than its forecast in May of 8%. However, annual growth by the third quarter of 2022 would be 4%, above the 3.4% previously predicted.

12.14pm BST

The Bank of England's monetary policy committee has said that modest tightening" of policy may be necessary if the economy continues to improve.

It said:

The committee judges that, should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term.

12.11pm BST

The Bank of England's monetary policy committee has highlighted the rise of inflationary pressures around the world, but added that the Delta variant of the coronavirus has slowed global GDP growth.

In its statement on Thursday the MPC said:

Global price pressures have continued to build, reflecting the speed and unevenness of the recovery in activity, and disruptions to supply chains.

The committee's central expectation is that current elevated global and domestic cost pressures will prove transitory. Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report. And, alongside temporary constraints on supply, the rapid recovery in demand has eroded spare capacity such that the economy is projected to have a margin of excess demand for a period.

Some members of the committee judge that, although considerable progress has been made in achieving the conditions of that guidance, the conditions are not yet met fully. The other members judge that the conditions of the guidance have been met fully, but note that the guidance made clear that these have only ever been necessary not sufficient conditions for any future tightening in monetary policy.

[T]he committee will not put undue weight on capacity pressures that are frictional in nature and likely to be temporary.

12.02pm BST

The Bank of England has maintained its monetary policy unchanged, as expected.

The rate-setting monetary policy committee voted by a majority of 7-1 for the Bank to keep the stock of government bond purchases at 875bn, with no new members calling for a reduction.

11.49am BST

The consensus is firmly that the Bank will keep its policy unchanged.

However, two policymakers - Sir Dave Ramsden and Michael Saunders - have signalled in speeches that they see growing reason for a withdrawal of some stimulus soon.

Since the previous Bank of England monetary policy report in May, UK economic data have remained robust, inflation has surprised to the upside, financial conditions have become easier and the risks from the Delta wave of SARS-CoV-2 infections have faded somewhat.

Although the most likely outcome remains that the BoE will keep its main policies unchanged at this week's monetary policy meeting (which would already imply a further reduction in weekly asset purchases), we think there is an outside chance that policymakers could surprise markets by announcing an early end to net asset purchases.

11.37am BST

We're coming up to midday, when the Bank of England will reveal the result of its latest monetary policy committee (MPC) meeting.

Here's the choreography: the monetary policy report, monetary policy summary and minutes of the MPC meeting will go up at midday. That will be followed by a press conference at 1pm that will be live-streamed on the Bank's website.

11.31am BST

Also thanks to commenter Nohearted who pointed out that Next's Simon Wolfson runs Frasers' incoming chief executive close for the title of youngest chief executive of a large FTSE company.

Wolfson's rise to the top was also aided by his family connections: he became Next's boss at the tender age of 33 way back in 2001. Wolfson followed his father into the role.

11.16am BST

Frasers Group has moderated its earlier losses. Shares in the retailer are now down by only 0.9% (while the broader FTSE 250 has gained 0.4%).

10.59am BST

A quick check in on the FTSE 100 reveals... not very much: the index is still down by less than 0.1% as investors wait for another hour for the Bank of England's latest.

The biggest faller is Lloyds Banking Group, which is down 3.5% after Goldman Sachs, the US investment bank, cut its rating on the shares to sell" and put its target price at 45p. Shares are at 45.5p, suggesting the market is in agreement.

10.44am BST

GFG Alliance, the troubled owner of Liberty Steel, has settled separate disputes with Rio Tinto and Tata Steel that had added to the peril facing the metals group as it looks for new financing.

Despite the challenges, our core businesses continue to perform very well, and we are taking advantage of the excellent market conditions we face. Much remains to be done, but we believe that we are now making rapid progress in building faith with our creditors and other stakeholders through our restructuring plan.

We are moving with significant momentum towards a profitable, restructured and focused business capable of delivering our Greensteel vision and strong returns.

10.17am BST

UK construction output was already back to its pre-Covid level in the second quarter of 2021, noted Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

He said:

Looking ahead, the decline in Covid-19 infections in recent weeks should help to boost builders' staffing levels. But construction demand might falter when surging input prices hit customers.

In addition, new housing demand likely will ease after the threshold for stamp duty has returned to 125K at the end of September. Commercial property vacancies also probably will increase as firms seek to take advantage of the shift towards working-from-home by shrinking their office space, and as more high street retailers disappear, thereby dampening demand for new buildings.

10.04am BST

It's a problem companies like to have, but it's nevertheless a problem: construction companies are working at full tilt so are having to leave orders on the table.

It was unsurprising that the industry was unable to maintain June's 24-year high in output growth, particularly when widespread supply shortages and constrained capacity to take on additional orders" were added to the mix, said Tim Moore, economics director at IHS Markit. He said:

July data marked the first real slowdown in the construction recovery since the lockdown at the start of this year.

The loss of momentum spanned all major categories of construction work and was most pronounced in the house building sector.

9.56am BST

The UK's property industry may be booming, but the construction industry appears to be losing some momentum, according to the latest purchasing managers' index (PMI).

9.45am BST

The Society of Motor Manufacturers and Traders (SMMT) has also cut its forecasts for UK car production this year: it reckons British factories will churn out 1.82m cars this year, down from the 1.86m it forecast in April.

However, on a brighter note the group expects battery electric vehicles to make up 9.5% of all UK registrations this year, up from 6.6% of sales in 2020.

9.19am BST

The UK car industry sold the fewest cars since 1998 in July, as manufacturers struggled with the long-running global shortage of computer chips and the increased number of workers being forced to self-isolate.

The automotive sector continues to battle against shortages of semiconductors and staff, which is throttling our ability to translate a strengthening economic outlook into a full recovery. The next few weeks will see changes to self-isolation policies which will hopefully help those companies across the industry dealing with staff absences, but the semiconductor shortage is likely to remain an issue until at least the rest of the year.

9.05am BST

Rolls-Royce has reassured investors by sticking to its guidance on its cash burn after slowing its spending further.

The benefits of our fundamental restructuring programme in civil aerospace are evident in our reduced cash outflow and improved operational efficiency. This leaner cost base together with a strong liquidity position gives us confidence in our ability to withstand uncertainties around the pace of recovery in international travel and benefit from the eventual rebound.

8.50am BST

The FTSE 100 is basically flat after its first half hour, with investors likely eyeing the Bank of England later: London's blue chip shares have lost less than 0.1%. It's the same story on the FTSE 250.

There are not many big movers on either index, but there are some movers and shakers worth mentioning who reported this morning.

8.25am BST

Some more detail on Michael Murray, the fiance of Mike Ashley's daughter, Anna who must surely rank as one of the youngest ever prospective chief executives of a FTSE 250 company.

The Guardian's retail correspondent, Sarah Butler, reports:

The Doncaster-born son of a property developer began by helping Ashley with personal property deals a few years after meeting his daughter Anna on holiday in 2011.

The former club promoter has become Ashley's right-hand man, overseeing a revamp of Sports Direct stores as well as expanding Flannels, improving the group's use of technology and building relationships with high-end brands.

8.17am BST

Mike Ashley will officially be in the back seat when he takes his executive director role at Frasers Group, but he will still be a major presence at the company.

He holds 66.5% of its shares, a stake worth 2bn, according to S&P Global Market Intelligence.

8.06am BST

Shares in Frasers Group have dropped by 3.3% in the opening trades on Thursday, as investors digest its results plus the news that Mike Ashley will hand over day-to-day control of the company to his prospective son-in-law.

The response of stock markets to Ashley's decision over the next few weeks will be interesting. There are not many examples of a 31-year-old being handed the reins of a FTSE 250 company (in fact, comments are welcome below if you can think of any at all).

7.48am BST

US pharmaceutical giant Pfizer and British distributor Flynn overcharged the National Health Service for vital anti-epilepsy drugs by as much as 2,600% overnight, the UK's competition regulator has found after re-examining a 2016 decision.

Following the overnight price increases by the companies, NHS spending on phenytoin sodium capsules rose from around 2m a year in 2012 to about 50m in 2013. For over four years, Pfizer's prices were between 780% and 1,600% higher than it had previously charged. Pfizer then supplied the drug to Flynn, which sold it to wholesalers and pharmacies at prices between 2,300% and 2,600% higher than those they had paid previously.

Thousands of patients depend on this drug to prevent life-threatening seizures as a result of their epilepsy. As the CAT recognised, this is a matter that is important for government, for the public as patients and taxpayers, and for the pharmaceutical industry itself. Protecting these patients, the NHS and the taxpayers who fund it, is our priority.

7.23am BST

Good morning, and welcome to our live coverage of business, economics, financial markets and the eurozone.

The controversial reign of Mike Ashley as the head of Frasers, the owner of Sports Direct, will come to an end in May 2022, the company has announced this morning.

The group's elevation strategy is transforming the business and receiving positive feedback from consumers and our brand partners, especially on projects such as the new Oxford Street Sports Direct which opened in June 2021.

The board consider it appropriate that Michael leads us forward on this increasingly successful elevation journey.

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