ECB leaves eurozone interest rates on hold but hints at cut this summer – as it happened

City traders are no longer fully pricing in the first UK interest rate cut in August and now expect borrowing costs to begin to fall in either that month or September, the Financial Times reports.

That suggests investors are repricing expectations for rate cuts after reading Megan Greene this morning.

The FT adds:

The two cuts they now expect for this year — one in which Prime Minister Rishi Sunak is hoping to deliver an election-winning economic turnaround — contrast with the more than six cuts markets anticipated in January.

The chart in this post shows why Megan Greene is concerned that UK services inflation is running hotter than in the US:

Back in the financial markets, UK government bond prices are weakening as investors brace for interest rates to remain higher for longer than hoped.

The yield, or interest rate, on UK 10-year government debt has risen by eight basis points (or 0.08 percentage points) this morning, to 4.21% from 4.13% last night.

Yields rise when prices fall, and show that bond traders want a higher rate of return for holding government debt, following the higher-than-forecast inflation rate in the US.

The shorter-dated, two-year UK bonds have also weakened, pushing up their yield by 6 basis points to 4.41%.

American Treasury bonds weakened yesterday, after US inflation rose faster than expected to 3.5% for March.

That shows that bond traders are dialling back their interest rate cut forecasts.

Hal Cook, senior investment analyst at Hargreaves Lansdown, says:

“Markets are now pricing in just one or two rate cuts in the US this year - behind Fed projections from March. Reminder: Markets were pricing in six or seven at the start of the year. This shift hasn’t done much damage to equities in recent months, and it still looks like the hope of cuts coming at some point is enough to keep bulls happy.

The primary cause of the shift in expectations has been continued sticky price and wage inflation, both remaining higher than expected in the US. This makes it less likely that the Fed will cut soon, as was expected at the start of the year.

Here’s the state of play this morning, from Reuters’ Andy Bruce:

The total number of online jobs being advertised in the UK has dipped, suggesting some cooling in the labour market.

The latest realtime UK economic data shows that online job ads fell 1% last week, and was 19% below the level recorded a year ago.

The Office for National Statistics also reported that spending on UK credit and debit cards dipped by 1% last week, and was 4% lower than a year ago.

Just in: UK banks are expecting more households and small businesses to default on debts this summer.

The Bank of England’s latest money and credit survey shows that default rates on secured loans (such as mortgages) to households increased in the last quarter, and are expect to increase again in the April-June quarter.

Lenders also reported that default rates for total unsecured lending increased in Q1, for both credit cards and other loans – and are also expected to increase in Q2.

This indicates that higher interest rates are hurting borrowers, with more unable to make the interest payments on their loans.

Among businesses, lenders reported that default rates on loans to small and medium businesses increased slightly in the last quarter, with further slight increases expected in the current quarter.

UK banks are also predicting a pick-up in both the supply and demand for mortgages in the current quarter.

Estate agents and surveyors are predicting the property market will bounce back over the coming months.

The latest survey by the Royal Institution of Chartered Surveyors (Rics), released this morning, shows that buyer demand rose again last month, to its highest level in two years.

With property listings also rising, surveyors expect house prices across the UK to return to growth within the next 12 months.

Falls in mortgage rates since last summer have helped the market, as investors have anticipated cuts from the Bank of England this year….

More here:

Professor Costas Milas of the University of Liverpool argues that the Bank should pay more attention to money supply when setting interest rates.

He tells us:

Although MPC policymaker Greene is correct that there is a tight labour market in the UK which “undermines” early interest rate cuts, perhaps more important is the lack of liquidity (proxied by Divisia money growth). The latter is in deep negative territory which puts downward pressure on inflation and “hedges” against strong GDP growth (see here)

As I explain in my latest LSE Business Review blog, the BoE’s forecasting models need to take into consideration Divisia money.

Former US central bank chief Ben Bernanke is expected to publish his recommendations to improve the BoE’s forecasting and policymaking operations tomorrow.

The Bank of England can cut UK interest rates by half a percentage point this year, predicts Simon French, chief economist at Panmure Gordon.

But, he warns that the timing of such cuts “remains deeply uncertain”, telling clients:

The recent upswing in economic momentum across all major geographies and a recovery in core price growth means the balance of risks is shifting fast for central banks - led by a Federal Reserve facing off to incontinent US fiscal policy and a positive wealth effect from a strongly performing equity market.

For the Bank of England - facing a rather different domestic backdrop - there is a narrow policy and rhetorical path for it to tread in the coming months that can deliver some easing of domestic interest rates. But the path is narrow because divergences are everywhere. Between US and European growth; between goods and services inflation; between absolute levels of consumer confidence and recent economic momentum.

He’s also posted about Megan Greene’s FT article, pointing out that the five internal members who sit on the Bank’s monetary policy committee are generally more dovish than external members such as Greene (apart from Swati Dhingra, who has been a lone voice voting to cut rates)