Clare Lombardelli also defended her (soon to be) colleagues on the Bank’s Monetary Policy Committee, over their reluctance to raise interest rates sooner after the pandemic.
Treasury committee member John Baron MP told Lombardelli that there is a consensus that the Bank of England was “well behind the curve” on inflation, and too slow to start raising interest rates as inflation climbed even before the Ukraine war.
You can’t defend that, can you, Baron asks.
Lombardelli can! She points out that central bankers around the world were juggling competing risks on activity and inflation; in the UK there were fears that unemployment would rise as the furlough scheme ended, while goods inflation had been pushed up by pandemic bottlenecks, which would unwind.
Lombardelli: Middle East developments could push up inflation
Developments in the Middle East and disruption to shipping through the Red Sea could exert upward pressure on inflation in the near term, BoE deputy governor appointee Clare Lombardelli tells MPs.
In a signal that geopolitical tensions could add to the bumpiness of inflation, Lombardelli says:
The quantities of goods being shipped through the Red Sea are down and shipping costs have more than doubled since the end of 2023. On energy, we saw in 2021 and 2022 how fast energy markets can be disrupted, with a direct impact on inflation.
Energy markets are now much calmer, UK gas prices are near pre-pandemic levels, but with a quarter of global oil and gas trade passing through the Strait of Hormuz, this is a potential choke point in the event of escalation.
So far there has been a limited impact on energy prices or inflation, but there are risks to activity and inflation in an adverse scenario.
Clare Lombardelli also tells MPs that Brexit appears to have had a negative economic impact.
In her written evidence to the Treasury committee, the incoming BoE deputy governor says:
It is not possible to quantify the specific impact of Brexit on the UK economy given it has taken place alongside other significant economic shocks and trends – the pandemic, the energy price shock, and a general slowing in the rate of globalisation.
The evolution of the UK economy since 2016 suggests that the economic impacts of Brexit may have come through more quickly than were anticipated by the weight of analytical studies which were conducted in the period following the referendum.
The evidence suggests that Brexit has had a negative economic impact through investment and trade. What is less certain is the precise size of this negative impact.
Fall in inflation likely to be 'bumpy', BoE's Lombardelli warns
The fall in UK inflation is likely to be ‘bumpy’ in the coming months, newly appointed Bank of England deputy governor Clare Lombardelli has warned.
In written evidence to parliament’s Treasury committee (where she is testifying this morning), Lombardelli predicts that the short and medium-term prospects for the UK economy are “improving”, after a very difficult period for people and businesses.
But while she sees price rises slowing, Lombardelli – who joins the Bank in July – warns that the journey may not be smooth, and that services inflation may be stickier.
She says:
Inflation has fallen significantly from the extremely painful levels which peaked at just over 11% in 2022, and it is expected to continue to fall.
The decline in the figures is likely to be bumpy as pricing behaviour isn’t smooth and base effects will impact on the numbers, but the overall experience for people should be of lower and more predictable inflation.
Headline inflation is expected to fall more quickly than services inflation.
The next UK inflation report, for March, is due tomorrow morning. CPI inflation is expected to have dropped to 3.1%, down from 3.4% in February, but still above the Bank’s 2% target.
Lombardelli, currently the chief economist at the Organisation for Economic Co-operation and Development (OECD), is a former economic advisor to David Cameron and George Osborne.
She will succeed BenBroadbent, the current deputy governor for monetary policy, on 1 July.
In today’s evidence to the Treasury committee, Lombardelli also predicts that unemployment will rise as higher interest rates and tighter financial conditions feed through the economy.
But, she adds, “these increases should not be large”, and the labour market is expected to remain relatively strong by international and historical standards.
Today’s labour market report is a story of two halves: “a cooling jobs market dampened by slower growth and falling demand and with pay growth still stubbornly strong.”
So says Sanjay Raja, chief UK economist at Deutsche Bank Research.
He explains that the pay data – showing average earnings up 6% per year – wasn’t what the Bank of England’s MPC wanted to see.
But the employment data, which “surprised massively to the downside” with a fall of 156,000, gives clearer signs that the labour market is cooling.
He adds:
The LFS redundancy data also highlighted a continuing trend of higher redundancies, with February marking a third consecutive month of 100k+ redundancies.
Financial results from two UK recruitment firms today show that the jobs market has cooled, at home and abroad.
Hays reported a 16% drop in fees earned by filling vacancies in the United Kingdom & Ireland (UK&I) in the first quarter of this year.
Overseas jobs market also cooled, dragging Hays’ total like-for-like fees down by 14%
Dirk Hahn,Hays chief executive, explains:
“Market conditions remained challenging through the quarter. In Australia and UK&I, Temp activity was stable through Q3, although volumes in each are down c.15% YoY, and slightly below pre-Christmas levels.
Rival recruiter RobertWalters reported a 20% drop in net fees in the UK in Q1, saying that trading conditions remain challenging, although fee income rose sequentially in London for the first time in five quarters.
Across the group, gross profits fell 21%.
TobyFowlston, chief executive, commented:
“In-line with the latter part of 2023, overall trading conditions remained challenging during the first quarter of 2024.
Although certain macro-economic indicators, such as inflation, continue to moderate in some markets, the general environment remains one where client and candidate confidence is at low levels, which we expect to continue to be a headwind to fee income growth in the near-term.
The number of people out of work rose by more than expected in February, raising concerns that employers are beginning to lay off staff in response to high interest rates.
The Office for National Statistics said the unemployment rate increased to 4.2% in February from 3.9%, well above the 4% expected by City economists.
Analysts said the cooling effects of higher interest rates were leading to more redundancies and discouraging employers from hiring staff.
Despite rising unemployment, regular pay growth excluding bonuses was stronger than expected at 6% in the three months to February, underlining the dilemma facing the Bank of England over when to start cutting interest rates. Pay growth of 6% was down from 6.1%, but stronger than the 5.8% expected by economists polled by Reuters. Total pay, which includes bonuses, was unchanged at 5.6%.
The drop in the UK’s employment rate to 74.5%, down from 75% in the previous quarter, means the jobs recovery is going backwards, warns Stephen Evans, chief executive at Learning and Work Institute.
Evans points out that Britain is lagging behind fellow G7 nations:
“The labour market continues to ease with falls in employment and rises in unemployment and economic inactivity. Most troubling is that the UK is the only G7 country where employment remains lower than pre-pandemic levels. This is driven by rises in economic inactivity, with 2.8 million people economically inactive due to long-term sickness, a record high.
“The answers are to get the economy growing and offer more and better help to find work to people who are economically inactive. The number of people economically inactive due to long-term sickness who get help to find work each year is only half the number who want a job. That needs to change.”
Shares in fashion retailer Superdry have been briefly halted this morning after plunging over 25%, as it announced plans for a sweeping restructuring plan and to delist from the stock market.
My colleague Julia Kollewe explains:
Superdry is to embark on a restructuring plan including rent reductions in stores and a fundraising, backed by its boss and co-founder Julian Dunkerton, and will delist from the London Stock Exchange.
The struggling British fashion retailer announced the plans a fortnight after Dunkerton decided against making a takeover offer with partners after a two-month pursuit. Superdry hopes the measures will return the business to a “more stable footing”.
The three-year restructuring plan, a formal procedure under the Companies Act for companies in financial difficulties, is expected to result in rent reductions on 39 UK sites, the extension of the maturity date of loans, and “material” cash savings from rent and business rate changes.