City investors and economists have been pushing back their forecasts for cuts to UK interest rates, after inflation fell by less than expected to 3.2% in March.
The money markets are now pricing in less than half a percentage point cut to the Bank of England’s base rate by December, implying that we may only get one cut to borrowing costs this year.
Currently, the first cut is priced in for September or November, with the possibility of a second by the end of the year.
DeutscheBank pushed back their forecast for the first cut to June, from May, while BNPParibas are now predicting August, not June.
There was some disappointment that inflation didn’t fall further, as the City had expected a drop to 3.1% per year in March. Food price inflation did slow, but motor fuel prices picked up in the month.
The government tried to take the credit for falling inflation, insisting that it “wasn’t an accident”, but did concede that prices are still going up:
'Inflation is going down but prices are going up.'@edballs questions Chief Secretary to the Treasury Laura Trott on how inflation can be coming down but the cost of goods can be going up.
And our analysis, explaining how the prospect that rates might not be cut until November is bad news for Rishi Sunak, if he hopes to call an election in the autumn.
Driven by rental increases in England & Northern Ireland - avg rents crept up from 9.0% in Feb to 9.2% in the 12mths to March 2024. The highest annual percentage change since this UK @ONS data series began in Jan 2015.
IMF warns voter giveaways would undermine public finances
Larry Elliott
The International Monetary Fund has issued a strong warning to Britain and other countries facing elections this year to avoid voter giveaways that might pose risks to their public finances, my colleague Larry Elliott reports from Washington.
In its half-yearly fiscal monitor, the IMF said the reduction in national insurance contributions (NICs) announced by Jeremy Hunt in his budget last month may have already made cutting the UK’s national debt more difficult.
NEW: Fiscal Monitor: 4 years after COVID-19, deficits and debts remain above pre-pandemic levels, driven by high interest rates and continued support measures. The path to normalization will require strong efforts, especially in the Great Election Year: https://t.co/huXd9fAjRjpic.twitter.com/d0QGsOXDKV
There is speculation Hunt might announce further tax cuts ahead of an autumn election [as the chancellor hinted in our 6.38am blogpost] but the fiscal monitor makes it clear this would be against the advice of IMF officials.
The Washington-based fund’s analysis showed the national debt as a share of the economy’s annual output – the debt-to-GDP ratio – rising steadily in every year between now and the end of the 2020s – from 92.9% in 2024 to 98% in 2029.
UK no longer an outlier on inflation, says Resolution
The drop in UK inflation to 3.2% in March means Britain is no longer an outlier on inflation, says Resolution Foundation.
That’s because prices are now rising slower here than in America (where inflation rose to 3.5% in March), for the first time in two years.
Simon Pittaway, senior economist at the Resolution Foundation, says:
“Many economies have struggled through an inflation-driven cost of living crisis over the past two years, but the UK has been an outlier – experiencing a prolonged period double digit price rises. With UK inflation finally falling below the US, its unwanted outlier status is over.
“With a further significant drop due next month, inflation should soon return to target – and the pressure to cut interest rates will grow.”
📉 At 3.2 per cent, inflation has fallen below US levels for the first time in two years.
Household bills are also dragging down inflation as energy prices decline. Market pricing suggests there may be further falls to come... pic.twitter.com/TnxFu52qeG
BoE's Greene: Middle East tension could affect inflation expectations
One of the Bank of England’s nine policymakers who set interest rates has warned that the recent tensions in the Middle East could pose a risk to the inflation outlook.
Speaking in Washington, MPC member MeganGreene said the crisis could heighten inflation expectations, Reuters reports.
Greene told in a seminar hosted by the Institute of International Finance:
“I do think that what’s going on in the Middle East does pose a risk,”
“I’m worried about the sort of an energy price shock and other supply side shock, which obviously follow a number of supply side shocks we’ve seen over the past couple of years, and what that might do to inflation expectations.”
Greene also warned that the ‘last mile’ of the journey towards hitting the 2% inflation target was the hardest part.
Greene is one of the more hawkish members of the MPC. Late last year she voted to raise interest rates above their current level of 5.25%, but has been voted for no change this year.
Last week, she wrote that in her view, “rate cuts in the UK should still be a way off”.
Tesla asks investors to approve Musk’s $56bn pay again
Electric car maker Tesla is asking its shareholders to once again approve CEO Elon Musk’s record-breaking $56bn pay deal, which was rejected by a Delaware judge in January.
In its proxy filing issued today, Tesla’s chairperson Robyn Denholm argues that Musk has hit all the targets under that scheme, and that the mega pay packet would be good for shareholders.
Denholm writes:
The 2018 CEO pay package required Elon to deliver transformative and unprecedented growth to earn any compensation. It was a big risk, and many thought that the plan’s targets for benefits to stockholders were simply unachievable. But our company and our leaders have always had big dreams and it is fundamental to the entrepreneurial spirit of Tesla to take big risks for the chance at big rewards. This has led to the incredible innovation and progress — and economic gains — that we have achieved at Tesla. In 2018, we asked for unbelievable growth and accomplishments.
Elon delivered: Tesla’s stockholders have benefited from unprecedented growth under Elon’s leadership and Tesla has met every single one of the 2018 CEO pay package’s targets. And — most importantly for the future of Tesla — the 2018 CEO pay package built in further incentives to benefit Tesla stockholders by requiring that Elon hold onto any shares he receives when he exercises his options for five years — which means he will continue to be driven to innovate and drive growth at Tesla because the value of his shares will depend on it!
Denholm adds that Tesla does not agree with the Delaware Court, which decided the package – which allowed Musk to buy Tesla stock at heavily discounted prices as goals were hit – was set inappropriately.
Tesla is also asking shareholders to approve moving its state of incorporation from Delaware to Texas.
Investment bank BNP Paribas has pushed back their target date for the first UK interest rate cut to August, from June.
They told clients today:
March’s UK inflation data, on top of stronger-than-expected pay figures, suggest stickier inflationary pressures than we had previously thought, and we now expect the Bank of England to wait until August to start cutting rates (from June previously).
In addition, with rising oil prices, we now see headline inflation returning to target only around the middle of the year and core inflation remaining above 3.0% until July 2024.
We expect Bank Rate to end 2024 at 4.50% and 2025 at 3.50% (compared with our previous 4.25% and 3.25%, respectively).
Deutsche Bank expects first UK rate cut in June, not May
Deutsche Bank has pushed back its forecast for the first UK interest rate cut, following the news that inflation only fell to 3.2% in March.
They now predict the first cut will come in June, rather than in May.
But, they still expect three quarter-point rate cuts this year, which is more than the City money markets anticipate (currently, fewer than two cuts are fully priced in).
Deutsche’s chief UK economist, SanjayRaja, writes:
After holding onto our May rate cut call since last summer, we now shift our view.
A delayed start, slower pace, but scale of rate cuts unchanged (for now).Our previous baseline included 75bps of rate cuts this year starting in May. We now shift the starting date for rate cuts to June.
We still see the MPC delivering three quarter point rate cuts this year (June, Sep, Dec). But we now expect the MPC to deliver only four rate cuts next year (Feb, May, Aug, Nov), sticking to a quarterly pace through 2025 (previously, we saw six rate cuts in 2025). We expect two further rate cuts in H1-26 taking the terminal rate to 3%.
Risks are skewed to a slower start and higher terminal rate, but asymmetric risks will likely build in a higher for longer world.
Pay for Metro Bank’s chief executive has tumbled 35%, after the lender scrapped bonuses in light of sweeping cost cutting plans implemented in the wake of an emergency rescue deal in October.
Metro’s annual report, released this morning, revealed that Daniel Frumkin received a £0 annual bonus for 2023, down from the £451,000 he received a year earlier. It took his total pay packet down to £834,000, having fallen from £1.3m in 2022.
The board said it scrapped bonuses in light of the turmoil caused by Metro’s failure to convince regulators to loosen its capital rules. The lack of concessions left Metro with a balance sheet shortfall, sparking market panic until it secured an emergency deal that left it 53%-owned by the Colombian billionaire Jaime Gilinski Bacal.
“2023 was a pivotal year for the Bank. Whilst there were strong outcomes in relation to delivering operational changes whilst maintaining the focus on our customers and our colleagues, the Bank nevertheless had to undertake a refinancing (Capital Raise) in November 2023 which raised additional capital the Bank required to operate sustainably in 2024 and beyond. This meant that choices were required, which led to significant reductions in the cost base and colleague levels within the Bank.”
It added:
“A zero bonus payout was considered appropriate for the executive population as the Bank continued to focus on returning to profitability and maintaining its capital position.”
However, Frumkin won’t have to wait long to recoup those losses. The board has, in the meantime, approved a 20% salary hike that will take his base pay, alone, beyond that figure to £925,000 this year. That was approved on 1 January.
They’re also putting a new pay policy to shareholders, with some tweaks, including raising the maximum payout of the long-term bonus to 200% of salary, up from 100% previously.
Though there’s unlikely to be any major revolt on any of its proposals, given its new major shareholder has been helping shape Metro’s policies in the wake of the rescue deal.
Yellow oilseed rape flowers on a bright and sunny Easter Monday morning in South Stoke, Oxfordshire, this month Photograph: Geoffrey Swaine/REX/Shutterstock
Looking back at today’s inflation report, there are still some startling price increases among the items in the basket of goods and services used to measure the cost of living.
Within the food basket, olive oil is 38.9% more expensive than a year ago, while sugar is 14.2% pricier.
Cocoa and powdered chocolate cost 18.5% more than in March 2023, as the global shortage of cacao pushes up prices.
The Energy and Climate Intelligence Unit has warned today that UK cooks face a cooking oil ‘double whammy’ price shock.
That’s because UK yields of oilseed rape, which is used for domestic and commercial vegetable cooking oil, are projected to be as much as 38% lower this year compared with 2023, after extreme wet weather in winter and early spring hit crops.
Tom Lancaster, land analyst at ECIU said:
“We’re seeing a double whammy on cooking oil. Be it Spanish olive oil or British vegetable oil, climate extremes are hurting crops and consumers are paying for it at the supermarket checkout.
Climate change has added £361 to food bills in the past couple of years and the failure of the British rapeseed oil harvest could see a hike in vegetable oil prices.
Křetínský takeover approach for Royal Mail parent has been rejected
Newsflash: Czech billionaire Daniel Křetínský has confirmed that he has made an approach to take over Royal Mail’s parent company, and been rebuffed.
Křetínský’s EP Corporate Group has issued a statement to the City, in which it “notes the recent press speculation” in relation to Royal Mail owner International Distributions Services (see last post).
And it confirms that it has made a proposal to buy IDS’s shares which it doesn’t already own earlier this month – but that this was rejected by the company’s board [reminder, Křetínský owns 27.5% of IDS].
EP says it is now considering its options…
Here’s the statement:
EP Group confirms that, on 9 April 2024, it submitted a non-binding indicative proposal to the Board of IDS seeking its recommendation for a possible cash offer for the entire issued, and to be issued, share capital of IDS not already owned by EP Group and its affiliates, namely VESA Equity Investment S.à r.l (“VESA Equity”), currently the largest minority investor in IDS.
While EP Group’s proposal was rejected by the Board of IDS, it looks forward to continuing to engage constructively with the Board as EP Group considers all its options.
Under City takeover rules, EP now has until 5.00pm on 15 May 2024 to either make a formal offer, or walk away for six months.
Share in Royal Mail owner jump 20% amid takeover talk
Shares in Royal Mail’s parent company have jumped 20% on the London stock market, amid reports that Czech billionaire Daniel Křetínský is preparing a takeover bid.
Křetínský currently owns a 27.5% stake in International Distributions Services, and the Financial Times is reporting that he is poised to launch a bid to take control.
This has pushed IDS’s shares up by a fifth to 255p. Before this move, the company was worth just over £2bn.
Post Office chief executive ‘exonerated of all misconduct claims’
Away from the inflation report, Post Office chief executive Nick Read has been “exonerated of all misconduct allegations” following a report into his behaviour, PA Media reports.
The external report, which the Post Office has not released, was said by former chairman Henry Staunton to contain allegations about Mr Read’s “conduct and lack of his management of the many governance and compliance issues”.
Today, the Post Office says the report, compiled by barrister Marianne Tutin of Devereux Chambers, had exonerated Read of all misconduct allegations and he had the “united backing of the board”.
In a statement, the Post Office said:
“Over the last few months an independent barrister has been investigating a Speak Up complaint into various allegations, which included a number of misconduct allegations against our CEO, Nick Read.
“Following several interviews and examination of documents by the barrister, Nick has been exonerated of all the misconduct allegations and has the full and united backing of the Board to continue to lead the business.
Staunton has revealed to MPs in February that Read was under internal investigation, and that the Post Office’s HR director had produced a ‘speak up document’, which was 80 pages thick.
Staunton claimed the speak up document has included Read’s pushing for a larger salary and threatening to resign.
The smaller-than-expected fall in inflation last month means that overall prices rose a little faster (3.2%) over the last year than expected.
Some elements of the inflation basket did become cheaper than a year ago (such as furniture and household goods, and household services), but most things became more expensive.
Some price rises, such as alcohol and tobacco, accelerated in March.
Here’s a breakdown of how the prices of various items changed year-on-year in March.
Food and non-alcoholic beverages: +4%, down from +5% in February
Alcohol and tobacco: +12.1%, up from +11.9%
Clothing and footwear: +4%, down from +5%
Housing and household services: -1.6%, up from -1.7%
Furniture and household goods: -0.9%, having been unchanged (0%) in February
Health: +6.6%, up from +6.5%
Transport: +0.1%, up from -0.1%
Communication: +7.5%, up from +5.6%
Recreation and culture: +5.3%, down from +5.4%
Education: +4.5%, matching +4.5% in February
Restaurants and hotels: +5.8%, down from +6%
Miscellaneous goods and services: +3.4%, down from +3.6%
Laura Trott, chief secretary to the Treasury, says the drop in the inflation rate in March is “great news” for people, and claimed that the government should get the credit.
She told Good Morning Britain this morning:
We saw inflation coming down. Crucially we saw food prices coming down, and this hasn’t happened by accident.
This has been a result of the government working very hard with the Bank [of England], with the monetary policy committee, to make sure we’ve got these inflation rates coming down steadily now.
Real wages are now rising, and people can have a little bit more money at the end of the month, and that’s really good news.
However, food and non-alcoholic beverage prices actually rose by 4% per year in March (down from 5% per year in February), and rose by 0.2% during last month alone.
Trott then concedes that it’s the /rate/ at which prices are rising has fallen (this is important to remember: life isn’t actually getting cheaper).
'Inflation is going down but prices are going up.'@edballs questions Chief Secretary to the Treasury Laura Trott on how inflation can be coming down but the cost of goods can be going up.
Another fact check- the Bank of England is independent from the government, and it has the mandate to get inflation to 2% (which is why MPs have been blaming the BoE for being too slow to raise rates back in 2021).
Rachel Reeves, Labour’s shadow chancellor, has weighed in too, pointing out that inflation is still over target:
“Conservative ministers will be hitting the airwaves today to tell the British people that they have never had it so good. However, after 14 years of economic failure under the Conservatives working people are worse off.
“Prices are still high in the shops, monthly mortgage bills are going up and inflation is still higher than the Bank of England’s target. At the same time Rishi Sunak risks crashing the economy again with his Liz Truss-backed £46 billion unfunded tax plan to abolish national insurance.
UK’s inflation battle may not yet be won, warns T. Rowe Price
Tomasz Wieladek, chief European economist at asset manager T. Rowe Price, reckons the Bank of England will be worried that the battle against inflation is not over.
He says elements of today’s inflation report, such as the high service sector inflation of 6%, will concern the BoE and make it cautious about cutting interest rates this summer.
Wieladek also suggests there’s a risk that interest rates could be hiked higher than their current 5.25%, if inflationary pressures stay high.
He explains:
UK CPI inflation fell to 3.2% in March from 3.4% in February, with core inflation dropping to 4.2% from 4.5%, and CPIH inflation held steady at 3.8%. However, services inflation remained relatively sticky, falling to only 6% from 6.1%. This relatively strong reading for services inflation was higher than consensus expectations of 5.8%.
These numbers are not easy to interpret, as a result of the early timing of Easter this year. Nevertheless, even accounting for Easter effects, it suggests underlying domestically generated inflation in the UK is significantly stronger than expected.
Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won. The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer. Indeed, given these strong domestic inflationary pressures in both wages and services, the MPC will now likely wait until late summer to get the required confidence to cut rates.
However, there is another risk that is not yet spoken about in the UK monetary policy debate. If services inflation and wages continue to remain persistently at these high levels, the risk the Bank of England will have to hike this year is rising. After all, the Bank of England is data-dependent. If the data continue to indicate policy is not tight enough to bring inflation back to target, the MPC may have to tighten policy further.
Currently, the money markets are still pricing in that rates will fall in future, with the Bank itself comparing its policy stance to hiking across Table Mountain (ie, rates are at their peak, but may stay there for a while).
The pound has gained ground in the currency markets this morning, another sign that investors are trimming their expectations for UK interest rate cuts.
Sterling is up 0.3% against the US dollar at $1.2463.
It’s still down around 1.3% during April, as the dollar has strengthened after US inflation rose more than forecast in March.
The last mile in the journey to the 2% inflation target may feel like the longest to Britons, following the smaller-than-hoped drop in CPI last month.
So says Myron Jobson, senior personal finance analyst at interactiveinvestor, who explains:
While the latest reading is marginally higher than expected, inflation continues to move in the right direction with the cooling of the areas of inflation that are most felt by Britons, such as food, stoking a sense of optimism over where prices are heading.
“Things are looking up, but the last mile to the Bank of England’s 2% target may feel like the longest to Britons who have endured daily battles against rising prices.
“After stripping out volatile food and fuel costs for a better sense of the underlying trend, core inflation came in at 4.2%, down from 4.5% in February. This reading matters because Bank of England policymakers monitor it to get a sense of inflation’s momentum and is one of the key considerations when it comes to setting interest rates.
Reuters reports that UK rate futures pricing now predicts about 34 basis points of cuts to Bank rate this year, down from 42bp on Tuesday.
That suggests that one quarter-point cut to interest rates, to 5% from 5.25%, is widely expected, with only a moderate probability of another this year.
That’s clearly a blow to borrowers desperate for lower interest payments, and also to the government’s hopes for several cuts to interest rates before the next general election.
