Closing summary
European Central Bank president Christine Lagarde has said that policymakers agreed at today’s meeting that talk of interest rate cuts is “premature”. Last week, she told Bloomberg in Davos that the bank could start cutting rates in the summer.
The pace of US economic growth slowed in the last three months of 2023, but far less than had been expected, underlining the continued resilience of the economy. Growth slowed to an annualised rate of 3.3% from 4.9% in the third quarter. The economy grew by 2.5% in 2023, its best performance since 2021.
Lloyds Banking Group is cutting around 1,600 jobs across its branch network as it shifts more services online to save money.
It will also create around 830 jobs elsewhere in the bank.
Britain’s next government faces some of the toughest tax and spending choices for generations as it will be forced to grapple with the impact of weak growth and high debt interest payments, a leading thinktank has said.
The Institute for Fiscal Studies (IFS) warned that Jeremy Hunt’s much-predicted budget tax cuts risked being reversed or paid for by spending cuts, and urged the Conservative and Labour parties to “level” with voters before polling day.
Our other main stories:
Thank you for reading. We’ll be back tomorrow. Bye! – JK
Updated
Bank of England, Treasury press ahead with 'digital pound'
The government and the Bank of England will press ahead with the design of a digital pound without pledging that a “Britcoin” will become available to the British public.
Officials at the Bank and the Treasury said a consultation exercise last year showed there was an appetite for a new method of transferring money electronically.
Responding to concerns that the Bank and the government would have access to users’ personal data, officials said primary legislation would safeguard digital currency users in the same way bank accounts are protected at the moment.
The Treasury said it would also maintain cash in circulation after a strong backlash from among the 50,000 respondents to the consultation, including MPs, who feared paper banknotes and coins would be phased out.
More than 40 countries are understood to be pursuing the development of a digital currency that is expected to rival the crypto currencies Bitcoin and Ethereum, which are valued on independent exchanges.
Supporters of the scheme, which could be launched before the end of the decade with the Bank acting as the backstop or custodian of the new digital currency, said it will allow innovation in the UK financial services sector, keeping firms in financial centres across the UK at the forefront of a global market place.
Critics, including members of the House of Lords economic affairs committee, have said they have “yet to hear a convincing case” for why the UK needs a central bank digital currency (CBDC), while some MPs asked whether the plan is “a solution in search of a problem”.
Simon Youel, head of policy and advocacy at research and campaign group Positive Money, said the government needed to respond to the rise of private crypto currencies.
The huge response to the consultation highlights the importance of a genuinely inclusive national conversation on the future of our money, which is presently facing a rapid privatisation as cash gets replaced by electronic bank money.
Colin Finlayson, fixed income investment manager at Aegon Asset Management, says the ECB may have to start cutting rates earlier than the summer.
The ECB kept policy unchanged at 4%, as widely expected. Although Ms Lagarde attempted to push back on the current market expectations of rate-cuts in the coming month, she did have to concede that both underlying inflation and inflation expectations have continued to fall.With the ECB current growth outlook characterised as having risks to the downside, the market paid little attention to her attempts to dampen rate-cut enthusiasm. The ECB are guiding towards the summer at the earliest for any rate cuts to begin but we feel that they may not have the luxury of waiting that long.
On the Lloyds job cuts, here is a statement from the bank:
As more customers choose to manage their day-to-day banking online, it’s important our people are available when it matters most. We’re introducing a number of new roles and making changes to our branch teams so our customers can see us how and when they want to.
Lloyds is cutting 1,600 jobs as part of a shift to more online services but is also creating 830 jobs elsewhere – “in an expanded relationship growth team – part of our consumer relationships business – where colleagues will work to understand our customers’ financial goals and needs and meet them through our products and services”.
The Accord union explains the changes in detail on its website:
There will be no compulsory role reductions at grades A and B, although grade B colleagues can express an interest in voluntary redundancy. Changes to management structures will mean there will be redundancies at grade C and above. The aim is to achieve most of these reductions through voluntary redundancy.
Updated
Asked whether she stands by her forecast made in December that the eurozone will avoid recession, Lagarde said the most recent PMI surveys are encouraging for the economy.
People can challenge PMI numbers and they do but at least we are seeing numbers that are either to the upside or or stable…
We recognise the weakness of of growth and that weakness obviously applies to Q4. You know there are multiple ways to define what is a recession, the technical terminology, two quarters in a row that that are negative is one way to look at it.
I remember discussing that with my colleague and friend Janet Yellen, where the US had two quarters in a row that were negative. And when I said well, Janet, you must be in a recession and she said: ‘What! With those unemployment numbers, forget it. We are not in recession.’ So I think we have to be attentive to all sorts of data signals and understanding of the economy.
This concludes the press conference.
Back at the ECB in Frankfurt, chief Christine Lagarde is asked whether her comments mean that a rate cut in April is unlikely.
She said:
In terms of an overall evaluation of our policy trajectory, which many of you are after, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and in a sustainable way at target.
So it’s a disinflation process in which we are, it is working, but we need to be more advanced. and we need to be further along in that process, to be confident that inflation will be at target sustainably. So I’m giving you a little indication about what I call the trajectory, but it’s not forward guidance, it’s trying to give you the mechanics that we will apply in our considerations when we look at data in the next few weeks.
Updated
Lloyds cuts 1,600 jobs as part of digital switch, Reuters reports
Just in: Lloyds Banking Group is cutting around 1,600 jobs across its branch network as it shifts more services online to save money.
It will also create around 830 jobs elsewhere in the bank.
Banks are keen to cut costs amid tough economic conditions and pressure on profit margins from competition and peaking interest rates.
Rival Barclays also slashed thousands of jobs last year, with the majority in the bank’s back office support division.
Updated
Lagarde also said the ECB is keeping a close eye on developments in the Red Sea, where attacks on ships by Yemen’s Houthi rebels have led to ships being rerouted, and concerns about shipping delays and higher costs, which could push inflation up.
We are observing very carefully because we are seeing that shipping costs are increasing, delivery delays are increasing. And while we all know that there is more shipping capacity than there was in in 2020 and 2021, we also know that costs and fees are increasing.
Lagarde: 'premature to discuss rate cuts'
The Q&A has started. The first question is whether the governing council discussed a rate cut at today’s meeting.
Lagarde said:
The consensus around the table of the Governing Council was that it was premature to discuss rate cuts.
One other thing, which was very much a consensus around the table was that we had to continue to be data dependent.
Watch the ECB press conference live: President Christine @Lagarde explains today’s monetary policy decisions https://t.co/ZiyUyrahlk
— European Central Bank (@ecb) January 25, 2024
Updated
Lagarde summed up the risks to inflation:
Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term, and hamper global trade.
Inflation could also turn out higher than anticipated if wage wages increase by more than expected or profit margins prove more resilient by contrast, inflation may surprise on the downside if monetary policy dampens demand by more than expected or if the economic environment in the rest of the world worsens unexpectedly.
Moreover, inflation could decline more quickly in the near term if energy prices evolve in line with the recent downward shift in market expectations of the future path for oil and gas prices.
Turning to inflation, ECB president Christine Lagarde said:
Inflation is expected to ease further over the course of this year as the effects of past energy shocks, supply bottlenecks and the post pandemic reopening of the economy fade and tighter monetary policy continues to weigh on demand.
Almost all measures of underlying inflation declined further in December.
The elevated rate of wage increases and falling labour productivity are keeping domestic price pressures high, although these two have started to ease.
And the growth outlook:
Looking now at the risk assessment, the risks to economic growth remain tilted to the downside.
Growth could be lower if the effects of monetary policy turn out stronger than expected.
A weaker world economy or a further slowdown in global trade would also weigh on euro area growth.
Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are key sources of geopolitical risks.
This may result in firms and households becoming less confident about the future and global trade being disrupted.
Growth could be higher if rising real incomes mean spending increases by more than anticipated or if the world economy grows more strongly than expected.
The pace of US economic growth slowed in the last three months of 2023, but far less than had been expected, underlining the continued resilience of the economy.
The commerce department reported on Thursday that US gross domestic product (GDP) – a broad measure of economic health – grew at an annualized rate of 3.3% in the final quarter of the year, down from 4.9% in the previous quarter but in line with pre-pandemic growth, and well ahead of the 2% economists had expected.
Robust consumer spending and government outlays contributed to the growth.
The Federal Reserve has been attempting to cool economic activity in order to bring down inflation. Since March 2022 the Fed has increased rates to a 22-year high and held them there. Inflation has fallen from a high of 9% in June 2022 to 3.4%.
The rate rises have increased the cost of borrowing and many – including the Fed – had expected a subsequent slowdown in economic activity to lead to layoffs. But so far the Fed appears to be on course for what it has termed a “soft landing”.
Hiring has remained robust – unemployment hovers at close to a 50-year low – and while growth has slowed, consumers have continued to spend, the US economy has weathered the rate rises and stock markets have hit record highs.
“The Fed – so far – has managed to strangle inflation without strangling the economy,” said Dan North, senior economist with Allianz Trade Americas. North said the Fed rate rises were still working their way through the economy and he expected 2024 to be a year of slow growth “but we are not using the recession word yet.”
Updated
European Central Bank president Christine Lagarde has kicked off the press conference with a statement on the economy.
Looking at the economic activity, the euro area economy is likely to have stagnated in the final quarter of ‘23.
The incoming data continue to signal weakness in the near term. However, some forward looking server indicators point to a pickup in growth further ahead.
The labour market has remained robust. The unemployment rate at 6.4% in November has fallen back to its lowest level since the start of the euro and more workers have entered the labour force.
US economy grows faster than expected
The US economy expanded more than expected in the fourth quarter, powered by consumer spending.
GDP rose at a 3.3% annualised rate, according to the government’s preliminary estimate, down from 4.9% in the previous quarter. This compares with market forecasts of 2.2% growth. In 2023, the economy expanded by 2.5%, its strongest performance since 2021.
Updated
ECB president Christine Lagarde will hold a press conference at 1.45pm GMT. You can watch it here.
ECB keeps interest rates unchanged
The European Central Bank’s governing council has kept interest rates unchanged, as expected.
The ECB’s rate on its main refinancing operations, which provide the bulk of liquidity to the banking system, is at 4.5%. Its deposit rate, which is paid on commercial bank deposits, is at 4%. The marginal lending facility, which offers overnight credit to banks, is at 4.75%.
The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.
Tight financing conditions are dampening demand, and this is helping to push down inflation.
Updated
Ahead of the European Central Bank’s interest rate decision at 1.15pm GMT, Germany’s 10-year bond yield rose to its highest level since early December.
Germany’s 10-year yield, the benchmark for the euro zone, touched a high of 2.371% earlier. Yields move inversely to prices.
The central bank is widely expected to leave interest rates unchanged but investors will be looking for any hints on when borrowing costs will start to come down.
The ECB’s deposit rate, which is paid on commercial bank deposits, was last raised in September to 4% – the highest since the euro was launched in 1999. The rate on its main refinancing operations, which provide the bulk of liquidity to the banking system, is at 4.5%. The marginal lending facility, which offers overnight credit to banks, is at 4.75%.
Jeroen Blokland, founder of Blokland Smart Multi-Asset Fund, tweeted:
Yikes! The German #ifo Index, a key bellwether for the German economy, unexpectedly fell in January and points to a #recession. The #ECB will not be able to hold on to its 'higher for longer' narrative much longer. pic.twitter.com/bRiZCVyc6y
— jeroen blokland (@jsblokland) January 25, 2024
Updated
Shares drift lower, oil prices rise
On the markets, shares are drifting lower while oil prices have risen and the pound is little changed.
The FTSE 100 index is trading 14 points, or 0.2%, lower at 7,513. Germany’s Dax has lost 0.4%, while France’s CAC is down 0.45% and Italy’s FTSE MiB has slid nearly 1% ahead of the European Central Bank’s interest rate decision.
In the oil market, Brent crude, the global benchmark, is $1.07 higher at $81.10 a barrel, a 1.3% gain. US light crude has gained $1.11 to $76.2 a barrel, up 1.5%.
Oil prices rallied after data showed US crude stockpiles fell more than expected last week, and the Chinese central bank’s cut in banks’ reserve requirements (the amount of cash banks must hold in reserve) raised hopes of more economic stimulus to kickstart the economy.
Updated
UK retail sales dive most in 3 years – CBI
Retail sales across the UK fell at the fastest pace in three years this month, according to an industry survey.
The Confederation of British Industry’s monthly retail sales balance, which measures sales volumes versus a year ago, fell to -50 in January from -32 in December, the weakest since December 2021 when Britain was in a Covid-19 lockdown. The balance measures the number of retailers who said sales volumes rose minus those who said sales fell.
February won’t be much better, the survey suggests. The volume of sales for this time of the year was -47, the lowest reading since May 2020.
Martin Sartorius, the CBI’s principal economist, said:
Looking ahead, demand conditions in the sector will remain challenging as higher interest rates continue to feed through to mortgage payments and household incomes.
Official figures published last week showed British retailers suffered the biggest drop in sales for almost three years in December, raising the risk that the economy slipped into recession late last year.
Supreme problems: Domino’s Pizza shares dive 30%, wiping $1.5bn
Domino’s Pizza shares have dived, wiping more than $1.5bn from the company’s market value.
A trifecta of problems facing the international operations of Domino’s Pizza Enterprises sparked a 30% plunge in the share price of the Australian-owned company on Thursday.
Domino’s, which holds the branding rights in several countries of the American pizza chain, disclosed that net profit before tax for the recent six-month period was expected to be between $87m and $90m, down from almost $105m a year earlier.
The shareholder response to the trading update was ruthless. Managing director Don Meij convened a call with analysts and investors, and sought to explain the troubles.
“It’s quite humbling to sit in front of you and to be able to share the disappointing results in part of our business today,” he said on the video conference. “It really shows a rollercoaster.”
Norges Bank keeps rates on hold, to stay at that level 'for some time'
Norway’s central bank has kept its benchmark interest rate at 4.5%, as expected, and said the cost of borrowing was likely to stay at that level “for some time ahead”.
The economic prospects for Norway do not appear to have changed materially since December, Norges Bank’s monetary policy committee said.
Norges Bank’s governor Ida Wolden Bache said:
The committee assesses that the policy rate is now sufficiently high to return inflation to target within a reasonable time horizon.
Monetary policy is having a tightening effect, and the economy is cooling down.
At the same time, business costs have increased considerably in recent years, and continued high wage growth and the crown depreciation through 2023 will likely restrain disinflation.
In December, the central bank raised rates in a surprise move, even though inflation had slowed. Norway’s core inflation was 5.5% in December, a 15-month low, down from a peak of 7% last June, but still above the central bank’s 2% target.
Economists are expecting a rate cut between July and September and another one in the final three months of 2024, which would bring the benchmark rate down to 4% by the end of the year.
Halfords hit by Christmas sales slump
In the UK, the bike and car parts retailer Halfords said sales in December were much weaker than in October and November. It explained that mild and wet weather affected demand for winter products and brought fewer people into its stores, while cash-strapped customers reined in spending in the run-up to Christmas.
Sales of car products fell 15.3% in December, after averaging 10.2% in October and November on a like-for-like basis (at stores open at least a year). However in January sales growth returned to those levels as conditions normalised, Halfords said.
Group revenues grew by 2% in the 13 weeks to 29 December. However, cycling and consumer tyres were “performing significantly worse than anticipated and have weakened in Q3”. Sales of bikes and accessories slid 1.2% in the quarter.
Halfords said it performed better than the cycling market as a whole, with kids bikes sales up 5% in December. Volumes in the cycling and consumer tyres markets are below pre-pandemic levels by 28% and 14% respectively.
The company is cutting costs of £35m this year, more than previously flagged, and announced a partnership with the specialist tyre distributor Bond International.
Graham Stapleton, the chief executive, said:
Trading in Q4 has begun strongly and we remain focused on everything that we can control, with a number of initiatives underway to achieve further efficiencies within the business, as well as investing in areas where we see real opportunities for future growth.
In German manufacturing, business expectations improved but remained pessimistic. Order books continue to shrink, albeit less rapidly than at the end of the year.
The business climate in the service sector clouded over considerably while in trade, the index fell to its lowest level since October 2022. In construction, the business climate index also continued to slide.
Germany 'stuck in recession' as business confidence worsens
In Germany, business confidence worsened in January, as Europe’s biggest economy remains weak.
The closely watched business climate index from the Munich-based Ifo institute fell to 85.2 from 86.3 in December.
The institute’s president Clemens Fuest said:
Companies assessed their current situation as worse. Their expectations for the months ahead were also once again more pessimistic. The German economy is stuck in recession.
Technically, Germany dodged a recession at the end of last year (defined by two or more consecutive quarters of contraction). In the final quarter of last year, the German economy shrank by 0.3%, compared with the previous quarter, when output flatlined.
But the economy contracted by 0.3% in 2023 and is on track for its first two-year recession since the early 2000s amid the impact of higher energy costs and weaker industrial demand.
🇩🇪 ifo Business Climate Index Falls – The ifo Business Climate Index fell to 85.2 points in January, down from 86.3 points in December. German economy is stuck in recession.#ifosurvey@KlausWohlrabe @FuestClemens pic.twitter.com/3cFSGVu0or
— ifo Institut (@ifo_Institut) January 25, 2024
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Foxtons boosted by lettings while sales revenues slide
The boss of the London estate agents Foxtons, Guy Gittins, hailed a “transformational year” following a turnaround plan, as it reported higher overall revenues and profits, although revenues in its sales business continued to slide.
Sales revenues fell by 14% last year from 2022 while the market slumped by 22%, according to Foxtons. It said it has gone into 2024 with an under-offer pipeline far ahead of last year and expects year-on-year sales revenue growth in the first quarter, and further growth through the year.
Things have improved in recent weeks. The firm explained:
Buyer demand has grown as mortgage rates have begun to normalise, with good levels of growth seen in recent weeks as the first mortgage products are released with rates below 4% since the September 2022 mini-budget. Any sustained reduction in interest rates is expected to spur significant further growth in buyer demand.
Total revenues rose 5% to £147m last year while adjusted operating profit edged higher to £14m from £13.9m.
Gittins, the chief executive, has invested in the lettings business, which makes up 70% of group revenues and grew by 16%, delivering more than £100m revenue for the first time. In bad news for tenants, “rents are expected to stabilise and remain at historically elevated levels.”
Gittins, who returned to Foxtons (where he started his career) in September 2022 after running rival Chestertons, said:
2023 has been a transformational year for Foxtons, following the implementation of a refreshed strategy and operational turnaround plan.
We have delivered a year of market share growth and have ended the year with revenue and adjusted operating profit ahead of market expectations; our operational upgrades and investment in fee earners, training, data and brand, coupled with a return to driving innovation in the industry, are now consistently delivering material benefits to our competitiveness and market positioning, helping us to end 2023 as the UK’s fastest growing large lettings and sales agency brand.
Updated
Dr Martens hit by lower US sales
Dr Martens has been hit by lower sales in the US, as cash-strapped consumers refused to splash out for Christmas.
The British bootmaker said sales made directly to customers fell 3% in the three months to the end of December, its third quarter, and wholesale revenues tumbled 46%. Overall group revenues were down 18%.
The company, which was founded in 1960 in Northamptonshire, is still expecting a decline of nearly 10% over the full year (“high single-digit percentage”).
Kenny Wilson, the chief executive, said:
This was driven by a weak USA performance, as expected. Trading in the quarter was volatile and we saw a softer December in line with trends across the industry. Whilst the consumer environment remains challenging, we are taking action to continue to grow our iconic brand and invest in our business.
Updated
Labour to unveil plans for City at forthcoming business conference
Labour will use its sold-out business conference next week to unveil the party’s City policy plans, the Guardian can reveal, as it tries to win over hundreds of UK executives before a general election.
More than 500 bosses from across British finance will gather in London on 1 February for the event, where opposition leaders including Sir Keir Starmer, his shadow chancellor, Rachel Reeves, and the shadow business secretary, Jonathan Reynolds, plan to “showcase Labour’s offer to business”.
The party is hoping that the conference – which sold out within two hours in the autumn – will demonstrate its “commitment to work hand in glove with the business community” and will use it as an opportunity to reveal its business policy plans after two major industry reviews.
The Guardian understands that will include Labour’s much-anticipated strategy for the City and will detail how the party plans to harness the strength of the UK’s £275bn financial and professional services sector.
Introduction: IFS says next UK government faces worst fiscal inheritance in 70 years; markets eye ECB rates decision
Good morning, and welcome to our rolling coverage of business, the financial market and the world economy.
The next UK government will face the toughest tax and spending decisions in 70 years, according to a leading think tank.
The Institute for Fiscal Studies said a combination of high interest rates and weak growth means whoever wins the general election later this year will find it “more difficult to reduce debt as a fraction of national income than in any parliament since at least the 1950s.”
It warned that Jeremy Hunt’s much-predicted budget tax cuts – he will unveil the budget on 6 March – risk being reversed or paid for by spending cuts, and urged the Conservative and Labour parties to “level” with voters before polling day.
Chinese stocks rallied after a cut in Chinese bank reserve requirements, releasing about a trillian yuan for lending (nearly £111bn). The Shanghai Composite rose 3%, after hitting a four-year low on Monday, and Hong Kong’s Hang Seng was up 2% while Japan’s Nikkei was little changed. Investors have been selling Chinese equities for months, amid worries about the sluggish economy and the country’s property crisis.
The European Central Bank is meeting today and will announce its interest rate decision at lunchtime. It is not expected to change its main interest rate of 4.5%. Minutes from the December meeting showed policymakers were pushing back on aggressive market expectations for rate cuts, and ECB president Christine Lagarde is likely to face questions on their timing during the press conference.
Last week, she said the central bank could cut rates in the summer, during an interview with Bloomberg at the World Economic Forum in Davos.
The Agenda
9am GMT: Germany Ifo business confidence for January
11am GMT: UK CBI retail sales survey for January
1.15pm GMT: ECB interest rate decision (forecast: no change)
1.30pm GMT: US Durable goods for December (forecast: 1.1%)
1.30pm GMT: US GDP for Q4 (forecast: 2%)
1.45pm GMT: ECB press conference
3pm GMT: US New home sales for December
Updated
