Closing post
Time for a recap….
The Bank of England has rejected claims that its QE bond-buying programme is to blame for inflation soaring over 10%.
In a session with the Treasury Committee, policymakers explained to MPs that it was the supply chain problems caused by the Covid-19 pandemic, and then the surge in food and energy prices after the Ukraine invasion, that drove inflation to its highest in decades.
The BoE also pushed back against criticism that the unwinding of QE, called quantitative tightening or QT, could be destabilising markets.
Deputy governor Sir Dave Ramsden liked QT to ‘descending a mountain’, rather than decommissioning a nuclear sub, arguing that the Bank wanted to be able to climb future peaks by doing more QE if necessary.
There are also signs today that higher interest rates are hitting the housing market.
The number of homes being repossessed and homeowners in arrears jumped in the first quarter of this year.
That included a 50% increase in the number of homeowner mortgaged properties being repossessed in the first quarter of 2023, compared with the previous three months, UK Finance said.
In other news:
Take note, younger readers. Children’s income in the UK has risen by 11% in the last year, ahead of inflation and rather faster than average wages.
The figures on children’s pocket money and earnings – part of what was claimed to be the most in-depth study of the UK’s “youth economy” – also found that six-year-olds had enjoyed the biggest “pay rise”, in the form of a 34% annual increase.
Meanwhile, average earnings from babysitting leapt 24% in a year to top £20, while some savvy children were able to prise cash out of their parents for “jobs” such as making someone a coffee or smiling for a family photo.
The data was based on the finances of more than 125,000 children and was collected from user activity on the NatWest Rooster Money pocket money app and prepaid debit card.
Whether it was down to parents deciding to shield their children’s finances from the worst of the cost of living crisis, or an improvement in youngsters’ ability to negotiate a better financial deal and monetise small tasks, the study – based on data collected between 1 March 2022 and 28 February this year – suggested that British kids have fared a lot better financially than many adults.
More here….
Shareholders in Next, the high street and online retailer, have launched something of a revolt today.
Around 20% of shares were cast against chairman Michael Roney being reelected, at today’s AGM.
Advisory group PIRC had recommended investors should vote against Roney, because he also chairs Grafton Group, the builders merchants.
PIRC argued:
“It is considered that a chair cannot effectively represent two corporate cultures.
“The possibility of having to commit additional time to the role in times of crisis is ever present.
There was also a protest against Next’s pay policies, with 16% opposing the remuneration report.
Updated
The age of huge UK property price increases may be coming to an end, according to a senior economist at the Office for Budget Responsibility.
David Miles, one of three members of the UK budget watchdog’s top committee, argues that slowing population growth slows and higher interest rates will weigh on house prices.
Miles told a speech at an Economic Statistics Centre of Excellence conference in London that:
“Those forces driving them up are going to be much weaker, I suspect, in the next 40 years than they have been in the past 40 years.
“If anything, this unusual age of massive rises of house prices may be nearing an end.”
The boss of Burberry has complained that the UK is at a “competitive disadvantage for global shoppers” which has held back sales in its home market after the government ditched a VAT tax break for tourists.
Jonathan Akeroyd, the chief executive of the luxury British brand best known for its signature check and raincoats, said sales to tourists had risen 19% in London in the three months to April but they had tripled in Paris and were up 43% in Milan.
He said total sales had risen 28% in the UK for the year as locals and visitors from Europe from the US, Asia and the Middle East spent more, but he noted a big surge in UK tourists spending in Europe, “which is quite telling”.
Akeroyd said:
“We are disappointed the government chose to scrap the VAT retail export scheme.
It leaves the UK at a competitive disadvantage for global shoppers. We are celebrating the fact that we are a British luxury brand and very hopeful that when tourists come to the UK they are coming to Burberry. We are really hoping this [tax change] can be revisited.”
More here:
This echoes a similar warning from the chairman of Burberry last month:
The pound has sagged to its lowest level since late April today, down three-quarters of a cent at $1.241.
Craig Erlam, senior market analyst at OANDA, says the markets seem ‘unmoved’ by BoE governor Andrew Bailey’s warning yesterday about a ‘wage-price spiral’ gripping the UK.
We heard from some Bank of England policymakers earlier as they were grilled by the Treasury Select Committee on quantitative tightening, among other things naturally. Bailey and colleagues were quite consistent in their messaging and it’s probably what the Governor said on Wednesday that raised a few eyebrows as he insinuated that the UK could be seeing a wage-price spiral which could complicate returning inflation to 2%.
The members were still confident in their assessment despite repeated reminders of apparent past failures and markets seem unconcerned about the supposed wage-price spiral, continuing to price in one, maybe two, hikes this year. Things should become much clearer very soon.
The increase in the number of households falling into early arrears on their mortgages “should not be a cause for panic”, says Sonia Fernandes, principal, mortgages at UK Finance.
Writing in a blog on UK Finance’s website, Fernandes explains:
“Lenders are proactively supporting borrowers who are worried about their finances.
“Over the last year, lenders have helped nearly 200,000 borrowers who cannot meet their full mortgage payment by providing tailored forbearance.”
Fernandes adds that borrowers can seek help as soon as they needed it:
“Tailored forbearance means that a lender will offer support focused on the borrower’s individual circumstances and what they can afford to pay.
“Examples of the support available includes a period of reduced payments, a period of zero payments or a temporary switch to interest-only. Importantly borrowers will never be asked to pay more than they can afford.
“There is no need for a borrower to wait until they have missed a payment to seek help. Over the last year, lenders proactively supported two million borrowers with financial difficulty assistance, including budgeting support, access to debt advice and breathing space.”
Updated
Over in the US, the number of new claims for jobless support has fallen.
There were 242,000 ‘initial claims’ filed across the US last week, a drop of 22,000, suggesting America’s labour market is holding up relatively well.
The fall comes after fraudulent claims in at least one state boosted the numbers in previous weeks, Bloomberg reports, adding:
On an unadjusted basis, claims decreased by the most in two months, to 215,810, largely due to a drop in Massachusetts.
Some economists have been wary about drawing strong conclusions from the data amid reports that fraudulent claims have been behind the recent upward trend in filings.
🇺🇸Initial claims for #unemployment fell back in week-ended May 13 (reflecting big downward move in MA after fraudulent claims boost over last weeks)
— Gregory Daco (@GregDaco) May 18, 2023
✅Claims: 242k (-22k)
✅4-wk average: 244k (-1k)
🟡Claims moderately higher than in Jan, but not rising rapidly pic.twitter.com/h4oCTnE3T1
UK government: Japanese firms commit £17.7bn investment
Over in Tokyo, UK prime minister Rishi Sunak has announced what sounds like a hefty jump in Japanese investment into the UK.
Japanese businesses have commited “almost £18 billion investment in the UK”, the government says, in a handily timed announcement as Sunak hosts a business reception in Tokyo.
Much of this planned investment will be in green energy, but some will only arrive over the next decade.
Japanese trading house Marubeni is planning to sign a memorandum of understanding with the UK, which envisages approximately £10bn of investment in the UK with its partners over the next 10 years. This will include offshore wind projects in Scotland and green hydrogen projects in Wales and Scotland.
There’s also £4bn from Sumitomo Corporation, to expand offshore wind projects off the coasts of Suffolk and Norfolk.
Political leaders do like to coral such deals together into a nice round number to mark such visits or events. Earlier this week, France hailed €13bn worth of future investments pledged by international companies at its Choose France event.
Today, Sunak says:
These new investments are a massive vote of confidence in the UK’s dynamic economy, from some of Japan’s top firms.
🇬🇧 British business🤝Japanese investment 🇯🇵
— Rishi Sunak (@RishiSunak) May 18, 2023
I'm delighted to announce a record £17.7 billion of Japanese investment into the UK, creating jobs and growing our economy.
The UK certainly needs a boost of spending. Business investment is still 1.4% below its pre-pandemic levels, last week’s GDP report showed.
However, today’s announcement does not include new investment from Japan’s car industry, at a time when the UK auto sector is gripped by concerns over Brexit trade rules.
Sunak, who is in Japan for the G7 meeting of world leaders, was asked about calls to delay new rules of origin regulations, to help the British car industry.
Speaking to broadcasters on board the JS Izumo aircraft carrier in the Yokosuka naval base near Tokyo, he said:
“It’s something that car manufacturers across Europe, not just in the UK, have raised as a concern.
“We are engaged in a dialog with the EU about how we might address those concerns when it comes to auto manufacturing more generally.”
The investment flow between Japan and the UK isn’t just one way, though.
UK company Octopus Energy is to invest £1.5bn in the Asia-Pacific energy market by 2027, to speed up the shift to “a cleaner, smarter energy system”.
Updated
The jump in people in arrears with their mortgage, or being reposessed, shows that rising borrowing costs and rampant inflation are battering household budgets.
Myron Jobson, senior personal finance analyst at interactive investor, explains:
“The golden era of low mortgage rates has come to an end following a rapid rise in interest rates to combat red hot and sticky inflation. Almost two million mortgage holders on tracker rates have felt the brunt of each of the 12 consecutive base rate hikes as they came. Meanwhile, the uptick in mortgage rates is a kick in the teeth for mortgage holders who have come off a fixed rate deal in recent history.
“There could unfortunately be a new wave of borrowers falling behind on repayments in the near future, as there are around 700,000 borrowers with fixed rate mortgages - the majority of which were set at interest rates below 2% - maturing in the second half of the year alone. However, the current low level of unemployment could slow the rise in mortgage arrears and repossessions.
“The fact that buy-to-let mortgages in arrears are increasing at a faster rate than residential mortgages shows that landlords have not been immune to the cost-of-living squeeze on budgets, Jobson points out:
Recent research by the ONS revealed that tenants are 4.4 times as likely to be experiencing financial hardship compared to homeowners. Missed or delayed rent payments could leave many smaller landlords in a financially precarious position. This cohort may have also seen their profit margins recede dramatically after coming off a fixed rate mortgage because of heightened mortgage costs.
“Those struggling to keep up with mortgage repayments should contact their lender as their first port of call to explore their options and support available. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all of your options.”
Sky News is reporting that the online party goods supplier founded by the Princess of Wales’s parents, Carole and Michael Middleton, has been sold after it failed to avoid collapsing into administration.
Party Pieces Holdings, launched by the Middletons in 1987, was bought on Thursday by James Sinclair, an entrepreneur, Sky says.
They add:
Sources said the sale had been implemented through a pre-pack administration, meaning it had appointed insolvency practitioners before being sold without some of its liabilities.
It was unclear what price Mr Sinclair’s company, Teddy Tastic Bear Co Ltd, had paid or how big the liabilities were that had been left behind.
Exclusive: Party Pieces, the party supplies business set up in the 1980s by the Princess of Wales’s parents, Carole and Michael Middleton, has been sold to James Sinclair, an entrepreneur, after collapsing into administration earlier today. https://t.co/q8sG6jleU9
— Mark Kleinman (@MarkKleinmanSky) May 18, 2023
Across the economy, company insolvencies in England and Wales fell by 15% in April, after rising to a three-year high in March, with companies high by higher interest rates and rising costs.
Jump in mortgage arrears and homes being repossessed
The number of UK homes being repossessed and homeowners in arrears jumped in the first quarter of this year, according to figures from a trade association.
There was a 50% increase in the number of homeowner mortgaged properties being repossessed in the first quarter of 2023, compared with the previous three months, UK Finance has reported today.
Some 750 homeowner mortgaged properties were taken into possession in the first quarter of 2023.
UK Finance said the increase in repossessions is from a very low base, as cases make their way through the courts.
More households fell behind with their mortgage payments too: there were 76,630 homeowner mortgages in arrears of at least 2.5% of their outstanding balance in the first quarter of 2023, 2% more than in the previous quarter.
The data also shows a rise in buy-to-let mortgages have fallen into arrears, as landlords are hit by rising interest rates rise.
There were 7,030 buy-to-let mortgages where landlords were in arrears by 2.5% or more of the outstanding balance at the end of March, UK Finance reports, an increase of 16% compared to the previous quarter.
Also, 410 buy-to-let mortgaged properties were taken into possession in the first quarter of 2023, 28 per cent greater than in the previous quarter.
Almost a thousand more buy-to-let mortgages used by UK landlords have fallen into arrears as interest rates rise https://t.co/EWNDNWdbR9
— Bloomberg (@business) May 18, 2023
Updated
EasyJet says rivals are pricing fares "way out of proportion"
Away from the Bank of England, EasyJet’s chief executive Johan Lundgren said rival airlines were setting fares “way out of proportion”.
Lundgren argues that demand means his own carrier could be set for record summer profits, our transport correspondent Gwyn Topham reports.
Speaking after announcing narrowing winter losses this morning (see earlier post), Lundgren said analyst consensus suggested that easyJet would have its best ever summer financially.
He said:
“While it’s still early on, we’ve only sold 36% of the Q4 capacity, it’s very encouraging.”
Air fares will be significantly higher this year, delighting some airline accountants, but Lundgren said easyJet would still be “providing exceptional value.”
He said that the average easyJet fare for in the summer months was still £75, adding:
“There are a number of legacy and full-service airlines completely pricing themselves way out of any proportion, which is giving up the opportunity to really demonstrate the value proposition that we have”.
He cited research that showed 45% of people now said they were more likely to fly with a low-cost airline than before the pandemic.
He said the airline had been operating well despite French air traffic strikes, with capacity already not far off summer peak, but after last year’s cancellations and disruption due to staffing issues, ““We are absolutely not complacent.”
EasyJet is opening a base at Birmingham, its first new UK base in a decade, and said it will have a million more seats overall on UK flights this summer than in 2019.
All these metaphors (comparing QT to climbing down a mountain) and explanations about the future direction of QE/QT are confusing everyone and blur the Bank’s message (again), warns Professor Costas Milas of University of Liverpool’s management school.
He tells us that the facts are as follows:
The MPC’s revised forecasts for higher inflation and output underestimate (in my view) the strength of monetary tightening already in place. Divisia money has contracted to a historically low of -3.2% in 2023Q1.
This should imply lower inflation and lower GDP growth than currently predicted by the MPC (as I discuss in my co-authored European Journal of Finance paper:)
Nevertheless, there is an alternative (but not very flattering) explanation. Current monetary tightening could be less effective than previously thought because the MPC (sadly) lacks credibility (as evidenced by household expectations of inflation that are consistently higher than those of the MPC).
In other words, the MPC will be forced to tighten much more than what it has done in the past in order to hit the 2% inflation target…
Uk 10-year bond yields highest since October
UK benchmark borrowing costs have hit the highest level since the aftermath of the mini-budget.
The yield, or interest rate, on 10-year UK gilts has risen to 3.915% today, the highest since last October.
That follows the suggestion from the Bank of England this morning that its quantitative easing programme could be higher next year than in 2023, implying more sales of bonds back to the market.
Bond yields move inversely to prices.
Updated
BoE denies causing surge in house prices
The Bank of England then denies that its quantitative easing programme has fuelled a surge in asset price inflation.
Governor Andew Bailey tells the Treasury Committee that real asset prices have not surged under QE in the way that is often reported.
Real equity prices certainly haven’t, Bailey says.
Actually, the period in which the house price to income ratio rose most was the period of 10 years before 2007.
That was the period when it rose most substantially. It haven’t done the same thing since then.
Ramsden: Gilt market turmoil after mini-budget may not have abated
Bank of England deputy governor Dave Ramsden then tells MPs that investors think Britain has a bigger inflation problem than the United States.
That, he tells the Treasury Committee, explains why British government bond yields have risen by more than their US counterparts.
Asked why the spread between interest rates on UK gilts and German bunds, and US Treasury bills, has widened, Ramsden explains:
“My take on this is that there is more of a concern about persistence of inflation (in Britain) and therefore an expectation that our short-term (interest) rate - set by us - will be higher. That feeds through into yields.”
Ramsden also told the Treasury Committee that expectations of US monetary policy have also changed, with the markets starting to anticipate possible cuts by the US Federal Reserve due to problems in the US banking sector.
Ramsden also reminds Conservative MP Andrea Leadsom that high UK borrowing is amother important factor influencing bond yields. The UK’s debt management office is issuing £243bn of debt this year, up from £125bn, he says, due to the fiscal interventions following the pandemic.
Thirdly, Ramsden suggests that the chaos following last September’s mini-budget is still a factor, given the turmoil in the liability driven investment (LDI) pension market caused by the jump in bond yields.
He says:
The third factor which may explain some of those yield differentials is that there may be a bit of a risk premium, or liquidity premium, following on from the LDI episode.
It may be that some of the pension funds and the like have not come back as fully into the market or they’re still adjusting, so you don’t have the same demand for some of those longer term gilts as you had in the past.
That means that the price of them may be lower than it might otherwise be, so the yield is higher.
Updated
Q: If monetary policy acts with a lag, as you argue, why is the Bank continuing to raise interest rates when inflation is expected to fall?
That’s a question we spend hours discussing, Ben Broadbent smiles, and there’s a “range of views”.
The issue is how long the ‘second-round effects’ of inflation, on wages and prices, lingers, as an interest rise today will have little impact by the end of 2023.
These rate increases are “causing more pain to people out there”, says John Baron MP (who had just been arguing that rates should have been raised faster).
Broadbent explains that the Bank’s forecasts are conditional on the markets’ interest rate forecasts. So if rates were cut further, inflation would be higher….
Governor Andrew Bailey says the Bank shares Baron’s concerns that inflation could be stickier than hoped, which is one reason it raised interest rates again this month, to 4.5%.
The committee will return to this issue at another session next week.
John Baron MP shoots back that central banks, such as the Bank of England, were behind the curve in waking up to rising inflation.
Had the Bank been more proactive, there might be less pain for people today, Baron suggests.
Q: A month before Ukraine, inflation was on a sharp trajectory higher at 6%, interest rates were 0.5%. Wasn’t that a woeful neglect of duty?
Deputy governor Ben Broadbent point out that interest rates were low for a decade without causing a rise in inflation.
There’s a distinction between causing an inflation shock, and being slow to respond to one, Broadbent insists, pointing to the enormous economic shocks from the pandemic and the Ukraine war.
He explains to the committee how the pandemic led to a shift in demand for goods, globally, pushing up prices.
The key question was how long that would last for – the Bank’s MPC judged that if this demand, and disruption, was caused by the pandemic, then the end of the pandemic would bring it down.
That wasn’t a terrible judgement, Broadbent insists, pointing out that the price of computer chips and lumber has dropped as expected. However, the China lockdown did last longer than expected.
Broadbent explains:
You always have to look forward and ask yourself, how long will this continue?
Baron isn’t convinced, saying it was “quite evident” that inflation, even before Ukraine, would not fall away significantly.
Broadbent disputes it, citing consensus forecasts at the time were that inflation would come down.
“Ah, consensus forecasts…”, says Baron dismissively.
Broadbent point out that these 30 forecasts are from people who spend their lifetime doing this work.
BoE denies QE to blame for UK double-digit inflation
Back at Threadneedle Street, the Bank of England is rejecting claims that its quantitative easing bond-buying programme is responsible for the UK’s cost of living crisis.
Conservative MP John Baron asks the BoE top brass about the link between QE and the UK’s bout of double-digit inflation.
Q: You announced a large expansion of QE in 2020. Was it simply a coincidence that inflation rose from 0.3% in 2020 when you launched your final tranche of QE to over 5% by the end of 2021?
Governor Andrew Bailey points out that the UK economy has been hit by several shocks, including the Covid-19 supply chain shock and the Ukraine war. They both drove up inflation, and aren’t to do with QE or QT.
Bailey tells the Treasury Committee that the UK has not seen a strong recovery in demand since the pandemic, which indicates that QE is not the cause of inflation.
Baron points out that UK inflation was running at 6% before the invasion of Ukraine in February 2022, so “we were already on a steep trajectory”.
Bailey agrees, but says the Bank was weighing up whether the inflationary shock from Covid-19 would be transitory, or not.
If the only shock that the world had experienced was that one [the Covid-19 supply chain disruption] then I think the evidence now suggests it had a limited time period.
Unfortunately, of course, Ukraine came along, and there was no gap between these shocks.
As such, Bailey says we can’t use the word “transitory” to describe these shocks.
Deputy governor Ben Broadbent points out that the UK had 10 years of QE without an inflation problem, or strong money growth, as did other regions such as the US and the eurozone [he outlined this in a detailed speech last month].
Deputy governor Sir Dave Ramsden tells MPs that the Bank launched more QE after the pandemic began, because it feared the economy would suffer ‘permanent scarring’.
Ramsden voted to end QE early, in September 2021, as he grew more concerned about inflationary risks.
But stopping QE early would have been a surprise, potentially jolting markets.
And cutting QE early, by £30bn, might have taken just 0.2 or 0.3 percentage points off Uk inflation.
Ben Broadbent suggests that market data indicates that the QE conducted in June and November 2021 may have added half a percentage point to UK inflation.
The idea that this is the cause of double-digit [inflation] is not well-supported.
Updated
Lloyds suspends AGM livestream amid protests
Lloyds Banking Group has been forced to suspend the livestream of its AGM in Glasgow twice within the first 10 minutes, after climate protesters interrupted chairman Robin Budenberg’s opening remarks.
It’s quite hard to hear what the protesters are saying, since they haven’t been given microphones and Lloyds keeps cutting out the feed, but it’s clear that they’re hitting out at the bank’s contribution to the climate crisis, through certain financial services.
Budenberg has urged them to wait until the Q&A segment, but to no avail, my colleague Kalyeena Makortoff reports.
Climate protesters have also staged a demonstration outside of the SEC Armadillo in Glasgow, alongside staff union Unite - which is separately concerned about the company’s decision to force staff to spend at least two days a week in-office.
Anyone working compressed hours will also have to negotiate new working patterns with managers.
Demo outside the Lloyd's AGM Glasgow. pic.twitter.com/JU0a313kRX
— Jules 'navet congelé' Again (@PalmersJules) May 18, 2023
Unite has previously said the move will do “immediate and tangible damage” to work-life balance and family budgets.
Unite members protest outside the Lloyds Banking Group AGM over management attack on vulnerable staff. New working hours scheme disproportionally impacts women, carers and the disabled working at Lloyds Banking Group.#workinghours #compressedhours @LBGplc pic.twitter.com/PfYtBmnZAi
— UniteFinanceSector (@Unite_Finance) May 18, 2023
Interesting from Bank of England deputy governor Dave Ramsden speaking to @CommonsTreasury just now. He reckons that the next year of quantitative tightening is unlikely to be less than the current £80 billion a year, and may be a bit more. MPC decides in September.
— David Milliken (@david_milliken) May 18, 2023
That follows Bank of England deputy governor Ben Broadbent, who said £80 billion QT was decided last year because of advice that £100 billion might disturb markets.
— David Milliken (@david_milliken) May 18, 2023
These figures include maturing gilts - so actual gilt sales (which affect markets more) will vary each year.
Ramsden: QT is like descending a mountain, no decommissioning a nuclear sub
Q: We’ve been told that quantitative tightening is similar to decommissioning a nuclear submarine, so it has to be done extremely carefully because the potential for things to go wrong is enormous….
Deputy governor Ben Broadbent agrees that there are risks, but the Bank has taken them into account. It’s important to avoid selling bonds into illiquid markets, and to conduct QT in a very predictable, very gradual way, he explains.
He tells the Treasury committee that the start of QT was delayed after the crisis in the LDI pensions market last autumn, for this reason.
Broadbent says:
It’s not the case that on the days we’ve sold these gilts there’s been any sort of disruption, and of course we watch for those things very closely.
Deputy governor Sir Dave Ramsden weighs in too, disputing the ‘nuclear submarine decommissioning’ angle.
He tells the MPs that the bank still wants QE to be a monetary policy tool in future.
Ramsden reminds the committee that he worked in the Treasury back in 2009, when then-governor Sir Mervyn King got in touch to say the Bank wanted to start quantitative easing.
It was always seen that QE would not go on for ever, there would always be some QT, he explains.
He compares the bond-buying programme to mountaineering, saying the Bank’s Asset Purchase Facility has grown to a size where the Bank reached “the top of the mountain” (the APF was £895bn at its peak, but is now shrinking under QT).
Ramsden says:
You have to be careful going back down the other side. Because you want to be in a position that you can climb another mountain afterwards, if you have to.
So you always have to be very careful on the descent.
A lot of accidents happen on the descent of mountains, Ramsden points out.
Treasury Committee chair Harriett Baldwin shoots back out that you also run the risk of starting an avalanche….
Updated
Bailey insists QT isn't destabilising markets
Q: Is the Bank of England certain that QT is not having any impact on the market? We’ve had a bank failure since you started… Is it having any inflationary or disinflationary pressures?
Governor Andrew Bailey says he doesn’t see any connection between quantitative tightening and the events in the banking sector.
As proof, he points out that the UK banking system has not experienced stress in recent months – the failure of Silicon Valley UK bank was a “very idiosyncratic issue”, because it was the subsidiary of a bank that failed in the US.
Bailey then explains that UK banks hold £1.5 trillion of “high quality liquid assets”, of which £900bn is reserves at the Bank of England. The BoE’s QT programme should reduce those reserves, with banks looking to hold other high quality liquid assets instead.
But that rebalancing should be “entirely manageable and entirely natural”, he pledges….
Deputy governor Ben Broadbent reiterates that QT is already priced into the financial markets, and those asset price levels are used in the Bank’s economic forecasts.
Broadbent says the Bank can’t tell exactly what impact QT is having, because it has already announced it (so it’s priced in…). But the Bank’s best bet is that it is having a fairly modest impact, maybe just 0.1 percentage point on inflation.
Ramsden: QT could go up a little bit
Q: How might the size of the Bank’s QT programme change in future years?
Deputy governor Sir Dave Ramsden says the Bank won’t definitely plump for another £80bn reduction in its bond holdings next year.
That’s because it would mean lower ‘active sales’ of bonds, given that more of the Bank’s stock of gilts expires next year.
Ramsden says bank analysis will determine the pace of QT:
So there’s the potential for us to go up a little bit. I don’t see us going down, given the experience of the first year.
Q: Why did the Bank set a target of selling £80bn of its stock of government bonds in the first year of QT?
Deputy governor Ben Broadbent says there has to be a number (!), before explaining that ‘active sales of £10bn’ a quarter, on top of the £10bn of bonds which naturally mature each quarter, felt about right.
He reveals that the Bank’s market experts warned that anything over £100bn might disturb market liquidity.
The important point, Broadbent explains, is that the markets have a number for QT which is ‘priced in’ to bond prices (and thus the yields, or interest rate, on those bonds).
On the days of the Bank’s QT auctions, there’s been no detectible moves in bond prices, he insists.
Updated
Deputy governor Sir Dave Ramsden denies that the Bank of England is “flying blind” with its QT programme.
Treasury Committee chair Harriett Baldwin replies that the Bank is flying ‘slowly’, and reminds the Bank that the launch of QT was disrupted last autumn (due to the market chaos created by the mini-budget).
Q: You announced the flight take-off, and then almost immediately had to land the plane when you started…
Governor (captain?) Andrew Bailey points out that the Bank hasn’t actually begun – so it delayed the takeoff of QT, rather than returning to the runway.
Bailey insists it was correct not to launch quantitative tightening operations in disturbed market conditions last autumn (the Bank waited until the start of November).
And he denies that the Bank contributed to the disturbed markets, with its plan to sell some of its QT bonds back to investors.
Bank of England governor Andrew Bailey tells the Treasury committee, "QT is not an active monetary policy tool," that should be left to Bank Rate. pic.twitter.com/R7pFEvspcC
— Damian Pudner (@Broomscroft) May 18, 2023
Bailey: BoE's balance sheet won't return to pre-crisis levels
Bank of England governor Andrew Bailey tells MPs that he does not believe the Bank’s balance sheet will return to its levels before the financial crisis, even once it has conducted its quantitative tightening (QT) programme.
Treasury Committee chair Harriett Baldwin asks Bailey why the BoE decided last September to embark on QT – the process of cutting its holdings of government bonds bought since the 2008 crisis.
[Reminder: the BoE had bought almost £900bn of UK gilts, in one programme launched after the collapse of Lehman Brothers, and a second after the pandemic].
Bailey explains that the Bank wants to adjust its balance sheet so that it has headroom to do whatever it might need to do in the future. It does not want its balance sheet to simply get larger after every economic shock.
But, the governor insists he does not “envisage” the BoE’s balance sheet returning to where it was before the financial crisis.
The key reason is that QE has created a stock of cash reserves owned by commercial banks which sits on the liability side of the BoE’s balance sheet.
There is “no question” that the banks will need to hold larger cash reserves to ensure prudential stability, and the UK is not alone in this, Bailey explains.
Updated
MPs grill Bank of England over QT
Parliament’s Treasury Committee are starting a hearing with senior Bank of England officials now, at the Bank.
MPs will grill BoE governor Andrew Bailey, and deputy governors Ben Broadbent and Dave Ramsden.
The committee says
Continuing its inquiry into quantitative tightening, the cross-party Committee of MPs will examine the impact of tightening on the economy, the role of quantitative easing in the outbreak of double-digit inflation, and whether tightening will bring inflation down.
Updated
The government’s levelling-up agenda has taken a knock, with new growth figures showing that London was the fastest-growing part of the English economy last summer.
London’s GDP grew by 0.9% in the third quarter of 2022, the ONS reports, making it the region with the largest positive quarter-on-quarter growth in Q3.
The largest negative growth in England was in the East Midlands, where GDP shrank by 1.6%.
We’ve published GDP, UK regions and countries: July to September 2022.
— Office for National Statistics (ONS) (@ONS) May 18, 2023
➡️ https://t.co/CslIPNOlNc
Overall, the UK economy contracted by 0.1% in July-September.
Wales’s economy struggled, with GDP falling by 2% in the quarter, while Scotland contracted by 0.3%. Growth in England and Northern Ireland was flat.
North East England’s GDP grew by 0.7% in Q3 2022, with the South West expanding by 0.4%. All other English regions shrank.
Inflationary pressures may be easing, according to the latest realtime data from the Office for National Statistics.
The ONS found that 18% of trading businesses expect to raise the prices of goods or services they sell in June, down from 23% for May.
More than a third (35%) of trading businesses reported an increase in the prices of goods or services bought in April compared with March; down from 38% when comparing March with February.
35% of trading businesses reported a rise in the prices of goods or services bought in April 2023 compared with March. 🚚
— Office for National Statistics (ONS) (@ONS) May 18, 2023
This has dropped since Sept 2022 and is the lowest percentage reported since the question was updated in March 2022. pic.twitter.com/lzUSpjyWXZ
18% of businesses expect to raise the prices of goods or services they sell in June 2023 (down from 23% for May).
— Office for National Statistics (ONS) (@ONS) May 18, 2023
When asked what, if anything, was causing them to consider raising prices 31% of businesses said energy prices was the top reason. ⚡️ pic.twitter.com/WjOJbVwW9P
Ovo Energy and Good Energy have been ordered to pay £4m after overcharging thousands of households on their gas and electricity bills by breaching the government’s energy price cap.
The affected households will receive a combined total of £2.7m from the two companies while an extra £1.25m will go to vulnerable customers in the UK under Ofgem’s voluntary redress fund.
The energy regulator for Great Britain, Ofgem, found that Ovo overcharged almost 11,000 customers by nearly £1.5m, or an average of £181 for each household, by failing to apply the government’s energy price guarantee which sets a maximum rate for every unit of energy used between last October and March.
Good Energy overcharged just under 7,000 households a total of £391,650, or about £109 on their energy bills.
The suppliers will repay the amounts to their customers, and have been ordered to make extra compensation payments for the “totally unacceptable” breach to the Ofgem fund.
Good Energy will pay £1.25m to the redress fund “for the inadequate systems, processes and repeated inaccurate reporting of information” over an extended period, the regulator said.
More here:
Luxury carmaker Aston Martin has secured a £234m investment from China’s automotive manufacture Geely, sending its shares soaring this morning.
Geely is buying 42m shares from chairman Lawrence Stroll’s Yew Tree Consortium at 335p each, and will subscribe to buy another 28m at the same price.
This will give Geely a 17% stake, making it the company’s third-largest shareholder behind Yew Tree (with 21%) and Saudi Arabia’s Public Investment Fund (with 18%).
Aston Martin says Geely’s investment is part of a “new relationship agreement” to suport its growth plan.
Stroll says:
“This announcement is a further significant step towards delivering our ambition for Aston Martin. Geely Holding, who initially became a shareholder last year, sees tremendous potential for Aston Martin’s long-term growth and success.
They offer us a deep understanding of the key strategic growth market that China represents, as well as the opportunity to access their range of technologies and components. Geely share our vision for Aston Martin and want to be a more significant shareholder.
Aston Martin’s shares have jumped 12% in early trading, the top FTSE 250 riser, to 260p.
Geely Holding increases its stake in Aston Martin to circa 17%.
— Seyed Ali Hosseini (@AliaghaHosseini) May 18, 2023
As a result, Geely Holding will become the third largest shareholder in the automotive company.#f1 #formula1 #astonmartin #geely pic.twitter.com/bTKoyXOExz
Geely’s investment comes at an important time for the car industry, as pressure mounts to reform the Brexit trade deal, points out interactive investor’s head of investment Victoria Scholar:
Aston Martin is a glamorous automaker with a chequered past having survived several bankruptcies. But James Bond’s favourite carmaker has revved back into the fast lane with a pick-up in sentiment spearheading investor returns on the stock.
Demand for luxury goods including cars has proven to be extremely resilient amid the cost-of-living crisis and a growing tranche of ultra-high net worth consumers. Earlier this month Aston Martin reported a narrower pre-tax loss in the first quarter of £74m versus £112m year-on-year.
This investment is a welcome developed at a time when there are growing concerns about the Brexit trade deal for UK auto manufacturing. Stellantis this week sounded the alarm over potential tariffs on exports to the EU. UK auto manufacturing has come under significant pressure since the referendum with annual car manufacturing more than halving between 2016 and 2022.”
Updated
Water industry admits it should have acted quicker to fix sewage problems
Untreated sewage pollution of rivers should have been managed sooner, the water industry chair said as she apologised for industry failures.
Water UK chair Ruth Kelly told Times Radio that companies did not monitor sewage outflows until recently, with only 10% overseen in 2015.
Speaking after the water industry apologised for its failings, and announced a £10bn infrastructure plan, Kelly said:
“We should have acted quicker. We should have acted faster. We should have acted to prevent the untreated water sewage going into our rivers and onto our beaches.
“We have listened, we get it and we have come today with a plan to put this right.”
Asked whether the average executive pay of £1.1m per year could be justified, Kelly poined out that 50% of CEOs would forgo bonuses entirely.
She said:
“Shareholders have decided they wanted to pay for some of the brightest and best people to lead the water company industry.”
Kelly also told BBC Breakfast that the UK public will face “modest upward pressure” on water bills for up to a century to pay for the clean up of sewage from rivers.
Musician and environmental campaigner Feargal Sharkey has said the water companies’ apology and sewers modernisation plan was “nothing to celebrate” as he said customers were left having to “pay them a second time” to clean up the country’s rivers.
The former Undertones frontman told BBC Radio 4’s Today programme:
“What I’m actually hearing is no apology for the fact we’ve paid them for a service we haven’t got.
“They are now suggesting that we should pay them a second time for a service we haven’t had.
BT’s job cuts also show the impact of artificial intelligence on the economy.
CEO Philip Jansen says BT will use AI to improve customer service.
Telecoms giant BT becomes the first (as far as I can recall) big firm to reveal the scale of job losses as a result of AI. Says 10,000 job losses come from automation and digitisation. Boss Philip Jansen says: "We will be a huge beneficiary of AI" - though not for axed workers.
— Graham Hiscott (@Grahamhiscott) May 18, 2023
Jansen also said the job cut target announced this morning was the culmination of an existing programme, which includes 30,000 contractors employed to build its fibre network in the next few years.
He told reporters:
“It’s a rolling programme, but it’s a five to seven year landing zone.”
Updated
A 'big chunk' of BT's job cuts to be in UK
Many of BT’s planned job cuts will fall on its UK workforce.
CEO Philip Jansen told a call this morning that ‘a big chunk’ will be in the UK, on the ‘build side’ of the company
Victoria Scholar, head of investment at interactive investor, says:
“BT is planning to cut 55,000 jobs by 2030 as it looks to slim down its operations and reduce its cost base. ‘A big chunk of job cuts will be in the UK’, said BT’s CEO Philip Jansen.
It is targeting £3bn in cost savings by 2025.
Full-year core earnings rose by 5% to £7.9 billion, in line with analysts’ expectations but BT reported disappointing free cashflow down 5% to £1.3 billion and pre-tax profits slumped 12% to £1.7 billion.
Telecoms seems to be awash with job cuts at the moment with Vodafone and BT both reducing the size of their workforces. Both have been struggling with the pressures of inflation, most notably from energy. BT is focusing on digitisation and integrating AI, a shift which is likely to require fewer workers. Last year the telecoms operator was caught up in a bitter dispute with workers over wages amid the cost-of-living crisis, resulting in BT’s first national strike for 35 years.
Shares in BT have fallen sharply today by over 7% and are languishing at the bottom of the FTSE 100, but the stock remains higher by just below 20% year-to-date.”
Updated
EasyJet narrows losses as customers 'safeguard' holidays
Elsewhere this morning, easyJet has shrunk its losses as customers look to ‘safeguard’ their holidays in the cost of living squeeze.
EasyJet reported a pre-tax loss of £415m for the six months to the end of March, an improvement on the £557m loss a year earlier.
It carried 33.1 million passengers over the six months between October and March, a 41% increase on the 23.4m a year earlier.
EasyJet chief executive Johan Lundgren said the airline enters the summer period “with confidence”.
Lundgren explains:
Recent research has shown that travel is the number one priority for household discretionary spend with customers safeguarding their holidays and increasingly opting for low cost airlines and brands which provide great value.
“easyJet holidays expects to deliver full year profits of more than £80 million as it continues its rapid growth in the UK alongside its entry into the European package holiday market.
From summer it will start selling holidays in Switzerland which will be the first of a number of planned new European markets.
Shares in easyJet are largely unmoved, though – up just 0.15% this morning at 521p.
Chris Beauchamp, chief market analyst at IG Group, says today’s update hasn’t provided the magic to drive easyJet’s shares higher.
The tone is upbeat, but now investors will want to see the airline delivering on these rosy assumptions. Given still-high inflation, some scepticism probably isn’t entirely unwarranted.
National Grid profits jump amid green energy delays
In the energy sector, National Grid has reported a jump in annual profits to almost £4.6bn.
The surge in earnings comes amid growing concern that it is not connecting renewable energy projects fast enough to meet the UK’s climate targets, my colleague Jillian Ambrose reports.
The FTSE 100 monopoly said its underlying operating profits climbed by 15% to £4.58bn for the financial year ending in March compared with the 12 months before.
This was driven by a surge in profits from its electricity distribution business which climbed by 39% from the previous year to £1.2bn for the year to the end of March.
National Grid is under pressure from developers to overhaul its approach to connecting new renewable energy projects to the grid as it emerged that many will be forced to wait more than a decade for a connection.
The UK plans to run its grid entirely on clean electricity by 2035 but many renewable energy projects have been told they will need to wait until the late 2030s to provide clean power to the grid.
The National Grid chief executive, John Pettigrew, said:
“there has never been a more exciting time to be at the heart of the energy industry”.
BT has seen Vodafone’s job losses earlier this week and “taken them to another level” this morning, says Matthew Dorset, equity research analyst at Quilter Cheviot:.
Dorset adds:
“The business has faced pressure from alternative network providers, although on the retail side customer numbers have remained stable.
On the Openreach side of the business BT had a net loss of 68,000 connections, a reversal of a recent trend of slowing losses. This will be a concern and a figure to watch going forward.
Dorset adds, though, that BT has benefited from its price rises being linked to inflation, which led to hefty increases.
“Crucially, BT has been able to maintain a competitive position in the market due to prices being inflation linked. Given competitors do the same there is no real threat of customer churn there and it should be supportive for earnings.
Finally, as interest rates have risen at an extraordinary pace, the debt burden facing alternative providers will be good news for BT. While it is a business in transformation, it has a good mix of short and long-term opportunities to take advantage of.”
BT shares fall
The market isn’t very impressed with BT either.
Shares in the company dropped up to 10% in early trading, the biggest faller on the blue-chip FTSE 100 index.
As well as announcing up to 55,000 job cuts, BT also reported a 1% drop in revenue for the year to 31st March.
Reported profit before tax fell 12% to £1.7bn, which BT blamed on “increased depreciation from network build and specific items, partially offset by adjusted EBITDA growth”.
BT shares fell as low as 133.2p, from 148.1p last night, the lowest since early February.
Shares in Royal Mail’s parent company are among biggest early fallers on the London Stock market, after its results this morning.
International Distribution Services have dropped by 4.5% on the FTSE 250 index of medium-sized companies, after being pulled into a £748m full-year loss by Royal Mail’s woes.
Prospect union has "deep concern" over scale of BT job cuts
Unions are alarmed by BT’s plans to cut up to 55,000 jobs by 2030.
John Ferrett, national secretary of Prospect (which represents thousands of managers at BT) says workers will be very unsettled by the announcement.
“Prospect are deeply concerned by the scale of these cuts. Announcing such a huge reduction in this way will be very unsettling for workers who did so much to keep the country connected during the pandemic.
“As a union we want to see the details behind this announcement in order to understand how it will impact upon members and have demanded an urgent meeting with the Chief Executive.
It’s important that job cuts are voluntary, Ferrett adds:
“We have always opposed compulsory redundancies in BT and has been able to ensure over the years that any reductions have been achieved on a voluntary basis.
“Prospect has a partnership agreement with BT which governs how the company and the union manage change in the organisation.
“We will be ensuring that the partnership agreement is fully adhered to during any consultations with BT over job reductions.”
BT’s jobs cuts announcement comes just two days after Vodafone announced it would cut 11,000 positions worldwide, the largest reduction in its history.
Following Vodafone’s 11k job cuts, today BT said it will reduce its “labour resource” from 130k to 75-90k by around 2028-2030. Telcos seeking transformation to leaner and more efficient organisations.
— Kester Mann (@kestermann) May 18, 2023
BT to cut tens of thousands of jobs
UK telco BT is planning to cut up to 55,000 jobs by 2030, as it pushes to become a ‘leaner business’.
BT Group, the UK’s largest broadband and mobile provider, has declared it will reduce its workforce by tens of thousands of jobs by the end of the decade.
BT says it will cut its “total labour resource” (it’s own workforce, and those employed by third parties) from 130,000 today to between 75,000 and 90,000 by the 2030 financial year.
Chief executive Philip Jansen says BT will rely on a much smaller workforce, reducing its cust base, once it has completing the rollout of its new fibre broadband network.
Jansen says:
“By continuing to build and connect like fury, digitise the way we work and simplify our structure, by the end of the 2020s BT Group will rely on a much smaller workforce and a significantly reduced cost base.
New BT Group will be a leaner business with a brighter future.”
Jansen also says BT’s Openreach operation, which maintains its network, is competing strongly, and “it’s clear that customers love full fibre”.
The Openreach Board has reaffirmed its target to reach 25 million premises with FTTP [Ultrafast Full Fibre broadband] by the end of 2026 and plans to further accelerate take-up on the network
Updated
Royal Mail chair sees grounds for optimism
Despite reporting a £1bn loss this morning, Keith Williams, the chair of Royal Mail, argues there are reasons to be optimistic.
Williams says Royal Mail is sorry that it hasn’t delivered a better service, and insists that the universal service obligation must be reformed.
Williams tells the City:
“I said before that we had reached a crossroads at Royal Mail. Now that we have a negotiators agreement with CWU that will shortly go out to ballot, and thanks to the good progress made on our five-point plan to stabilise Royal Mail, our destination is coming into sight.”
“There is now a clear path towards a more competitive and profitable Royal Mail, delivering improved services for our customers whilst further reducing our environmental impact. Importantly, if ratified, the CWU agreement provides greater job security and increased rewards - through both pay and profit share - for our employees. Successful delivery of the agreement will be key.”
“Quality of service has been significantly affected by industrial action and high levels of absence. I am sorry that we have not delivered the high standards of service our customers expect. Improving quality of service is our top priority.”
“GLS has a proven track record of growth, solid margins and cash generation. During 2022-23 it delivered a robust performance in a tough macro-economic climate. Its flexible operating model, balanced B2C and B2B portfolio, diversified geographic exposure and continued investment have underpinned good progress this year and we continue to invest for long-term growth and margin accretion.”
“So as we enter 2023-24 we have grounds for optimism. The economic climate remains challenging, and Royal Mail faces the task of rebuilding business from the damage caused by industrial action. To do this successfully and plan for the long term, urgent reform of the Universal Service Obligation is essential. Our plan is to return to group profitability this year but also seize the opportunity for both businesses to deliver ongoing profits thereafter, to the benefit of both our employees, customers and shareholders.”
Royal Mail posts £1bn loss after year of strife
Royal Mail has reported a loss of over one billion pounds, after a year hit by strikes and poor delivery performance.
Parent company International Distributions Services has reported that Royal Mail made a loss of £1.044bn in the year to March, down from a profit of £250m a year earlier.
IDS says Royal Mail was hit by industrial action, with workers holding a string of strikes in the last year in a bitter dispute over pay and conditions.
IDS blames Royal Mail’s inability to deliver “the in-year benefits of planned productivity improvements”.
Weaker online shopping, and a drop in volumes of Covid-19 kits, also hit Royal Mail’s earnings compared with a year ago.
IDS warns that the UK’s Universal Service Obligation (USO) – which requires Royal Mail to deliver letters six days a week to every address in the land if necessary – “requires major reform”.
It tells shareholders this morning:
We urge the Government to work with us to protect the long-term sustainability of the one-price-goes-anywhere Universal Service.
Earlier this week, communications regulator Ofcom launched an investigation into poor performance at Royal Mail that could lead to a fine. after more than a quarter of first-class mail was not delivered on time.
Earlier this year, a cyber attack forced Royal Mail to temporarily suspend international parcel and letter deliveries through Post Office branches for several weeks.
The company’s international parcels business, GLS, made an operating profit of £296m, down 9.5%, today’s financial results show.
But overall, IDS has made a loss of £748m, down from a £577m profit the year earlier.
Last week, Royal Mail’s CEO Simon Thompson quit, after the acrimonious tussle with unions, but will stay on until the end of October.
On an adjusted basis, Royal Mail made an operating loss of £419m, beating market expectations according to Reuters.
Updated
Introduction: German carmakers lobby to maintain tariff-free access to UK
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
European carmakers have joined the push to delay post-Brexit rules on where parts are sourced from, amid fears that the future of the British automotive industry is at stake.
As we covered yesterday, Vauxhaul owner Stellantis, Ford and Jaguar Land Rover all called on the UK government to renegotiate the Brexit deal, to change “rules of origin” terms.
Currently, electric vehicles shipped between the UK and the EU will incur a 10% tariff unless at least 40% of their parts are sourced from within the two regions. That proportion is due to rise to 45% next year, which is a problem for electric carmakers as most electric vehicle batteries are still imported from Asia.
The European trade group for the car industry is calling for a delay extension to this phase-in of tougher post-Brexit trade rules.
The European Automobile Manufacturers’ Association (ACEA) warns that supply chains, particularly electric vehicle batteries, are not ready.
An ACEA spokesperson expained:
“There has been massive investment in European battery supply chains.
“The capacity to meet these rules of origin will come, but just not in the next few years. ACEA has requested that the current phase-in period for battery rules is extended by three years.”
VDA, the German car industry lobby group, has weighed in in support, the Financial Times reports today.
VDA said “we must urgently make adjustments” to the agreement, as Europe’s battery industry had not developed fast enough.
Otherwise, they fear that tariffs would place…
“a significant competitive disadvantage for the European car industry in relation to its Asian competitors in the so important UK market”.
Also coming up today
Water companies have apologised for repeated sewage spills and pledged to invest £10bn this decade in an attempt to quell public anger over pollution in seas and rivers.
The companies will triple their existing investment plans to plough funds into the biggest modernisation of sewers “since the Victorian era” to reduce spills of overflowing sewage into England’s waterways.
Industry body Water UK said the plans will cut the number of overflow incidents by up to 140,000 each year by 2030, compared with 2020. But the costs will ultimately be recouped from customers through higher bills, adding to the cost of living pressures in coming years.
MPs are heading to the Bank of England to grill the central bank’s top brass this morning.
The Treasury Committee plan to quiz governor Andrew Bailey on the Boe’s government bond-buying stimulus scheme (quantitative easing, or QE) and its role pushing up inflation, and how it will be unwound (quantitative tightening, or QT).
Yesterday, Bailey pledged to lift interest rates as far “as necessary” to get inflation back to the bank’s 2% target.
European stock markets are set to open higher, on hopes that the US debt ceiling deadlock will be broken, avoiding a US default.
Joe Biden and the Republican speaker of the US House, Kevin McCarthy, said on Wednesday they thought a deal to avoid a US debt default was in reach.
The agenda
10.15am BST: Treasury Committee hearing with the Bank of England
1.30pm BST: US weekly jobless claims data
3pm BST: US existing home sales
AGMs: Lloyds Banking Group, Legal & General AGM, and Next
