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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound tumbles to two-year low as stagflation fears rise – as it happened

Shell Bank of England Inflation Interest Rates Oil United States Jerome Powell United Kingdom Victoria Fritz Russia
The Bank of England, which is set to raise interest rates this week to curb rising inflation.
The Bank of England, which is set to raise interest rates this week to curb rising inflation. Photograph: Andy Rain/EPA

Closing summary

Time to wrap up.

Britain is facing the risk of stagflation after the Bank of England warned that surging energy prices will drive inflation to 10% by the end of the year as the economy stumbles.

The pound plunged to its lowest since June 2020 as the BoE hiked borrowing costs to a 13-year high. Sterling has lost 2.5 cents since the start of the day, down 2%, on track for the worst day since March 2020.

The BoE predicted that the economy could contract sharply in the last quarter of this year when the energy price cap is lifted, as the cost of living crisis hit household spending.

Announcing its fourth rate rise in as many meetings, the BoE said:

Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth.

These developments have exacerbated greatly the combination of adverse supply shocks that the United Kingdom and other countries continue to face. Concerns about further supply chain disruption have also risen, both due to Russia’s invasion of Ukraine and to Covid-19 developments in China.

The UK economy is also expected to shrink in 2023. Although it might not be a technical recession, Bank of England governor Andrew Bailey agreed that the UK faces a ‘very sharp slowdown’.

Experts agreed that the UK was on the brink of a recession, and that stagnation worries were rising.

Here’s the full story:

Our economics editor Larry Elliott explains:

Just as in the 1970s, the Bank says external factors are mainly to blame. In 1973, it was the Yom Kippur war that led to 25% inflation by mid-1975. This time it is the war in Ukraine. The Bank is pencilling in another 40% increase in the energy price cap in October, taking the average annual household bill to £2,800.

There may be arguments about whether the UK is technically heading for recession because the Bank is not forecasting two consecutive quarters of falling output – but it will certainly feel like it. Living standards are about to take their biggest hit in decades. In another echo of yesteryear, sterling took a dive on the currency markets after the Bank’s interest-rate decision.

The same energy prices which are hurting consumers drove Shell’s profits to over $9bn in the first quarter of the year.

Andrew Bailey, Governor of the Bank of England, after today’s press conference.
Andrew Bailey, Governor of the Bank of England, after today’s press conference. Photograph: WPA/Getty Images

Our Money team have pulled together a round-up of what today’s interest rate rise mean - here’s a flavour:

  • 1,092,000 Number of borrowers on a standard variable rate mortgage. These home loans have an interest rate set by the bank or building society. Some are explicitly linked to the base rate so will automatically go up in line with it, but others are set at the lender’s discretion.
  • £504 How much more a £200,000 variable rate mortgage will cost each year as a result of today’s increase, according to figures from UK Finance. It says a 25 basis points rise in rates adds £42 a month to repayments.
  • 4.71% The average standard variable rate charged by UK mortgage lenders, according to Moneyfacts. In December 2021 this stood at 0.31%. It has not risen by as much as the base rate because not all lenders have moved in line with the base rate.
  • 2.23% Lowest rate available on a 10-year fixed-rate mortgage currently. Available from Lloyds bank to people with a deposit of at least 40%.
  • £2.50 Extra interest earned on £1,000 of savings – although do not assume the rate rise will be passed on to you, as in most cases it is up to the savings provider to decide whether to increase what it pays out. If your money is in a fixed-rate savings bond, you will definitely not see a rise in returns.

And here’s the full piece:

Analysis: Recession the price Bank prepared to pay to bring UK inflation to heel

The Bank of England’s grim forecasts have piled more pressure on UK chancellor Rishi Sunak to take action.

With inflation seen hitting 10%, employment rising and the economy contracting in 2023, Sunak needs to do more to help households suffering a deepening cost of living crisis.

Our economics editor Larry Elliott says.

Confronted with the dilemma of whether to worry more about the risks of recession or of inflation becoming embedded, the Bank has opted for a middle course, raising interest rates by a quarter point to 1% – their highest level since early 2009. But the vote was not unanimous: three of the nine members of the monetary policy committee wanted a half-point increase.

Having been too optimistic about the economy in the past, the Bank may now be too gloomy. There are two reasons for that. The first is that Threadneedle Street’s forecasts are based on what the financial markets think will happen to interest rates – and given the prospect of prolonged stagnation, the current City belief that borrowing costs will peak at 2.5% looks much too high. Some members of the MPC think no further tightening will be needed.

The second reason is that it is hard to envisage the government watching the economy slide into recession without doing something to alleviate the pain. The Bank has upped the pressure on Rishi Sunak to act – and act big.

Here’s Larry’s full analysis:

Full story: Bank of England raises interest rates, warns of recession and 10% inflation

The Bank of England has warned that the cost of living crisis could plunge the economy into recession this year, as it increased interest rates to tackle soaring inflation that is expected to rise above 10% in the coming months.

Threadneedle Street’s monetary policy committee (MPC) voted by a majority to raise its base rate from 0.75% to 1%, lifting the cost of borrowing to the highest level in 13 years, as it sounded the alarm over the risks from spiralling inflation exacerbated by Russia’s war in Ukraine.

Despite the growing risks to the economy as households endured one of the biggest annual declines in their income for decades, the Bank said a quarter-point rise was warranted to block persistently high inflation from taking hold, as the shock from soaring energy costs rippled through the global economy.

Issuing a downbeat verdict as voters went to the polls in local elections, the Bank predicted Britain was on track for years of meagre economic growth as people cut back their spending to deal with the heavy blow to living standards.

Against a backdrop of soaring international energy prices, household gas and electricity bills are expected to rise by 40% in October, after the government offset only some of last month’s record rise using measures outlined in Rishi Sunak’s spring statement.

With the chancellor under pressure to launch a fresh support package for householders, the Bank said consumers tightening their belts to deal with the cost of living crisis was likely to push the economy into a sharp contraction in the fourth quarter.

Although a modest recovery is expected at the start of next year, ensuring two consecutive quarters of falling GDP (the technical definition of a recession) is likely to be avoided, the Bank warned Britain’s economy would shrink by 0.25% over the course of 2023 as a whole, in effect a slow-burn recession.

UK recession risks: What the experts say

The ‘cost of living crisis’ means the UK may be on the brink of recession, warns Steven Bell, chief economist at BMO GAM:

Inflation is running well ahead of wages and the government has intensified the squeeze by raising taxes. In addition, the small army of people employed to tackle the pandemic is being disbanded.

Real personal incomes are set to fall by 2.5% this year, the biggest decline since records began in 1947. The Bloomberg consensus survey of forecasts sees UK GDP in 2022Q2 increasing by only 0.2% compared with Q1.

Before the Ukraine war, that consensus was for a healthy 0.9% increase. Indeed, a significant minority are now expecting an outright fall in GDP in Q2 2022.

Katharine Neiss, chief European economist at PGIM Fixed Income says there is a risk the Bank could be pushed into setting even higher rates into a recession, as a falling pound pushes up inflation.

The BoE is in arguably the most difficult situation among major central banks.

With inflation expected to peak in the double digits by year-end and growth likely to more than halve into next year, according to the central bank’s latest forecasts, it is the prospect of prolonged above target inflation that is driving policy decisions for now.

James Smith of ING sees clear hints that the Bank’s MPC committee thinks that is going to be too aggressive.

“Policymakers are clearly divided, and three voters opted for a 50bp move this time. It’s clear that the committee is divided on just how concerned it should be about the tight jobs market, faster wage growth and elevated consumer inflation expectations.

“In short, expect more hikes, but not as many as markets expect. We’d already pencilled in another rate rise for June and we suspect on the basis of today’s split decision, another one could follow in August. But the new forecasts, taken together with the increasing division among committee members, suggest the Bank is getting closer to a pause in its tightening cycle.”

Newsnight’s Ben Chu has produced some neat charts of the Bank’s forecasts:

The minutes of the Bank’s meeting highlight the split among policymakers as they try to curb inflation at the risk of pushing the economy into recession.

They show that “most members of the Committee” judged that some degree of further tightening might still be appropriate in the coming months, although views differed about the balance of risks.

But some members of the Committee judged that the risks around activity and inflation over the policy horizon were “more evenly balanced and that such guidance was not appropriate at this juncture”.

Pound slumps to near two-year low on stagflation worries

The pound has plunged, hitting its lowest level since June 2020, on growing fears that the UK could fall into recession.

Sterling has slumped to $1.2375, down nearly nearly two and half cents today, on track for its worst day since March 2020, when the pandemic caused markets to crash.

You might expect a rise in interest rates to strengthen a currency, especially as three of the nine policymakers wanted a larger, 50 basis-point rise to 1.25%.

Instead, the split at the Bank of England, the sharp cut to growth forecasts, and the prospect of even higher inflation is hurting the pound.

Matthew Ryan, senior market analyst at global financial service firm, Ebury, says the Bank’s Monetary Policy Committee looks more divided on policy than we’ve seen in some time.

The vote on interest rates was more hawkish than we had expected, with all nine members in support of an immediate hike and three in favour of a 50 basis point move. The bank’s inflation assessment was also upgraded, with price growth now set to peak in excess of 10% later this year.

“The MPC does, however, appear highly concerned about the impact of rising commodity prices on growth, and now expects the UK economy to contract in 2023. The tweaking of the bank’s wording on future policy moves is all pretty vague and muddled, and suggests to us that policymakers are unsure on upcoming policy moves ahead of a potentially damaging period of ‘stagflation’.

Sterling has reacted to the bank’s lack of clarity, and indeed the threat of a UK recession, in a negative fashion and is currently back trading below the 1.24 level versus the US dollar.”

Fawad Razaqzada, market analyst at City Index and FOREX.com, agrees that stagflation worries are hitting the pound:

The divided MPC thinks CPI will peak above 10% and the economy is facing a very sharp slowdown.

The spilt in votes and uncertainty over inflation and growth puts rate setters in a tricky dilemma. Balancing inflation against growth will be very difficult.

So, the key risk facing the UK is not necessarily tighter policy, but uncertainty over monetary policy and, more to the point, stagflation.

As fears grow that the UK is heading for a contraction in output, amid rising prices domestically and abroad, weak growth in eurozone due to the Russia-Ukraine conflict, and China’s lockdowns, this should keep the pound’s upside limited.

Updated

Q: You’ve been cautious about using the term ‘stagflation’ - but this is stagflation, isn’t it? How worried should households be?

Bailey says he avoids the term, as it doesn’t have a good definition.

“The main reason I don’t tend to use the word is that it is not in my view very well-defined.

[An economy facing double-digit inflation and the risk of a contraction doesn’t sound like the worst definition, though...]

Q: What do you say to struggling households who will feel you’ve just given them another kick?

Bailey says some people think the Bank should raise interest rates even higher. He doesn’t, so policy is ‘calibrated’ to reflect the balance of risks.

The Bank has also revised up its forecast for wage growth, he expains, saying that companies tell him they’ve ‘really struggling’ to hire staff.

The conversation with businesses often goes ‘well I know you say there is going to be this big downturn in the economy’ but it is not coming from where they see it, and their real concern is they just can’t hire enough people to meet the demand they have today.”

Q: When you say there’s nothing the Bank can do to protect people from this hit, as you saying ‘over to you, chancellor’?

Governor Andrew Bailey says the Bank never advises government on policy, it is simply pointing out that monetary policy has its limits.

Q: Is the pain that households are facing the only way to get inflation down? Is it medicine we need to take?

Andrew Bailey explains that the shock to real incomes (from the surge in prices) will be the main downward driver on inflation, rather than monetary policy.

The biggest driver is the real income shock which is coming from the change in the terms of trade, particularly from energy prices, and from some core goods and some food.

The hit to incomes in the UK from surging energy and imported goods costs are “unavoidable”, warns deputy governor Ben Broadbent.

Monetary policy (changing interest rates) cannot offset it, he explains.

Broadbent says the Ofgem energy cap is likely to increase by around £1,500 during 2022 (April’s rise, plus the one coming in October), on top of a £300 increase in 2021.

You can double that hit, if you add the increase in imported goods prices due to the Ukraine war.

In contrast, the impact of raising interest rates on mortgage costs is a fraction, perhaps just a tenth, he adds.

Updated

Onto questions:

Q: Your forecasts looks very much like a recession, so how can you justify exacerbating the pressures on households and businesses in the cost of living crisis?

BoE Governor Andrew Bailey says the Bank’s forecast show a “very sharp slowdown”, although not a technical recession (two consecutive quarters of negative growth).

Explaining today’s rate rise, Bailey says the Bank is walking a very narrow path, and cites two risks.

First, the UK’s very tight labour market, and the pressure on wages as firms struggle to hire staff.

Second, the question of how savings build up during the pandemic will be used.

Bank of England governor Andrew Bailey is holding a press conference now.

He explains that inflationary pressures have ‘intensified sharply’ since the Ukraine war began, and that Russia’s invasion has led to a material deterioration in the global economic outlook.

With inflation already well over the Bank’s 2% target, the risks to inflation are skewed to the upside, Bailey says. But when CPI inflation falls it will fall rapidly, he predicts.

UK economy to shrink in 2023, warns Bank of England

The Bank of England’s latest forecasts show there is a serious risk of the UK falling into recession, as it hikes interest rates in an attempt to tackle inflation.

The Bank latest forecasts imply UK GDP could fall by nearly 1% in the final quarter of this year, when the energy price cap is lifted again (taking inflation to 10% this autumn).

Next year looks alarmingly weak too. The Bank has cut its growth forecast for 2023 to show a contraction of 0.25%, from a previous estimate of 1.25% growth.

It cut its growth projection for 2024 to just 0.25%, from a previous forecast of 1.0%.

My colleague Richard Partington has the details:

Here’s the BBC’s Faisal Islam:

UK households face an even more painful squeeze on their living standards than forecast three months ago:

The Bank of England warns that the surge in energy and goods price will have a material impact on disposable incomes, with inflation taking an even bigger bite:

UK GDP growth was expected to slow sharply over the first half of the forecast period. That predominantly reflected the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.

Total real household disposable income was projected to fall by 1¾% in 2022, which was a greater fall than in the February projection. Four-quarter consumption growth was expected to slow materially over the first half of the forecast period.

Updated

Bank: Inflation to hit 10%

The Bank of England has warned that UK inflation is going to hit 10% before the end of the year.

Explaining today’s increase in interest rates to 1%, the Bank warns that it sees double-digit inflation looming.

Consumer price inflation, which hit 7% in March, is expected to hit 9% in April due to the jump in the energy price cap.

It is then seen peaking “slightly over 10%” in the last quarter of 2022, when energy bills are likely to rise again in October.

That will mean an even worse cost of living squeeze for millions of households.

The Bank says:

As economies around the world opened up after Covid restrictions eased, people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.

Higher energy prices have also played a big role. Large increases in oil and gas prices have pushed up petrol prices and energy bills.

Services inflation is picking up a little.

Russia’s invasion of Ukraine has led to more increases in the prices of energy and food.

We expect inflation to rise further to around 10% this year.

Prices are likely to rise faster than income for many people. That means that people will be able to buy less with their money. The UK economy has been recovering from the effects of Covid, but we expect the increased cost of living to lead to slower growth overall.

The Bank of England can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation.

But we do have tools to make sure inflation comes back down to our 2% target. The main tool we use to bring inflation down is to increase interest rates.

We raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then again to 0.75% in March.

This month we have raised Bank Rate to 1%.

We expect inflation to fall back next year and be close to our target in around two years.

Updated

BoE raises interest rates to 1%

The Bank of England raised interest rates to their highest since 2009, despite concerns that the UK economy risks falling into recession.

The BoE’s nine rate-setters voted 6-3 to raise Bank rate by a quarter-point to 1%, from 0.75%, due to the rise in inflation to 30-year highs.

But three policymakers - Catherine Mann, Jonathan Haskel and Michael Saunders - called for a bigger increase to 1.25% to stamp out the risk of the inflation surge getting embedded in the economy.

More to follow...

Musk secures $7bn funding from investors including Larry Ellison for Twitter deal

Elon Musk has secured $7bn in new funding from investors to help finance his $44bn takeover of Twitter.

An SEC filing shows that Oracle co-founder Larry Ellison is providing $1bn, with a string of others including crypto trading firm Binance ($500m), Sequoia Capital ($800m) and Qatar Holding ($375m) also on board.

Also, existing investor Saudi Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, will roll 35 million shares into the bid vehicle. That stake is worth $1.9bn at Musk’s offer price.

At the same time, Musk’s margin loan, secured on some of his stake in Tesla, has been reduced to $6.25bn from $12.5bn announced earlier.

The filing also shows that Musk will keep talking other shareholders, including former CEO Jack Dorsey, to contribute shares to the proposed acquisition.

Updated

UK business activity slows to three-month low

Growth across the UK services sector has dropped to its lowest in three months - another warning light flashing on the economic dashboard.

The UK Composite PMI Output Index, which measures activity at UK companies, dipped to 58.2 in April from 60.9 in March. That still shows growth, but the slowest since the start of the year.

New order growth hit at a four-month low, and confidence fell. UK companies also hiked their prices at the fastest pace on record - in response to a record jump in their own costs.

The report, by S&P Global and CIPS, says:

The slowdown reflected intense cost pressures and the war in Ukraine. In fact, input costs rose at the fastest pace in the history of the series which stretches back more than 24 years.

Accordingly, output charges also increased at a record pace. Strong inflation was seen across both sectors, but was more pronounced in manufacturing. Companies continued to expand staffing levels rapidly in April, albeit at a softer pace. Meanwhile, business confidence dropped to the lowest in a year-and-a-half.

The services sector, which makes up around three-quarters of the economy, was hit by a sharp slowdown in new business.

Andrew Harker, Economics Director at S&P Global, explains:

“The twin headwinds of the cost of living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far.

Worryingly, companies seem to be expecting impacts to be prolonged, with business confidence dropping to the lowest in a year-and-a-half.

German factory orders fall as global economy weakens

German factory orders havs slumped, as the Ukraine war disrupts supply chains and adds to inflationary pressures.

Demand for Made In Germany goods plunged 4.7% in March from the previous month, driven by a decline in orders from overseas.

That’s worse than the 1.1% drop forecast, and indicates the global economy is weakening as the rising energy and commodity prices drive up inflation.

Overnight, China’s services sector has recorded the second-steepest drop in activity on record, as tighter Covid-19 restrictions hit the industry.

The Caixin purchasing managers’ index, which tracks the state of the economy, plummeted to 36.2 in April from 42 in March. Firms reported a sharper fall in new business and employment, amid new lockdowns and other restrictions.

Any reading below 50 shows contraction, and this is the fastest decline since the start of the pandemic.

Shares in publishing group Reach have tumbled 20% after it reported a drop in advertising revenues as brands tried to avoid appearing next to articles about the Ukraine war.

Reach, which has over 130 national and regional brands in print and online including the Daily Mirror and Daily Express, reported that print revenues fell 4.2% in the four months to 24 April, while advertising revenue shrank 10.1%.

Reach says:

Over the past two months the market has experienced reduced advertiser demand and lower average yields, with the war in Ukraine significantly reducing the level of ‘brand safe’ content for news publishers.

Digital growth slowed, with revenue up by 9.3% year-on-year, compared with growth above 25% during 2021.

Reach adds that costs (such as energy and newsprint) have also risen:

We still anticipate broadly flat group revenue for the year, though with a higher mix of circulation revenues and lower digital contribution than previously expected as a result of more challenging trading conditions.

The impact of further recent newsprint inflation is fully reflected in our cost expectations for the current financial year, with actions now underway to help mitigate the impact on operating profit.

UK auto sector cuts 2022 sales forecast amid cost of living squeeze

The SMMT also warns that the squeeze on household incomes and geopolitical uncertainty will both hit car sales this year, as it lowered its sales forecast for this year.

The sector faces further economic headwinds, with rising inflation, not least due to the spiralling energy and fuel costs squeezing household incomes, and further supply chain and other uncertainties arising from the global political situation and the effects of the Russian invasion of Ukraine.

More positively, however, drivers able to invest in a new vehicle can still reap benefits, as interest rates remain historically low, grants for BEVs will be in place until at least early 2023, and running costs associated with new electric cars are generally lower than those of petrol or diesel.

UK car sales fall as supply problems hit sector

UK car sales fell almost 16% last month, as shortages of key parts such as computer chips continue to hit production.

New car registrations declined by 15.8% year-on-year in April to 119,167 units, according to new figures from the Society of Motor Manufacturers and Traders.

The SMMT has also slashed its forecast for sales this year, due to semiconductor shortages and the cost of living crisis.

It says:

Despite showrooms being open for the entire month, unlike the previous year which saw lockdown restrictions in place until 12 April, global supply chain shortages, of which semiconductors are the most notable, have continued to constrain the delivery of new vehicles.

Battery electric car registrations rose 40.9% year-on-year to 12,899, and now make up 10% of the market, while diesel registrations halved year-on-year to 6,725, and only makes up 5.6% of sales.

The SMMT now expects just 1.72m new registrations this year, down from 1.89m forecast before. That’s just 4.5% more than in 2021, due to supply chain constraints and broader macro-economic factors.

Mike Hawes, SMMT chief executive, explains:

“The worldwide semiconductor shortage continues to drag down the market, with global geopolitical issues threatening to undermine both supply and demand in the coming months.

Updated

Shell has also reported higher earnings at its renewables and energy solutions division, which is crucial to its transition to clean energy.

The unit made an adjusted net profit of $344m in January-March, up from $43m in Q4 2021, and a loss of $102m in the first quarter of last year.

That’s dwarfed by its fossil fuel divisions, though, with oil production generating $3.5bn of adjusted earnings and gas making $4.1bn profits in the quarter.

Laura Hoy, equity analyst at Hargreaves Lansdown, says:

Calls for a windfall tax have been rebuffed by claims that the majors will start to clean up their acts, spending some of the excess to build out their renewables divisions. This quarter was the first time we got a glimpse of how well this part of Shell’s business is functioning, and it was encouraging to see underlying profits were on the up.

Renewables are likely to become a much larger slice of the pie as the energy transition ramps up, Hoy adds:

This technology is largely unproven, so oil and gas investors that have become accustomed to generous returns are taking a leap of faith.

If the group’s able to build out this part of the business to become a reliable profit driver while oil prices are still high, it would make the transition all the smoother.”

Over in Turkey, inflation has surged to a 20-year high of almost 70%.

Consumer price inflation jumped to 69.97% per year in April, driven by the rally in global energy prices, and domestic food costs following the slump in the lira.

Energy inflation climbed to 118.2% from 102.9% in March, while food prices were 89% pricier than a year ago.

Prices charged by factories also more-than-doubled over the last year, with producer price inflation around 122%.

Turkey was already facing soaring inflation after its central bank cut interest rates several times, weakening the lira, under pressure from president Recep Tayyip Erdoğan to stimulate the economy.

The Ukraine war has made the situation even worse, as Ruth Michaelson and Deniz Barış Narlı wrote last month:

Turkey’s financial crisis has been further compounded by Russia’s invasion of Ukraine, which has driven up global food prices, particularly for wheat. The lira’s slide against the dollar was already affecting Turkey’s ability to import wheat, but the loss of Ukrainian supplies has left it scrambling to find alternatives, including dipping into its own reserves.

‘I paid a 1,000 lira electricity bill in February, just for these two machines,” says Mehmet Aslan, pointing at two refrigerators holding cured meat, cheese and plump yellow rounds of butter from the town of Rize, where his family comes from (as does Erdoğan’s). Last Ramadan, Aslan says his shop was bringing in 6,000-7,000 lira a day in sales; this year he’s lucky if it breaks 1,500 lira.

“People are making up prices,” he adds, pointing to a large jar of honey. “I could just make that 400 lira [£21] and no one would say anything. I could even make it 500.”

Full story: Shell profits soar to $9.1bn amid calls for windfall tax

Shell has reported a record quarterly profit of $9.1bn for the first three months of the year, piling more pressure on the government to implement a windfall tax to fund measures to tackle soaring household energy bills, our energy correspondent Alex Lawson writes:

The first-quarter profit was boosted by a sharp rise in oil and gas prices, and compared with $6.3bn of profits in the final three months of 2021 and $3.2bn during the first quarter of last year. It was above analysts’ expectations of first-quarter adjusted earnings of $8.7bn.

Campaigners have called for a one-off levy on companies benefitting from soaring oil and gas prices to fund government initiatives to reduce the burden of rising bills.

Shell said it had taken a $3.9bn hit after it ditched its Russian investments after the invasion of Ukraine in February.

The UK oil firm is negotiating an exit from the huge Sakhalin-2 liquefied natural gas project north of Japan, in which it has a 27.5% stake. It is also divesting Nord Stream 2, a venture with the Russian gas company Gazprom.

Here’s the full story:

TUC General Secretary Frances O’Grady says:

“These eye-watering profits are an insult to hard-working families.

“While millions of households struggle with soaring bills, oil and gas companies are having a bonanza.

“The likes of Shell and BP are treating the British public like a giant cash machine.

“The government must act now. The case for a windfall tax has become unanswerable.”

Back in November 2021, BP’s boss Bernard Looney actually said soaring global commodity prices have made his company a “cash machine”, when the global recovery from Covid-19 lockdowns was pushing oil prices up.

Shares in Shell have hit their highest level in over two years in early trading, after it beat profit forecasts.

Shell are up 3.3% at around £23 each, the highest since January 2020 before the Covid-19 pandemic hit demand for energy.

Shell’s share price
Shell’s share price Photograph: Refinitiv

The wider market is also higher, with the FTSE 100 up 1.4%.

The government’s refusal to impose a windfall tax on oil company’s surging profits is ‘completely unforgivable’, says Liberal Democrat leader Ed Davey:

Ministers have claimed a windfall tax would hurt investment - but that argument has been undermined by BP CEO Bernard Looney. He told The Times this week that BP would continue an £18bn investment plan even if the government bowed to calls for a tax.

Although, as our financial editor Nils Pratley explained this week, a windfall tax on North Sea would not solve the energy crisis facing households on its own:

Indeed, just by considering the back-of-the-envelope arithmetic, one can see why the financial dial wouldn’t move. The little secret about the Labour party’s version of windfall tax is that it is very modest.

The formula imagines an increase from 40% to 50% in the tax rate on North Sea oil and gas profits, which in BP’s case would merely turn an expected £1bn tax bill for the relevant assets this year into one of £1.25bn....

By the same token, though, Labour should stop giving the impression that a windfall tax is some form of cure-all for the crisis in consumers’ energy bills. On the party’s original January formulation of its tax, the projected total from across the entire North Sea industry was just £1.2bn. Even if one assumes that a higher oil price (and thus corporate profits) would add a bit, we’re not talking about game-changing sums. For context, it would cost £10bn to give 10m lower-income households a £1,000 saving on their bills for a single year.

Shell has also returned billions of dollars to investors so far this year, a time in which millions of households have fallen into ‘fuel stress’, unable to pay their energy bills.

Total shareholder distributions in the last quarter were $5.4bn, Shell says.

That includes $4bn of the $8.5bn share buyback announced in February. It expects remaining $4.5bn will be completed before its second quarter 2022 results at the end of July.

It also lifted its quarterly dividend to $0.25 per share, up from $0.17 in Q1 2021, and $0.24 in Q4 2021.

Will Hares, senior analyst at Bloomberg Intelligence, has crunched the numbers:

Updated

Shell’s chief executive officer, Ben van Beurden, says:

“The war in Ukraine is first and foremost a human tragedy, but it has also caused significant disruption to global energy markets and has shown that secure, reliable and affordable energy simply cannot be taken for granted.

The impacts of this uncertainty and the higher cost that comes with it are being felt far and wide. We have been engaging with governments, our customers and suppliers to work through the challenging implications and provide support and solutions where we can.

Generating value through strong earnings and cash flow, coupled with maintaining a healthy balance sheet and continuing the disciplined delivery of our strategy, are crucial for Shell to play a leading role in the energy transition. This allows us to support our customers as they shift to cleaner energy. It’s also the best way for us to contribute to the security of energy supplies.

Introduction: Shell profits triple; BoE rate hike today?

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Oil giant Shell has almost tripled its quarterly profits, as the surge in oil and gas prices drive up earnings and intensify calls for a windfall tax on excess profits.

Shell recorded adjusted earnings of $9.13bn (£7.25bn) in the first quarter of this year, its latest quarterly results show.

That’s almost three times the $3.2bn it made in the same quarter a year earlier, and 43% higher than in the last quarter of 2021 - and even more than analysts had forecast.

Shell says the increase in earnings is mainly due to higher energy prices, a strong performance by its trading arm, and lower operating expenses and tax, partly offset by lower volumes.

The group has also taken a $3.9bn charge related to “the phased withdrawal from Russian oil and gas activities”.

Shell is no longer buying Russian oil on the spot market (after apologising for buying one shipment in March), but will continue to fulfil contracts on buying fuel from Russia signed before the invasion of Ukraine.

It says it is making an:

Orderly withdrawal from its involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas and LNG in a phased manner, aligned with new government guidance.

Since these announcements, Shell has stopped all spot purchases of Russian crude, liquefied natural gas, and of cargoes of refined products directly exported from Russia. Shell will not renew long-term contracts for Russian oil, unless under explicit government direction, but is still legally obliged to take delivery of crude bought under contracts that were signed before the invasion. By the end of this year, all of Shell’s long-term 3rd party purchases of Russian crude will stop, except for two contracts with a small, independent Russian producer.

All of Shell’s contracts to purchase refined products exported from Russia will also end.

Shell adds, though, that it still has “long-term contractual commitments” for Russian liquidied natural gas (LNG).

Reducing European reliance on piped natural gas supplies from Russia is also a very complex challenge that requires concerted action by governments, as well as energy suppliers and customers.

Soaring energy prices pushed UK inflation to a 30-year high of 7% in March, and some economists fear it could hit 10% this year, intensifying the cost of living crisis.

Those pressures mean the Bank of England is widely expected to raise interest rates today to the highest level in 13 years, despite worrying signs that the economy is slowing.

The City predicts the BoE will vote for a quarter-point rise, lifting base rate from 0.75% to 1%, which would be the fourth rise in as many meetings, as it tries to dampen down inflationary pressures.

John Hardy, Head of FX Strategy at Saxo Bank, explains:

The BoE feels that the outlook for real growth in the UK is very poor, driven by a drop in real incomes and that it is tightening its policy as a necessity linked to intolerably-high inflation.

But could hiking today be a policy error, if the economy is faltering?

Kallum Pickering, a senior economist at Berenberg, says there are reasons to be cautious:

“Amid plunging consumer confidence and evidence of a pullback in household demand, [raising rates] is not without risk, in our view.

“If we are unlucky, the UK is already in the early stage of a recession.”

The Bank will also publish new economic forecasts, which may show slower growth and rising inflation than expected three months ago, with UK households facing the fastest fall in living standards since the mid-1950s.

Here’s our preview on the Bank’s decision:

Last night, America’s central bank announced its biggest interest rate rise in 22 years, as it lifted US interest rates by 50 basis points, to a range of 0.75% to 1%,

Federal Reserve chair Jerome Powell also signalled the Fed could implement further 50bp increases at future meetings, as it takes a more aggressive approach to tackling high inflation.

Powell explained:

Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.

The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.

But Powell also said the FOMC wasn’t “actively considering” a 75bp jump, which calmed fears of a steep rate hike next month.

Shares surged on Wall Street, with the S&P 500 recorded its biggest one-day percentage gain in nearly two years.

European markets are expected to rally too.

Other central banks, including India and Brazil, raised rates on Wednesday, in a global battle against inflation.

The agenda

  • 9am BST: UK car sales for April
  • 9.30am BST: UK service sector PMI report for April
  • Noon: Bank of England interest rate decision
  • 12.30pm BST: Bank of England press conference
  • 1.30pm BST: US jobless claims

Updated

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