Closing summary
Russia’s central bank has hiked interest rates by 3.5 percentage points in an emergency move aimed at halting the rouble’s recent slide, after it fell to its weakest point in almost 17 months.
The decision to raise the key rate from 8.5% to 12% was announced after an extraordinary meeting of the bank’s board of directors, called after the rouble plunged past the psychologically key level of 100 to the dollar on Monday morning.
The central bank said it had taken the decision to “limit risks to price stability” after several inflation indicators rose to over 7% in the past three months, a significant deviation from its target of 4%.
The Bank of England is under renewed pressure to raise interest rates next month after wages jumped more than expected in June, boosted by a one-off payment to NHS workers.
A rise in borrowing costs is likely even though the latest figures for the UK labour market also showed employers had begun to shed workers in response to a slowdown in economic activity.
Total pay, including bonuses, rose by 8.2% a year in the three months to June, the Office for National Statistics (ONS) reported, stronger than the 7.3% analysts expected.
Regular pay, which excludes bonus payments, rose by 7.8% in the quarter, the highest regular annual growth rate since comparable records began in 2001, up from 7.5% in March-May.
Our other main stories:
Harvey Nichols boss quits
The boss of Harvey Nichols has quit the retailer she first joined 25 years ago after tensions over its strategy, and a member of its owning family will take the reins.
Manju Malhotra started at the Knightsbridge store in London in 1998 as a newly qualified accountant and worked her way up through the ranks before becoming chief executive in January 2020, just before the Covid pandemic forced stores to shut.
The exit of the down-to-earth Londoner, whose first experience of retail was helping out in her parents’ fashion store off Brick Lane in the East End, comes after a row over strategy with the group’s Hong Kong-based owner, Sir Dickson Poon.
It is understood Malhotra disagreed with the owners over the pace of change at the company. According to the Daily Telegraph, Malhotra wanted to make significant changes after several years of losses at the group, which has eight stores in the UK and Ireland, including large outlets in Edinburgh, Birmingham, Leeds and Manchester, as well as a specialist beauty shop in Liverpool and five overseas branches.
Larry Elliott: Russian interest rate hike just a sticking plaster
Protracted wars are costly and cause economic damage, our economics editor Larry Elliott points out:
Ancient Rome discovered that, as did the US in the 1960s when the conflict in Vietnam was one factor behind pressure on the dollar that led eventually to the breakup of the Bretton Woods fixed currency system.
The decision by Russia’s central bank to raise interest rates from 8.5% to 12% to defend the plunging rouble is the latest example of this age-old truth. Eighteen months into the war with Ukraine, Russia’s current account surplus is shrinking and inflationary pressure is growing. The currency is taking the strain, and the trigger for Tuesday’s emergency move appears to have been the rouble hitting 100 to the US dollar on Monday.
Wall Street has fallen at the opening bell as stronger-than-expected US retail sales data fuelled concerns that interest rates will stay high for longer, while European markets are also in the red.
Nasdaq down 30 points, or 0.2%, to 13,757
UK’s FTSE 100 index down 85 points, or 1.1%, to 7,422
Germany’s Dax down 114 points, or 0.7%, to 15,790
France’s CAC down 66 points, or 0.9%, to 7,282
Carlsberg lifts profit outlook
Danish brewer Carlsberg has lifted its profit guidance for the full year after a “solid business performance” in the first half of the year.
The world’s third-biggest brewer said it now expects organic operating profit growth this year of between 4% and 7%, versus a previous range of minus 2% to plus 5%. The Copenhagen-based company said:
Based on solid business performance year to date and our expectations for the remainder of the year, we are upgrading our full-year earnings expectations for 2023.
The company said sales volumes grew 0.8% organically between January and June, while sales grew 11% amid higher prices, lifting operating profit by 5.2%. Carlsberg’s shares rose 2.2%.
Carlsberg is due to publish its full results tomorrow.
Canada inflation rises to 3.3%
In Canada, inflation has picked up again, and came in higher than expected.
Headline inflation rose to 3.3% in July from 2.8% the month before, according to Statistics Canada, worse than economists’ forecast of 3%.
However, the statistics office said the rise was mainly caused by a base-year effect in gasoline prices, as a large monthly decline in July 2022 was no longer impacting the 12-month movement.
Core inflation was little unchanged and food prices increased at the slowest pace since February 2022. The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.65% compared with 3.70% in June.
Context for Canada's July inflation increase: it's entirely due to energy contributing a smaller negative amount than in June. pic.twitter.com/hrs70AAnBL
— Trevor Tombe (@trevortombe) August 15, 2023
Core inflation pressures are still too high for comfort and a further interest rate hike cannot be ruled out, said Olivia Cross, assistant economist at Capital Economics.
The continued above-target gains in the CPI-trim and CPI-median core measures will cause some concern for the Bank of Canada and means it is still too early to rule out a further interest rate hike altogether. Nonetheless, we still expect a more pronounced easing of core inflation later this year.
Most of the rebound was admittedly caused by the unwinding of favourable base effects from June, which meant that energy price inflation rose from -14.6% to -8.2%. However, the larger 0.5% seasonally adjusted monthly increase in the overall CPI, after the 0.1% m/m rise in June, shows the move was not just due to base effects…
Meanwhile, we also learnt today that manufacturing sales values fell by 1.7% m/m in June, with sales volumes declining by 1.0%. That weakness reflected declines in most sectors with the notable exception of motor vehicle sales, which by a further 11.4% m/m as the sector continued to benefit from easing supply shortages. With motor vehicle and parts sales volumes now back near their pre-pandemic level, most of that boost now appears to be behind us.
Inflation in Canada ticked back above the central bank's control range in July, but weakening core measures point to cooling momentum in price pressures https://t.co/0K6V7gPkcJ
— Bloomberg (@business) August 15, 2023
Updated
Andrew Hunter, deputy chief US economist at Capital Economics, said:
The 0.7% m/m jump in retail sales in July suggests that tighter monetary policy is still having remarkably little impact on real economic activity, but that isn’t necessarily a problem for the Fed when the evidence continues to suggest that inflationary pressures are fading rapidly.
Admittedly, there was some evidence of renewed weakness in spending on consumer durables, with motor vehicle sales falling by 0.3% m/m, furniture and homeware sales down by 1.8% and spending at electronics and appliance stores falling by 1.3%. But that was more than offset by broad based strength in other sectors, led by a 1.5% rise in sales of sporting goods and a 1.9% gain for online retailers. The resulting 1.0% m/m rise in control group sales leaves overall real consumption growth on course to be stronger than we had assumed, particularly with the 1.4% rise in spending at bars and restaurants – the strongest gain since January – indicating that overall spending on services also rose fairly strongly.
With the renewed surge in Treasury yields highlighting that the full impact of the Fed’s tightening is still feeding through, and employment growth already slowing fairly sharply, we still think a renewed slump in GDP growth over the second half of the year is much more likely than an acceleration. But as long as core inflation continues to fall rapidly, resilient growth won’t in itself be enough to prompt further rate hikes from the Fed.
US retail sales stronger than expected
In the US, retail sales rose more than expected last month, sending stock futures lower amid concerns that the Federal Reserve could keep interest rates high for longer.
Retail sales grew 0.7% in July from the month before, against expectations of 0.4% growth, according to the US Commerce Department.
The Dow Jones is expected to fall nearly 300 points when Wall Street opens in less than an hour.
Elsewhere in the markets, gold has dropped below $1,900 per ounce for the first time in six weeks.
Gold weakened to its lowest level since late June, pushed down by the strengthening US dollar.
Fawad Razaqzada, market analyst at City Index and Forex.com, says:
It could be that the dollar is finding support because of the weakness observed in some equity markets, most notably in China. Here, equities and renminbi both continue to struggle, putting pressure on the positively correlating markets such as the Aussie and kiwi, and thus indirectly boosting the US dollar and undermining gold.
Concerns surrounding the perilous financial state of some of China’s largest property developers and the nation’s post pandemic economic struggles have dented investor sentiment.
The financial markets indicate there is an 87% chance that the Bank of England raises interest rates by a quarter of one percent at its meeting next month, to 5.5%.
But a larger, half-point rise, is not impossible – it’s seen as a 13% chance by the money markets today.
Rates are seen peaking at 6% next February, meaning traders anticipate three-quarters of a percentage point of increases over the next six months.
Updated
L&G CEO says rising nimbyism is slowing net zero drive
Legal & General’s CEO Nigel Wilson has blamed nimbyism for throwing up roadblocks to housing projects and slowing the UK’s net zero ambitions.
“Nimbyism is probably on the rise again”, Wilson told the Guardian, following L&G’s results released this morning (see earlier post).
Wilson explained:
“If you talk to any of the big participants, they’ve all got a long list of planning things that they’re stuck with. It’s not that there isn’t support from the government - everything’s stuck at a very local level.
We’ve hardly built any offshore wind at all in the last few years because it’s primarily decided at a very local level and many people want to see the wider picture of why we do need more offshore wind, more solar, more, more ground source heating in the UK.”
He stressed that there’s a “collective responsibility” from private industry and government to communicate a cohesive infrastructure strategy that wins over the UK population and local communities for projects that lead to more affordable housing, or uptake of heatpumps, for example.
He added:
“We need to win the hearts and minds of everybody in the cities and come up with an economic model that lets that happen. Otherwise, it’ll remain just as a cottage industry.”
FCA worried about interest-only mortgage borrowers
Nearly half of people with interest-only mortgages “may be overly optimistic” about their ability to pay them off, Britain’s financial watchdog has warned.
There are just under one million interest-only mortgages, down by half since 2015, as more people have moved onto repayment loans or repaid them earlier than expected.
The Financial Conduct Authority said:
Of those remaining, the greatest number of interest-only mortgages are set to mature in 2031 (72,000) and 2032 (77,000), with a smaller peak in 2027. This means borrowers without a repayment plan still have time to act and reduce at least some of their outstanding capital by the end of their mortgage.
David Geale, director of retail banking at the FCA, said:
Whilst it is encouraging to see the number of interest-only mortgages reducing faster than expected, with the majority of loans being paid off or transferred to other products, the challenge remains for a significant number of borrowers.
Taking an interest-only mortgage can mean lower monthly payments, but borrowers need a plan to repay the outstanding balance when the mortgage comes to an end. If you have an interest-only mortgage and are unsure if your current plan is sufficient, speak to your lender as soon as possible, to discuss your options.
The FCA’s research fond that 82% of the borrowers were confident about being able to repay the outstanding capital by the end of the mortgage term.
However, the research suggests this may be overly optimistic – while 36% of borrowers expected some shortfall, modelling suggests this could be closer to 46%.
NIESR, the economic research institute, predict that UK regular pay (excluding bonuses) will grow by 7% during the third quarter of this year, following this morning’s labour market report.
Total pay (including bonuses) is forecast to grow by 6.9% in Q3.
Private sector pay will rise 7.2% in July-September, NIESR estimate, ahead of predicted public sector pay growth of 6.6%.
Paula Bejarano Carbo, associate economist at NIESR, adds:
Though there are increasingly tangible signs that the labour market is cooling – such as a rise in the unemployment to vacancy ratio to 1.4 – the labour market remains quite tight, suggesting we will still see continued high pay growth this year.”
Unite postpones one of two Gatwick airport strikes
Unite, Britain’s biggest union, has postponed of of two strikes due to begin later this week at Gatwick airport. After receiving a “greatly improved offer,” passenger assistance staff will vote on it.
Ground handling staff working for a different company are still expected to go on strike, though, as a fresh offer made by their employer over the weekend is not likely to be approved by Unite members in a ballot closing on Thursday.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank in Switzerland, said:
The impact is going to be quite limited from the central bank intervention as obviously the major problems remain and the biggest one is the Russian situation in Ukraine.
The rouble’s depreciation is not excellent news for Russia, especially in its financing of the war and also the Russian economy is under a different downside pressure due to the
geopolitical issues.
In all likelihood, the civilian economy will take the pain. Rising inflation and higher interest rates will weaken the purchasing power of ordinary Russians, forcing them to buy fewer foreign goods https://t.co/SMa28oVsxu
— The Economist (@TheEconomist) August 15, 2023
Samy Chaar, chief economist at Lombard Odier in Geneva, said:
The rate hike is currency dependent; the currency is at levels we haven’t seen since just after the invasion.
It’s very basic, understandable monetary policy management,
you want to avoid the currency sliding too much, because it will
create imported inflation, so the central bank is taking a very
orthodox move.
Susannah Streeter, head of money and markets at London-based Hargreaves Lansdown, said:
Faced with the highly volatile rouble following the plunge in exports and surge in military spending, policymakers at the Central Bank of Russia have stepped in with this move in an attempt to shore up the currency and stem further capital flight.
Despite initially brushing off the rouble’s fall to a 16-month low yesterday, there are worries at the Bank that financial stability could be shaken further if inflation continues to race up further. However, with conflict in Ukraine entrenched, the sanctions grip tight and an ongoing voracious demand for new weapons, there is no easy escape from the economic fallout of the invasion.
An interest rate hike had widely been forecast, so the rouble has failed to follow on from the significant rally late yesterday, with the move appearing to underwhelm, given the
scale of the challenges ahead.
Viktor Szabo, portfolio manager at abrdn in London, said:
Clearly it seems that they have reached the pain threshold. I thought it would be a bit higher, but clearly they like the round numbers.
Now they will have to wait, but their main problem is that their trade surplus is shrinking and they can’t do much about that.
'As long as the war continues it just gets worse for Russia' – analysts
Here is some reaction to the Bank of Russia’s rate hike to 12% today, following yesterday’s collapse of the rouble, courtesy of Reuters.
Timothy Ash, senior emerging markets sovereign strategy at Bluebay Asset Management in London, said:
As long as the war continues it just gets worse for Russia, the Russian economy and the rouble. Hiking policy rates won’t solve anything - they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth - unless the core problem, the war and sanctions are resolved.
Stuart Cole, chief macro economist at Equiti Capital in London, said:
It is an emergency response to the fall in the value of the rouble, which has recently suffered one of the fastest depreciations of EM currencies.
While such a depreciation risks boosting inflation, it is also the signal it sends out to the Russian public about the costs of the invasion of Ukraine. As such, today’s decision
will likely have had an element of politics behind it as well as economics.The move will also have been an attempt to slow capital outflows, which have been seen as a growing problem as Russians seek to preserve the value of their assets.
But, given the sanctions regime Russia is under, it is doubtful the move by the CBR will have much long-lasting effect beyond slowing even further any economic activity still being seen in Russia.
Liam Peach, senior emerging markets economist at Capital Economics in London, said:
Today’s rate hike will only temporarily slow the bleeding. The rouble’s depreciation is a consequence of many factors moving against Russia all at once. The current account surplus has shrunk drastically due to a slump in energy prices and export revenues as well as a rapid rebound in goods imports.
Russia will struggle to attract capital inflows because of sanctions. And there’s little ammunition for currency intervention – the central bank has some unfrozen renminbi assets and gold reserves, but the bar for using these is likely to be high.
Updated
High interest rates hit investor demand at L&G
Legal & General is the biggest faller on the FTSE 100, with the shares down 3.6%, after the pension and insurance firm reported a 10% drop in assets under management.
High inflation and a series of rate hikes have hit investor demand and asset values, and other fund managers such as abrdn have also been hit.
Higher-than-expected UK pay growth has cemented expectations of a further rate hike at the Bank of England’s next meeting in September.
L&G, one of the biggest investors in the UK stock market, had assets under management of £1.2 trillion at the end of June, with net outflows of £12.3bn in the first half of the year.
Outgoing chief executive Nigel Wilson described the results as “mixed” but said the insurer was seeing “slightly more tailwinds than headwinds”. He will be replaced by Banco Santander executive Antonio Simões, when he retires at the end of the year.
Updated
Here’s our full story on grocery price inflation:
Food price inflation in the UK eased to 12.7% last month, the second sharp drop in a row, as the price of milk fell back but eggs, sweets and oven chips continued to increase in price.
Price rises slowed for the fifth month in a row in the four weeks to August 6, market research group Kantar reported on Tuesday.
Fraser McKevitt, the head of retail and consumer insight at Kantar, said the 2.2 percentage point reduction in the pace of price rises was the second sharpest month-on-month fall in inflation it had recorded since 2008.
Updated
UK insolvencies fall but rainy summer puts hospitality firms at risk
The number of companies going bust in the UK declined last month but remained higher than before the pandemic, according to the latest stats.
Some 1,727 companies became insolvent, 6% lower than in the same month last year. But this was higher than levels seen while the government support measures were in place during the pandemic, and also higher than pre-pandemic numbers.
There were 248 compulsory liquidations in July 2023, 81% higher than in July 2022. Compulsory liquidations have increased from historical lows during the pandemic, partly as a result of an increase in winding-up petitions presented by HMRC.
There were 1,336 creditors’ voluntary liquidations (CVLs), down 17% year on year. Administrations and company voluntary arrangements rose, though.
David Hudson, restructuring advisory partner at the business advisory firm FRP, said:
Insolvency levels will continue to rise throughout 2023 as higher interest rates, inflation and weaker consumer confidence feed through.
Encouragingly, we’re seeing businesses reinforcing their positions against future headwinds. For example, in construction, firms are increasingly building escalators into contracts that allow them to increase prices if certain input costs go up. But steps like these only do so much to recover losses that have already been incurred and with property prices in decline this will compound the issue. In the face of what are still punishing trading conditions, businesses that have been under sustained pressure for some time now will find they can go no further.
The poor weather that’s drenched the UK this summer may also mean a greater risk of insolvency in the hospitality, tourism and retail sectors over the next eight to 10 months.
These are businesses that often rely on a busy summer trading period to get them through the quieter winter period. With UK travel agencies already reporting a rise in domestic tourists booking trips abroad to flee the rain, this weather could mean a washout when it comes to their revenue and profit for this year. Any businesses that are missing trading targets now should be forecasting over the long-term to see where future pressure points lie and seeking help so these issues don’t become catastrophic.
Updated
Market summary
On the markets, the FTSE 100 index has fallen 1.2%, or 90 points, to 7,416 while sterling strengthened after the jump in UK basic pay growth, which analysts said helps cement an interest rate hike in September.
The pound rose 0.2% against the dollar earlier and is now up a smidgen at $1.2689.
Germany’s main share index, the Dax, has lost 117 points or 0.7% to 15,786 while France’s CAC is off 0.9%, or 68 points, at 7,280. Only Italy’s FTSE MIB is in the black, rising 0.57%, or 160 points,, to 8,435.
Brent crude, the global oil benchmark, is trading 0.3% lower at $85.91 a barrel.
Russia’s rouble has staged a small recovery to 97.4 per dollar but pared gains, after the country’s central bank hiked rates by 3.5 percentage points to 12%, citing high inflation.
Yesterday, the currency weakened dramatically to its lowest level since March 2022, hitting 102 per dollar at one stage, dragged down by the impact of western sanctions on Russia’s trade position, with imports climbing, and soaring military spending.
Updated
M&S shares jump after surprise profit upgrade
Marks and Spencer shares jumped nearly 8% after it said it expects increased profits for the current financial year, upgrading its outlook after growing its market share in food, clothing and homeware.
In an unexpected update to the City, the high street retailer told investors its interim results, due to be published in November, would show “a significant improvement” against previous expectations.
M&S said that in the first 19 weeks of the year like-for-like food sales grew 11% and clothing and homeware sales rose by over 6%.
The firm saw considerable growth sales growth in its holiday range between April and June, with a 46% increase in sales of beachwear and 22% rise in sales of linen.
It said that the company’s operating margin has continued to be “robust” and that it was making “good progress” on its programme to reshape M&S.
In a statement, the retailer said:
There remain considerable uncertainties about the economic outlook, and there is a risk that the consumer market will tighten as the year progresses.
Nevertheless, we now expect the outcome for the year to show profit growth on 2022-23, and the interim results to show a significant improvement against previous expectations.
The boost in sales comes despite the cost of living crisis squeezing consumer incomes and just weeks after clothing retailer Next upgraded its profit forecast after shoppers flocked to the summer sales.
The Sun’s business editor Ashley Armstrong tweeted:
Quite the moment for M&S’s turnaround - a rare profit upgrade on the back of strong food (⬆️ 11%) AND clothing sales (⬆️6%).
— Ashley Armstrong (@AArmstrong_says) August 15, 2023
Has the retailer got its mojo back at last?! Fashion crowd seems to think so. (As does my online shopping basket) pic.twitter.com/sJbVIpV3wy
Here is our full story on the UK labour market data.
The Bank of England is under renewed pressure to raise interest rates next month after wages jumped more than expected in June, boosted by a one-off payment to NHS workers.
A rise in borrowing costs is likely even though the latest figures for the labour market also showed employers had begun to shed workers in response to a slowdown in economic activity.
Total pay, including bonuses, rose by 8.2% a year in the three months to June, the Office for National Statistics reported, stronger than the 7.3% analysts expected.
Regular pay, which does not include bonus payments, rose by 7.8% in the quarter, the highest regular annual growth rate since comparable records began in 2001, up from 7.5% in March-May.
Updated
Rouble recovers after central bank rate hike
The statement doesn’t mention the rouble, which dropped to its lowest level in nearly 17 months yesterday. The Russian currency has been boosted by the central bank’s move.
It now takes 95 roubles to buy a dollar, whereas yesterday the exchange rate was at 102 roubles per dollar at one stage.
Russia’s central bank lifts rates to 12%
The Bank of Russia has raised its key rate to 12% from 8.5%. It explained in a statement on its website:
The decision is aimed at limiting price stability risks.
Inflationary pressure is building up. As of 7 August, the annual rate of inflation rose to 4.4% while current price growth rates continue to increase. Over the last three months current price growth amounted to 7.6% on average in annualised terms on a seasonally adjusted basis. The same core inflation measure went up to 7.1%.
Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports. Consequently, the pass-through of the ruble’s depreciation to prices is gaining momentum and inflation expectations are on the rise.
Hereinafter, with current price growth rates staying at the attained levels the risk of inflation’s deviation upwards from the target in 2024 is substantial. The Bank of Russia’s decision is aimed at shaping monetary conditions and overall domestic demand dynamics necessary to bring inflation back to 4% in 2024 and stabilise it close to 4% further on.
Moving forward, in its key rate decision-making the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic transformation processes, as well as the risks posed by domestic and external conditions and the reaction of financial markets. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will return to 4% in 2024.
Updated
UK grocery inflation slows as some staples like milk are cheaper, says Kantar
UK grocery price inflation slowed further over the past month as some staples like milk and sunflower oil have become cheaper at supermarkets.
However, prices are still up year-on-year “across every supermarket shelf,” analysts at Kantar said.
They reported price inflation across supermarkets and other food stores at 12.7% for the four weeks to 6 August, down from 14.9% the previous month. It is the fifth month of declines since the figure peaked at 17.5% in March.
Fraser McKevitt, head of retail and consumer insight at Kantar, said:
The latest slowdown in price rises is the second sharpest monthly fall since we started monitoring grocery inflation in this way back in 2008.
Prices are still up year-on-year across every supermarket shelf, but consumers will have been relieved to see the cost of some staple goods starting to edge down compared with earlier in 2023.
Shoppers paid £1.50 for four pints of milk last month, down from £1.69 in March, while the average cost of a litre of sunflower oil is now £2.19, 22p less than in the spring.
The data, based on the shopping habits of 30,000 households across the UK, also showed strong demand for own-label products from cash-conscious customers, with sales up by 9.7% for the quarter.
Overall take-home grocery sales increased by 6.5% over the month, Kantar said, down from 10.4% growth the month before.
It explained that with the recent wet weather, shoppers turned away from traditional summer favourites, while soup sales grew 16% as people looked for warming meals.
McKevitt added:
It was a better month for Barbie than barbecues this July as the rain put a spanner in the works for many consumers’ outdoor plans - a stark comparison to last year when we experienced the hottest day on record.
Volume sales of ice creams were down by 30%, while soft drinks sales were nearly a fifth lower than 12 months ago.
Sales at Tesco and Sainsbury’s grew strongly over the month, rising by 9.5% and 9.3% respectively. But Aldi was the fastest growing retailer for the fourth month in a row, with its sales jumping by more than a fifth year-on-year.
Updated
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:
For now, wages still are rising too quickly for the monetary policy committee to tolerate indefinitely.
As things stand, we still expect the MPC to raise Bank Rate by 25bp in September, and then leave it at 5.50% at the remaining meetings of this year. The momentum in wage growth still is too strong for the committee to take a break just yet.
But the risk that the committee does nothing in September now is greater than the odds that they hike by 50bp; ultimately, the next two inflation reports will have the largest influence on the MPC’s next steps.
The surge in UK basic pay growth to a record high of 7.8% is a double-edged sword.
It suggests that the cost of living could begin to ease, said Jack Kennedy, senior economist at the global hiring and matching platform Indeed.
There are signs the cost of living could finally start to ease after record annual pay growth drove pay above inflation for the first time in over one-and-a-half years.
At the same time, it will add to the Bank of England’s concerns about inflation, and Treasury nervousness over the state pension triple-lock.
Adrian Lowery, financial analyst at wealth manager Evelyn Partners, said:
This above-expectations wage growth will be watched nervously at the Treasury as it threatens to add fuel to the triple lock fire. The wages element of the triple lock - annual earnings growth for May to July - won’t be available until next month but this outcome suggests it could be significant. Moreover, strong wage growth is likely to impair the retreat of inflation in the coming months, and the Bank of England recently warned that the pace of wage growth is a threat to its longer-term inflation target of 2%.
While the consumer prices index for July due tomorrow is widely expected to show a fall in the headline annual inflation rate, there are reported fears in Whitehall that subsequent months could reveal a plateau or even a tick back up in the rate. The inflation reading for September, or a possibly even-more racy wage growth figure, will determine what could be a very substantial rise in the state pension and reignite the debate over whether the triple lock is sustainable.
The cost of the state pension is already expected to outweigh combined spending on education, policing and defence in the next two years. With neither of the leading parties yet willing to question the affordability of the triple-lock in the run-up up to a general election, this could intensify the squeeze on the public finances.
Updated
Productivity growth in the UK has improved, and is now higher than before the Covid-19 pandemic.
The preliminary estimate of output per hour worked for April to June 2023 was up 0.1% compared with the same quarter a year ago, and 1.4% above its pre #COVID19 level.
— Office for National Statistics (ONS) (@ONS) August 15, 2023
➡️ https://t.co/ccdMRh0DIx pic.twitter.com/7jkuldlEep
Updated
There was a further 38,000 decline in economic inactivity as people returned to job market from looking after the family and home, the ONS said, although those inactive because of long-term sickness increased to a record high.
UK labour market data point to one more rate hike – analysts
The UK labour market data supports the case for one more rate hike from the Bank of England, said Ruth Gregory, deputy chief UK economist at Capital Economics. She explained:
The fall in employment in the three months to June and further rise in the unemployment rate will be welcomed by the Bank of England as a sign labour market conditions are cooling. But with wage growth still accelerating, this supports our view that the Bank of England will deliver one more 25 basis point rate hike before it brings its tightening cycle to a close.
The 66,000 fall in employment in the three months to June (consensus forecast +75,000) will be welcomed by the Bank of England as a sign that the tight labour market is easing.
Admittedly, the cooling in labour market conditions didn’t feed through into an easing in wage growth.
The Bank of England will be concerned about the fact that, the single-month annual growth rate in one of its preferred gauges of inflation persistence, regular private sector wage growth, rose from 8.1% to 8.3%. And the three-month rate was 8.2%, far above the 7.6% the Bank of England had predicted in August.
This suggests the Bank of England has a bit more work to do and supports our view that the Bank will raise rates from 5.25% to 5.50% in September, although a lot will depend on the next labour market release and two CPI inflation data releases.
In April to June 2023, annual growth in regular pay (excluding bonuses) was 7.8%; this is the highest regular annual growth rate we have seen since comparable records began in 2001.
— Office for National Statistics (ONS) (@ONS) August 15, 2023
➡️ https://t.co/OkfDwgsEBn pic.twitter.com/dO2MfBELqx
Updated
The chancellor of the exchequer, Jeremy Hunt, noted that the unemployment rate, at 4.2%, is still low by historical standards.
Our ambitious reforms will make work pay and help even more people into work – including by expanding free childcare next year – helping to deliver on our priority to grow the economy.
Jonathan Ashworth, Labour’s shadow work and pensions secretary, was scathing, though.
These figures confirm once again that the Tories are failing working people and businesses across Britain.
Families are struggling to get by, there are record numbers of people out of work due to long-term sickness, and the employment rate for over 50s is still below pre-pandemic levels – yet Tory ministers have no solutions to get people back to work. The consequence is thousands written off and a rising benefit bill.
Only Labour’s plan to build a strong economy will create good jobs and get Britain working again.
Introduction: UK basic wage growth hits record high; Russia's central bank expected to lift rates
Good morning, and welcome to our live coverage of business, economics and financial markets.
In the UK, basic pay growth has jumped to the highest rate since records began while the unemployment rate rose unexpectedly.
Average weekly earnings excluding bonuses rose 7.8% in the three months to June, the highest since records began in 2001, according to the Office for National Statistics. This will add to the Bank of England’s concerns about high inflation.
Total earnings rose 8.2%, higher than the 7.3% growth forecast by economists, boosted by NHS one-off bonus payments made in June.
In another surprise, the unemployment rate increased from 4% to 4.2%, the highest since October 2021. This was driven by people who have been unemployed for up to 6 months.
The number of employed people declined by 66,000 between April and June, while vacancies were also down. Between May and July, the number of vacancies fell by 66,000 on the quarter to 1.02m.
In June alone, employment fell by a huge 567,000, reversing the 184,000 single-month leap in April.
There were 160,000 working days lost because of labour disputes in June, more than half in the health and social work sector.
Headline indicators for the UK labour market for April to June 2023 show:
— Office for National Statistics (ONS) (@ONS) August 15, 2023
▪️ employment was 75.7%
▪️ unemployment was 4.2%
▪️ economic inactivity was 20.9%
➡️ https://t.co/HNQFOg0iDP pic.twitter.com/lrYYlvbV2S
The Russian rouble is rising ahead of an extraordinary meeting by Russia’s central bank. It is expected to raise interest rates to prop up the currency, which fell to its weakest level in almost 17 months yesterday.
It took 102 roubles to buy one US dollar at one stage, a nearly 2% increase, according to Refinitiv data. That was the weakest level since March 2022. This morning, the rouble has risen to 96.40 per dollar.
The decision from the Bank of Russia is expected at 10.30am Moscow time (8.30am BST). Its key rate is currently at 8.5%.
President Vladimir Putin’s economic adviser Maxim Oreshkin said yesterday:
The central bank has all the tools to normalise the situation in the near future.
It is in the interests of the Russian economy to have a strong rouble.
China’s central bank unexpectedly cut its key policy rates for the second time in three months, as the authorities seek to boost a sputtering economic recovery.
But some analysts said the cut to one-year medium-term lending facility rates by 15bp to 2.50% was not enough, and China could follow up with a reduction in its lending benchmark loan prime rate next week.
They said falling credit growth and growing deflation risks in July prompted the move. Some housing developers are struggling and risk defaulting on their debts and a private wealth manager missed payments, also raising questions over the health of the economy. Yesterday, China’s biggest private property developer, Country Garden, said it would suspend trading in some bonds.
The Agenda
8am UK Kantar grocery price inflation
10am BST: Eurozone ZEW Economic sentiment index for August
10am BST: Germany ZEW Economic sentiment index for August
1.30pm BST: Canada inflation for July (forecast: 3%)
1.30pm BST: US Retail sales for July (forecast: 0.4%)
Updated
