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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Market slide as US inflation hits 8.6%; UK families cut back on food – as it happened

Bundesbank United Kingdom United States Bank of England Inflation Economy
People shop in a supermarket in Washington, DC, last month.
People shop in a supermarket in Washington, DC, last month. Photograph: Nicholas Kamm/AFP/Getty Images

Closing post

Time for a recap

Stock markets have slumped on both sides of the Atlantic after inflation in America surged unexpectedly to a new 40-year high.

Britain’s FTSE 100 has tumbled 2% to a three-week low, with miners, technology firms and hospitality companies among the big fallers, as recession fears mounted.

The pan-European Stoxx 600 is off around 2.5%, as is the S&P 500 in New York.

Economists predicted that America’s Federal Reserve would press on with sharp increases in interest rates in an attempt to cool inflation, with an increase of at least 50-basis points expected next week.

US gasoline prices jumped 4.1% last month, and were nearly 50% higher than a year ago, while food prices have jumped 12% since last May and air fares are up nearly 40% in a year.

Inflation accelerated on a monthly basis, up 1% in May alone:

The jump in inflation piles more pressure on president Biden, as the war in Ukraine continues to drive up energy prices and create supply chain disruption. Here’s the full story:

US consumer sentiment has slumped to a record low, mainly due to inflation hitting households.

Anxiety about the cost of living crisis is also rising in the UK. Three-quarters of adults are worried about it, and over 40% have cut back on food spending.

Women, those with disabilities and parents with young children are most anxious about the impact of rising prices..

Nurses are facing a £1,600 real-terms wage cut under plans being considered by the government for this year’s pay rise, with ministers expected to offer an increase of just 3% for NHS staff in England despite the soaring cost of living.

Petrol and diesel hit record levels again at UK forecourts, pushing up the cost of filling the average UK petrol car further over £100.

The AA recommended that drivers cut out shorter journeys.

Russia has cut interest rates back to levels before the Ukraine war. The Central Bank of Russia lowered its key lending rate from 11% to 9.5%, in an effort to support its economy.

The UK’s largest banks are no longer “too big to fail” and could foot the bill for their own failures, the Bank of England has said, but it found shortcomings at three banks including HSBC and Lloyds.

The UK competition watchdog is considering launching an investigation into Apple and Google’s dominance of the mobile browser market after finding the tech companies have a “stranglehold” on a range of areas including app stores.

Hiring at UK firms has slowed. UK employers increased the number of new staff in May at the slowest pace since early 2021 after a steep fall in the number of workers responding to job adverts.

Economic pain is rising in Germany too, where the Bundesbank slashed its growth forecasts and hiked its estimates for inflation this year.

Full story: US inflation hits 40-year high of 8.6% as food, gas and shelter costs rise

Inflation rose to a four-decade high in the US in May, rising 8.6% from a year ago, the labor department said on Friday.

The latest consumer price index (CPI) figures showed that the cost of living increased 1% from April and was broad-based, with the indexes for shelter, gasoline and food being the largest contributors.

Gas prices have been soaring across the US, approaching $5 a gallon this week – $1.90 more than a year ago. According to the latest CPI report the energy index rose 3.9% over the month, with the gasoline index rising 4.1%. Other major component indexes also increased. The food index rose 1.2% in May as the food at home index increased 1.4%.

May’s rise was driven by sharp increases in energy costs, which rose 34.6% from a year earlier, and groceries, which jumped 11.9% on the year. Food and energy prices are more volatile than other categories included in the CPI, and the labor department publishes a “core prices” index which excludes them. It rose 0.6% from April.

Inflation fears have battered Joe Biden’s poll numbers and his administration has sought to blame Russia’s invasion of Ukraine for rising prices. The war in Ukraine and the continuing disruption to global trade caused by the coronavirus pandemic have both contributed to rising prices for food and energy. But there were worrying signs of inflation spreading.

Shelter costs were up 5.5% compared with a year ago. After three months of declines, prices for used cars and trucks rose 1.8% in May from April and are up 16.1% over the year.

US consumer sentiment hits all-time low as inflation bites

US consumer confidence has cratered to a record low, as inflation hammers families.

The University of Michigan’s consumer sentiment index has sunk to its lowest on record, tumbling to just 50.2 this month from 58.4 in May, and 85.5 points a year ago.

Surveys of Consumers Director Joanne Hsu explains:

Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession.

All components of the sentiment index fell this month, with the steepest decline in the year-ahead outlook in business conditions, down 24% from May. Consumers’ assessments of their personal financial situation worsened about 20%. Forty-six percent of consumers attributed their negative views to inflation, up from 38% in May; this share has only been exceeded once since 1981, during the Great Recession.

Wall Street slides at the open

The New York Stock Exchange.
The New York Stock Exchange. Photograph: Spencer Platt/Getty Images

Wall Street has opened in the red, as feared, after US inflation resumed its upward march in May to a new 40-year high.

All three indices are lower, as traders fear that rising interest rates will trigger a downturn.

  • The Dow Jones industrial average: down 566 points or 1.75% at 31,706
  • S&P 500: down 72 points or 1.8% at 3,945
  • Nasdaq Composite: don 228 points or 1.9% at 11,526

Richard Flynn, Managing Director of Charles Schwab UK, said the rate of inflation in May will cause concern that price rises are spiralling.

Today’s figures exceed both investors’ expectations and the rate of inflation in April. In a bid to control price rises, the Federal Reserve has begun to aggressively tighten interest rates. Yet this fix creates its own risks and, even if inflation peaks soon, it’s unlikely to decelerate quickly. High prices may put pressure on consumer spending into the medium term.

“Add ongoing supply-chain problems and the economic impact of Russia’s invasion of Ukraine to the threat of inflation, and it’s easy to see why fears of a downturn have risen swiftly. For investors, US stocks, bonds, and cash are all in a bear market or teetering on the edge of one. There’s no perfect signal of when bear or near bear markets will end. For now, rallies are likely to be countertrend.”

Americans faced the biggest annual jump in food prices, to eat at home, in over 40 years.

The food at home index rose 11.9% over the last 12 months, the largest 12-month increase since April 1979.

All six major grocery store food group indexes increased over the span, with five of the six rising more than 10%.

Meats, poultry, fish, and eggs increased the most, rising 14.2%, including a 32.2% jump in egg prices.

Fruits and vegetables cost 8.2% more than a year ago, while prices of dairy products jumped 11.8%.

Here’s Steven Rattner, former head of president Obama’s Auto Task Force:

Michael Pearce, senior US economist at Capital Economics, suggests the Fed could raise US interest rates by 75 basis points next week.

Markets were already anticipating a 50 basis point rise - a repeat of May’s move, the biggest in 20 years.

Pearce, though, suggests the Fed might be even more aggressive:

The surprise increase in headline inflation to 8.6% in May, from 8.3%, together with another strong rise in core prices raises the odds that the Fed will need to extend its series of 50bp rate hikes into the fall, and even opens the door to a larger 75bp move at next week’s FOMC meeting.

There is very little in the details of this report to suggest that inflationary pressures are easing, he explains:

Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bp rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.

The pound has now shed a cent against the rallying US dollar to $1.238, a three-week low.

The dollar has rallied against other currencies too, as traders predict that US interest rates will be hiked sharply higher in the months ahead.

This jump in US inflation will test the Federal Reserve’s resolve to tame prices, says Seema Shah, chief strategist at Principal Global Investors.

It also dashes any hopes that the Fed might pause its rate hikes to support asset prices if the markets tumbled (the idea of a Fed ‘put’).

“What an ugly CPI print.

Not only was it higher than expected on almost all fronts, pressures were clearly evident in the stickier parts of the market. The decline in inflation - whenever that finally happens - will be painfully slow. The Fed’s price stability resolve is going to be really tested now.

Policy rate hikes will need to relentlessly aggressive until inflation finally starts to fade, even if the economy is struggling. Any chance of a Fed put, already very low, has been “put” firmly to bed.”

Markets slide after US inflation surges

Stock markets have tumbled after US inflation hit a new 40-year high, while currencies such as the pound and the euro have fallen against the US dollar.

Investors are betting that the US Federal Reserve must press on with hefty interest rate hikes, in an attempt to cool prices even it it hits economy growth.

The Dow Jones industrial average, which contains 30 major US companies, is on track to fall 400 points, or 1.2%.

Victoria Scholar, head of investment at Interactive Investor tweets:

European markets, which were already in the red, have fallen further.

The UK’s FTSE 100 index has hit a three-wek low, down 1.8%, or 137 points, at 7,338 points.

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, says:

The current conflict in Ukraine and the covid induced lockdowns in China are putting further upward pressure on the rate of inflation and we’re likely to see persistently high readings over the coming months, albeit the rate may reduce from here, until growth starts to slow and supply pressures ease.

The significant increases in the cost of living and the interest rate increases are starting to have a detrimental impact on current and future growth for the American economy and this is likely to bring inflation meaningfully lower over the medium term.

The Fed has a tricky task ahead of them trying to ensure that inflation expectations don’t become entrenched but they are likely to continue tightening policy into a slowing economy. The ‘softish’ landing they are hoping for may continues to look like a big ask.”

Updated

The jump in airline fares last year is quite startling:

US inflation is rising much faster than earnings, meaning the average American is are suffering a real wage cut.

Average hourly earnings rose by 5.2% in the year to May, last week’s non-farm payroll showed, well behind price rises.

Weekly wages also lagging, as Liz Ann Sonders, chief investment strategist at Charles Schwab, tweets:

Here’s Bloomberg’s Lisa Abramowicz:

US inflation ‘hot again' as prices jump in May

US inflation is ‘hot again’, warns Greg Daco of Oxford Economics.

Here’s a breakdown of the factors that pushed up prices by 1% just last month:

The prices rises pushing US inflation to 40-year highs were notably broad-based last month.

The cost of shelter rose 5.5% over the last year, the largest 12-month increase since the period ending February 1991.

Household furnishings and operations increased 8.9% over the last 12 months.

The cost of new vehicles jumped 12.6%, while used cars and trucks were 16.1% pricier than a year ago -- and airline fares were 37.8% higher.

Key event

US energy prices surged by 34.6% over the last 12 months, partly due to the rocketing gasoline prices at the pumps.

The gasoline index increased 48.7%, while fuel oil (used for heating, and to fuel trucks and ships) prices more than doubled -- up 106.7%, the largest increase on record.

Core US inflation, which strips out volatile factors such as food and energy, was also higher than expected last month - at 6.0% (three times the Federal Reserve’s target).

That’s down from 6.2% in April, but above the 5.9% expected.

Updated

US consumer prices accelerated by 1% in May alone, dashing hopes that inflationary pressures might be easing.

The increase was broad-based, with the indexes for shelter (housing costs), gasoline, and food being the largest contributors.

After declining in April, the energy index rose 3.9% over the month with the gasoline index rising 4.1% and the other major component indexes also increasing.

Food prices rose 1.2% in May, while the food at home index increased 1.4%.

US inflation hits four-decade high of 8.6%

Newsflash: US inflation has hit a new four-decade high.

Consumer prices surged to 8.6% in the year to May, as the cost of living crisis hitting Americans continues.

That’s worse than expected -- and up from 8.3% in April.

More to follow.

It’s nearly time for the latest US inflation report....

Full story: Rising cost of living a worry for 77% of adults in Great Britain, says ONS

More than three-quarters of adults worry about the rising cost of living, with about half of them doing so almost every day, according to research by the Office for National Statistics.

Among adults over the age of 16 in Great Britain, the ONS said 77% reported feeling “very or somewhat worried about the rising cost of living”. Of these respondents, 50% said they worried “nearly every day”.

A separate ONS survey shows how people have changed their behaviour in response, with 52% of people saying they were using less fuel such as gas and electricity at home after major cost increases, while almost half have reined in spending on food and reduced non-essential travel in order to help their finances.

The anxiety statistics, which cover the period 27 April to 22 May, highlight the mental health impact of inflation, while the other ONS survey, covering 25 May to 5 June, looked at its impact on people’s daily decisions of what to buy.

The second poll found that the number of people spending less on food shopping and essentials jumped to 41% of households from 36% in the previous fortnight, while the proportion of those buying fewer items in their food shops increased to 46% from 44%.

More here:

The pound has dipped to around its lowest level in three weeks against the US dollar today, at below $1.243.

Worries about the UK economic outlook are weighing on sterling, while the dollar is higher ahead of the latest US inflation report in 45 minutes.

Russia’s central bank also suggests it could keep cutting interest rates.

In its statement announcing today’s cut, it says:

The Bank of Russia will consider the necessity of key rate reduction at its upcoming meetings.

Russia’s inflation rate is currently running at 17%, but price pressures have eased in recent weeks as the rouble recovered its earlier losses.

The Bank estimates that annual inflation will be 14.0–17.0% in 2022, before dropping to between 5% and 7% in 2023, and returning to its 4% target in 2024.

Russia cuts interest rates to pre-invasion level of 9.5%

Russia’s central bank has cut its key interest rate back to levels before the Ukraine war began.

The Bank of Russia has lowered its key interest rate to 9.5%, from 11%, in an attempt to support the economy as Western sanctions continue to bite.

In a statement, the CBR says “proinflationary risks” continue to abate:

The external environment for the Russian economy remains challenging and significantly constrains economic activity. At the same time, inflation is slowing faster and the decline in economic activity is of a smaller magnitude than the Bank of Russia expected in April.

Recent data suggest that price growth rates in May and early June have been low. This comes as a result of ruble exchange rate movements and the tailing-off of the surge in consumer demand in the context of a marked decline in inflation expectations of households and businesses.

The Bank of Russia had more than doubled rates after the invasion of Ukraine in February, from 9.5% to 20%, to prop up the rouble. But it has been steadily cutting them since, as the currency strengthened and the economy headed into a deep recession.

Today, the CBR says Russian companies are still struggling to fix production and logistics, despite trying to find new suppliers for finished goods, raw materials and components, and new customers.

Consumer activity in real terms is on the decline, it adds, as households show a high propensity to save and real incomes shrink.

Updated

CMA plans investigation into Apple and Google's 'effective duopoly' on mobile

Britain’s competition watchdog is taking enforcement action against Google over its app store payment practices, and pledged to tackle Apple and Google’s grip on the mobile markets.

The Competition and Markets Authority is investigating Google’s Play Store rules which oblige app developers offering digital content to use Google’s own payment system, Google Play Billing, for in-app purchases.

The CMA is also consulting about a launching a market investigation into Apple and Google’s market power in mobile browsers and Apple’s restrictions on cloud gaming through its App Store.

Having studied both companies’ mobile ecosystems, it has concluded they have an “effective duopoly” that lets them “exercise a stranglehold” over these markets, which include operating systems, app stores and web browsers on mobile devices.

Andrea Coscelli, chief executive of the CMA, said:

When it comes to how people use mobile phones, Apple and Google hold all the cards. As good as many of their services and products are, their strong grip on mobile ecosystems allows them to shut out competitors, holding back the British tech sector and limiting choice.

We all rely on browsers to use the internet on our phones, and the engines that make them work have a huge bearing on what we can see and do. Right now, choice in this space is severely limited and that has real impacts – preventing innovation and reducing competition from web apps. We need to give innovative tech firms, many of which are ambitious start-ups, a fair chance to compete.

The CMA also warns that Apple has “blocked the emergence of cloud gaming services on its App Store”, adding:

Gaming apps are a key source of revenue for Apple and cloud gaming could pose a real threat to Apple’s strong position in app distribution. By preventing this sector from growing, Apple risks causing mobile users to miss out on the full benefits of cloud gaming.

The cost of living crisis is causing clear mental health damage, as well as hitting people’s finances, today’s report shows.

Myron Jobson, senior personal finance analyst, interactive investor, explains:

The overwhelming majority of the sample reported feeling unsettled by the rising cost of living over a period where energy bills soared to almost £700 a year, on average, while the cost to put food on the table and fuel a car also rose significantly.

“The cost of living crunch is indiscriminate, but it has impacted people differently. All of us are noticing our bills go up, but it is felt more acutely by those on low incomes.

“The study also shows that women are more worried about rising prices than men, which could be symptomatic of the gender wage gap, while those aged 30 to 49 years 50 to 69 years were the age groups most likely to report feeling very or somewhat worried about inflation.

“Parents of young children are more worried about rising prices than a those without a dependent child. They have to contend with an additional burden of a rising childcare bill, with nursery fees, snacks and even nappies also on the up.

There’s little hope of respite, either, with energy bills set to go up by £800 a year on average in the autumn.

AA: drivers should cut shorter journeys as fuel hits new records

Petrol prices have hit fresh record highs, prompting the AA to encourage drivers to cut out shorter journeys.

The average price of a litre of petrol at UK forecourts reached a new record of 183.2p on Thursday, according to data firm Experian. That’s an increase of 7p in just a week -- including a 2p jump on Tuesday, the biggest in 17 years.

Diesel hit a new record too, at 188.8p.

AA president Edmund King says drivers need to take action, including cutting out journeys where possible.

“This is the worst week of pump pain so far for drivers.

“We would urge drivers at the moment to cut out shorter car journeys if they are able to do so, and walk or cycle to save money.

“Almost one fifth of AA members are already doing this.

“But by changing your driving style you can also save up to 15% on fuel costs.

More than half of British households have cut back on their use of energy, according to the Office for National Statistics’s cost of living survey.

It found that 52% of adults are using less fuel such as gas or electricity at home in the last two weeks, and that 5% have fallen behind on their bills.

Also, 60% of adults are spending less on non-essential items, as well as the 46% who are buying less food (see earlier post).

Four in 10 people are cutting back on non-essential journeys in a vehicle. That suggests record petrol and diesel prices are forcing motorists to drive less, now it costs £100 to fill the average petrol car.

Updated

UK inflation expectations jump

The public’s expectations for the rate of inflation in a year’s time have risen to their highest in records going back to 1999, a quarterly survey by the Bank of England has found.

The public expect inflation in 12 month’s time to be 4.6%, up from 4.3% back in February. That would be more than double the BoE’s 2% target.

Expectations for two- and five years’ time rose to 3.4% and 3.5%, the highest since 2013 and 2019 respectively, showing that people are bracing for prices to keep rising for some time.

Updated

Three-quarters of adults fear cost of living crisis

Three quarters of British adults are worried about the cost of living crisis, with women, disabled people, poorer housholds, and those with young children most anxious about rising inflation.

The Office for National Statistics has reported that 77% of adults are either very or somewhat worried about the rising costs of living.

That figure rises to 81% for woman (compared with 73% of men), and to 82% for disabled people.

Nine in ten of those living with a dependent child aged 0 to 4 years fear the impact of rising prices, the survey (carried out between 27 April and 22 May)

Understandably, poorer households were the most likely to feel very worried about the cost of living, with rising food and energy prices hammering household incomes.

The ONS says:

Those with a gross personal income of less than £10,000 per year had the highest percentage feeling very worried (31%), whereas those with a gross personal income of £50,000 or more had the lowest percentage feeling very worried (12%).

The survey also found that half of the adults who were very worried about the rising costs of living felt those worries nearly every day.

A second ONS survey shows that nine in 10 adults have reported their cost of living had risen over the past month, driven by rising food, gas and electricity and fuel prices.

Alarmingly, this is forcing some families to cut back on food.

Over 4 in 10 (46%) adults reported that they were buying less food when food shopping in the past two weeks. That’s up from 18% at the start of the year, and 44% in mid-May.

Rising food and energy bills pushed UK inflation to 9% in April, the highest in 40 years.

Earlier this week, the Food Standards Agency (FSA) warned that the cost of food is a big worry for the vast majority of Britons, with the number of people who skip meals or use a food bank jumping in the last year.

Updated

Full story: UK’s largest lenders no longer ‘too big to fail’, says Bank of England

Santander was the only one of the UK’s eight top banks to get a completely clean bill of health from the Bank of England’s ‘too big to fail’ assessment.

The BoE found areas for further enhancement at Barclays, Nationwide, Natwest and Virgin Money, as well as shortcomings at Lloyds, Standard Chartered and HSBC.

My colleague Kalyeena Makortoff explains:

It said that three lenders – HSBC, Lloyds and Standard Chartered – had to address shortcomings that could otherwise “complicate unnecessarily” their ability to fail safely. Each of the three lenders was found to either not have adequate financial resources, or proper data and measurements of them, in place to ensure they can absorb losses without putting public money at risk.

Concerns were also raised over whether HSBC could properly restructure the business in a way that would ensure services were still being provided while authorities helped wind down the lender. Standard Chartered was also singled out for failing to identify all the restructuring options available to it.

The lenders will have until 2024 – when the next assessment takes place – to address the shortfalls. The assessment covered eight high street banks in total, including Barclays, Nationwide, NatWest, Santander UK and Virgin Money UK.

Deutsche Bank have lifted their forecasts for UK interest rates -- predicting borrowing costs will hit 2.5%, as the Bank of England tried to rein in inflation.

Chief economist Sanjay Raja predicts the BoE’s Monetary Policy Committee will raise interest rates next Thursday, from 1% to 1.25% -- but it won’t be unanimous...

Instead, risks are skewed to a more split MPC, with at least three members on the committee looking for a bigger 50bps move.

Deutsche Bank now expect the MPC to hike in every meeting for the remainder of the year and one more time in February next year.

Raja explains:

And while our previous call had the Bank Rate peaking at 1.75% – within the range of neutral, which we broadly put at 1.25% to 2% – our updated call has Bank Rate going to 2.5%, beyond neutral and into modestly restrictive territory.

Indeed, in our view, risk management considerations have shifted. With risks to the Bank’s inflation projections tilted firmly to the upside, the modest push into a restrictive stance should give the MPC added confidence in getting inflation back to target over the medium-term.

UK banks have made several improvements since the last financial crisis, which means they can now fail safely, the Bank of England says:

They include:

  • holding more loss absorbing capacity;
  • being able to monitor liquidity needs and mobilise liquid resources throughout resolution;
  • ‘resolution-proofing’ contracts and critical service arrangements to enable continuity through resolution;
  • changes to group structure to keep banks open and operating in a resolution;
  • the ability to plan at speed for further restructuring changes to return the firm to long- term viability; and
  • greater planning for communications in a resolution to ensure public confidence is maintained.

European markets fall amid stagflation fears

European stock markets have dropped this morning, as economic anxiety hits stocks.

The UK’s FTSE 100 is down for the fourth day running, losing 63 points or 0.8% to 7413 points.

Germany’s DAX has lost 1%, while Italy’s FTSE MIB has shed 1.8%.

Investors fear that the eurozone economy will stumble, after the European Central Bank’s said yesterday it plans to raise interest rates in July and September.

Richard Hunter, head of markets at interactive investor, says:

“There is little respite at present from inflationary concerns, giving investors little room for manoeuvre in navigating the darkening economic clouds.

The European Central Bank signalled its intention for an interest rate rise next month, coupled with a downgrade to growth forecasts. With the ECB now joining the clutch of central banks in tightening mode, the spectre of stagflation looms large once more as investors seek refuge from the gathering storm.

The latest employment data adds to signs that the UK recovery is slowing, as firms struggle to hire staff.

British employers added staff in May at the slowest pace since early 2021, according to a regular survey by accountants KPMG and the Recruitment and Employment Confederation (REC).

Their index of permanent staff hiring fell for a sixth month of 59.2 from 59.8 in April - showing slowing growth (but above the 50-point mark showing stagnation).

Temporary staff hiring in May also fell to its lowest since early last year.

UK hiring

Neil Carberry, chief executive of the REC, says it’s still a “a hugely positive jobs market” for people looking for work.

While the pace of growth has dropped after a stellar first quarter, by any normal measure there are still lots of vacancies out there, offering improved wages. For companies, they emphasise again that hiring is a challenge in this market, and getting it right matters – the help of professional recruiters will be vital. The market for temporary work is stabilising faster than for permanent staff, which could suggest a little caution creeping into employers’ thinking in the face of high inflation.

“But compared to pre-pandemic, labour supply is still the big issue we have to solve. With over half a million people missing from the jobs market, and demand still growing strongly, this is a big, strategic issue for the UK. Growth is essential to funding public services and paying higher wages sustainably. Any plan for growth must include action to help people into work from inactivity, skills reform, support for innovation on productivity and targeted immigration reform.”

The UK has fixed its problem of having banks which are simply too big to fail, says Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England.

But the BoE also cautions that “resolvability is a spectrum”, and banks need to maintain their preparations, and keep testing them.

Ramsden says:

“The Resolvability Assessment Framework is a core part of the UK’s response to the global financial crisis, and demonstrates how the UK has overcome the problem of ‘too big to fail’.

The UK authorities have developed a resolution regime that successfully reduces risks to depositors and the financial system and better protects the UK’s public funds. Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue.”

Bundesbank halves 2022 growth forecast,

Germany’s central bank has slashed its growth projections for the German economy.

The Bundesbank also predicted sharply higher inflation, as households are hit by soaring food and fuel price, hitting confidence and purchasing power.

The German central bank now sees prices rising by 7.1% in 2022, well above the 3.6% projected in December. Inflation is expected to be high in 2023, too -- with the forecast raised to 4.5% from 2.2%.

But GDP is only expected to rise by 1.9%, less than half of the 4.2% it predicted in December, reflecting the impact of the Ukraine war on Europe’s largest economy.

Growth in 2023 was cut to 2.4% from 3.2%.

Bundesbank President Joachim Nagel warned that German inflation will be the highest in decades:

“Inflation this year will be even stronger than it was at the beginning of the 1980s,”

“Price pressures have even intensified again recently.

The Bundesbank also warns that Germany’s economy would shrink sharply if Russian energy supplies were cut off:

The Bundesbank has, in addition, calculated an alternative risk scenario which includes a cessation of Russian energy supplies. In this scenario, economic activity could experience a pronounced decline in 2023.

Updated

Introduction: Top UK banks no longer "too big to fail"

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

The UK’s top banks are no longer ‘too big to fail’, but three of its major lenders need to take steps to improve shortcomings.

That’s the verdict from the Bank of England this morning, as it publishes its assessment of how failing lenders could be dismantled in a crisis without needing taxpayer handouts.

The BoE has found that if a major UK bank failed today it could do so safely: remaining open and continuing to provide vital banking services to the economy.

Shareholders and investors, not taxpayers will be first in line to bear the costs, overcoming the ‘too big to fail’ problem.

This verdict follows years of work, creating a resolution regime to handle a failed bank - something that didn’t exist in 2007-08 when the credit crunch led to the collapse of Wall Street bank Lehman Brothers.

That meant UK banks either had to be rescued with taxpayers’ money in 2008 (as happened with Royal Bank of Scotland and Lloyds), or collapse, causing huge disruption.

The BoE says:

The Bank’s assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal.

But, the BoE has also identified shortcomings at HSBC, Lloyds Banking Group and Standard Chartered over their resolution plans.

All three have pledged to make improvements.

Also coming up today

Investors are nervously awaiting May’s US inflation report, due at 1.30pm BST. It’s likely to come in around April’s 8.3%, near a 40-year high.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, fears we could see a ‘bad surprise’:

The positive pressure on food and energy prices and the unexpected uptick in secondhand car prices in May could prevent the index from easing for a second consecutive month.

A stronger-than-expected inflation figure would revive the Federal Reserve hawks, and eventually push the S&P500 below the 4000 mark before the weekly closing bell. A softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind.

Russia’s central bank sets interest rates, and could lower them again from 11% to 10%, while the UK’s Office for National Statistics publishes a report on the rising cost of living.

The agenda

  • 7.30am BST: German Bundesbank’s semi-annual forecast
  • 7.30am BST: China vehicle sales for May
  • 9.30am BST: ONS report on ‘worries about the rising costs of living’
  • 11.30am BST: Central Bank of Russia interest rate decision
  • 1.30pm BST: US inflation report for May
  • 3pm BST: University of Michigan’s US consumer sentiment report

Updated

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