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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank governor says ‘things moving in the right direction’ amid criticism for leaving rates on hold – as it happened

Inflation Interest Rates MPC United States The Bank of England Andy Haldane Bank of England United Kingdom Jefferies
The Bank of England in London, which will set UK interest rates at noon today
The Bank of England in London, which will set UK interest rates at noon today Photograph: Peter Nicholls/Reuters

Closing post

Time to wrap up….

Bank of England policymakers have signalled at least three interest rates cuts this year after seeing “encouraging signs” of falling inflation as they kept interest rates on hold at 5.25% for a fifth time.

The financial markets expect three cuts of 0.25 percentage points this year, forecasting the first to take place in June. The Bank said its survey of financial companies found that they expected rates to fall to 4.5% before the end of 2024.

Inflation has decreased sharply in recent months, with the consumer prices index falling to 3.4% in February. That was still above the Bank’s 2% target, but well below a peak reading of 11.1% in October 2022.

Eight members of the Bank’s rate-setting monetary policy committee (MPC) voted to hold interest rates, while the ninth, Swati Dhingra, backed a cut of 0.25 percentage points. It was the first time since September 2021 that no one on the MPC voted for a rate rise.

The pound fell against the dollar and euro as investors calculated they would get a lower interest rate this year on their UK deposits than was previously forecast. Sterling was down 0.6% against the dollar at $1.27, and down 0.2% against the euro at €1.16 after the announcement.

Shares are rallying in London, though, with the FTSE 100 up around 2% and on track for its best day in over a year.

More here:

Based on the data so far and signals from Thursday’s decision, financial markets expect a first cut in June….

But the BoE has faced criticism from several quarters for not cutting rates today, to help the economy and take some strain off households.

The BoE’s decision came on a busy day for central bank news, in which Switzerland surprised markets with a rate cut, while Turkey hiked its policy rate from 45% to 50%.

In other news:

Updated

Over in parliament, shadow transport secretary Louise Haigh has challenged ministers over the revelation that P&O Ferries has paid some crew members less than half the UK minimum wage.

The story, from the Guardian and ITV News, broke this week, on the second anniversary of P&O Ferries controversially sacking about 800 workers in 2022.

The low-cost crew, who replaced many of the workers P&O axed two years ago, are being hired from countries including India, the Philippines and Malaysia, and are earning as little as £4.87 an hour.

Analysis: an interest rate cut is likely on the way

Andrew Bailey’s comments today could provide some relief for Rishi Sunak, my colleague Richard Partington writes.

But, the PM may have a few months to wait before he can hail a cut in interest rates….

Richard writes:

Based on the data so far and signals from Thursday’s decision, financial markets expect a first cut in June.

This will however mean a tough waiting game for Sunak, who is leading a government in desperate search of good news on the economy before he takes the plunge to call a general election.

Britain has had three prime ministers since the Bank last cut interest rates in March 2020. Sunak will be hoping for progress in the economy to allow Threadneedle Street to take action before his time in Downing Street runs out.

More here:

US Justice Department accuses Apple of ‘illegal monopoly’ in competition lawsuit

The US government has filed a sprawling antitrust case against Apple, alleging that the tech giant has illegally prevented competition by restricting access to its software and hardware.

The case is a direct challenge to the company’s core products and practices, including its iMessage service and how devices such as the iPhone and Apple Watch connect with one another.

The lawsuit, filed in federal court in New Jersey, alleges that Apple has monopoly power in the smartphone market and uses its control over the iPhone to “engage in a broad, sustained, and illegal course of conduct”, the Associated Press reported.

The US Department of Justice’s suit against Apple is a landmark case targeting the most valuable publicly traded company in the world and follows a raft of antitrust suits aimed at big tech. Amazon, Apple, Meta and Google have all faced investigations from regulators in recent years, both in the United States and Europe, over allegations that they have consolidated power while illegally stifling competition. All boast market capitalizations above a trillion dollars.

Central to the case is whether Apple’s strategy of blocking rival companies from accessing various proprietary features such as its iMessage instant messaging service and Siri virtual assistant constitutes anticompetitive practices. The case will also examine whether Apple making its devices easily integrate with each other, but not with non-Apple products, creates unfair hardware limitations that block competitors from the market.

More here:

David Muir, a senior economist at Moody’s Analytics, predicts the Bank of England will feel able to cut interest rates by the middle of this year:

“At this month’s meeting, the Bank of England inched a bit closer to loosening policy. The Monetary Policy Committee judges that even if interest rates are lowered they could still be restrictive enough to return inflation to target.

That said, evidence that inflationary pressures are easing sufficiently will need to build further. So we don’t think a rate cut is just around the corner.

But by the middle of the year, price pressures should be well enough contained to give the BoE the confidence to begin lowering rates.”

The pound’s selloff is gathering pace – sterling has now lost over a cent against the US dollar to $1.266, the lowest in over two weeks.

Bailey: Reasonable to expect interest rate cuts

Bank of England Governor Andrew Bailey has said it was reasonable for financial markets to expect interest rate cuts.

Speaking after today’s interest rate decision, Bailey added that he was very hopeful about the path for inflation.

Responding to questions from broadcasters about whether markets were right to price in two or three rate cuts this year, Bailey said it was reasonable, explaining:

“I’m not going to endorse the market curve, but I think that it’s reasonable that markets are taking that view, given the way inflation has performed.

“That is not a prediction from me as to what’s going to happen, either on timing or amount, but I am encouraged.”

Bailey has also said the fall in inflation was “very encouraging and good news”, but added that there are signs of inflationary persistence – such as service sector inflation running at 6% per year in February.

Ruth Gregory, deputy chief UK economist at Capital Economics, predicts the Bank of England will become more dovish soon, saying:

With the Bank of England striking a slightly more dovish tone whilst keeping interest rates at 5.25% and inflation likely to fall further and faster than the Bank expects, we still think a rate cut in June is possible and that rates will fall to 3.00% in 2025 rather than to 3.75-4.00% as currently priced into the market.

Reddit rings Wall Street opening bell

Over in New York Reddit’s mascot, Snoo, has ceremonially rung the Wall Street opening bell to mark the web platform’s stock market float today.

Snoo appeared to enjoy the appearance, performing a little jig and giving NYSE traders a cheery wave:

Reddit is floating with a market value of $6.4bn today after pricing its shares at the top of its range, $34, last night.

Updated

Britain’s FTSE 100 index is firmly on track for its best day this year.

The blue-chip index is now up 150 points, or 1.94%, its biggest percentage rise since last September, after the Bank of England added to hopes of global interest rate cuts this year.

The key point from the Bank of England today is that the central bank is setting the stage to cut interest rates in a few months, says Daniele Antonucci, chief investment officer at Quintet Private Bank.

Antonucci also predicts that the Bank will cut rates down to 4% by the end of the year, saying:

It’s not surprising that the Bank of England decided to keep the bank rate unchanged at 5.25%.

The key thing is that policymakers took extra crucial steps to set the stage for forthcoming cuts.

This is because the Bank is becoming increasingly confident that inflation is on a more convincing downtrend.

So central bankers are now looking to reduce the degree monetary tightening and, likely, cut it June.

Like the Fed and the European Central Bank, the Bank of England is basically validating market expectations of rate cuts by mid-year.

In the UK, we continue to look for five quarter-point cuts in 2024.

Elsewhere in finance today, JP Morgan, the Cooperative Bank, and NatWest Group, were among 32 City firms which missed self-imposed targets for getting women in senior roles last year, according to the Treasury’s latest Women in Finance Charter report.

The scheme’s annual report - which keeps tabs on signatories who voluntarily commit to bespoke targets for representation of women - said that of the 32 firms that missed their targets, 27 were close – either within five percentage points or five appointments of hitting their target.

Nearly three quarters of signatories either increased or maintained their proportion of women in senior management, the report explained. Over half of the signatories have set a target of having at least 40% of those in senior positions be women.

However, it is unlikely to quell concerns about slow progress for female representation across the City, which rose to just 35% in the City. That is up from 34% in 2022, and compares to 27% from its launch in 2016.

The report comes weeks after the Treasury Committee’s Sexism in the City report hit out at slow progress from the voluntary scheme.

It said there had been “progress in the right direction, but at a rate of little over a percentage point a year, it is frustratingly low.” The Treasury committee added that the initiative had not “brought about the change that was hoped for,” and called on charter signatories to forge a stronger link between executive pay and progress on improving diversity.

Aviva CEO Amanda Blanc, who is also the government’s Women in Finance champion, admitted that progress had been too slow.

She said in a comment on Thursday:

“There is a clear sense of progress and determination to achieve gender diversity in financial services. With over a third of signatories meeting their targets and a steady uptick in female representation, the level of ambition is growing.

Whilst this progress is commendable, we need to move quicker: at the current pace, we won’t achieve gender parity until 2038. Let’s use the report’s insights as a catalyst for action.”

Updated

Stock markets are roaring higher, on hopes of interest rate cuts on both sides of the Atlantic soon.

In London, the FTSE 100 has now climbed by 135 points, or 1.75%, to 7,874 points, its highest since the start of May.

Over on Wall Street, the Dow, the S&P 500 and the Nasdaq have all hit fresh record highs in early trading, after the Federal Reserve yesterday stuck to its forecast of three US interest rate cuts this year.

Updated

It’s interesting that Andrew Bailey gave fading ‘global factors’ some of the credit for the fall in UK inflation.

Yesterday, chancellor Jeremy Hunt claimed that the fall in CPI showed that the government’s “plan is working”, even though cheaper global energy and food prices were the main factors…..

Today’s cartoon in The Times captures the government’s position rather well:

Bailey: We're seeing encouraging signs, but can't cut rates yet

Bank of England governor Andrew Bailey says the ‘global factors’ which drove up inflation are fading, which helped to bring down inflation last month.

But the Bank isn’t yet at a point where it can cut rates, he explains.

In a video released by the Bank of England, Bailey says:

Inflation has continued to fall, and that’s very good news.

Global factors that previously pushed up prices in the UK are fading, and the decisions we have taken on interest rates are also helping to bring inflation down.

Because of this, inflation was down to 3.4% in February, and that’s the lowest it’s been for over two years.

We’ve left interest rates unchanged again today because we need to be sure that inflation continues to fall all the way back to the target of 2%, and stays there.

So we’re not yet at the point where we can cut interest rates. But they signs we’re seeing are encouraging.

Achieving low and stable inflation is the best thing we can do for people and businesses up and down the country.

Pound weakens after BoE hawks throw in towel

The pound has dropped against the US dollar today, indicating the markets expect the Bank of England to cut interest rates more quickly than it did before.

Sterling is down 0.5% against the US dollar at $1.2715, losing all its gains yesterday (when the dollar weakened after the US Federal Reserve indicated it still expects to make three rate cuts this year).

Kathleen Brooks, research director at XTB, says the decision of two hawkish BoE policymakers to stop voting for higher rates is significant:

Catherine Mann and Jonathan Haskel, who voted for rate hikes at the February meeting, have folded and joined the majority of the MPC and voted to maintain the interest rate at this meeting. Swati Dhingra, the most dovish member of the MPC, voted to cut rates to 5%.

This is a notable shift, and it is the first time that both Haskel and Mann have not voted for a rate hike to 5.5% for 5 months. This suggests that even the hawks at the BOE can appreciate the progress made on inflation, and feel happy with the current level of rates. This opens the door to rate cuts in the coming months, although the BOE was unwilling to disclose the timing of a potential cut.

The Bank of England will probably wait until August to start cutting interest rates, predicts James Smith, ING’s developed markets economist.

That’s later than other forecasts, with some seeing June as quite possible.

But ING also expect rates to be cut by a whole percentage point by the end of this year, from 5.25% to 4.25%.

Smith says:

For now, we are sticking to our base case of an August rate cut on the basis that the BoE will have another month’s worth of data and new forecasts available.

In our view we’d probably need to see a meaningful downward surprise relative to the BoE’s services inflation and wage growth forecasts during April/May to unlock an earlier June cut. We’re sort of splitting hairs here though, and the bigger picture is that once rate cuts begin, we expect further cuts at each meeting this year. That means 100bp of easing in total during 2024.

Updated

Bank criticised for leaving interest rates on hold

The Bank of England is being criticised for today’s decision to leave interest rates at a 16-year high.

Clearly the unnamed Tory MPs quoted by Politico this morning (see earlier post) aren’t alone in thinking the Bank is blundering.

Unite general secretary Sharon Graham says workers need lower borrowing costs:

“It seems that the Bank of England is flatly refusing to recognise the economic reality on the ground. We won’t see a sustainable recovery until workers and their families have some respite from the high interest rates strangling demand throughout the economy.

Workers won’t pay the price for recent years’ sky-high inflation driven by widespread profiteering across the economy.”

Carsten Jung, senior economist at the IPPR thinktank, fears the Bank has raised interest rates too high:

“Inflation is coming down more quickly than many predicted just a few months ago. This is largely due to global supply chains recovering and energy costs falling. But also domestic price pressures are falling quicker than the Bank had anticipated.

“All this shows the Bank of England tightened the screws too much, which is squeezing much needed future growth. The Bank should thus cut rates more quickly than its current plans. The tightening stance by both the Chancellor and the Bank of England contribute to the UK’s growth falling far behind the USA’s fast recovery.”

Suren Thiru, economics director at ICAEW, says an “overly cautious” Bank of England risks prolonging the UK’s economic struggles:

“While interest rates staying on hold again was expected, the more dovish vote split and meeting minutes suggest that rate setters are opening the door for rate cuts later this year.

“Though this interest rate hiking cycle is firmly in the rear-view mirror, the long delay between tightening policy and its impact on the wider economy means that the heavy toll of 14 rate rises has yet to fully crystalise.

“The Bank of England remains overly cautious on the prospect of rate cuts given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long.

“With inflation on track to drop back to the Bank’s 2% target in April, an interest rate cut by August looks a distinct possibility.”

BoE cuts could come as early as May, says Neuberger Berman

Interest rates could be cut as soon as the Bank of England’s next meeting, in May, says Robert Dishner, senior portfolio manager for multi sector fixed income at investment manager Neuberger Berman.

The Bank of England has moved closer to cuts as it votes to maintain rates at current levels. The 8-1 vote also saw two previous voters for hikes (Catherine Mann and Jonathan Haskel) now voting to hold rates at the current levels.

This is the first time since September 2021 that no member voted for a hike. The Bank did not change the language “monetary policy will need to remain restrictive for sufficiently long,” but we view the vote as a bigger signal towards cuts in the May or June meeting.

Additionally, the Bank is marking to market the freeze in fuel duty as announced in the Spring Budget and 2Q24 CPI is projected to be marginally weaker than forecast back in February at slightly lower than 2%. It noted “some upside risks remained around both the wage and CPI inflation projections,” but we think this seems strange in the context of lowering the 2Q24 inflation forecast.

On net, it is a modestly dovish result which opens the doors to rate cuts.

The latest market pricing suggests a rate cut in May is only a 13% chance, with another hold a 87% probability.

The money markets are increasingly confident that interest rates will be cut by the summer.

Three rate cuts in 2024 are fully priced in, with a cut in June more likely than not.

Joe Tuckey, head of FX Analysis at currency specialists Argentex Group PLC, says:

“Following on from the dovish tone set by the lower inflation data earlier this week, the doves kept swooping as the vote split within the Monetary Policy Committee saw the two prior rate hike hawks abandon their stance.

The recent theme of increased expectations for a June rate cut, rather than August, has been bolstered by this week’s news. Progress on wage inflation has been seen, but how much more evidence will be needed is a key question going forward.”

Mahmoud Alkudsi, senior market strategist at ADSS, says:

The upcoming CPI figures for April and May will be crucial, as a sustained decline in inflation levels would potentially pave the way for rate cuts during the June meeting.

This would also exert downward pressure on GBP. On the flip side, if we see a slower decline in inflation, it could increase the likelihood of rate cuts in the August meeting, which would bolster GBP.

Bank sees inflation below 2% in Q2

The Bank of England has trimmed its inflation forecast, and now believes it will fall below its 2% target this spring.

Today’s minutes say:

CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.

Last month, the Bank had forecast inflation would fall to 2% in the second quarter of this year.

BoE governor: things are moving in the right direction

Andrew Bailey, governor of the Bank of England, says “things are moving in the right direction”, as he explains why the Bank left interest rates on hold today at 5.25%.

Bailey says:

“In recent weeks we’ve seen further encouraging signs that inflation is coming down.

We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.

We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Alert observers may recall that Bailey said last month that “we’re heading in the right direction”, when the Bank also left rates on hold. Yesterday’s drop in inflation, from 4% to 3.4%, has obviously reassured him that the journey is on track.

Updated

The Bank of England also hints that it could cut rates soon.

In the minutes of this month’s meeting, the MPC explains that current policy is restrictive, as it tries to bring inflation down to 2% (from 3.4% last month).

A cut in borrowing costs would not necessarily mean policy was no longer restrictive, it argues.

The Bank says:

The Committee had judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated.

The Committee recognised that the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.

The BBC’s Faisal Islam points out that this is the first time since 2021 that no Bank policymakers voted to raise interest rates:

The Bank started its tightening cycle in December 2021, raising interest rates to 5.25% by last August (where they have remained since).

Bank policymakers split 8-1 over interest rate decision

Today’s decision was almost unanimous, with two policymakers abandoning their call for higher interest rates.

The Bank’s monetary policy committee voted by a majority of 8–1 to maintain Bank Rate at 5.25%.

One member, Swati Dhingra, voted to reduce Bank Rate by 0.25 percentage points, to 5%, maintaining her dovish stance.

But the other eight – Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Jonathan Haskel, Catherine L Mann, Huw Pill, and Dave Ramsden – all voted to leave rates at 5.25%.

Mann and Haskel had previously voted to raise rates to 5.5%, at last month’s meeting, so they’ve changed their vote.

Bank of England interest rate decision

Newsflash: The Bank of England has left UK interest rates on hold, despite yesterday’s drop in inflation.

The Bank’s monetary policy committee has voted to maintain Bank Rate at 5.25%, a 16-year high, and the fifth ‘no change’ decision in a row.

More to follow….

Five minutes…..

Economist Julian Jessop suggests we could see a shift in the voting split, or a more dovish statement from the Bank at noon.

Today’s shock rate rise in Turkey is its central bank’s ‘whatever it takes’ moment, says economist Timothy Ash:

Just 20 minutes until the Bank of England’s interest rate decision is announced….

Russ Mould, investment director at AJ Bell says:

“The Bank of England is expected to keep UK rates unchanged at its midday decision today despite yesterday’s figures showing a big drop in the rate of inflation.

Central banks will want to see evidence that the decline in the rate of inflation is not a one-off. Therefore, the key focus for markets is the vote split as that could give the best indication as to whether the members of the Monetary Policy Committee are veering more towards a rate cut or not, and hence stir the pot as to when it could actually happen.

Turkey raises interest rates to 50%

Newsflash: Turkey’s central bank has raised interest rates, hiking by five whole percentage points, taking its benchmark rate up to 50%.

In a surprise move, the Central Bank of the Republic of Türkiye has announced it has raised its policy rate from 45% “in response to the deterioration in the inflation outlook”.

Inflation in Turkey hit 67% in February, which has undermined the central bank’s hopes of pausing its rate rise cycle.

Today, the central bank says:

Tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.

Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.

This means that Turkey has now hiked interest rates by 4,150 basis points since last summer, when interest rates were 8.5%.

The move could stabilise the lira ahead of local elections next week, in which president Recep Tayyip Erdoğan’s ruling party hope to take back control of Istanbul and Ankara.

Updated

The Bank of England should take some comfort from today’s PMI survey showing the UK has probably escaped recession, says Matthew Ryan, head of market strategy at global financial services firm Ebury.

Ryan explains:

“Today’s data should provide Bank of England officials with a degree of comfort that their actions are not triggering either a deep or prolonged recession.

“While we expect a dovish shift in this afternoon’s MPC vote, this will likely be accompanied by communications that suggest the BoE remains a number of months away from lowering interest rates.”

Politico: bubbling Tory anger that Bank won't cut rates

According to Politico, there is “already some bubbling Tory anger” that the Bank of England is unlikely to start cutting rates today.

Much of that fury is directed toward Bank governor Andrew Bailey, Politico say, with a suggestion that the Bank wants to ‘curry favour’ with the opposition by keeping rates high.

Here’s a flavour from Politico’s London’s Playbook:

GET ON WITH IT: However, there is already some bubbling Tory anger that the BoE is unlikely to start cutting rates today, with much of it directed toward Bank boss Andrew Bailey. There are genuine fears from across the party that a timid Bank of England will strangle economic growth and kill off any hopes the Tories have of winning the next election.

Word from the right: Jacob Rees-Mogg, a frequent Bailey critic, told Playbook that the central bank had been “slow to increase and then to decrease” interest rates. “Inflation is a lagging indicator, but the Bank is reactive to it,” he said. Another right-wing Tory MP said if there is “no movement” on rates by May, there will be “demands for Bailey’s blood.”

Is this the anti-growth coalition? One minister told Playbook the BoE should cut rates today, while also making the rather extraordinary claim that some Tory MPs believe Bailey and co. are “holding back to curry favor with Labour.”

Interest rate cuts could help the Conservative’s to defuse Labour’s attack line that Britons face a mortgage timebomb this year, due to the jump in borrowing costs….

This makes the IMF’s warning about preserving central bank independence (see earlier post) particularly timely…..

Updated

With just 90 minutes until the Bank of England’s interest rate decision, tension is building in the City.

All 68 City economists surveyed by Reuters expect the BoE to leave interest rates on hold at 5.25% today.

But, we’ve had a reminder from Zurich this morning that central banks can make surprising decisions……

Looking further ahead, the City expects three quarter-point interest rate cuts during 2024, bringing rates down to 4.5% by December.

Henk Potts, market strategist at Barclays Private Bank, believes the Bank could cut more aggressively this year.

The Bank of England is expected to keep rates at 5.25% for a fifth consecutive meeting on Thursday and maintain the current cautious guidance. However, recent data and economic projections have supported the case for interest rate cuts. Inflation has moderated and labour markets are finally starting to ease. Headline CPI is expected to fall below the central bank’s 2% target level later in the year, with unemployment climbing to 4.5% in the final quarter.

“The Monetary Policy Committee (MPC) is likely to be laser-focused on the incoming inflation prints, labour market reports and growth figures for the first quarter. These could pave the way for a pivot to an easing stance by the May meeting, with the first 25bp rate cut pencilled in for June. With more to follow, we anticipate that the Bank Rate will finish the year at 4%.”

IMF urges politicians not to interfere with central bank independence

Just in: The International Monetary Fund has fired a warning shot at politicians not to interfere with central bank independence, in a busy year for elections.

In a new blog post, IMF chief Kristalina Georgieva warns that central bankers today face many challenges to their independence, as governments press them to cut borrowing costs.

She writes:

Calls are growing for interest-rate cuts, even if premature, and are likely to intensify as half the world’s population votes this year. Risks of political interference in banks’ decision making and personnel appointments are rising. Governments and central bankers must resist these pressures.

But why does this matter? Just consider what independent central banks have achieved in recent years. Central bankers steered effectively through the pandemic, unleashing aggressive monetary easing that helped prevent a global financial meltdown and speed recovery.

Georgieva warns that the battle against inflation has not yet been won, and urges elected leaders not to interfere with central bank independence.

Otherwise, she says, we risk a return to the high inflation suffered five decades ago, when fewer central banks had control over interest rates.

Georgieva explains:

The recent success in bringing down inflation contrasts sharply to the economic instability that prevailed during the high inflation period of the 1970s. Back then, central banks didn’t have clear mandates to prioritize price stability, or clear laws protecting their autonomy. As a result, they were often pressured by politicians to lower interest rates when inflation was high.

UK PMI: What the experts say

This morning’s UK PMI report provides further evidence UK economy may have moved out of recession, says Ashley Webb, UK economist at Capital Economics, adding:

While the composite activity PMI fell a touch in March, it still suggest that the UK economy has probably moved out of recession.

Rhys Herbert, senior economist at Lloyds Bank, says the data provides more evidence that economic conditions are continuing to be optimistic.

“With falling inflation and steady interest rates, some industries – such as the service sector – will be expecting demand to remain positive. However others, including manufacturing as highlighted by our recent UK Sector Tracker, are still experiencing some challenges such as those created by the recent disruption along international shipping routes.

“Markets remain optimistic about rate cuts this year and we will watch today’s decision with interest, although the markets consensus is that changes will not be seen until later this year.”

UK recession probably over as PMI index shows growth

Newsflash: Britain’s private sector continued to grow in March, bolstering hopes that the economy is escaping recession this quarter.

Data provider S&P Global reports that the growth slowed slightly this month, but manufacturing returned to growth in March after a 12-month slump.

It’s latest poll of purchasing managers, just released, has found another solid upturn in output levels across the UK private sector this month.

The flash UK PMI Composite Output Index has come in at 52.9 in March, down fractionally from 53.0 in February, but still showing expansion for the fifth month running.

Here are the key findings (where 50 points = stagnation)

  • Flash UK PMI Composite Output Index at 52.9 (Feb: 53.0). 2-month low.

  • Flash UK Services PMI Business Activity Index at 53.4 (Feb: 53.8). 3-month low.

  • Flash UK Manufacturing Output Index at 50.2 (Feb: 48.3). 13-month high.

  • Flash UK Manufacturing PMI at 49.9 (Feb: 47.5). 20-month high.

Businesses reported that input prices continued to rise at a sharp pace in March. New business increased for the fourth month running, helped by the first increase in total export sales since May 2023.

It suggests the economy returned to growth this quarter, after shrinking in the second half of 2023.

Chris Williamson, chief business economist at S&P Global Market Intelligence, says:

“Further signs of the UK economy having pulled out of last year’s brief recession are provided by the provisional PMI data for March. A further robust expansion of business activity ended the economy’s best quarter since the second quarter of last year.

The survey data are indicative of first quarter GDP rising 0.25% to thereby signal a reassuringly solid rebound from the technical recession seen in the second half of 2023.

France and Germany are dragging down the eurozone economy, new data shows.

The latest survey of eurozone purchasing managers shows that the eurozone economy came close to stabilising in March.

The eurozone PMI, which tracks activity at businesses across the region, rose to a nine-month high of 49.9 this month, up from 49.2 in February, and almost at the 50-point mark showing stagnation.

S&P Global, which compiles the report, says there was only a marginal decline in the eurozone’s output of goods and services, adding:

However, ongoing falls in output in France and Germany offset a gathering upturn in the rest of the eurozone to point to an uneven economic picture.

French business activity contracted this month, at a faster rate, with its PMI falling to 47.8 from 48.4.

Germany’s downturn eased slightly, with its PMI rising to 47.4 in March from 46.3 in February, showing a slower contraction.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, says:

“Overall, Germany now teeters on the edge of a technical recession.”

Updated

Taiwan raises interest rates

More drama! Taiwan’s central bank has raised interest rates, unexpectedly.

The Central Bank of the Republic of China (Taiwan) has startled the markets by lifting its key rate, from 1.875% to 2%.

That’s a surprise – 25 out of 26 economists surveyed by Reuters expected rates would be held.

Taiwan’s central bank says the “mild” rate hike is meant to suppress inflation expectations, as electricity prices are going up in April.

It has also lifted its GDP forecast, due to foreign net demand and domestic consumption.

Norway leaves rates on hold

Here comes Norway’s interest rate decision…

And Norges Bank has… HELD interest rates, at 4.5%, resisting any temptation to follow Switzerland and cut borrowing costs.

Governor Ida Wolden Bache says:

“The policy rate will likely need to be maintained at the current level for some time ahead in order to bring inflation back to the 2 percent target within a reasonable time horizon”.

Switzerland’s surprise decision to cut borrowing costs today, when other central banks are on hold, shows that we’re entering an interesting new phase of monetary policy.

Neil Wilson of Markets.com explains:

Cue the cuts: The Swiss National Bank cut rates by 25bps this morning, sending the Swissy lower against peers, the euro jumping to its best since July 2023 against the franc. Inflation fell to 1.3% in Jan and 1.2% in Feb, plus the SNB was uncomfortable with CHF strength. If you are about to hit the slopes, this could be a bonus!

But it’s interesting now because we are entering a multi-speed exit from tightening phase of the cycle and central banks are starting to need to think for themselves again and take things in the direction that best suits their economy.

The SNB is in a rush to cut; the Fed seems to be prepared to sequence it neatly despite inflation running at 4%; the BoE will see inflation down to 2% this quarter but is not seen cutting until later this year.

The Swiss franc has tumbled against the US dollar following Switzerland’s surprise interest rate cut:

Here’s more early reaction:

Shock interest rate cut in Switzerland

Newsflash: Switzerland’s central bank has surprisingly cut interest rates!

The Swiss National Bank has just announced it is lowering its policy rate by 0.25 percentage points to 1.5%, from 1.75%.

It makes the SNB the first major central bank to cut interest rates in the current cycle.

That’s surprised the financial markets, who had expected the SNB to hold rates today.

Announcing the move, the SNB says the cut is possible because “the fight against inflation over the past two and a half years has been effective” – Swiss inflation fell to just 1.2% in February.

The SNB adds:

For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability. According to the new forecast, inflation is also likely to remain in this range over the next few years.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The policy rate cut also supports economic activity. Today’s easing thus ensures that monetary conditions remain appropriate.

Updated

FTSE 100 index at 10-month high

Stocks in London have opened higher, as investors cheer the dovish words from America’s central bank last night (see earlier post).

The FTSE 100 index of blue-chip companies is up 87 points, or 1.1%, at 7,824 points, its highest level since early May.

Mining stocks are among the risers, as the prospect of three cuts to US interest rates this year should support the global economy, and demand for raw materials.

Shares in fashion and homewares retailer Next have jumped 4% to a record high, after it beat forecasts with a 5% rise in pre-tax profits last year.

Some Bank of England policymakers may push for earlier interest rates today, suggests Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Ahead of the decision, due at noon, she writes:

Bank of England policymakers are highly unlikely to waver from their stance and are likely to continue to stress that vigilance is still needed while they spy the prospect for rate cuts on the horizon.

With February’s inflation snapshot coming in slightly lower than expected, it’ll give the monetary policy committee a little more confidence that their action is doing the trick in bringing down demand in the economy, but a majority vote for rates to be held is still expected.

However, there may well be more dissenters around the table, arguing for earlier cuts, given the super-stagnant nature of the economy and the worry that inflation may end up undershooting the target not just briefly but for a more sustained period.

Last month, Swati Dhingra was the only MPC member to vote for a cut. She fears that delaying rate cuts coud harm the economy.

Nationwide Building Society has agreed terms to take over rival Virgin Money.

The two companies have agreed terms of a deal under which Nationwide will pay 220p per Virgin Money share, valuing it at £2.9bn.

That’s a 38%% premium to Virgin Money’s share price on 6 March, the day before the two lenders announced they were working on a deal.

The deal will create a combined group with £366bn in total assets, nearly 700 branches and more than 23 million customers, and solidify Nationwide’s position as the second-largest mortgage lender behind Lloyds Banking Group.

Bosses at Virgin Money, the UK’s sixth-largest retail bank, could share £6m from the deal.

But, Nationwide has also faced pressure to allow its members to vote on the deal. It says today that it plans to rebrand the Virgin Money business over time.

UK budget deficit higher than expected

Just in: Britain borrowed more than expected to balance the books last month.

Public sector net borrowing (excluding public sector banks) has come in at £8.4bn for February, higher than the £5.95bn which economists expected.

But it’s a drop of around £3.4bn compared to February 2023, when the deficit reached £11.8bn.

Increased tax receipts helped to push down the deficit.

The Office for National Statistics points out that this is the fourth month running when borrowing was lower than a year ago.

This leaves the national debt at £2.659 trillion, or around 97.1% of GDP.

Ruth Gregory, deputy chief UK economist at Capital Economics, says these borrowing figures are “disappointing”, but may not prevent tax cuts later this year.

February’s disappointing public finances figures suggest that the OBR’s new 2023/24 borrowing forecast published in March’s Budget already looks too optimistic. But this may not prevent the government from squeezing in another pre-election tax-cutting fiscal event later this year.

Updated

Stock markets are in a buoyant mood today after America’s central bank stuck with its forecast that US interest rates will be lowered by three-quarters of a percentage point this year.

Last night, the Federal Reserve left interest rates on hold, but also signalled that it still expects to cut rates three times this year.

That cheered Wall Street, driving the Dow Jones industrial average up by 1% last night. And today, Japan’s Nikkei index has jumped 2% to a new alltime closing high.

Deutsche Bank expect very few changes from the Bank of England today.

Their chief UK economist, Sanjay Raja, expects the MPC to stick to its February guidance that Bank Rate is restrictive and “will need to remain restrictive for sufficiently long to return inflation to the 2% target”.

But… he identifies three areas where the Bank could surprise us today:

The vote tally. After a three-way 2-6-1 split in February, we think the committee will be less divided in March following recent economic news. Given weaker growth, weaker inflation, and weaker pay data, we think an 8-1 vote tally now looks more likely (with external MPC member Dhingra voting for a rate cut).

A dovish surprise on the forward guidance? While we expect the MPC to stick to its recently refreshed forward guidance, we see dovish risks, too. Indeed, inflation has inched lower than the Bank projected in February. Private sector pay growth has also pushed lower than the Bank’s forecast for Q1-24, with pay deals softening in the last month or so.

What kind of risk could we see? A further shift in the forward guidance, with the MPC acknowledging that a change in Bank Rate may be warranted in order for monetary policy to maintain an appropriate degree of restrictiveness. The MPC could also reiterate its view more that rate cuts would still leave Bank Rate in restrictive territory, raising the likelihood for a spring rate cut.

Jefferies: Expect rate cuts by August

If not now, then when?

Many City analysts predict the Bank of England will start cutting rates by this summer, when inflation could have dropped all the way back to its 2% target.

Modupe Adegbembo, economist at Jefferies, explains:

We expect the MPC to keep rates on hold at 5.25% [today] and think the BoE is likely to begin cutting in August, though cuts could plausibly come earlier if wages fall back faster than anticipated.

Given the resilience of the economy, we think the BoE will cut rates steadily, penciling in 75bp of cuts across this year leaving Bank Rate at 4.50% by end-2024.

Updated

Introduction: It's Bank of England day

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

It’s a busy day for central bankers, with the Bank of England expected to leave UK interest rates at a 16-year high at noon.

Despite inflation dropping to a two-and-a-half year low on Wednesday, economists predict BoE policymakers will choose to leave Bank Rate at its current level, 5.25%.

That would fail to bring any relief to UK borrowers, and maintain the pressure on the economy from higher borrowing costs.

According to the money markets this morning, ‘no change’ is a 95% while there’s just a 5% possibility of a quarter-point cut (lowering rates to 5%).

The Bank has been clear in recent weeks that it wants to see further evidence that inflationary pressures are falling'; economists will scrutinise the minutes of this week’s meeting for any hints as to how long policy should remain restrictive.

At last month’s meeting, the Bank’s nine policymakers split three ways – six voted to hold rate, two wanted a rise, and one a cut. That split could change today, as the monetary policy committee weighs up the risks of tightening for too long, versus easing too early.

The Bank will surely have appreciated yesterday’s drop in CPI inflation to 3.4%, neared to its 2% target. But it will also have noted that services inflation – a guide to domestic inflationary pressures – was 6.1%. That could be too high for comfort, for the BoE.

The MPC will also want to see signs that wage pressures are easing – as George Buckley, economist at Nomura, explains:

Annual rates of inflation are likely to fall further over the course of 2024, and pay settlements are running at a slower pace according to XpertHR data.

But calculations of price “momentum” suggest we’re not quite at the settling point we need to be for the annual rate of inflation to migrate all the way back to its target. The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast.

Not cutting has its risks, though. Monetary policy operates with a lag – meaning interest rate changes are like turning the rudder on a supertanker, not the steering wheel of a racing car.

Last month, the Bank’s former chief economist, Andy Haldane, warned that keeping rates high could ‘crush the economy’

Haldane’s successor, Huw Pill, has likened the Bank’s challenge to a trip on Table Mountain. Rates may have reached their highest levels, but there’s more of a plateau to travel before they start falling….

The agenda

  • 7am GMT: UK public finances

  • 8am GMT: Taiwan’s interest rate decision

  • 8.30am GMT: Switzerland’s interest rate decision

  • 9am GMT: Norway’s interest rate decision

  • 9am GMT: Eurozone ‘flash’ PMI survey of business activity for March

  • 9.30am GMT: UK ‘flash’ PMI survey of business activity for March

  • Noon GMT: Bank of England interest rate decision

  • 12.30pm GMT: US weekly jobless figures

Updated

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