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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

European Central Bank raises interest rates to fight inflation; Nationwide to lift fixed mortgage rates – as it happened

Mark Carney Interest Rates Bank of England Drax ESO The Bank of England United Kingdom Christine Lagarde ECB Economy
The skyline of Frankfurt with the headquarters of the European Central Bank (ECB).
The skyline of Frankfurt with the headquarters of the European Central Bank (ECB). Photograph: Kai Pfaffenbach/Reuters

Afternoon summary

Time for a recap…. here are today’s main stories.

Former Bank of England governor Mark Carney has warned that governments will be paying higher rates of interest for their debt for the foreseeable future, and that mortgage holders should adjust to this new situation.

Carney told ITV’s Robert Peston:

If you have still a few years of low interest rates on your mortgage, if you fixed just at the right time as it turned out, recognise that there will be ann adjustment over the medium term.

It’s a question of degree but the direction is very clear.

The turbulence in the mortgage market has continued, with Nationwide lifting its fixed-term mortgage rates from tomorrow….

…and average rates across the market increasing again.

In the eurozone, the European Central Bank has lifted its key interest rates by a quarter of one percent.

The ECB warned that inflation is projected to remain too high for too long, as it lifted its forecasts for price rises over the next few years.

ECB president Christine Lagarde indicated that eurozone interest rates will be lifted in July too, saying:

“Are we done? Have we finished the journey? No. We’re not at our destination.

Do we still have ground to cover? Yes, we still have ground to cover.

And in other news:

Pound at one-year high against US dollar

Sterling has hit a 14-month high against the US dollar for the second day in a row.

The pound has gained 0.8 of a cent to $1.2745, the highest since April 2022.

The dollar has been pushed down by new economic data showing US industrial output fell by 0.2% in May, while new jobless claims were higher than expected last week.

The euro has hit a 15-year peak against the yen and a fresh four-week high against the dollar, after the European Central Bank raised interest rates and signalled that a July hike is on the cards too.

As flagged earlier, here are the ECB’s new forecasts for inflation (slightly higher than the old projections)….

….and growth (down a bit this year, and next)

Analysts: A hawkish ECB....

Mohit Kumar, chief European economist at Jefferies’, says the European Central Bank’s decision – and press conference – were a little hawkish.

Kumar says:

“A touch on the hawkish side, with core inflation projections revised meaningfully higher (5.1% vs 4.6% for 2023, 3% vs 2.5% for 2024).

“However, Lagarde let pass a number of opportunities to sound more hawkish. She indicated that they will hike more, but only mentioned July rather than multiple hikes. The market is already pricing in a July hike and 60% chance of a September hike. The ECB does not see wage price spiraling. She also attributed to past hikes making their way forcefully into the economy, in a nod to lags of monetary policy transmission.

“Overall, the press conference does not change our view of the ECB or Bunds. We still believe that ECB terminal rate would be 3.75%, though of course it would be data dependent, particularly on inflation.

Roman Ziruk, Senior Market Analyst at global financial services firm Ebury, agrees, calling today’s ECB decision as a ‘hawkish hike’.

Ziruk explains:

The Governing Council reiterated that inflation is expected to remain ‘too high for too long’ and the core inflation forecasts were revised up rather substantially.”

“Additionally, President Lagarde didn’t shy away from striking a hawkish tone during the press conference, repeating that the bank has ‘more ground to cover’ and making it clear that we should expect another rate hike in July.”

“The ECB communication suggests that the bank is concerned about the effects of a strong labour market on inflation. The ECB is clearly not convinced that price pressures will be able to come down to an acceptable level on their own.

Felix Feather, European economic analyst at Abrdn, believes the next rate rise – inked in for July – could be the last…

“The ECB isn’t missing a beat in its rate hiking cycle - tightening another 0.25% to bring the deposit rate to 3.5%. While the ECB continues to stress data dependence, President Lagarde suggested a July hike is very likely as well.

We think that hike will be the last of the cycle, given the turn lower in inflation. But wage growth is still very strong, so there’s a decent chance that they end up hiking in September as well.

With policy already in restrictive territory, and the lagged effects of previous hikes still passing through to the real economy, investors must contend with both higher rates, still high inflation, and the possibility of a policy-driven recession later in the year.”

This is the key message from the ECB’s president today:

Back in Frankfurt, ECB president Christine Lagarde says the eurozone is not experiencing a wage-price spiral.

Lagarde says:

“We are not seeing a second-round effect. We are not seeing a wage-price spiral...

The sooner the better in terms of when do we bring inflation back to 2%, but we have also to be realistic and measured in the response that we give.”

She then explains that rising unit labour costs did contribute to the upward revision to eurozone core inflation forecasts.

Updated

Nationwide lifts fixed-term mortgage rates from Friday

Back in the UK, Nationwide Building Society is to raise its fixed rates on mortgages offered via brokers by up to 0.7 percentage points tomorrow.

Nationwide says:

“This includes rates across our New Business, Switcher, Additional Borrowing and Existing Customer Moving Home ranges.”

This follows the increase on wholesale borrowing costs in the last few weeks, which are expected to drive UK interest rates higher and keep them high (as Mark Carney warned last night).

The quoted rate offered by Nationwide on a 2-year fix for new borrowers, available for a £999 fee, will rise on Friday to 5.69% across most loan-to-value ratios, from 5.24% currently.

Updated

Lagarde: Not begun thinking about skipping rate increases

Q: Could the ECB consider skipping rate rises at certain meetings, and only make changes when you also release new forecasts (which would be every other meeting)?

Lagarde reiterates that the ECB still has ground to cover to reach its inflation target.

The governing council have not discussed a skip, and not begun thinking about it either, “because we have work to do”.

Q: Your new forecasts show you don’t expect to reach your 2% inflation target in the next three years – so is 3% the new 2%?

Lagarde says the ECB is in the middle of its fight against inflation, and insists it will get inflation down to the 2% target, (rather than shuffling the target up to make it more achievable).

Updated

Q: Were today’s decisions unanimous?

Christine Lagarde says there was “quite a harmonious discussion” at this month’s meeting, with some deep analysis of the eurozone labour market and the factors driving inflation.

“It was a very, very broad consensus,” she insists, to raise interest rates and to confirm that the ECB would stop reinvesting cash from maturing bonds bought through its asset purchase programme.

That’s not exactly confirmation that the decisions were unanimous, though….

Christine Lagarde explains that the ECB wants to get inflation down to its 2% target, and feel confident that it will stay there.

The ECB chief explains that the governing council need to be confident that core inflation is heading downwards

Q: How alarmed are you by the upward revisions to eurozone inflation in 2025 – will that mean that prevous expectations that terminal rate of interest (peak rates) of 3.75% will not be enough?

Lagarde says the ECB isn’t satisfied by the inflation outlook.

Lagarde isn’t tempted into commenting on the terminal rate.

It is something we will know when we get there, she says.

Lagarde: July rate rise is very likely; we're not done yet

The ECB are now taking questions…

Q: Is the ECB close to pausing its monetary policy tightening, and what is your take on the US Federal Reserve holding interest rates last night?

Christine Lagarde says today’s decision, to raise interest rates, followed analysis of the latest economic data and new staff forecasts.

Lagarde says the ECB’s decisions are ‘data-dependent’, and insists that further increases in borrowing costs will be needed.

She says:

Are we done? Have we finished the journey? No, we’re not at the destination.

Do we still have ground to cover? Yes.

Unless there is a material change to the ECB’s forecasts, Lagarde adds, the central bank is very likely to raise interest rates again in July.

And on the Fed, Lagarde says she doesn’t know the difference between a ‘pause’ and a ‘skip’ (two terms banded around to describe last night’s no-change). But the ECB is not thinking about pausing.

“The outlook for economic growth and inflation remains highly uncertain”, Lagarde tells reporters in Frankfurt.

Downside risks includes the possibility of upward pressures to food and energy prices from Russia’s war against Ukraine, or the risk of a broader increase in geopolitical tensions that disrupt global trade.

There is also a risk that the tightening of monetary policy (higher interest rates) have a greater impact than expected, she says.

Weaker growth in the world economy would also dampen growth in the eurozone.

But… growth could be higher than thought, if rising confidence leads individuals and companies to spend more.

Updated

Lagarde: wages and profits keeping inflation high

Digging into inflation, ECB chief Christine Lagarde says that past increases in energy costs are still driving up prices across the economy.

Pent-up demand following the reopening from pandemic restrictions are also pushing up inflation, especially in the services sector.

Wage pressures are becoming an ‘increasingly important source of inflation’, Lagarde says, citing recent increases in wages.

Lagarde also cites corporate profits as another source of inflation, saying:

Firms in some sectors have been able to keep profits relatively high, especially where demand has outstripped supply.

ECB president Christine Lagarde tells reporters in Frankfurt that the eurozone economy has “stagnated” in recent months.

GDP shrank by 0.1% in both Q4 2022 and Q1 2023 (creating a technical recession).

Economic growth is likely to remain weak in the short run, she warns, but strengthen in the course of the year as inflation comes down and supply disruption continues to ease.

Manufacturing continues to weaken, she says, partly due to lower global demand and tighter financial conditions in the eurozone, but the service sector remains resilient.

The jobs market remains resilient, though, Lagarde insists, with unemployment at record lows.

Watch Lagarde's press conference

ECB president Christine Lagarde is giving a press conference now to explain today’s interest rate decisions.

Lagarde confirms that the three key ECB interest rates have been lifted by 25 basis points, and that the ECB has adjusted its inflation forecasts (higher) and growth forecasts (lower).

Lagarde also points out that the Governing Council’s past rate increases are being “transmitted forcefully to financing conditions” and are having an impact, gradually, across the economy.

She adds:

Borrowing costs have increased steeply and growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to decline further towards target, as they are expected to increasingly dampen demand.

Lagarde also says the Governing Council will discontinue reinvestments under its asset purchase programme (created to stimulate the economy) from July.

You can read the statement here.

Today’s changes mean the ECB’s benchmark deposit rate is the highest level in 22 years:

ECB raises interest rates: what the experts say

Neil Shah, Director of Research at Edison Group, predicts eurozone interest rates could reach their peak this summer, following today’s increases.

He points out that the eurozone is technically in recession, after shrinking slightly in the final quarter of 2022 and the first three months of 2023. Higher borrowing costs will suppress the recovery.

Shah says:

“The ECB’s latest 25-point hike has the Eurozone approaching Lagarde’s aforementioned “cruising altitude.” With a further hike in July likely and a potential pause in September, the ECB’s terminal rate could be within reach over the summer months.

On top of that, the Eurozone’s economy has contracted over the past two quarters. As a priority, the ECB will want to avoid turning a technical recession into a real one.

Claus Vistesen, economist at Pantheon Macroeconomics, says the ECB’s new forecasts (see previous post) suggest the eurozone faces stagflation:

Carsten Brzeski, global head of macro at ING, points out that the ECB has now raised its deposit rate to 3.5%, from minus 0.5% a year ago.

Brzerski doesn’t see a pause in sight soon, saying:

Despite a recent softening, actual headline and core inflation remain too high and with expectations for inflation to return to target only in two years from now, there were clear arguments for the ECB to continue raising rates.

The fact that the ECB’s newest staff projections include an upward revision of both headline and core inflation across the entire time horizon must have strengthened the case for continued hiking.

Still, with the Federal Reserve’s hawkish pause and a eurozone economy not only turning out to be less resilient than anticipated but also facing a very subdued growth outlook, the ECB is increasingly taking the risk of worsening the economic outlook.

Also, historical evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. These are two strong arguments for a further slowing of core inflation in the second half of the year.

The ECB also pledges to keep borrowing costs at ‘sufficiently restrictive’ levels to bring inflation down to target, saying:

The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

New ECB inflation and growth forecasts

The European Central Bank has lifted its inflation forecasts, but trimmed its growth forecasts.

Its staff now expect headline inflation to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025 – all 0.1 percentage point higher than previously.

The ECB says that core inflation (stripping out food and energy costs) is forecast to be more persistent than previously thought:

Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation.

Core inflation is now expected to reach 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025.

Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.

ECB raises interest rates by 25 basis points to fight inflation

An exterior view of the European Central Bank headquarters in Frankfurt
An exterior view of the European Central Bank headquarters in Frankfurt Photograph: Ronald Wittek/EPA

Newsflash: The European Central Bank has voted to lift borrowing costs across the eurozone.

The ECB’s governing council has voted to raise the three key ECB interest rates by 25 basis points, or a quarter of one percent.

Announcing the move, it says:

Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.

Eurozone inflation was recorded at 6.1% in the year to May, down from 7.0% in April, so three times higher than its target.

Today’s changes mean that the interest rate on ECB’s main refinancing operations will rise to 4%.

The marginal lending facility (used by commercial banks for short-term borrowing from the ECB) rises to 4.25%, while the deposit facility rate (paid on commercial bank deposits left at the ECB) rises to 3.5%.

Updated

Latest data shows mortgage rates rising

Mortgage rates are continuing to climb.

New data from USwitch, the price-comparison website, shows that the average two-year fixed-rate mortgage, at a loan-to-value ratio of 75%, from the major lenders has risen to 5.49% today, from 5.19% last week.

Average UK mortgage rates from big 6 lenders

That follows the increase in UK government short-term borrowing this week, when the yield (or interest rate) on two-year gilts hit a 15-year high. Those yields are used to price fixed-rate mortages.

Moneyfacts data shows that the average rate on a two-year fixed mortage is 5.92% today, up from 5.86% on Tuesday.

Five-year fixed rate mortgage rates are 5.56% on average today, Moneyfacts reports, up from 5.51% two days ago.

The number of mortgage deals available has risen, by 62, to 5,080, they add.

Updated

City AM: Revolut hit with 40 per cent valuation write down amid banking licence woes

Revolut’s value has plunged by nearly 40 per cent over the past year as it struggles to win a banking licence.

In its full year results today, listed venture capital investor Molten Ventures said it had written down its holding in Revolut by forty per cent over the past year.

The firm marked its stake down from £91.3m in March last year to £54.5m at the end of March this year. The write down would imply a valuation of around $19.8bn for Revolut.

At the peak of the tech boom in 2021, London-based Revolut, run by Russian-British founder Nik Storonsky, had been valued at $33bn. But it has struggled to win approval from UK regulators for its banking licence.

Martin Davis, CEO of Molten Ventures, told City AM that Revolut needs to provide more “visibility” over its its banking licence, and its profitabilty, saying:

“We’re quite encouraged with the direction they’re taking. But the reality is, we all know that there are some proof points the market wants to see around increased revenues for 2022, to get a clean set of accounts 2022,”

Molten aren’t alone in reassessing Revolut’s value. In April, a UK trust run by the asset manager Schroders suggested that the value of its stake in Revolut has plunged by 46% over the previous year.

Updated

Here’s the i’s housing correspondent, Vicky Spratt, on the mortgage rates crisis:

Updated

The money markets are currently indicating that UK interest rates will have hit 5.75% by February 2024, up from 4.5% today.

Laith Khalaf, head of investment analysis at AJ Bell, says it won’t take much to lift expectations to 6% (levels last seen in early 2001).

Khalaf explains:

“The Bank of England is caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot.

The latest readings for core inflation and wage growth have come in hot, and that has spooked the market, sending gilt yields skywards and raising expectations of more interest rate hikes to come.

The market is now firmly pricing in an interest rate rise at the MPC’s June meeting, and then four further hikes, taking us to 5.75%. A few hawkish comments from the Bank of England, or some more ugly inflation data, could easily tip those expectations up to 6%.

While interest rates may not ultimately hit those heights, those expectations do set market pricing in the here and now for government bonds, cash accounts and mortgages.

The head of NatWest Bank has warned that high borrowing costs, and the cost of living squeeze, is hurting poorer households, PA Media reports.

Dame Alison Rose told the Goldman Sachs European financials conference in Paris that lower income households are “really struggling with high inflation and high interest rates”.

“Typically these are not significant borrowers with us,”

“We’re putting a lot of proactive help and support out to customers.”

The group is also “monitoring it very closely”, she added.

Rose also said that NatWest customers were showing resilience despite wider economic uncertainty, saying:

“We’re not seeing any material signs of distress.”

Mike Ashley’s Frasers Group has upped its stake in Asos by just under a million more shares taking his stake to 10.6%, my colleague Sarah Butler reports.

That places Ashley in a position where he could block the automatic takeover of his shares by any bidder for the troubled online fashion retailer.

Buying into the company got more expensive today – shares have risen 14% after the group revealed it had returned to profitability in the latest trading quarter despite an on-going slide in sales.

The last tranche of 865,000 shares cost Frasers about £2.8m when they were bought on 12 June - today they would cost more than £3.2m.

So far Ashley is making money on his latest foray into stock picking…. it remains to be seen what time of long-term return on investment he will see and that may depend on whether the company attracts a bid from Frasers or anyone else and how its biggest shareholder Anders Povlsen reacts.

The UK housing market is “a metaphor for confidence in the UK economy – and its looking wobbly,” warns Bill Blain, market strategist at Shard Capital.

Blain warns that there would be ‘immense’ economic consequences if higher interest rates cause a collapse in house prices.

Young couples, for example, who have stretched to afford a house. could be “financially ruined” as mortgage rates effectively triple from 2% to 6%, Blain warns, adding:

To avoid a fundamental collapse in UK housing based on the unaffordability of homes, falling real incomes, and leverage (high mortgage repayments) we need to engineer a soft landing. The obvious way would be to encourage more house building, raise real wages so they become affordable – but that would mean an element of inflation, which would actually smooth the process.The alternative is rising unaffordability, the perception only the rich can afford homes, angry renters and an element of political populism leading to chaotic polices like nationalisation of rental property, rent controls and such. That way lies madness.

Perhaps the greatest thing that could help avoid a property-linked economic crash landing is a fundamental reappraisal of policy – and understanding that high levels of “sustainable” debt is ok to fund the nation if accompanied by sound spending policies. That is not meant to sound a bit Liz Truss: cut taxes, increase borrowings, nonsense. It could be done with a bit of thinking and imagination – a massive programme of social housing building where jobs are, lower home prices for those on the ladder and looking to step on, sorting out planning, and letting wages edge higher to sustain current private housing prices – avoiding the catastrophic consequences a collapse would have on national confidence.

Interesting to see what happens – the solution involves an element of inflation, but if housing does collapse the consequences on the economic confidence of the UK will be immense.

Wholesale gas prices are rising today, as the hot weather lifts demand for air conditioning.

The month-ahead cost of UK gas has jumped over 11% this morning to 106p per therm, meaning it has almost doubled since the start of June.

European wholesale gas prices have also jumped over 10% to €43 per Megawatt hour.

Last August, they spiked to €300/MWh as European countries scrambled to fill gas reserves ahead of last winter.

But they then fell back, and in May hit a two-year low.

Record number of renters seeking help with no-fault evictions

A record number of renters need help with no-fault evictions, suggesting landlords may be pushing cases through before the practice is banned in England under new legislation.

Citizens Advice said last month it helped almost 2,000 people with section 21 evictions, the most in a single month on record and a 25% increase since May 2022.

The practice will be prohibited in the renters’ reform bill, tabled last month by Michael Gove, the secretary of state for levelling up, housing and communities, affecting 11 million private renters.

The National Residential Landlords Association also said record numbers of landlords are selling up as mortgage interest rates keep rising. “The main reason landlords are seeking possession of properties is that it is no longer viable to continue letting,” said Ben Beadle, chief executive of the lobby group.

Consumer spending in the UK weakened last week, according to the latest realtime economic data from the Office for National Statistics.

Debit card spending fell by 8 percentage points last week, data from Revolut shows, while overall retail footfall was 95% of the level of the previous week.

However, transactions at many Pret A Manger outlets increased; in London, sales rose by 21 percentage points after the end of half-term holidays across parts of the UK.

Beer taps inside The Counting House pub in the City of London.
Beer taps inside The Counting House pub in the City of London. Photograph: Katie Collins/PA

British pub chain Fuller Smith & Turner has estimated that it lost over £5m of sales due to strike action in the last year.

Fullers told shareholders this morning:

The train and tube strikes were particularly detrimental in Central London, where a significant proportion of our estate is situated, with commuters choosing to work from home.

Over the year to 1 April, revenues grew to £336.6m from £253.8m, despite the impact of strike action. Like-for-like sales in Central London grew by 40.1%, as demand bounced back after pandemic restrictions.

But pre-tax profits dropped to £10.3m from £11.5m, with Fullers also hit by high inflation in energy, food and wages.

UK businesses have improved female representation on their boards, research shows, but two-fifths of FTSE 100 firms still do not have a woman in one of their top four executive roles.

The proportion of women on the boards of the 585 FTSE all-share listed companies has risen over the past year from 36% to 40%, according to the analysis of Companies House data.

However, the number of female bosses has flatlined, with just a tenth of executive roles occupied by women, excluding company secretaries. On a more positive note, the number of firms with all-male boards has halved to just four.

Last night, the Bank of England announced a review into how it makes and uses economic forecasts, following heavy criticism of its efforts to predict and control inflation this year.

David Roberts, the Chair of Court at the BoE, told the House of Commons Treasury committee that a broad external review of its “forecasting and related processes during times of significant uncertainty” had been commissioned.

Jumana Saleheen, Vanguard’s chief economist in Europe, says the Bank’s use of market expectations of interest rate moves in its forecasts are one problem:

Homeowners 'turn their backs on the Tories' as mortgage rates rise

Homeowners are turning their backs on the Tories as high interest rates increase the costs of their mortgages, exclusive polling for the i newspaper shows.

Strategy firm Stonehaven reports that Labour holds a 15-point lead over the Conservatives amongst homeowners, who are traditionally seen as Tory supporters.

The survey of more than 2,000 households at the end of May showed that 44% of mortgage holders say they would vote Labour if a general election were held tomorrow – an increase from 33% at the 2019 vote.

Just 29% of mortgage holders back the Tories, down from 44% at the last general election. The figures were calculated after the “don’t knows” were taken out.

Mark McInnes, insights adviser at Stonehaven, says:

“No party has won a general election in the last 50 years without winning mortgage holders”.

More here.

Updated

Hunt advisor: Important to keep raising interest rates

A member of Jeremy Hunt’s Economic Advisory Council has declared that interest rates need to keep rising to fight inflation, despite the unpleasant side effects.

Sushil Wadhwani, a former member of the Bank of England’s monetary policy committee, told the Today programme that failing to fight infation now risks making the situation worse.

Wadhwani says:

Inflation ultimely is the enemy of growth. It’s very important for us to get inflation down if you want sustainable growth

In that sense it’s important to continue administering the medicine, in the form of higher interest rates, not withstanding the side-effects, because if we delay raising rates then we might find the disease gets worse and we might then find that we have to do even more and experience even worse side effects.

Wadhwani adds that there have been “significant upside surprises” in both price and wage inflation in the last few months, “and it is increasingly looking like inflation is embedded”.

Having said that, it’s very important that no-one overreacts and no-one panics here, because there is a lot of tightening in the system. Mortgage rates are yet to go up for many people.

Wadhwani advises the MPC to “proceed judiciously” by raising interest rates by a quarter of one percent next week, from 4.5% to 4.75%, and resist the “siren calls” for a half-point hike.

Q: But raising interest rates higher risks killing the patient, not healing it. And the cost of government borrowing is higher than in the Liz Truss era….

Wadhwani also suggests that mortgage rates would be even more painful if the UK had stuck with Liz Truss’s economic policies, which were blamed for driving up borrowing costs last autumn.

Two-year mortgage rates could be closer to 8% than 6% today, he suggests, adding:

We would be in a much much worse situation had we allowed her to continue to attack the independent economic institutions.

China cuts medium-term lending rates as economy sputters

Over in China, the central bank has its medium-term borrowing costs for the first time in 10 months, as it tried to protect its economy from a downturn.

The People’s Bank of China lowered the rate on one-year medium-term lending facility (MLF) loans, by 10 basis points to 2.65% from 2.75% previously.

The move came after new economic data showed retail sales and industrial production growth slowed last month, suggesing the post-Covid recovery was stalling.

In the energy sector, National Grid has held talks with Drax over bringing two coal-fired units at its vast power plant in North Yorkshire out of retirement to prevent power cuts this winter.

The grid’s electricity system operator (ESO) has discussed possibly restarting the two units, which were shut this year after 50 years of coal-fired power generation at the Selby site.

Drax has converted four of the plant’s six units from biomass to coal in recent years and the final two units were kept available at the request of National Grid between October and March.

Drax began decommissioning the units in April but the ESO said on Thursday that talks to keep them available for the winter were “ongoing”.

ESO corporate affairs director, Jake Rigg, said:

“We are still in negotiations and we are working with Drax and with government.”

However, sources close to Drax said employees on the sites had already retired and work had begun on shutting down the units, meaning a restart was “very unlikely, although not impossible”.

In its early view of winter conditions, the ESO forecast that electricity supply would outstrip demand this winter, with a forecast buffer of 4.8GW of power.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, agrees that the Bank of England is likely to keep hiking interest rates in the months ahead.

And even once borrowing costs peak, they are unlikely to fall quickly, she warns:

At the point when the Bank of England chooses to press pause, immediate cuts in interest rates aren’t expected. Inflation is still likely to be a threat, partly because of the ongoing fight for talent across the labour market.

Brexit is considered to have made this more acute, particularly for certain industries, such as healthcare. This has had a knock-on effect on another problem facing the economy – the high numbers of long-term sick, given that a lack of staff is likely to mean longer waits for treatment.

With so many people too sick to work, jobs market tightness is expected to remain.”

Updated

Homeowners warned to expect more pain with mortgage costs at highest in decades

Although UK interest rates have risen from .1% to 4.5% in the last 18 months, they are still well below the levels seen in the 1990s housing crash (Bank rate was around 14% in 1990).

But, as Ed Conway of Sky News explains, borrowers are already facing a big mortgage squeeze (once you adjust for the size of mortgages, and people’s disposable income as a propoortion of those payments).

This means that mortgage payers taking out new loans today are now facing the biggest home loan squeeze since the early 1990s housing crash, and the pain is set to worsen in the coming months, Ed adds:

Updated

Introduction: UK interest rates will remain high for years, Mark Carney warns

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

UK borrowers, from mortgage-payers to the government itself, will face high interest rates for years to come, a former Bank of England governor has predicted.

Mark Carney, who ran the BoE from 2013 to 2020, has warned that “big tectonic shifts in the global economy” mean the cost of borrowing – which has jumped over the last 18 months – will remain high for a while.

Carney told ITV’s Peston show last night:

One of the things that governments in the UK, and Canada, elsewhere have to get used to, now, is that they are going to be paying higher rates of interest for their debt for the foreseeable future.

Not just measured in 12 months, 24 months, but actually, the big techtonic shifts in the global economy mean that we are likely to have higher longer-term interest rates for a period.

And if governments face higher long-term borrowing costs, it’s a “good working assumption” that everyone else will too, Carney agrees.

He says borrowers should recognise this:

If you have still a few years of low interest rates on your mortgage, if you fixed just at the right time as it turned out, recognise that there will be an adjustment over the medium term.

It’s a question of degree but the direction is very clear.

The Bank of England is widely expected to raise interest rates again at its next policy meeting, next week. It has already raised interest rates 12 times in a row, to 4.5%, the highest since 2008.

This morning, the money markets are predicting interest rates could be near 5.75% by the end of this year.

Yesterday, chancellor Jeremy Hunt warned the UK has “no alternative” but to raise interest rates to bring down inflation, which was 8.7% in April.

Carney’s comments come as UK mortgage lenders continue to lift the cost of their deals.

Yesterday, HSBC announced that it would be raising the pricing on a swath of its residential and buy-to-let fixed deals from today, just days after temporarily pulled down the shutters due to a surge in demand.

Other lenders increasing rates included Coventry Building Society’s broker arm, which said it would be launching new, more expensive deals on Friday.

On Monday, Santander became the latest big bank to temporarily pull its mortgage deals for new borrowers from sale, and the following day, NatWest put up the rates on some of its deals by as much as 1.57 percentage points.

Also coming up today

Inflation is a problem beyond the UK, of course. In the eurozone, consumer prices rose by 6.1% in the year to May, which is likely to prompt the European Central Bank to hike its key interest rates today.

We’ll hear from ECB president Christine Lagarde later today.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:

The ECB is broadly expected to hike the interest rates by 25bp when it meets today, and ECB chief Lagarde will likely sound hawkish at the press conference following the decision and insist that despite the recent easing in inflationary pressures – and perhaps the deteriorating economic outlook, the ECB will continue its efforts to fight.

Last night the US Federal Reserve left interest rates on hold, pausing after 10 increases in a row. But Fed chair Jerome Powell was clear that the US central bank plans to keep squeezing inflation out of the economy (it fell to 4% last month).

In a sign that US interest rates will head higher, Powell said:

“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”

The agenda

  • 9.30am BST: Latest UK realtime economic activity and business insights

  • 10am BST: Eurozone trade balance for April

  • 1.15pm BST: European Central Bank interest rate decision

  • 1.30pm BST: US retail sales for May

  • 1.45pm BST: European Central Bank press conference

Updated

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