European markets close lower
Weak UK data and a less hawkish than expected outlook from the Bank of England left sterling weaker but the FTSE 100 virtually unchanged by the close. But with the euro edging higher, European markets slipped back, while on Wall Street the Dow Jones Industrial Average was on course for its worst daily performance for nearly a month, not helped by poor figures from Macy’s. The final scores showed:
- The FTSE 100 finished up 1.39 points or 0.02% at 7386.63
- Germany’s Dax dropped 0.36% at 12,711.06
- France’s Cac closed down 0.32% at 5383.42
- Italy’s FTSE MIB fell 0.33% to 21,482.52
- Spain’s Ibex ended down 1.57% at 10,861.4
- But in Greece, the Athens market added 0.66% to 797.16
On Wall Street, the Dow is currently down 44 points or 0.2%.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Over in Athens, Greek finance minister Euclid Tsakalotos has felt the full force of protests today with communist-aligned demonstrators occupying his office ahead of next week’s vote on yet more austerity measures demanded by creditors in return for fresh bailout funds to avert default. Helena Smith reports:
Barging their way into the finance ministry on Syntagma Square, scores of communist-aligned protestors hung a massive banner from the building’s façade exhorting Greeks to “rise up” and participate in the general strike that will coincide with parliament legislating further cuts and tax increases in exchange for emergency bailout loans next week. The protest, which kicks off a week of work stoppages, strikes and street demonstrations ahead of the vote, kept Tsakalotos locked out of his sixth-floor office for most of the day.
Standing in front of the finance ministry, Yannis Hiotelis, a retired bank employee said his pension had been already been cut 60 percent. “How do they expect us to survive?” he asked of prime minister Alexis Tsipras’ leftist-led government. “Austerity only leads to unhappiness, disillusionment, bitterness and ultimately friction. We are talking about outright pillage. This government has made a mockery of its own so called leftist politics.”
The protest came as the International Monetary Fund appeared to roll back on speculation that it would sign up to the Greek bailout programme before a comprehensive debt deal had been found for the debt-stricken country. Greece is expected to be the focus of talks when the G7 meet over the next few days.
The above photo shows Yannis Hiotelis, retired bank ermployee, right, holding banner outside the Greek finance ministry in Syntagma square on Thursday. It reads: “Pensioners rise up! All on the street. All to battle.”
Updated
Joshua Mahony, market analyst at IG, said:
Today has been all about the UK, with a batch of hugely uninspiring data points giving way to a surprisingly volatile Bank of England meeting. The FTSE has suffered alongside its European and US counterparts, with a relatively stable day turning sour this afternoon. Gold producers Fresnillo and Randgold Resources are the top performers of the day, and it looks like investors are battening down the hatches for now.
The downturn in UK economic data over recent months has been there for all to see, yet this morning provided a perfect overview of how British industry is struggling of late. Negative construction output, manufacturing production and industrial production in March goes to show how tough the current business environment is for firms. However, probably the most damning number was the trade balance for goods which showed that despite the boost of a weaker pound, we are seeing consumers continue to focus on imports over domestic products.
The Bank of England was the main event today, with Super Thursday providing a pretty predictable set of forecasts alongside a very predictable rate decision.
Perhaps the most interesting part of it was the fact that we saw such volatility around the event, with the pound moving sharply lower after the BoE admitted it could be the end of 2019 before we finally see a rate rise. The chance of a rate rise during the long Brexit negotiations was always going to be slim, but Carney said that the speed of rate rises will be determined by how successful those negotiations are. The bank’s upward revisions for inflation and downgrades to growth should be taken with a pinch of salt given the uncertainty provided by the impending election, oil prices and Brexit negotiations.
It’s turning into a disappointing day for investors, with markets under pressure and the pound underwhelmed by the Bank of England’s comments and the UK data. Connor Campbell, financial analyst at Spreadex, said:
You’d think, with the Bank of England stating that interest rates may rise faster than expected, that sterling would be pretty happy. You’d be wrong.
That’s because there was a lot of BoE data to digest this afternoon, and not much of it good. First of all sterling was likely disappointed that Kristin Forbes was the sole MPC member to vote for a rate hike, missing out on the potential hawkish hand rumoured from Michael Saunders. Then there was the slight downward revision to the 2017 GDP forecasts, which were trimmed from 2.0% to 1.9%. Even the pound-positive news that inflation is expected to hit 2.7% in this quarter – a decent whack higher than the 2.4% initially expected – was joined by a warning that average earnings growth will be a mere 2% this year, down from the 3% previously stated 3%, marking a huge fall in real wages and living standards.
This left sterling in a rather bad mood, the currency falling half a percent against both the euro and the dollar (with cable now sitting at a one week low). In a rare sight the FTSE took no joy in the pound’s fall, the UK index itself shedding 0.2% to lurk just the wrong side of 7400.
Sterling’s slide did have ramifications elsewhere, however; the euro’s gains drove the DAX and CAC lower, the German and French indices dropping half a percent apiece. Over in the US, meanwhile, the Dow Jones finally fell through the 20900 level it has been testing for the past week, plunging 100 points to hit a 2 and a half week nadir.
It's only dropped back to a 4 day low, but biggest sell off we have seen in the US for a while. S&P500 back to the trend: pic.twitter.com/TWSlvkL524
— David Jones (@JonesTheMarkets) May 11, 2017
Back to the Bank of England once more, and here’s the view of one ex-member of its monetary policy committee:
big issue for mpc is why no members who seem to understand data & will challenge the forecast = back to tyranny of the (wrong) consensus?
— Danny Blanchflower (@D_Blanchflower) May 11, 2017
With stock markets under pressure after their recent runs - the Dow Jones Industrial Average is down 135 points or 0.6% at the moment - there are signs of life in the precious metals market.
Gold is currently up $5 an ounce at $1223 while silver is up from $16.14 to $16.26, as investors dip their toes back into perceived safer areas.
Back with the Bank of England, and this chart shows how UK and US interest rates are now diverging:
The Bank of England holds fire on interest rates but what about its growth projections? https://t.co/N40H5iaUqk pic.twitter.com/iATvtL2ewH
— EEF Economics Team (@EEF_Economists) May 11, 2017
Wall Street opens lower, Snap loses 23%
US markets have opened on the back foot as consumer shares were undermined by disappointing results from department store group Macy’s.
The Dow Jones Industrial Average is down while the S&P 500 opened 0.25% lower and the Nasdaq Composite down 0.3%.
Macy’s shares have dropped 9% to a six year low after its quarterly results came in short of expectations.
Snapchat parent Snap slumped 23%, wiping some $6bn off its market value, after it reported a $2.2bn loss after the market closed on Wednesday and warned of slowing growth.
US weekly jobless claims in surprise fall
Over in the US, and new claims for jobless benefits unexpectedly fell last week, another indication of the growing strength of the labour market.
Weekly jobless claims fell by 2,000 to 236,000 compared to expectations of a rise to 245,000. Claims have been below 300,000 - a level seen as a sign of a healthy jobs market - for 114 weeks in a row, the best run since 1970.
The news provides more evidence that the Federal Reserve may raise US interest rates again at its June meeting.
Updated
And the slide in sterling continues in the wake of the Bank of England’s meeting, with the expectation that it will not raise interest rates before the end of 2019, notwithstanding the more hawkish tone of some of its comments.
So the pound has hit a one week low against the dollar of $1.2851, down around 0.7%. Against the euro it has fallen 0.5% to €1.1838.
And here’s some City reaction to the Bank of England’s meeting:
Howard Archer at IHS Markit:
Markedly slower-than-expected UK GDP growth in the first quarter, the snap general election on 8 June, muted earnings growth and early difficult posturing ahead of the start of the Brexit negotiations between the UK and the EU made a pretty compelling argument for the Bank of England to sit tight at the May meeting – even if the Bank of England forecasts show an extended inflation overshoot..
However, we maintain the view that the Bank of England is being too upbeat on the growth outlook with some pretty optimistic assumptions, particularly relating to the likely pick-up in wage growth. We also think Brexit uncertainties will hamper growth.
We maintain the view that the Bank of England is highly likely to keep interest rates at 0.25% through 2017 and 2018 - and very possibly beyond. In fact, we do not see the Bank of England edging interest rates up until 2020 given likely prolonged economic and political uncertainties centred on Brexit.
However, given major uncertainties over the UK economic outlook nothing can be ruled out on the interest rate front.
David Lamb, head of dealing at FEXCO Corporate Payments:
The prospect of the pound reaching $1.30 has evaporated after the Bank of England all but confirmed that a rate hike remains as distant a prospect as ever.
The Governor may be sounding a touch more hawkish but any instinct he might have to raise interest rates to rein in inflation is being kept firmly in check by the Bank’s unwritten commandment – ‘thou shalt not jeopardise growth’.
So while the Inflation Report suggests the Bank’s rate rise conundrum remains finely balanced, in reality the doves continue to rule the roost. For now any hawkish talk remains just that – and there was precious little in the Governor’s press conference or the Report’s small print to suggest any significant shift towards a more hawkish trajectory.
None of this is new – but to have it laid bare is a reality check for sterling bulls and the pound is paying the price. Yet the pound’s slide against both the dollar and the euro is still relatively modest and it comes after a strong run, meaning sterling could still end the week stronger than it began it.
David Page, Senior Economist at AXA Investment Managers:
We still consider risks to the downside of the BoE outlook, currently forecasting growth of 1.7% for this year and 1.2% for next. Accordingly and in the knowledge that much hinges on the outlook for Brexit negotiations, we expect the BoE to continue to tread carefully.
While we recognise the risk that the MPC may tighten policy later in 2018 if Brexit negotiations are smooth over the next few years, we argue that in practice the materialisation of some downside risk is likely to leave the MPC keeping its policy rate on hold through the Brexit period and into 2019.
Dean Turner, Economist at UBS Wealth Management:
“’Super Thursday’ has become ‘Average Thursday’. Given the proximity of the General Election, no fireworks were expected. There were no surprises on the growth and inflation adjustments, but the Bank’s continued confidence in a “smooth” transition to a new deal with the EU stands out given recent news flow.
The Bank expects the squeeze on consumers will be offset in part with a better performance by exporters and investment. In our view, the this seems a little optimistic; we expect growth will slow more meaningfully as firms reassess their investment plans while Brexit talks are taking place.
Sterling’s immediate drop looks justified. There is little in this report to suggest that the MPC will become more hawkish in the short term, notwithstanding their marginally more upbeat language.
TUC: Wages must become an election priority
Mark Carney’s warning that real wages will shrink this year is an alarm bell for UK politicians, says the TUC.
TUC General Secretary Frances O’Grady says workers have already suffered enough since the financial crisis; a second wage squeeze is simply not fair.
O’Grady says:
“British workers have already suffered the longest pay squeeze since Victorian times. It will worry them that the Bank of England says there is more pain to come this year.
“All the political parties must explain in their manifestos how they will give Britain a pay rise. They should start with scrapping the unfair pay restrictions on public servants, which will leave midwives over £3,000 a year worse off in real terms by 2020. And they must commit to boosting the National Minimum Wage to £10 as soon as possible.”
Bank of England: What the media say
There’s lots of coverage of the Bank of England’s quarterly inflation report.
Chris Giles of the Financial Times is struck by Carney’s comments on Brexit:
UK interest rates will be able to rise towards more normal levels during the next three years if Theresa May negotiates a “smooth” Brexit, the Bank of England said on Thursday as it published forecasts suggesting that the recent economic slowdown will be temporary.
But in a stark warning to the UK prime minister less than one month before the general election, the central bank made it clear that its sanguine forecasts depended on Mrs May coming back from Brussels with a Brexit deal that ensures companies will not have to make sharp adjustments as the UK leaves the EU.
FT: BoE says ‘smooth’ Brexit would lead to normalised interest rates
In the Telegraph, Szu Ping Chan points out that the Bank’s forecasts are still quite upbeat:
Stronger business investment and the ongoing global recovery will ensure economic growth this year remains robust, even as households face the biggest real income squeeze in years, according to the Bank of England.
Bank policymakers trimmed their forecast for UK growth this year to 1.9pc due to slower household spending growth.
While this is down from 2pc in its February projection, growth is still expected to be higher than 2016, when the economy grew by 1.8pc.
Bloomberg’s Jill Ward focuses on the governor’s real wage concerns:
Mark Carney warned that U.K. households will face a difficult year, underpinning the Bank of England’s decision to keep interest rates on hold. The pound fell.
While the BOE governor said policy makers have assumed the U.K.’s departure from the European Union will unfold smoothly, he noted the uncertainties surrounding that process and said real wage growth will remain weak for now.
“This is going to be a more challenging time for households,” Carney said at a press conference in London on Thursday. “Wages won’t keep up with prices for goods and services they consume.”
Sterling fell as much as 0.6 percent to the day’s lows and traded at $1.2855 at 1:19 p.m. London time.
Carney: Volatility can't stay this low forever
Q: Are your forecasts at risk if stock markets fall back from their current high levels and volatility rises?
Mark Carney agrees that volatility is pretty low right now - although sterling volatility is closer to its historic average.
He doesn’t have a full explanation for why volatility is so low [the VIX ‘fear index’ hit its lowest since 1993 this week].
Carney also warns that volatility is likely to rise at some point:
The world hasn’t become dramatically less uncertain and we can certainly see some potential triggers for increased volatility at some point.
And that’s the end of the press conference
Q: Your forecasts are build on a smooth Brexit, including a transition forecast. Isn’t that rather optimistic, given Mrs May is heading for a hard Brexit - and that infamous dinner at Number 10 Downing Street?
The UK’s stated objective is a bold, comprehensive trade agreement with the EU, and an appropriate transition period.
Donald Tusk has said it’s in everyone’s interest to avoid disruption around Brexit.
It’s not our place to call those goals into question, Carney says.
Q: Theresa May wants to reduce immigration below 100,000 per year, which may tighten the labour market and dampen growth. Do you take that into account?
Carney does his best to avoid saying anything controversial, explaining that the Bank bases its forecasts on migration projections from the Office for National Statistics, rather than on political promises.
And he cites research on the labour supply, that shows that changes in available workers - either due to domestic factors or migration - only has “a relatively limited impact on inflation.”
That’s because extra workers may push wages down a little, but that then creates more demand (as there are more people in the economy), and that has a tightening effect.
That’s all old news here, Carney concludes with a reassuring grin (the question came from a Dutch journalist).
Q: Is it better to leave monetary policy looser for longer, rather than risking tightening too soon?
The current stance of monetary policy is ‘appropriate’, Carney replies carefully, dampening the idea that policy is too loose.
And he denies that Brexit will prevent the BoE from hiking rates.
The process of negotiating Article 50 will obviously have an influence on the economy and inflation, but it does not ‘tie the hands of the MPC’, Carney insists.
Carney: Higher inflation is price worth paying to create jobs
Q: You said hopefully wages will catch up next year; will that be enough for people who are struggling right now?
The key to making ends meet is having a job, Carney replies. So the Bank needs to set monetary policy so that as many people are in work as possible.
That’s why we’re tolerating this rise in inflation and not raising interest rates, the governor explains, adding:
If the trade-off is people in work, but inflation is a little higher, then it’s better to have people in work.
Asked about the global economic picture, Mark Carney says that China is one key medium-term risk.
Both the rate of growth in China, and the economic adjustments as it transitions to a consumer-driven economy, must be watched closely.
He also flags up the potential upward pressure on global interest rates.
Q: How can you be confident about employment staying strong, and wages rising, given the possibility that artificial intelligence will reshape the labour market and take jobs?
It is possible that automation, machine learning, will have a major impact on the jobs market in the future, Carney agrees.
But there are not signs that it is having a big effect today.
Q: How worried are you about the fall in Britain’s savings ratio to a record low?
Mark Carney says it takes a “very special and to some extent sad individual” to really understand the intricacies of the savings ratio (which measures the ratio of personal savings to disposable income in an economy).
And fortunately we has deputy governor Ben Broadbent on hand, Carney jokes!
Over to you, Ben....
Broadbent sound fairly relaxed. He that we should be “very wary” about making judgements about the level of the savings ratio, as you can’t really know where it is. But obviously it can’t keep falling forever, and a sharp fall would be a concern.
Updated
Carney defends leaving rates at record lows
Q: Inflation is above forecast, the economy is growing at trend growth, unemployment is falling...so how can you justify excessive stimulus at these levels? And are you not raising interest rates because households can’t stomach it?
Where to begin, sighs Carney, before taking a stab at it...
Our stimulus isn’t excessive, it’s appropriate, he replies, in the judgement of the whole monetary policy committee.
Inflation is above target because the exchange rate fell 16% because Britain voted to leave the EU. So do we lean against that? Changing monetary policy won’t change the future trading relation between Britain and the EU, and with other countries.
The economy is not at full employment.
And the output gap is closing...because monetary policy is appropriate.
Updated
Asked about trade, Carney says that trade growth has been ‘relatively modest’ given the scale of the fall in sterling and the pick-up in global trade
(maybe he’s thinking of this morning’s worrying jump in the UK trade deficit....)
Interesting. Carney: Bank has detected “evidence some businesses are hesitating to raise wages at a time of uncertainty abt market access”
— Ed Conway (@EdConwaySky) May 11, 2017
Difficult for Bank to raise rates before Brexit talks conclude - ING economists
Despite some hawkish comments in the Bank of England’s statement, ING economist James Smith says he still does not expect a rate hike before Brexit talks concude in 2019. He says:
Today’s major tail risk was that MPC member Saunders could join Kristin Forbes in voting for an immediate 25bp rate hike. In the event, the committee voted 7-1 (note the MPC is a voter down at present) to keep rates unchanged.
Unsurprisingly, there were no earth shattering changes to growth or inflation forecasts, with the possible exception of the 2017 CPI forecast (which was raised from 2.4% to 2.7%). After all, the General Election period is not an ideal time to make major alterations.
But the overall tone of the statement was fairly upbeat, and the MPC kept its reference to having limited tolerance to above-target inflation. Importantly, they also note that monetary policy “could need to be tightened by a somewhat greater extent” than the path implied by markets.
That all sounds fairly hawkish, but we still aren’t convinced that the Bank will look to raise rates any time soon. We suspect that the MPC will continue to “look through” the spike in CPI, and focus instead on the adverse effect it is having on consumers. The uncertainty surrounding the UK’s future relationship with Europe is still also likely to weigh on investment and hiring for the foreseeable future.
Interestingly, in slight contradiction to its other comments, the Bank does acknowledge that they must balance the trade-off between returning inflation to target quickly and supporting jobs/activity – and that this trade-off is present “through most of the forecast period”.
This suggests to us that there is still a divide in views between the hawkish external MPC voters, and the more cautious Governor/Deputy Governors. It’s also worth remembering that Kristin Forbes, who voted for the rate hike today, leaves the committee in June.
That will make it harder to form a majority in favour of lifting rates, and we continue to expect policy to remain on hold until Brexit talks conclude in 2019.
Q: How can you be certain that real wages will turn positive again in a couple of year’s time?
Mark Carney points to the ‘tightness’ in the labour market. Britain is still creating jobs, and at some stage that should feed through to higher wages.
Deputy governor Ben Broadbent wages in too - pointing out that while real wages are falling, real incomes are not.
That’s because not all income comes from wages -- pensions, for example, are still rising in real terms.
A quick explanation: Real wages means people’s actual pay, minus the inflation rate.
So, for example, if pay is rising by 2%, and inflation is rising by 2.1%, real incomes are slightly negative.
Q: Is the squeeze in real incomes all down to Brexit?
No, says Carney. Part of the story is that wage growth has been weak for some time.
Weak wage growth is partly due to poor productivity (a long-running problem for Britain).
Some firms may be hesitant about taking on higher wage costs due to the Brexit uncertainty, he suggests.
Q: You say your forecasts are build on a ‘smooth’ Brexit - what impact would a turbulent Brexit have?
Carney says the Bank hasn’t done an alternative forecast; a smooth Brexit includes an agreement on future trade links and a smooth transition out of the EU.
At Bank of England: Real wages will fall this year. Consumers will feel the squeeze. But things will get better next year as inflation slows
— Noreena Hertz (@noreenahertz) May 11, 2017
I like how Carney explains his points both in technical terms ('real wages declining') and layman's terms ('wages not keeping up').
— Todd Buell (@ToddBuell) May 11, 2017
Carney: Real wages will fall this year
Onto questions...
Q: Can you explain in layman’s language what you are seeing with real wages?
Certainly, smiles the governor, before delivering the bad news.
The actual pace of wage growth has been slow compared to past experience, says Carney. And with inflation now rising, pay packets will take a hit.
He declares:
This is going to be a more challenging time for households.
In our language, real income growth will be negative, Carney explains. For the public, that means “wages won’t keep up with prices”.
But he remains hopeful that real wage growth will return later in the BoE’s forecast horizon.
Updated
While Brexit will play an important role, other factors will also play a part affecting inflation, Carney continues.
Monetary policy can respond in either direction to changes in the economic outlook (ie, the Bank could either cut or raise interest rates as needed), says the governor.
And he concludes by warning that rates could rise faster than the market currently prices in.
Good news for workers: The Bank of England thinks that the factors pushing down real wages will not persist for long.
Carney explains that wages are expected to rise as the output narrows towards the end of its forecast horizon.
And he adds that monetary policy has its limits. It cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new trading arrangements after Brexit, or the weaker real income growth that is likely to accompany that adjustment.
Mark Carney on GDP growth and household spending. #InflationReport #SuperThursday pic.twitter.com/G3dzAGUXzx
— Bank of England (@bankofengland) May 11, 2017
Mark Carney begins by saying that the path the UK economy takes depends on how households, businesses and the financial markets respond to the negotiations around Britain’s exit from the EU.
And there are signs that Brexit is having an effect.
Wage growth is now moderating and inflation is picking up, so consumer spending has fallen.
But the pound has risen as the markets anticipate a more orderly Brexit process.
The Bank now thinks that consumption growth will be slower in the near term than previously thought, but then recovering as disposable incomes pick up, Carney explains.
He confirms that the Bank has cut its growth forecast for 2017 to 1.9%, and raised its inflation forecast for this year. He also notes that the pound has rallied since the forecasts were finalised (which might pull inflation down a bit)
Watch Mark Carney's press conference
Bank of England governor Mark Carney is holding a press conference at the Bank of England now, accompanied by deputy governor Ben Broadbent.
You can watch it here:
Pound falls
Sterling has fallen against the US dollar since the minutes were released, losing half a cent to $1.288.
That’s slightly surprising, to be honest, given the Bank’s warning that rates are likely to rise faster than the City currently expects.
But I think some traders had been expecting a stronger hint, or even a second vote to raise interest rates today (the rumour was that Michael Saunders might jump the fence).
Fawad Razaqzada, market analyst at Forex.com, explains:
The BoE said the UK may need tighter monetary policy than the yield curve currently implies and re-iterated that it has limited tolerance for above-target CPI inflation. But the markets were left disappointed by the fact no other MPC member joined Kristin Forbes in voting for a rate rise.
Here’s some instant reaction to the Bank’s announcement, from Resolution Group’s Duncan Weldon:
Shorter BOE: bigger than expected real income squeeze this year but not much change in forecasts. *If* Brexit is smooth then rates go up.
— Duncan Weldon (@DuncanWeldon) May 11, 2017
And the FT’s Sarah O’Connor:
Bank of England to Britain: It's not our fault you guys decided to make yourselves poorer pic.twitter.com/UgAExT3n1a
— Sarah O'Connor (@sarahoconnor_) May 11, 2017
The Bank minutes include a warning that its forecasts are based on Britain achieving a ‘smooth’ Brexit.
It says:
In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target. This is conditioned on the assumptions that the adjustment to the United Kingdom’s new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates.
BoE doesn't change its forecasts much. Warns T May that sanguine outlook depends on her negotiating a "smooth" Brexit
— Chris Giles (@ChrisGiles_) May 11, 2017
The Bank of England has also warned that it might have to raise interest rates faster than the market thinks.
The minutes of today’s meeting conclude that:
In judging the appropriate policy stance, the Committee will be monitoring closely the incoming evidence regarding these and other factors. Monetary policy can respond in either direction to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.
On the whole, the Committee judges that, if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections.
You can read the minutes online here.
Katie Allen: Bank warns that living standards will fall
My colleague Katie Allen has emerged from the lock-in at the Bank of England, and reports....
The Bank of England has warned households that living standards will fall this year as the Brexit vote works its way through to higher prices and meagre pay deals.
Presenting a sober assessment of the economic outlook just weeks before the general election on 8 June, the Bank left interest rates on hold at their record low of 0.25% but hinted that they may need to rise sooner than investors were anticipating if inflation continued to overshoot its target.
The monetary policy committee (MOC) was split for its second meeting running over the rates decision, with Kristin Forbes again voting against the other seven members and calling for an immediate rise to 0.5% to keep rising inflation in check.
The Bank’s quarterly forecasts published alongside the interest rate decision were for economic growth to edge up to 1.9% this year from 1.8% in 2016. That 2017 forecast was little changed from a 2% prediction made in February. Growth was forecast to slow next year to 1.7%, little changed from February’s 1.6% prediction.
The bigger changes were on the inflation forecasts after price rises have proved faster than the Bank’s expectations in recent months. Inflation has picked up to 2.3%, its highest level in more than three years on the back of higher oil prices and as the pound’s sharp drop since the referendum has made imports to the UK more expensive.
The Bank now expects inflation to be 2.7% this quarter, up from the 2.4% rate it was forecasting in February. It said inflation, on the consumer prices index (CPI), would continue to rise further above its 2% target in the coming months, “peaking a little below 3% in the fourth quarter.”
At the same time it cut its forecast for average earnings growth for this year to 2% from 3% pencilled in back in February.
That echoed other forecasters’ warnings over falling living standards. If the Bank’s outlook for pay this year proves correct, it would leave wages falling in real terms - once adjusted for inflation. That will have repercussions for an economy that is highly reliant on consumer spending to drive growth.
More gloom on UK living standards outlook: Bank of England average earnings growth f'cast cut to 2% fr 3% made in Feb
— Katie Allen (@KatieAllenGdn) May 11, 2017
Updated
BoE cuts growth forecasts and predicts higher inflation
The Bank of England has slightly cut its growth forecast for this year, from 2% to 1.9%.
On the upside, it now expects growth of 1.7% in 2018, up from 1.6% three months ago.
The BoE also forecasts that inflation will be higher than previously expected; peaking at 2.8% this autumn.
Here’s the official announcement:
MPC holds #BankRate at 0.25%, maintains government bond purchases at £435bn and corporate bond purchases at up to £10bn. pic.twitter.com/vPlTLdPDnD
— Bank of England (@bankofengland) May 11, 2017
Bank of England leaves rate on hold
Breaking! The Bank of England has voted to leave UK interest rates unchanged, at their current record low of 0.25%.
It’s a seven-one split; only Kristin Forbes voted for a hike in borrowing costs.
The Bank also left its asset-purchase programme unchanged.
ING have thrown their hat into the ring, predicting that the BoE was split 7-1 on whether to leave interest rates on hold.
Watch for this from the Bank of England - will there be another MPC member voting for a rate hike? Unlikely, but you never know.#BOE #FX pic.twitter.com/TqbtCnrqRn
— ING Economics (@ING_Economics) May 11, 2017
Just five minutes until we know if they’re right....
In 30 minutes time, we learn what decisions the Bank of England took this month, plus we see the new forecasts in the Inflation Report.
Although interest rates aren’t expected to change, there’s some chatter in the City that Kristin Forbes might not be the only person to vote for a hike.
Neil Wilson of ETX Capital explains:
Today’s meeting has the potential for a bigger vote split but for the Bank to sound more cautious overall.
There is some chatter on the street that Michael Saunders has joined hawk Kristin Forbes in voting for a 25 basis point rate hike at the meeting. He’s previously made the case for raising rates to normalise policy in light of rising inflation and growth remaining resilient. Forbes voted for a hike at the last meeting and inflation has since risen from 1.8% to hold at 2.3% for two months.
It was also observed in March that several MPC members felt it would require “little further upside news on the prospects for activity or inflation” to make them vote for a hike. If that holds then Saunders might not be the only one to follow suit.
However, Jeremy Cook of World First doesn’t expect any big shocks.
I'll be surprised if the hawks get too much of a grip on the BOE today; it should all be rather dull tbh
— World First (@World_First) May 11, 2017
Here’s Angela Monaghan on this morning’s downbeat economic data:
The pound has fallen back towards $1.29, following the news that Britain’s trade deficit widened in March as industrial production dropped by 0.5%.
Updated
ITEM Club: More evidence of a slowdown
Martin Beck, senior economic advisor to the EY ITEM Club, says that today’s industrial production and trade figures are “uniformly weak”.
Here’s his take:
The industrial sector saw the third consecutive monthly drop, with the effect of the unseasonably warm weather on utilities output the biggest driver of the fall. But manufacturing also contributed, shrinking by 0.3%. Along with earlier revisions, this has cut the ONS’ estimate of growth in industrial production in Q1 from 0.3% to 0.1%. But this was not enough to affect its estimate that overall GDP rose by 0.3% in the quarter.
“Construction output also fell in March for the third month in a row. But there was no change to the preliminary estimate that output rose by 0.2% in the first quarter of the year.
“March’s trade data capped off a disappointing set of official releases. The shortfall of exports relative to imports widened to £4.9b from £2.7b the previous month, a six-month high. And the deficit for Q1 almost doubled from the last quarter of 2016, suggesting that net trade exerted a significant drag on output in Q1. That said, the trade numbers continue to be distorted by large movements in flows of non-monetary gold. Overall, signs that the economy has slowed continue to build.”
Economist Sam Tombs of Pantheon also flags up that the depreciation in the pound isn’t helping Britain’s trade gap to narrow:
The trade deficit, ex erratics, hit a 9yr high in March. Import vols still up more than exports. This must be the worst depreciation ever pic.twitter.com/yZ37lF0rDc
— Samuel Tombs (@samueltombs) May 11, 2017
EU imports rose in March
Total UK imports in March jumped by £2.9bn due to an increase in the amount of goods entering the country, many from the European Union.
The ONS explains:
At the commodity level, the main contributors to this increase were chemicals from the EU (£0.6 billion), oil from non-EU countries (£0.5 billion), cars from the EU (£0.4 billion) and mechanical machinery (£0.2 billion) from non-EU countries.
The UK is so keen to leave the EU that we're importing as much of it as possible, as fast as possible.... https://t.co/p6ozYVj18O
— Kit Juckes (@kitjuckes) May 11, 2017
So, we don't HAVE to import all that stuff from the EU. But, er, we do. pic.twitter.com/zQwjy2e2vc
— Katie Martin (@katie_martin_fx) May 11, 2017
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This chart, which strips out erratic elements, show how Britain’s trade in goods worsened in March:
UK trade deficit in goods less oil and erratics still widening, no depreciation boost. pic.twitter.com/BZR3eaUQK9
— Mike Bird (@Birdyword) May 11, 2017
Today’s “ropey” trade and industrial production data confirm that Britain’s economy is slowing, says IHS’s Howard Archer.
He adds:
The poor data dilute any hopes that markedly slower GDP growth of 0.3% quarter-on-quarter in the first quarter could be revised up.
Indeed, the actual industrial production data was weaker than estimated in the preliminary first quarter GDP estimate while the trade deficit unexpectedly widened
City experts are in agreement; this morning’s UK economic data was rather poor....
Weak UK data:
— Jamie McGeever (@ReutersJamie) May 11, 2017
Construction, manufacturing, industrial output all below forecast. Trade deficit £13.44B, 3rd widest on record (nominal terms)
The summary of today's UK manufacturing, production and trade data for March is that they were weak and disappointing #GBP #GDP
— Shaun Richards (@notayesmansecon) May 11, 2017
Disappointing trade figures. Monthly deficit up £2.3bn to £4.9bn in March, quarterly deficit up £5.7bn to £10.5bn: https://t.co/YWRDvZLl5r
— David Smith (@dsmitheconomics) May 11, 2017
UK trade gap widens
More bad news: Britain’s trade gap widened last month, dashing hopes that the weaker pound is spurring an exporting boom.
The total trade deficit, covering goods and services, widened by £2.3bn between February and March 2017 to £4.9bn.
The ONS explains:
Total imports increased by £2.9 billion between February and March 2017, with an increase in imports of goods from both EU and non-EU countries.
Alarmingly, the UK trade deficit jumped to £10.5bn in the first three months of 2017, an increase of £5.7bn. That’s because imports swelled by 3.3%, while exports declined by 0.5%.
Increased imports of machinery and transport equipment (mainly mechanical machinery and cars), oil and chemicals all drove the deficit up during the last few months.
These charts show that the US, Germany and France were Britain’s top export markets, while we imported the most from Germany, China and the US.
The ONS also warns that there’s no sign that the fall of sterling is narrowing the trade gap.
The impact of a cheap pound is more complex than you might think, it says:
Some companies may hedge against currency movements in the short- to medium-term. In addition, evidence suggests that a high proportion of UK imports are traded in foreign currency, while some UK exports are traded in sterling, so there will not necessarily be a straightforward pass through from the changes in the value of sterling to the value of trade.
Between February and March 2017, the volume of goods exported increased by 3.2% and is now 8.5% higher than in March 2016. Import volumes have increased by 8.5% in the month to March 2017, the largest monthly growth since December 2014. The growth in export volumes in the latter part of 2016 may be a consequence of the fall in the value of sterling, making UK exports more competitive. However, volumes of imports have also increased in the same period and therefore we are not yet seeing a notable narrowing of the trade deficit attributable to the sterling depreciation.
Updated
UK industrial production falls faster than expected
Newsflash: Britain’s industrial sector has suffered a sharp fall in output, fuelling concerns that the economy is slowing.
Industrial production shrank by 0.5% in March, reports the Office for National Statistics.
That includes a 0.6% decline in manufacturing, and a 4.2% drop in energy supply.
The ONS explains:
Basic metals and metal products provided the largest downward pressure on manufacturing in March 2017, while warmer-than-average temperatures led to a decrease in energy supply.
This means that UK industrial production only inched up by 0.1% in the first three months of this year.
Updated
Over in Brussels, the European Commission is releasing its latest growth forecasts -- including a brighter picture for the UK.
The EC now expects Britain’s economy to expand by 1.8% this year, up from 1.5%. GDP is then forecast to slow to 1.3%, up from 1.2%.
The EC has also hiked its forecast for eurozone growth this year to 1.7%, up from 1.6%, with unemployment expected to keep falling.
Commissioner Pierre Moscovici is presenting the forecasts now:
#Unemployment in the euro area is set to fall to 9.4% this year and 8.9% in 2018, the lowest level since 2008. #ECforecast
— Pierre Moscovici (@pierremoscovici) May 11, 2017
Growth map 2017: Poland 3.5%; Spain 2.8%; Netherlands 2.1%; UK 1.8%; Germany 1.6%; France 1.4%; Italy 0.9% #ECforecast @EU_Commission pic.twitter.com/CMgc11ki2H
— Pierre Moscovici (@pierremoscovici) May 11, 2017
The fiscal outlook is improving on the back of growth & low interest rates: the euro area deficit should fall to 1.4% in 2017. #ECforecast
— Pierre Moscovici (@pierremoscovici) May 11, 2017
What to watch for on Super Thursday
The City has three questions for the Bank of England today.
Has it hiked its inflation forecasts, has it cut its growth forecasts, and does it give fresh hints on when interest rates might rise?
Jamie Dutta, senior market analyst at Faraday Research, explains all:
1) High Inflation
The Brexit vote’s biggest impact has been on the sharp drop in sterling, which has pushed U.K. inflation to three year highs of 2.3%. This overshoot above the BOE target of 2% is expected to push higher still over the rest of the course of the year. In the February report, the central bank forecast consumer prices to peak at 2.7% in 2018, but since then oil prices have dropped substantially and sterling has recovered.
A weak pound is of course beneficial for exports and inflation, but as wage growth has slowed down rising inflation will likely undermine consumer expenditure; one of the major drivers of the economy. Interestingly, there was market talk today that Carney may be tempted to talk up the inflation impact.
2) Low Growth
The UK economy started the year on the backfoot with GDP slowing worse than expected to its weakest pace in 12 months. The most recent figure of +0.3% is more than half the +0.7% pace advance at the end of last year. It is also most notably below the +0.6% forecast from the BOE in the first quarter.
The latest survey data on the other hand has showed some positive momentum carrying through to Q2 with resilient consumer confidence figures. Whether negative real wage growth coming in the next few months hits spending growth more aggressively will be key for GDP prospects and Carney’s handling of this will be fascinating. Indeed, we called this his ‘hire-wire’ balancing act at the February meeting.
3) Interest Rate hints
After one (departing) policymaker [Kristin Forbes] voted for a rate rise in March,Carney is expected to keep a measured tone as there is no reason at this stage to start a more hawkish rhetoric, especially after the modest Q1 growth figures.
In addition the June general election may have an extra bearing on the Committee’s reasoning. February saw Carney talk about the ‘twists and turns’ of the Brexit journey and it is most likely that monetary policy will be kept steady until any negotiation deal clarity is evident. For us, the impact on sterling will be key. Cable spiked higher earlier today to $1.2988 on the market chatter of possible hawkish bias by Carney. This seven month high comes after a series of bull flag breakouts seen since the 300 point plus move after the election announcement.
We note that the directional move of this last pattern was modest which means the city chatter will need to be heard tomorrow if we are to break through the 1.30 psychological barrier. We could then see a new $1.31-$1.34 range especially as the well-known shorts in sterling have barely squared up over the last few weeks.
There’s little early drama in the European stock markets, yet.
Markets are pretty flat as traders await the Bank of England’s decisions.
Here’s the seven men and one woman who set UK interest rates this month.
There should be nine MPC members, of course, but we’re waiting for a replacement for Charlotte Hogg since her shock resignation in March. They’d better hurry up, as Kristin Forbes leaves at the end of June....
Updated
The pound is bobbing around the $1.294 mark this morning, having failed to bash its way over $1.30 yesterday (a level not seen since September)
It may take something special from the Bank of England to drive sterling to a new seven-month high, says FXTM chief market strategist Hussein Sayed:
Pound sterling has been flirting with the 1.3 level for most of the past week, but failing to break above this key level indicates that a strong catalyst is needed to convince traders to go long from here.
Whether we see a break above or a pullback hinges upon the Bank of England’s decision and the quarterly Inflation Report issued today.
Sayed points out that City experts aren’t sure what messages they’ll hear from the BoE today. Will policymakers be encouraged by low unemployment, or alarmed that growth was below forecast in Q1 and the housing market is slowing?
Although Gavin Patterson has lost that £4m bonus, he’s still got a job....
....Unlike 4,000 BT workers worldwide, who are being axed under new plans to reshape its Global Services division.
BT is cutting 4,000 jobs in a drive to recover from an accounting scandal and a profit warning https://t.co/FgX1DQIvt0 pic.twitter.com/wgu3xvAmlJ
— Reuters UK (@ReutersUK) May 11, 2017
BT boss happy to lose £4m bonus over Italian problems
BT’s chief executive is counting the cost of the company’s Italian accounting scandal this morning. A £4m cost, to be precise.
Gavin Patterson lost his bonus following the discovery of accounting problems at its division that cost BT £145m, and wiped billions off its market value.
My colleague Mark Sweney has the details:
Speaking on Bloomberg, Patterson revealed that forfeiting the bonus was actually his idea. He says:
I believe that as a CEO you need to set an example
I signalled to the board back in January, when we announced the problems in Italy, that it would be inappropriate to take a bonus if one was due. And that’s what you can see today.
Here’s a clip of Patterson explaining all:
BT chief executive Gavin Patterson says he won't take his bonus this year https://t.co/otlPc1JS85 pic.twitter.com/z4U4gXGtPp
— Bloomberg TV (@BloombergTV) May 11, 2017
Updated
Today’s Bank of England meeting is overshadowed by signs of a slowdown in the housing market.
The Royal Institution of Chartered Surveyors has warned that momentum is ebbing, with sales slipping and housing stock in short supply.
It comes after several building societies have warned that prices have dipped in recent months, and reports that rents in London are now falling too.
The agenda: Bank of England Super Thursday
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s Super Thursday at the Bank of England, the moment when Britain’s central bank delivers its latest quarterly inflation report on the UK economy.
The BoE is also setting interest rates, and releasing the minutes of this month’s meeting too, so we’ll have lots to get into.
City experts are predicting an 7-1 split over interest rates, with Kristen Forbes likely to remain a low voice pushing for an rise in borrowing costs. The rest of the committee are likely to vote to leave them unchanged at the current record low of 0.25%.
There will be an empty chair around the Monetary Policy Committee table too, as Charlotte Hogg has not been replaced since resigning for not revealing early enough that her brother worked for Barclays.
The Bank could trim its growth forecasts today, and predict that inflation will be higher than expected three months ago. Consumer price are already rising faster than its 2% target, so there is some pressure for the BoE to consider tightening policy.
But growth has been disappointing, slowing to just 0.3% in the first three months of this year.
So with Brexit still to play out, governor Mark Carney has every reason to sit tight and urge caution.
George Buckley of Nomura, for example, doesn’t expect fireworks:
“With economic surprises having been negative in recent weeks, the Bank looks to be in wait-and-see mode at the moment.”
RBC Capital Markets also believe the BoE will be happy to tolerate higher inflation for a while yet:
Since the February Inflation Report growth has disappointed expectations a little and inflation has exceeded the Bank’s forecast a little. This makes the trade-off faced by the MPC trickier but we expect that the core neutral stance will hold this time.
That means the MPC is likely to continue to tolerate a forecast for above-target inflation by exercising the flexibility in its remit to have due regard for the risk that a quicker return of inflation to target could trigger undesirable volatility in output and employment.
Here’s a video preview from Sigma Squawk:
Bank of England Super Thursday
— Sigma Squawk (@SigmaSquawk) May 11, 2017
Rate decision 12pm, unchanged decision expected by all economists surveyed.#gbpusd pic.twitter.com/elY7NdoMFE
We also get new UK trade and industrial production data this morning.
Here’s the economics calendar:
- 9am: European Commission publishes new economic forecasts
- 9.30am: UK industrial production for March
- 9.30am: UK trade figures for March
- 12pm: Bank of England interest rate decision + minutes
- 12pm: Bank of England publishes Quarterly Inflation Report
- 12.30pm: Mark Carney’s press conference
- 1.30pm: US weekly jobless figures
On the corporate side, telecoms giant BT and fashion firm SuperGroup are reporting results.
European stock markets are opening calmly; Britain’s FTSE 100 may be pulled into the red by several companies going ex-dividend.
#ftse100 could wobble on open as these companies are set to go ex dividend today - but should recover as day goes on. #markets #FTSE @IGcom pic.twitter.com/H8CyQ9haG9
— Katie (@KatiePilbeamIG) May 11, 2017
Here’s IG’s opening calls:
Our European opening calls:$FTSE 7376 -0.13%
— IGSquawk (@IGSquawk) May 11, 2017
$DAX 12762 +0.03%
$CAC 5408 +0.14%$IBEX 11046 +0.10%$MIB 21580 +0.13%"
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