Bank of England expected to leave interest rates on hold despite falling inflation – business live | Business


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

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Key events

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.

Public sector net borrowing excluding public sector banks was £8.4 billion in February 2024, down £3.4 billion on February 2023.

This was the fourth consecutive month where borrowing was down on the same month a year earlier.

➡️ https://t.co/XRqfwTOyTj pic.twitter.com/4CzN6S2pMZ

— Office for National Statistics (ONS) (@ONS) March 21, 2024

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

Public sector net debt excluding public sector banks was £2,659.4 billion at the end of February 2024, provisionally estimated to be around 97.1% of the UK’s annual gross domestic product.

➡️ https://t.co/XRqfwTOyTj pic.twitter.com/cw8E44DhnU

— Office for National Statistics (ONS) (@ONS) March 21, 2024

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.

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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.

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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

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