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Bank of England set to raise rates to 4.75% as inflation slow to fall

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11 months ago

June 16, 2023

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Bank of England set to raise rates to 4.75% as inflation slow to fall

The Bank of England looks set to raise interest rates by a quarter point to a 15-year high of 4.75% on June 22, its 13th straight rate rise as it fights unexpectedly sticky inflation that risks making it a global outlier.

Investors this week bet the Bank of England might hike rates as high as 6% this year – well above where the US Federal Reserve or the European Central Bank are expected to go, and a level not seen in Britain since 2000.

BoE Governor Andrew Bailey told a parliament committee on Tuesday inflation was taking “a lot longer than expected” to come down and the labour market was “very tight”.

Bailey was speaking just after official figures showed basic pay in the three months to April rose by an annual 7.2% – the fastest on record, excluding periods where the data was distorted by the COVID-19 pandemic.

While pay is still falling when adjusted for inflation, these numbers caused markets to ramp up their bets on BoE rate hikes, and pushed two-year government bond yields to their highest since 2008.

Three weeks earlier, there was a similar sharp move after data showed consumer price inflation fell less than forecast in April, leaving it at 8.7%, the joint-highest with Italy among large advanced economies.

“The UK is really experiencing a very challenging situation. It is obviously challenging for all the central banks, but I think the UK is uniquely challenged,” said Katharine Neiss, chief European economist for US investment firm PGIM and a former BoE official.

However, Neiss thinks the BoE is unlikely to raise interest rates as much as markets have priced in.

“The direction of travel is the right one – higher rates – but perhaps not as high as the market is expecting,” she said.

In a Reuters poll this week, economists predicted the BoE would raise interest rates just twice more, taking rates to a peak of 5% by August or September.

If that proves the case, the BoE will not have much more tightening in store than markets currently expect for the Fed – whose policymakers see two more rate rises – or the ECB, which raised rates on Thursday and whose President Christine Lagarde indicated another rate rise was likely in July.

How much tighter?

The BoE faces three big challenges when assessing how much more rate tightening it needs to do.

First, the structure of Britain’s mortgage market has changed since its last tightening cycle in 2006-2007. Fewer households have mortgages and more are on fixed rates – so a key channel for higher interest rates to affect the economy now operates with a delay.

While the most recent jump in interest rates has caused turmoil for homebuyers, the BoE estimates three quarters of the tightening is yet to be felt.

“The writing is on the wall in terms of the health of the UK consumer, who must be already existing on fumes given the ongoing negative real wage growth that we’re seeing,” said Richard McGuire, head of rates strategy at Rabobank.

Two of the nine members of the BoE’s Monetary Policy Committee (MPC), Swati Dhingra and Silvana Tenreyro, have voted against rate rises since December.

Second, it is unclear how much of Britain’s inflation premium over other countries represents a time-lag – partly due to a different timing of energy subsidies – rather than persistent inflation pressures.

However, the BoE is likely to have been alarmed by core CPI – which excludes energy and food – rising to 6.8% in April, its highest since 1992.

May inflation data is due on June 21. Third, the extent to which Brexit and any long-term impacts of COVID-19 on the labour market have hurt Britain’s productive potential remains unknown.

“The central bank is effectively flying blind with regards to having a really strong view about where the supply capacity of the UK economy is,” Neiss said.

Megan Greene – an economist who will succeed Tenreyro on the MPC next month – said on Tuesday she thought Britain’s economy was probably incapable of growing faster than 1% a year without generating excess inflation.

In the short term, market interest rate expectations are now back at the level where they were in November, when the BoE indicated they were too high.

But Bailey’s opportunity to fine-tune his message to markets will be limited next week, as no new economic forecast or accompanying press conference is scheduled.

And despite the unwelcome inflation surprise, markets see only a slim 15% chance of a half-point rate rise.

“If the Bank of England accelerated policy tightening now, that would smack of panic or a loss of control,” McGuire said.

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Related Topics:Bank of England Business International

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A sigh of relief as inflation at lowest ebb of 17.3pc in two years

Published

4 days ago

May 2, 2024

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A sigh of relief as inflation at lowest ebb of 17.3pc in two years

Pakistan’s consumer price inflation has come down to 17.3 per cent in April, the lowest during the preceding two years, data from the Pakistan Bureau of Statistics (PBS) says.

Pakistan has been beset by inflation above 20pc since May 2022, registering as high as 38pc in May 2023, as it has gone through reforms as part of an International Monetary Fund (IMF) bailout programme.

Month-on-month inflation is down 0.4pc, showing negative growth for the first time since June 2023.

The Finance Ministry in its monthly economic report said it expected inflation to hover between 18.5pc and 19.5pc in April and ease further in May to 17.5pc-18.5pc.

“The inflation trajectory is slowing primarily on account of food inflation which has slowed down considerably,” said Faizan Kamran, chief executive of a Karachi-based investment and research company.

Kamran added that he expected inflation to fall into single digits in the next five to six months.

The State Bank of Pakistan (SBP) maintained its key interest rate unchanged at 22pc for the seventh straight policy meeting on Monday, hours before the donor agency executive board approved $1.1 billion in funding under a $3 billion standby arrangement signed last year.

Pakistan receives last tranche from IMF

The State Bank of Pakistan (SBP) received SDR 828 million (around $1.1 billion) from the International Monetary Fund (IMF) on Tuesday – a day after the Fund approved the last tranche for Pakistan under the $3 billion Stand-By Arrangement (SBA).

In a statement, the SBP said the amount would reflect in the foreign exchange reserves for the week ending on May 3.

Last week, the SBP said its foreign exchange reserves dropped by $74 million to $7.981 billion (in the week ending on April 19) because of external debt repayments.

IMF greenlights $1.1bn tranche

On Monday, the IMF approved disbursement of $1.1 billion tranche, concluding the second bailout package in eight years. The board met in Washington and completed the second review. It is learnt that all board members, except India, favoured the last installment for Pakistan.

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Business

Czech central bank cuts a key interest rate again with inflation down and the economy on the mend

Published

4 days ago

May 2, 2024

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Czech central bank cuts a key interest rate again with inflation down and the economy on the mend

The Czech Republic’s central bank on Thursday cut its key interest rate for the fourth straight time as inflation dropped and the economy showed signs of recovery.

The cut by a half-percentage point brought the interest rate down to 5.25%. The move was expected by analysts.

The bank started to trim borrowing costs by a quarter-point on Dec. 21, which marked the first cut since June 22, 2022. It continued with a cut by a half-percentage point on Feb. 8 and went on by another half-percentage cut on March 20.

Inflation declined to 10.7% in 2023 from 15.1% in 2022, according to the Czech Statistics Office, and dropped to 2.0% year-on-year in February, which equals the bank’s target, and remained unchanged at the same level in March.

The Czech economy was up by 0.4% year-on-year in the first quarter of 2024, and increased by 0.5% compared with the last three months of the previous year, the preliminary figures released by Statistics Office indicated on Tuesday.

That came after the Czech economy contracted by 0.2% in the last three months of 2023 compared with a year earlier.

The Czech bank’s decision comes as central banks around the world, including the U.S. Federal Reserve, are trying to judge whether toxic inflation has been tamed to the point that they can start cutting rates.

The European Central Bank left its key rate benchmarks unchanged at a record high of 4% in April, but signaled it could cut interest rates at its next meeting in June.

But the U.S. Federal Reserve emphasized earlier this week that inflation has remained stubbornly high in recent months and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.

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Business

Neelum Jhelum Power Plant shutdown for physical inspection of head race tunnel

Published

4 days ago

May 2, 2024

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Neelum Jhelum Power Plant shutdown for physical inspection of head race tunnel

The Neelum Jhelum Hydropower Plant was shut shutdown yesterday for a physical inspection of its head race tunnel to locate the problem which led to a decrease in pressure a month ago.

Once the problem is traced, a comprehensive plan will be chalked out in coordination with the project consultants and the international experts for undertaking remedial works to rectify the issue, said a press release.

According to the details, a sudden change in the head race tunnel pressure was observed on April 2, 2024. As per the advice of the Project Consultants for the safety of the head race tunnel, the project management kept operating the plant at a restricted generation of 530 MW since April 6 to monitor fluctuation in the head race tunnel pressure.

Neelum Jhelum Hydropower Plant continued generating about 530 MW of electricity till April 29 without any issue. However, at 2257 hours on April 29, further change in the head race tunnel pressure was observed. Subsequently, the generation was gradually reduced but the pressure could not sustain within the safe limits as per the advice of the Project Consultants.

Keeping in view the safety of the head race tunnel and the powerhouse, the plant was shut down at 0600 hours on May 1 for a physical inspection of the head race tunnel to identify the problem of reduced pressure. Consequent to the detailed discussion with the consultants for dewatering of the 48 Km-long tunnel, the intake gates at the dam site were lowered for flushing of the de-sanders.

The dewatering started from the powerhouse side on the same day. The dewatering will be executed at intervals for the safety of the tunnel.

It is important to note that Neelum Jhelum Hydropower Project has been constructed in a weak geological and seismic-prone area. It has a 51.5 Km-long tunnel system. Its head race tunnel is 48 Km long, while the tail race tunnel is 3.5 Km-long. About 90% of the project is underground. Earlier, the plant was shut down in 2022 for repair of the tail race tunnel downstream of the powerhouse. After completion of the repair and rehabilitation work, the plant resumed electricity generation in August 2023.

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