The City View: Bank of England hike rates once more
Today Andy Silvester talks to Jack Barnett, City A.M.’s Economics and Markets reporter. Together they go through the thinking behind the Bank of England’s 25 basis point rate rise earlier today, which brought the UK’s interest rate to 1%. They take a look at the Bank’s forecasts, and explain why a recession is almost inevitable.
And in other news — Shell and BP have announced bumper Q1 profits, and Elon Musk has lined up investors to help with his purchase of Twitter.
Episode transcript (auto-generated)
Andy Silvester 0:08 Good afternoon and welcome to the City View podcast on a fairly momentous day in the city, thanks to the Bank of England are hiking rates by 0.25 basis points this afternoon. Ascending, the interest rates are 1% highest for 13 years, although obviously historically low at at any kind of historic standard, and other corporate news around about some on the side of the Atlantic, some on the other side shell joining BP and announcing bumper first quarter profits. Shell made 7.3 billion in the first three months of the year. That’s nearly triple what it announced last year. Of course, that’s driven by extremely high energy prices right now across the world as well as demand still being significantly high. We haven’t yet seen that demand destruction. And on the other side of the pond, Elon Musk finally putting some meat on the bones of his Twitter purchase as he lined up investors to help with the purchase of Twitter around 5 billion pounds worth of commitments, biggest one made by Oracle’s chief as well as Mr. Musk’s friend, and then other bits and pieces around there including investments from Sequoia Capital. And interestingly by Nance the cryptocurrency firm. All of that somewhat pales in comparison to the big economic news of the day. It has to be said Jack Barnett is here with me our economics and markets correspond here it says em, Jack, you are the bank this morning. And just talk us through before we get to the details, talk us through the choreography of what it’s like being a hacker at the bank on decision dayJack Barnett 1:39 It’s pretty uncomfortable, I think it’s probably it’s probably the word to use. Everyone’s kind of thrown into what can be described as a pen, I think maybe into a room you’re locked away, your phones are taken away from you. And then obviously, you’re given the the crucial document switch ahead of time when they were announced at midday. Everyone then frantically scrambled through the big report and then typically finds out the top line that one of which I’m sure we’re going to touch on in a second. Everyone in France with the rights that their stories and and at midday, the countdown comes down and given access to the to the Wi Fi and and everyone publishes their story. Then we all turn it up to the conference room. We listen to the governor deliver his remarks. And then each respective journalist has given in turn to grill the governor. So it’s quite a it’s there’s a lot of pageantry to the day. But nonetheless, it’s obviously a very, it’s an important event but only comes around every quarter as well. So… Andy Silvester 2:39 Indeed, all right, well, let’s touch on that those conclusions, actually. So I’ve sort of included that the interest rate hike is one thing. Let’s just do that quickly, before we move on to other economic forecasts. Mark is pretty much priced that in right. Jack Barnett 2:56 Yeah. So we had a 25 basis point hike is now 1%, as you said, had not been there since right about 2009 or so. It’s the fourth meeting in a row, the bank has hiked interest rates. It hasn’t done that since he was give given independence 25 years ago. So just on that measure, that probably indicates is how concerned the bank is about inflation. But as you also pointed out, interest rates are historically extremely low, compared to, you know, over the last 100 years or so. So it’s yeah, it’s obviously a historic move. But in the context of things, it’s not going to do a great deal Andy Silvester 3:34 for sure. And real world. Obviously, that interest rate with inflation running as high as it is, is is really a question about how much a mortgage is going to cost. But more importantly, if you’re a saver, not ideal news, although your interest rate goes up. So it’s better than it was a couple of days ago. Inflation is still far outpacing the rate. Let’s talk about inflation. Because the bank has been consistently I think it’s fair say dovish, in its projections for inflation, going back to the middle of last year, really when some of these inflationary pressures started to be felt in the UK economy. A slight change in tone over recent months and a very strong strident change in time today, it felt almost apocalyptic the way the bank was talking about inflation over the next few months, just talk us through those forecasts because they’re at once sort of exactly what we expected, but also somehow worse than we feared. Jack Barnett 4:28 Yeah. So the bank has now got inflation peaking at just shade over 10% in October, largely driven by a further upgrading in off gems price cap of 40%. In October, it wasn’t you know, it was only a few months back to the bank was expected inflation to peak at about 5% or so. So that is it’s an indication of a how much of a change of tone the bank has had towards inflation and also just how, how badly they got their forecasts wrong. Which they have Been doing kind of since the start of the pandemic. Now, off the back of that inflation peak, with more damning figures about living standards. Now, if you can remember costume about sort of February time the bank was the first big institution to be warning about how much living standards would fall this year before the ABR didn’t before the IMF did it. So this year, they’ve got living standards falling on their measure. Now you can take various different measures, but on their measure, they will enter the second quickest fall since records began in the mid 1960s. That’s mainly been driven by high energy energy prices, just squeezing people’s budgets and wages, just not keeping pace with that expected inflation peak. And in that off the back of that what I’m sure you obviously want to touch on the fact that the wider what does that mean for the macro picture? Well, the Fed the Fed now you can kind of discern from what the bank is saying is that a recession next year is pretty much nailed on Yeah, the bank has got the economy next year shrinking point two 5%. And in the first three quarters of the year, based on their projections, the economy is likely to shrink on an annualised quarterly basis. And that’s quite wonkish. But it’s quite, you do need to make this distinction between that between because of the you know, you’re getting into definitions about what a recession is, but fully economy just shrink by 2.5%. across the whole of next year, it seems pretty likely that we’re going to have a recession at some point. Yeah, that is mainly just being driven by the fact that that living standards are falling so steeply, inflation is so high, households are likely to respond by cutting spending or saving more, as they’re exercising greater caution. The UK economy is very, very reliant people spending money, if that falls back growth, then tipped back into negative territory. Andy Silvester 6:43 That’s interesting, as obviously just worth pointing out technical recession is two quarters in a row of negative growth. At least officially, although recessions tend to be felt a lot sooner in terms of people’s pockets and living standards, and they necessarily show up on the spreadsheet. There is an argument and it has been made by Rupert Harrison today. He’s now at Blackrock but was formerly George Osborne’s chief economic adviser and chair of the economic council of advisors or Council of Economic Advisers, governors feel that the labour market isn’t as tight in the UK as it is elsewhere. And therefore, when supply comes back, inflation will naturally fall back away combination of demand destruction as well as as well as that supply chain sort of catch up, I suppose. And that, therefore, what the bank is doing is choking off the recovery. I think that’s probably not a view that I share. But it is true that there’s question of how much headroom they’ve got. Right? Because although the mandate of the bank is 2%, inflation 2%, Inflation 2% Inflation, there is a quarry on the end of that, which is in a way that supports growth. And I guess I mean, you ask the governor today and they didn’t sound like they were playing ball and looking into the crystal ball and coming up with the answer. He wants it. But there is a question about how much everything they have got on rates? Jack Barnett 7:57 Yeah, very much. And it’s quite, when they put out their forecasts, they do two different assumptions, one of which is the market implied interest rate path, and then the path which what existing interest rates now and on the market path. That’s where you’ve got all these really, really gloomy statistics, where looks like we’re heading for a recession. But there is a gap of about 1.25 percentage point between that path and the existing rate. Now, the question that we asked them was that how, how much room does the bank have going to have to hike interest rates to get on top of inflation without tipping the economy into this into this slump? That it’s forecasting? Well, I think the thing to know is that most people in the city are expecting more rate hikes. The forward guidance today was was a little bit more hawkish than what people were expecting. So you could probably benefit in at least one or two more rate hikes for the Bank of England, maybe taking it to 1.5% by the end of the year. Now, the difference between that market implied interest rate curve and the 1%. Curb, the 1.5% isn’t is pretty much in the middle of that Labour give or take. So the in the inference from that is that the bank, the sort of cost of getting inflation down to the bank is a recession and they seem to be quite happy to say, Listen, house in order to shake this insert inflation crunch out of the economy, households are unfortunately going to have to absorb some short term pain for longer term gain. And that’s going to come in the form of higher interest rates and higher prices. Andy Silvester 9:24 That’s fascinating little parlour game to play in trying to work out what’s going on the MPC room. What we do know is that the MPC is, is slightly split, not in the way that it traditionally is between rate rise and hold, but actually rate rise to what we saw today and a more drastic rate rise. Jack Barnett 9:38 Yeah, so we had a six free split on the MPC, six voting in favour of a 25 basis point height, which is obviously what we’ve got, including the governor, Andrew Bailey, that then we had free dissenters who actually voted for double that 50 basis points which would have followed in the same direction as the Fed last night who heights basis points, rates by 50 basis points as well. Like, I think you can tell as an indication that there is there is not a mutiny as such on the MPC. But there are definitely murmurs beginning to emerge that, you know, we need to be going steeper and faster. But at the moment, it looks as if they’re going to be moving in 25. Basically, one increment. Andy Silvester 10:20 Well, a wise man once said, by which I mean you that if they move too slowly on interest rates at the start of an inflationary cycle, you end up being forced to move further than you might necessarily have wanted to. I think it’s fair to say we might be might be seeing that now. It’s, you know, it’s staring into the runes and of course, nobody could have predicted what knockin seriously predicted he could have sort of forecast in for it, but no, because seriously, but it’s a volume Putin’s invasion of Ukraine, which has made life significantly more challenging for the global economy. But yeah, maybe a rate rise October, November last year, maybe that starts to cut this off at the past, but that Hindsight is a wonderful thing. Um, Jared, we’ll leave it there for now. Thanks for giving us your insight of what it’s like at Threadneedle Street on decision day. And that’s all from us at the city and podcast and all from me for this week at the city view. Tomorrow we’ll be joined by none other than the former health secretary and now crypto evangelist, Matt Hancock. It makes for very interesting listen, I can assure you have a wonderful weekend. That’s all for me. We’ll see you next week.