Bank of England must ‘create recession’ to fight high inflation, Hunt advisor says, as mortgage rates rise again – business live

Core inflation in the UK could remain higher than in the US or euro area until late next year, Capital Economics fears.

Ruth Gregory, their deputy chief UK economist, explains:

Inflation in the UK has stayed higher than elsewhere as the UK has endured the worst of both worlds – a big energy shock (like the euro-zone) and labour shortages (even worse than the US).

Admittedly, the upward influence of the energy supply shock is fading.

But the tighter labour market will probably mean that UK core inflation stays higher than in the US and the euro-zone until late-2024.

America’s central bank chief has warned that interest rates in the US will head higher.

Earlier this month, the Federal Reserve paused (or possibly skipped) an interest rate, by voting to leave its benchmark rate on hold.

But today, Jerome Powell told Congress that most policymakers on the Federal Reserve’s FOMC committee expect to push rates higher at future meetings.

In prepared remarks for the House Financial Services Committee, Powell says:

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.

Powell also says the Fed is “squarely focused” on its dual mandate to promote maximum employment and stable prices, adding”:

My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal.

Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.

The pound has lost ground today, reflecting concerns that higher interest rates will trigger a recession.

Sterling has lost half a cent against the US dollar, dropping below $1.27 for the first time since last Thursday.

That suggests that the possibility of higher borrowing costs, and possibly a bumper half-point hike on Thursday, is worrying traders.

As Kit Juckes, chief global FX strategist at Société Générale, explains:

The risk of a 50bp rate hike tomorrow has increased, the risk of a deeper slowdown has increased even more.

Today’s upward inflation surprise increases the pressure on the Bank of England and raises the risk of a return to an oversized hike at tomorrow’s meeting, say the Markets 360 team at BNP Paribas.

But, their base case is for a quarter-point increase, accompanied by “more decisive language” in the minutes of this month’s meeting, or other post-meeting communications.

They predict interest rates will peak at 5.5%, a whole percentage point above today’s levels:

The bottom line, regardless of the size of tomorrow’s move, is that the MPC has a lot more work to do to bring underlying inflation under control – we stick to our terminal rate call of 5.50%.

Downing Street has insisted Rishi Sunak is still sticking with his pledge to halve inflation by the end of the year, despite inflation remaining stickily high.

The Prime Minister’s official spokesman told reporters:

“That remains the target.”

Asked if they are on track to fulfil the promise, the spokesman said the government was (despite inflation coming in above target for the last few months):

“Yes. Despite some of the coverage at the time (of the announcement of the pledge) this was never something that was straightforward.

“It was rightly an ambitious target that we remain committed to and it can only be achieved with fiscal discipline.”

Here are more details from the IFS’s new report into the financial hit from rising mortgage payments, which warns that 1.4m mortgage holders will lose 20% of their disposable income to rising borrowing costs.

IFS: Interest rate hikes could cost 1.4m people a fifth of their disposable income

Richard Partington

Back in parliament, Rishi Sunak has said it is vitally important that savers are treated fairly, following concerns that savings rates have not risen in line with borrowing costs.

Chancellor Jeremy Hunt will discuss this matter when he meets with UK banks on Friday, the PM added.

Martin Lewis of MoneySavingExpert.com says he was called to an “urgent private meeting” with Jeremy Hunt today to discuss mortgages.

Lewis says he explained that banks should offer “proper forbearance” to struggling mortgage-holders, and not ramp up their profit margins:

Duncan Robinson of The Economist questions which of the pair are actually in control….

Our economics correspondent, Richard Partington, spots some interesting detail in the UK inflation report:

Over in parliament, Labour leader Sir Keir Starmer has asked prime minister Rishi Sunak if he agrees that Britain is facing “a mortgage catastrophe” (as Conservative MP Lucy Allan warned last weekend).

Sunak replies that “it is right” to help those with mortgages, which is why the right priority is to halve inflation.

Sunak says;

Inflation is what is driving interest rates up. Inflation is what erodes people’s savings and pushes up prices, and ultimately makes them poorer.

Sunak adds that he highlighted the importance of tackling inflation before he became PM, and adds that the IMF have backed the government’s approach.

An unimpressed Starmer replies that Britain is suffering from 13 years of economic failure and last autumn’s ‘kamikaze’ budget.

Q: How much will the Tory mortgage penalty cost the average homeowner?

Sunak claims Starmer isn’t aware of the ‘global macroeconomic situation’ (earning much heckling).

Sunak says the government has taken steps to protect borrowers, including lifting support for the UK’s mortgage interest scheme (details here), the new protections agreed with the FCA, and tens of billions of costs of living support.

Starmer gives him the answer – £2,900 per year, for those who need to remortgage from 2024 (that’s according to Resolution Foundation).

Sunak shoots back that interest rates have risen in other countries, such as the US, Australia, Canada and New Zealand, and a two-decade high in the eurozone.

Our Politics Liveblog has all the action:

Hunt: Banks must live up to the commitments we agreed

Large increases in UK interest rates used to be rare. When the Bank of England lifted base rate by 50 basis points (half a percent) last August, it was the biggest rise in 27 years (since 1995).

That was followed by half-point hikes in September, December and February, with a monster 75-basis point rise thown in at the November meeting, before the Bank returned to smaller quarter-point hikes in March and May (up to 4.5%).

The sustained strength in UK inflation in May “cements the case” for the Bank of England to deliver further tightening at its meeting tomorrow, says Gurpreet Gill, macro strategist for Global Fixed Income at Goldman Sachs Asset Management.

Gill, who predicts rates will peak at 5.25%, says a half-point rise tomorrow can’t be ruled out:

“While our base case is for a 0.25% rate hike at this week’s meeting, the data opens the door to an increased pace of a 0.5% rate rise.

“Core and services inflation, alongside food prices, continue to diverge from moderating trends observed in other advanced economies like the US, complicating the path towards the Bank’s target.

“We see upside risks to our terminal rate forecast of 5.25%. However, downside growth risks may exert disinflationary pressure later this year.”

Here’s Sky News’s Paul Kelso on the financial market reaction to the UK May inflation report:

UK exporters have been hit by falling exports this month, but price pressures appear to be easing too.

The Confederation of British Industry (CBI)‘s monthly healthcheck of UK factories has found that order books recoveedred last month. However, the export order balance fell again to -29 from -26, the weakest since February 2021.

And on inflation….UK manufacturers expect to raise prices by the smallest amount since February 2021 over the next three months.

The CBI’s monthly index of manufacturers’ average selling price expectations slowed to +19 in June from +21 in May, its lowest in more than two years but well above its long-run average of +7.

CBI deputy chief economist Anna Leach said:

“Total order books have improved a touch in recent months, but they remain fairly soft. And although output expectations have turned positive again, growth is expected to be quite weak in the three months to September.”

Rising interest rates, and rising prices, are both hurting the budgets of low-income families.

New research from the Joseph Rowntree Foundation this morning show that the numbers of low-income households going without essentials or in arrears has not improved for over a year.

JRF senior economist Rachelle Earwaker warns that 5.5 million low-income households have had to cut down on or skip meals because they can’t afford food. Four million reported going hungry, and 2.7 million have reported having a poor diet because of the cost of living crisis.

Earwaker adds:

Low-income households are struggling to afford their bills, with 4.5 million in arrears, and 2.6 million holding high cost credit loans with loan sharks, doorstep lenders, payday lenders or pawnshops.

The JRF are calling for the Government to implement an Essentials Guarantee, to ensure that the basic rate of Universal Credit will at least always covers life’s essentials.

UK inflation surprised to the upside today, for the fourth month in a row, reports Berenberg Economics.

They have now lifted their forecasts for UK interest rates – predicting Bank Rate will have risen to 5.25% (was 5.0%) at the end of 2023 and 4.0% (was 3.5%) one year later.

Berenberg warns that UK inflation is changing its nature, and becoming more domestically driven, saying:

By and large, imported inflation caused by last year’s spike in energy and food prices is receding on trend as energy prices correct and the 2022 surge in these prices washes out of the yoy comparison. The yoy rate for goods prices eased to 9.7% from 10.0% despite higher prices for used cars.

However, the more domestically driven increase of services prices advanced from 6.9% to 7.4%. Many services are labour intensive and thus affected by strong wage gains. As reported last week, the rise in weekly average earnings (ex-bonus) accelerated to 7.5% in April from 7.1% in March.

Helped by resilient gains in employment (1.2% yoy in April), most households continue to open their wallets despite the gradually building headwind from higher mortgage rates.

Resolution Foundation’s chief executive, Torsten Bell, points out that there are winners from higher interest rates:

But he’s not impressed by claims that Liz Truss and Kwasi Kwarteng are somehow vindicated over last year’s mini-budget debacle:

Sticky inflation is extending the cost-of-living crisis for everyone in Britain, and hardening the mortgage crunch for the seven million households who have a mortgage.

That’s the warning from the Resolution Foundation today.

James Smith, Resolution’s research director,

“The latest data will reinforce market expectations of how high interest rates will go, and put more pressure on the Bank. This is bad news for anyone with a mortgage, who will be looking out for more positive signals before their current deal comes to an end.”

Resolution have calculated that mortgage repayments are set to rise by £15.8bn a year by 2026, meaning an average hit of £2,900 for households remortgaging.

Three-quarters of that £15.8bn hit will fall on the richest 40% of households, they add, as higher-income households are more likely to have a mortgage.

But rising prices hit poorer households more.

They add:

Inflation rates for the poorest tenth of households are 25 per cent higher than those for the richest tenth of households as they spend more of their income on food and energy bills.