Andrew Bailey: Markets are underestimating risks of persistent inflation
Harriett Baldwin MP then challenges the Bank of England about the various recent comments from policymakers.
Q: One day, your chief economist [Huw Pill] says market expectations of cuts are not unreasonable, the next day you say it’s too early to talk about rate cuts. Yesterday, you said it was far too early. It’s a runnning commentary for markets.
Andrew Bailey tells the Treasury Committee that the market is putting “too much weight” on the current data releases, including the fall in inflation in October.
He says the committee is concerned about the potential persistence of inflation, in the remainder of the journey to 2% inflation.
I think the market is underestimating that.
MPC member Catherine Mann then weighs in, with an apparent rebuke to the fellow committee members (such as Bailey) who wouldn’t vote for a rate rise this month as she did.
I think actions speak louder than words, especially when you deal with the markets.
That is a key reason why I believe it’s important to have action, in showing commitment to the target.
Key events
Closing summary
Time for a recap…
The Bank of England has fired a warning shot at the financial markets not to get carried away with the recent fall in inflation, as it also faced criticism for “confusing” comments on interest rate moves.
Appearing before the Treasury Committee, BoE governor Andrew Bailey told MPs that he believes inflation is on track to fall back to the 2% target. But he warned that risks are to the upside, explaining:
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%.
I think the market is underestimating that.”
Bailey also welcomed October’s drop in inflation to 4.6% as “obviously good news”, but news which was largely expected.
He cited two risks; first, that domestic inflation remains high, and second that Middle East conflict drives up the oil price.
Fellow rate-setter Catherine Mann – who was in the minority voting for a rate rise to 5.5% this month – argued that tougher action was needed, saying:
I think actions speak louder than words, especially when you deal with the markets.
That is a key reason why I believe it’s important to have action, in showing commitment to the target.
Treasury committee chair Harriett Baldwin criticised the recent comments from the BoE She accused it of a “confusing running commentary”, after chief economist Huw Pill said expectations of rate cuts next summer were not unreasonable.
Elsewhere….
UK public sector net borrowing has hit its second-highest October level since records began in 1993, as inflation-linked debt interest repayments pushed up the deficit.
The UK borrowed almost £15bn to balance the books last month, but that still left borrowing since April nearly £17bn lower than expected.
Tax receipts rose, helped by rising pries and the ‘fiscal drag’ pulling more people into higher tax bands
This gives chancellor Jeremy Hunt some fiscal headroom ahead of tomorrow’s Autumn Statement.
Deliveroo riders do not have the right to collective negotiations on pay and conditions, the UK’s top court has ruled, in a blow to gig economy campaigners and the unions that represent them.
Analysis from Which? has found that just one in 50 Black Friday deals are at their cheapest price on the day of the sales extravaganza.
The UK faces the prospect of a battery “gigafactory gap” that will undermine the electric car industry unless the government offers the growing sector more help, MPs on parliament’s business committee have said.
Shell Energy has been fined £1.4m for failing to alert more than 70,000 phone and broadband customers to the end of their contracts or tell them what they could save by signing up to a new deal.
Capita, which runs services for local councils, the military and the NHS and manages the BBC TV licence fee, plans to cut 900 jobs as part of efforts to save costs, many of them in the UK.
Telegraph and Spectator sale paused
Just in: the sale process of the Telegraph and The Spectator is to be paused until early December.
In a brief statement, the Boards of the parent companies of Telegraph Media Group Limited and The Spectator have announced that the sales processes for each of the businesses shall be paused today until a crucial court hearing scheduled for 4 December.
Breaking: Telegraph and Spectator sale paused
— Thomas Seal (@TW_Seal) November 21, 2023
That court hearing is due to consider whether to liquidate a key holding company owned by the Barclay family.
The pause comes after the Barclay’s struck a deal with RedBird IMI, an Abu Dhabi-backed vehicle, to secure the funding they need to repay over £1bn owed to Lloyds bank, which was conducting an auction of the Telegraph and Spectator.
Yesterday, RedBird IMI said it is to take control of the Telegraph and Spectator after agreeing loans to repay the Barclay’s debts.
If the holding company company, called Penultimate Investments Holding Limited, was liquidated it would remove the Barclays from a role in the Telegraph’s future, and leave Lloyds free to pursue an unencumbered auction of the newspapers, Sky News reported.
A number of suitors had been questioning whether to invest further time and money in submitting offers given developments in recent days, Sky added this morning.
City bond dealers are expecting the UK to cut its plans for government debt sales this year, Reuters reports, ahead of tomorrow’s autumn statement.
The Debt Management Office (DMO) is expected to cut its gilt issuance remit for 2023/24 to around £222.8bn, down from £237.8bn, a poll has found.
That follows UK borrowing this year undershooting expectations for many months (although not October, as we learned at 7am), and running at nearly £17bn less than expected so far.
Reuters adds:
About half of the primary dealers thought the DMO might cut its plans for net issuance of short-term T-bills back to zero, from a 5 billion pound increase in the current remit.
The poll showed public sector net borrowing excluding publicly owned banks – the headline budget deficit measure – was likely to come in around £117bn pounds by the end of 2023/24 in March next year, roughly £15bn less than the OBR forecast in March.
Deliveroo riders are not employees, Supreme Court rules
In a landmark decision for the gig economy, the UK Supreme Court has ruled today Deliveroo riders cannot be recognised as employees or represented by trade unions for collective bargaining.
The ruling is a blow to hopes that gig economy workers could receive greater job protection.
In a unanimous ruling this morning, five justices at the UK’s highest court dismissed an appeal against an early ruling. The case was brought by the Independent Workers Union of Great Britain (IWGB) wants to represent Deliveroo riders in north London in order to negotiate on issues of pay, hours and holiday with the company.
Announcing the court’s decision, Judge Vivien Rose said Deliveroo riders do not have an “employment relationship” with Deliveroo and were not entitled to compulsory collective bargaining.
In a written ruling, the Supreme Court said that Deliveroo riders could appoint a substitute to undertake a delivery, can work for competitors, do not have to work specific hours or even carry out any deliveries at all.
Also this, Deliveroo have zero liability if a substitute courier breaks the rules – it’s all on the original rider. Stunned that this is allowed. pic.twitter.com/3IJz2irdoL
— Marlon Solomon (@supergutman) November 21, 2023
Another argument was that Deliveroo drivers are free to reject offers of work and to work for the company’s competitors.
Beth Leng, Employment Lawyer and Partner at SA Law, explains:
“Whilst the decision may go against the grain of a recent trend in cases – towards affording those in the gig economy greater protection – the decision of the Supreme Court focuses almost entirely on the issue of substitution.
The court agreed with previous decisions that the power conferred on Riders under the new contract to appoint a substitute was “virtually unfettered” – it wasn’t limited to other Deliveroo Riders and applied both before and after delivery. The court concluded: “such a broad power” was “totally inconsistent” with the requirement for personal service.
This will no doubt be a blow to campaigners in this area but once again, it underlines the importance of a detailed examination of how these gig economy contracts work in practice.”
Deliveroo have welcomed the ruling, with a spokesperson saying:
“This is a positive judgement for Deliveroo riders, who value the flexibility that self-employed work offers.
The IWGB said the ruling came as a “disappointment”, adding:
“As a union we cannot accept that thousands of riders should be working without key protections like the right to collective bargaining, and we will continue to make that case using all avenues available to us, including considering our options under international law.”
Pound at 10-week high against the dollar
The pound has hit its highest level in 10 weeks today, after the Bank of England pushed back against market expectations for interest rate cuts.
Sterling has hit $1.2556 this morning, after BoE governor Andrew Bailey told MPs that the markets were underestimating the risks that inflation will remain persistent, having dropped to 4.6% last month.
Bailey’s comments last night, that it is ‘far too early’ to think about interest rate cuts will also be supporting the pound.
The dollar, in contrast, has been weaking in the last few weeks as traders anticipate several cuts in US interest rates in 2024.
Mike Owens, senior sales trader at investment platform Saxo, suggests the pound could strenthen tomorrow if Jeremy Hunt announces any policy that exceeds expectations for domestic economic growth.
Professor Costas Milas, of the Management School at the University of Liverpool, agress that the Bank of England’s policymakers have created confusion over interest rates (as Harriett Baldwin MP said this morning).
He tells us:
The BoE’s policymakers keep on giving mixed messages on interest rates which, in turn, mislead markets. Confusion then grows further because the BoE then uses the very market expectations of interest rates to forecast both inflation and GDP growth!!!
One suggested way foreword is to publish inflation and output forecasts based on the interest rate expectations of the Bank’s MPC. This might also be problematic since individual MPC members are also likely to give very mixed messages regarding their own interest rate expectations…
There is no obvious solution to this problem. Nevertheless, the MPC should continue publishing forecasts of inflation and output based on constant (that is, current) interest rates.
These forecasts will at least serve as benchmark estimates of the future state of the economy without running the risk of creating market confusion.
BoE’s Ramsden: Brexit has chilled business investment
Deputy governor Sir Dave Ramsden has warned that the 2016 EU referendum has “chilled” business investment in the UK.
He was speaking to the Treasury Committee after Labour MP Keir Mather asks the Bank about its forecasts for business investment – showing a 1% fall in 2024, and a flatlining in 2025, before 2% growth in 2024.
Q: How much are high interest rates holding back business investment?
Ramsden says there was a “break” in the trend of business investment growth in 2016. It had been growing after the financial crsis, but then flattened off in 2016.
Ramsden says there are a variety of reasons, but there’s a lot of analytical evidence that a key driver of business investment decisions is certainty.
That means certainty about the outlook for the economy, stability through low and stable inflation, but also certainty over fiscal policy, and over the relationships your economy will have, he explains, adding:
It is hard to conclude otherwise than that the decision to leave the EU, that may have had lots of good reasons for it, has chilled business investment.
The best thing the Bank can do to stimulate business investment is get inflation down to target, Ramsden says, adding that higher borrowing costs do have a short term impact on investment.
Bailey: Mortgage arrears lower than we’d expect
Labour MP Siobhain McDonagh asks the Bank of England’s policymakers if they expect a rise in evictions.
McDonagh points out that mortgage holders face an average increase of £3,000 per year when refixing their home loans. And in the last quarter, there were 87,930 home owners in mortgage arrears, and 4,100 repossession claims.
BoE governor Andrew Bailey agrees that there is a ‘tick-up’ in arrears, but from low levels.
Arrears levels are actually lower than the Bank would expect, which he attributes to higher-than-expected wage increases.
Bailey says:
We’ve actually seen less of this, so far, than we would have expected to see and past evidence would expect.
He adds that the Bank is watching arrears figures closely, but also says it is much harder to repossess a home than it was in the early 1990s.
Labour MP Angela Eagle tries to tempt the Bank of England governor into puncturing Rishi Sunak’s pleasure about inflation falling to below half its level at the end of last year.
Q: There are claims that the prime minister is personally responsible for halving inflation, do you agree?
Andrew Bailey says the government and the PM adopted a target – it’s not the Bank’s target (which is to get inflation down to 2%).
He agrees that the Bank of England is responsible for controlling inflation.
Q: Are you worried that tax cuts might be announced tomorrow, which would be inflationary? Would it force you to raise interest rates?
Bailey says he will wait and see what is in the autumn statement. But there’s a crucial difference with the mini-budget a year ago – this time, there will be a report from the Office for Budget Responsibility.
Q: Are there any tax cuts that aren’t inflationary? Is an inheritance tax cut less inflationary than a 1p cut on income tax?
Bailey refuses to speculate, adding that any tax cuts will be factored into the Bank’s next forecasts.
Andrew Bailey has also denied that the Bank of England is blundering by selling off government bonds bought under its quantitative easing programme, at a loss.
This process of quantitative tightening (QT) was expected, in July, to cost £150bn – with the bill falling on taxpayers.
That’s because government bond prices have fallen, compared to after the financial crisis and in the pandemic, when they were bought by the BoE.
The European Central Bank, in contrast, is not unwinding its bond portfolio, points out Danny Kruger MP.
Bailey replies that it doesn’t matter whether you sell the bonds, or hold them till they mature.
Either you crystallise the loss (by selling the bond for a lower face value) or you run up a carry cost (the difference in interest rates between what the BoE is paid for holding the bond, and what it pays out on its reserves).
Other central banks are accruing “very large losses and liabilities on their balance sheets”, Bailey insists.
Deputy governor Sir Dave Ramsden points out that the asset purchase programme did deliver £123bn of profits for taxpayers up until 2022, so the losses currenly accruing should be set against that.
Future losses are “hugely uncertain”, Ramsden insists – it depends on future path of bank rates and yields.
Kruger says it would be “a great shame” if that £123bn profit was all wiped out.
BoE denies being slow to raise rates
The Bank’s policymakers have also denied they were too slow to raise interest rates to fight inflation.
John Baron MP, Treasury Committee member, argues that the Bank doesn’t have time to pause on its way up because it was “so far behind the curve”, unlike other central banks who “started increasing earlier”.
Andrew Bailey hits back, saying:
“We were the first major central bank to raise rates, so that is not true.”
Sir Dave Ramsden also pointed out that other central banks acted less quickly:
“We weren’t so far behind the curve. We actually raised interest rates in December 2021, which is before the Fed and before the European Central Bank.
Those are the facts.
“It is simply not the case that we were behind the curve when you look at the inflation numbers, the shocks we were dealing with, and what other central banks were doing.”
When the Bank started raising rates in December 2021, inflation had risen from 3.1% in September to 5.1% in November.
The US Federal Reserve started its tightening cycle in March 2022, while the ECB made its first move in July 2022.
Bailey: Inflation target should remain at 2%
Andrew Bailey has also pushed back against suggestions that the UK’s inflation target of 2% is too low in the current environment, and should be raised.
The Bank of England governor says “it’s a very bad argument” to claim that the target should be 3%, because bringing inflation down from 3% to 2% will be too hard.
Frankly, of course, the next time we had this problem people would say ‘let’s call it 4’, and that’s a very bad place to be.
Bailey says there isn’t an ‘objective magic’ to 2%, but it is the operational definition of price stability.
Sir Dave Ramsden points out that other countries have now converged on the UK’s symmetric 2% target, which was set in 1997.
Bank accused of “confusing running commentary” over interest rates
MPC member Jonathan Haskel rides to Huw Pill’s defence, saying he was misquoted.
Harriett Baldwin seems unconvinced, pointing out that the BoE’s chief economist did say that market expectations for cuts next year were not unreasonable.
Ahha, Haskel says. Huw was trying to say what the market thinks, not what he or the Bank think, he insists.
Pill’s comments, though, certainly moved the markets – driving up the prices of government bonds and pushing down borrowing costs.
Baldwin then chides the committee, though, saying the Bank’s “confusing running commentary” makes it hard for businesses and mortgage-holders to make decisions in the real world.
Deputy governor Sir Dave Ramsden hits back, denying that the BoE is giving a “confusing running commentary”.
We are commenting and being very clear in distancing ourselves from market expectations.
Ramsden then repeats the Bank’s concerns about persistent inflation.
He says the Bank believe inflation will have fallen to 3.8% by the end of the first quarter of 2024. That’s “further good news”.
But services inflation (which makes up almost half the inflation basket) will still be 6.4%.
Those are the indicators of persistence that we are focusing on when setting Bank Rate at the current level.
Markets are entitled to their view, but that doesn’t mean we are validating that view when we are comment on it.
That was Huw’s position, that’s Andrew’s position, and my view when we comment on markets.
Sir Dave Ramsden, BoE deputy governor, defends the central bank’s recent comments on interest rates.
He says central bankers are encouraged to communicate, and to be accountable.
He then echoes Andrew Bailey’s concerns that the markets have reacted too much to recent signs of improvement in inflation.
Ramsden points to a speech he gave on Friday, which warned that the market curve (where investors think interest rates will be) has fallen by 50 basis points [half a percentage point] over the next three years, compared with the assumptions in the Bank’s November’s monetary policy report.
Other things being equal, Ramsden says, that means less restrictive monetary condtions.
And with the supply side of the economy constrained, current market pricing implies more demand, and an increased risk of inflation, Ramsden cautions.
We are absolutely committed to getting inflation back to the 2% target.
Andrew Bailey: Markets are underestimating risks of persistent inflation
Harriett Baldwin MP then challenges the Bank of England about the various recent comments from policymakers.
Q: One day, your chief economist [Huw Pill] says market expectations of cuts are not unreasonable, the next day you say it’s too early to talk about rate cuts. Yesterday, you said it was far too early. It’s a runnning commentary for markets.
Andrew Bailey tells the Treasury Committee that the market is putting “too much weight” on the current data releases, including the fall in inflation in October.
He says the committee is concerned about the potential persistence of inflation, in the remainder of the journey to 2% inflation.
I think the market is underestimating that.
MPC member Catherine Mann then weighs in, with an apparent rebuke to the fellow committee members (such as Bailey) who wouldn’t vote for a rate rise this month as she did.
I think actions speak louder than words, especially when you deal with the markets.
That is a key reason why I believe it’s important to have action, in showing commitment to the target.
