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
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.
Balwdin 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.
Will Bank maintain rates at 5.25%?
Q: So all other things being equal, with inflation at 4.6%, you’ll keep rates at 5.25% for an extended period?
Andrew Bailey says his view is that it is sensible to keep rates where they are, as the Bank did three weeks ago.
But he repeats that risks are to the upside.
MPC member Catherine Mann (one of three hawks who voted to raise rates this month) argues that rates should be higher, due to price pressures next year.
She tells the Treasury Commmittee that BoE surveys show firms expect to raise prices by 4.5% to 5% next year, or up to 6% in the services sector.
Those firms expect to offer wage rises of 5% and increase workforces by 1.2%, Mann says.
So they’re looking for next year to be more robust than it is now.
More tightness now is important, Mann insists, to cement the Bank’s commitment to the 2% target.
Harriett Baldwin then reminds the Bank of England governor of the analogy used by chief economist Huw Pill in August.
Q: We’ve reached Table Mountain, in terms of interest rates?
Andrew Bailey says Table Mountain is qite a good analogy, because:
There is a case now, I personally think, for holding the rate where it is… for an extended period.
But the risks are to the upside too, Bailey adds.
He cites two risks.
First, that domestic inflation remains high, partly due to inefficiencies in the jobs market leading to higher wages.
Second, the risk that turmoil in the Middle East drives up the oil price. So far, that hasn’t happened, but it could happen “if there was a wider regional engagement”.
Bailey: Fall in inflation was good news, but largely expected
Treasury Committee chair Harriett Baldwin begins by asking the Bank of England about the drop in inflation in October, “to 4.7%”.
Q: Do you agree with the market expectation that you have done enough on interest rates to bring inflation down to 2% in the next year?
Andrew Bailey apologises for correcting Baldwin, but inflation was actually 4.6% in October (Baldwin may have been using the newer CPIH measure, rather than the CPI measure which the Bank targets).
Bailey says the fall (from 6.7% in October) was “obviously good news”, but news which was largely expected.
Bailey explains the Bank expects some more of last year’s surge in prices to unwind in the next few months, including on food prices.
But beyond that, further falls in inflation will depend on the unwinding of second-order effects (where inflation expectations push up wages).
The BoE governor warns there is a “weakening picture of demand in the economy”, while in the labour market wages are still well above levels consistent with the 2% inflation target.
But, Bailey says he thinks the UK is on target to come back to 2%.
[Reminder: Six of the MPC’s nine members voted to leave interest rates on hold this month, while three voted for a rise to 5.5%].
Bank of England appears before MPs
Andrew Bailey, governor of the Bank of England, is about to testify to MPs on the Treasury committee.
He’s being accompanied by Sir Dave Ramsden, Deputy Governor for Markets and Banking, and two external members of the Monetary Policy Committee – Jonathan Haskel and Catherine Mann.
The Committee say:
Members of the committee are likely to ask witnesses for their assessment of recent data on wage growth and unemployment, and how these might feed into future decisions on inflation. The panel may be questioned on whether they believe there is a risk the Bank has over-tightened monetary policy as well as whether they have any concerns about the quality of labour market data on which their decisions are partly based.
The Committee may also choose to question the witnesses about the prospect of changes to the Bank Rate and their individual voting records.
Three in five Brits think closing tax loopholes should be a priority in the autumn statement, a new poll conducted by Tax Justice UK has found.
This rises to nearly three in four of those that voted Conservative at the 2019 general election.
However, only one in four think that cutting taxes, rather than spending on public services, should be a priority for the Chancellor.
Rachael Henry, Head of Advocacy and Policy at Tax Justice UK, explains:
‘Britain has many extremely wealthy individuals and companies that are not paying their fair share. Britain’s tax code is littered with unfair loopholes that benefit the super-rich, while the rest of us are struggling to pay the bills.
The public don’t want to see tax cuts. They want investment in public services so they can see a GP or send their kids to school without fear of classrooms collapsing.
The government can raise desperately needed cash for the NHS and schools by making those that can, pay their fair share of tax. If they choose to leave this cash on the table, it’s clear they have chosen the side of the wealthiest, rather than standing with the majority in Britain trying to get by.’
New research from Tax Justice UK this uncovered over £7 billion available to the Treasury if just five tax loophole areas were closed.
They are:
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End fossil fuel subsidies for oil and gas companies to raise £4.4 billion a year
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2. End classic car exemption to raise £130 million a year
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3. End video games tax relief to raise £197 million
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4. Close capital gains tax loopholes to raise £1.1 billion a year
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5. Close inheritance tax loopholes to raise £1.7 billion a year
Worryingly, government borrowing in October alone was higher than the independent Office for Budget Responsibility had expected.
The OBR had inked in borrowing of £13.7bn for last month, below the £14.9bn which the government actually borrowed to balance the gap between tax receipts and spending.
That breaks the recent trend of borrowing coming in below the OBR’s forecast, which has given Hunt £16.9bn of wiggle room.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Recent months had seen public sector net borrowing come in consistently below the OBR’s forecast, but October broke that pattern.
A deficit of £14.9bn compared with the £13.7bn deficit predicted by the OBR in March and was £4.4bn higher than the deficit in October 2022. The overshoot was more than accounted for by higher-than-expected public spending, notably on debt interest payments. These were the highest for an October since records began. Monthly tax receipts also exceeded the OBR forecast, but to a lesser extent.
Back in the City, UK meat producer Cranswick has lifted its profit forecast this morning, after passing on higher costs to customers.
Cranswick says it expects to hit the “upper end of current market consensus” for the current financial year, ending on 30 March.
Revenues are up 12.3% this year, due to “effective inflation recovery” – the passing on of higher pig prices – and “resilient volume growth”.
Cranswick, which produces sausages, bacon and chicken products, as well as houmous and pet food, says that the broad-based cost inflation it experienced has now slowed.
IEA: Middle East crisis puts oil market on edge
The oil market is “on edge” over the latest crisis in the Middle East, the head of the International Energy Agency (IEA) has warned.
IEA chief Fatih Birol told an energy conference in Norway today that the Israel-Hamas war has not currently had a significantly effect on market prices.
But he warned that this could change, if the conflict escalated.
Birol said:
If one or more of the oil producing countries in the region is directly involved in the conflict, we may see the implications of that.
Brent crude rose towards $94 per barrel in mid-October, after the Hamas attack of October 7. But it then started to dip, falling to $77/barrel towards the end of last week.
Capita to axe 900 jobs in cost-cutting drive
UK outsourcing firm Capita has announced it will cut around 900 jobs worldwide as part of a “significant cost reduction programme”.
The cuts will mainly fall on indirect support function and overhead roles, as Capita tries to cut costs by £60m per year.
Capita, which runs crucial services for local councils, the military and the NHS, employs 43,000 people, mostly in the UK but also across Europe, India and South Africa.
In the UK, it has offices in London, Manchester, Sheffield, Leeds, Edinburgh and Belfast, while its European operations are based in the Republic of Ireland, Poland, Germany and Switzerland.
Jon Lewis, Capita’s CEO, says:
“We are, today, announcing the accelerated delivery of the efficiency savings announced in our Half Year Results with a £20m increase in overhead cost reduction to £60m on an annualised basis from Q1 2024.
As part of the organisational review which underpins the programme we are announcing today, we continue to identify further areas of cost efficiency and will pursue these during 2024.”
Shares in Capita have rallied 9% in early trading.
October’s public finances are no barrier to (some) tax cuts, writes Investec economist Ellie Henderson.
Henderson also explains how inflation added to government spending, and revenues, last month:
Within the headline number, central government expenditure was £13.7bn higher than in October 2022. £4.5bn of this lift comes from added expenditure on net social benefits, largely reflecting the inflation-linked uprating of benefits. Interest payments were also £1.1bn higher than last year, as the index-linked gilt stock is uprated by RPI inflation.
Slightly offsetting this though was a £2.6bn fall in expenditure on net social benefits where falling wholesale energy prices resulted in reduced spending on energy support schemes this October relative to last year.
On the other side of the balance sheet, central government receipts were £2.5bn higher than a year ago. VAT receipts once again received a boost (+£1.2bn) due to the increase in the price level over the year, while income tax receipts (+£1.1bn) were healthy reflecting the tight labour market.
