Unexpectedly persistent inflation and rising mortgage risks boost bets on BOE rate to hit 6%
(Bloomberg) — Below is a edited transcript of the key events surrounding UK inflation and mortgages on Wednesday, June 21. The posts originally appeared on the Markets Today live blog.
06:13 Welcome
Good morning and welcome to Markets Today. We’ll be kicking off early this morning for the crucial UK inflation reading at 7 a.m., so stay tuned.
06:53 Inflation Likely to Slow, But Core Is More Important
UK consumer price inflation is expected to have slowed in May, albeit only slightly, with consensus of 8.4% compared to 8.7% in the prior reading.
More important for the Bank of England’s intentions, however, is core inflation. That measure strips out energy and food costs and is seen holding steady at 6.8% and therefore not providing space for the central bank to hold off more interest-rate hikes.
Dan Hanson and Ana Andrade at Bloomberg Economics say any meaningful slowdown in inflation is unlikely to arrive until July, when a decline in household energy bills is factored in.
07:04 Another UK Inflation Surprise
Oof, that’s another upside surprise, with the number holding at 8.7% versus economist expectations for a slowdown to 8.4%.
Core rose to 7.1%, higher than the 6.8% estimate.
07:05 Pound Spikes
The pound is pushing higher on that hotter-than-expected inflation data, briefly touching $1.28.
FTSE 100 futures are sliding lower, down around 0.2% having been unchanged prior to the numbers.
Sam Unsted Equities Reporter
07:06 Problems for the BOE
This is really bad news for the BOE and the government.
It is really quite something how these inflation numbers are constantly surprising like this. It feels like almost everyone is banking on a rapid deceleration this year, but thus far there are no signs of that happening.
In a sign of the shock, 35 of the 37 economists surveyed by Bloomberg expected the reading to be below 8.7%.
07:10 Measure of Housing Inflation Also Accelerates
Beyond elevated headline inflation and a pickup in the core figure, the measure that includes housing costs also accelerated, according to the ONS.
07:10 Pound Reverses Course
That initial spike the pound saw after the data has disappeared and it’s back to where it was.
FTSE 100 futures remain about 0.2% lower.
07:18 Pound Torn Between Prospect of More Rate Hikes, Recession Risk
The pound appears really torn after those inflation numbers, probably because traders are weighing the balance between the impact of yet another UK inflation shock.
On the one hand, it’s likely to turbocharge bets for more Bank of England interest-rate hikes to curb a persistent increase in prices. On the other, too much tightening could revive worries over UK growth. Remember that earlier this week, Bloomberg Economics estimated that if borrowing costs hit 6%, that would equate to a 2% peak-to-trough decline in GDP.
07:24 Core Concerns
As Bloomberg Economics said earlier, it is the core number which will really worry the BOE.
As economist Julian Jessop notes, the figure is not only staying stubbornly high, but still actually increasing, with the 7.1% reading the highest rate since March 1992.
07:28 Economists React to Inflation Shock
Here’s a selection of gloomy quotes on the number that have hit my inbox in the past few minutes:
- George Lagarias, Chief Economist at Mazars:
- “There’s no way to sugar-coat this, 8.7% is a bad number. Inflation has become entrenched and remains high versus other developed market economies. This number will compel policymakers, the Government and the Bank of England, to further clamp down on consumption”
- Alpesh Paleja, CBI Lead Economist:
- “The absence of movement in CPI inflation underscores the persistent nature of current cost and price pressures, with households and businesses left feeling the pinch. In particular, the ongoing strength in food price inflation means that many will have to keep tightening their belts for some time.”
- Suren Thiru, Economics Director at ICAEW:
- “May’s hotter than expected outturn suggests that the fight against inflation is far from over, particularly given sky-high food bills and rising core inflation. Although another interest rate rise on Thursday looks inescapable, further tightening will do little to address current inflationary pressures and instead risks deepening the financial pain facing people and businesses.”
And here’s one more from our very own Lizzy Burden on Bloomberg TV: UK inflation remains “hot, hot, hot.”
Watch more here:
07:31 Pickup in UK Live Music Prices Comes Amid Beyoncé Fanfare
Are we seeing the return of the Beyoncé effect on inflation?
Higher costs for airfare and live music events were noted by ONS Chief Economist Grant Fitzner among the contributors to the pickup in prices.
There’s a certain symmetry here with last week’s surprise inflation figures in Sweden, which stirred speculation over whether Beyoncé’s concert in Stockholm contributed to elevated prices.
Incidentally, the R&B singer also made stops in the UK last month, with her first show in the London over the May bank holiday weekend — just one of five — drew about 62,000 attendees.
07:35 Food Prices Remain a Major Inflation Driver
Looking beyond Beyonce, grocery prices have been front and centre recently and the inflation data won’t change that. Food and non-alcoholic beverages inflation slowed in May but is still 18.4%, by far the highest reading in the survey.
There were also increases for clothing and footwear, alcohol and tobacco, health and communication. So zero comfort for households.
07:37 Traders See BOE Rate Hitting 6% Later This Year
Oof (for the second time this morning).
Traders have reacted to the inflation shock by fully pricing in BOE rates hitting 6% later this year and even seeing a chance rates will go higher in 2024.
Investors also see around a 50% chance officials will opt for a larger half-point hike Thursday, rather than a more usual 25 basis points.
Remember a month or so ago when all the speculation was about a BOE pause? Not anymore…
07:46 Sunak’s Promise to Halve Inflation Now at Risk
Here’s what our economy and government team made of the report. The key points:
“UK inflation remained higher than expected for a fourth month, ratcheting up pressure on the Bank of England to hike interest rates more aggressively.
The figures raise the specter of the central bank opting for a bigger rate increase on Thursday, stepping up the pace of its quickest monetary tightening in four decades. It also puts into peril Prime Minister Rishi Sunak’s promise to cut inflation in half this year.”
07:48 More Mortgage Pain Beckons
This reading could spell more pain for the mortgage market, where average rates are already north of 6%, spelling misery for many homeowners.
Yesterday, Chancellor of the Exchequer Jeremy Hunt said he will meet banks and UK mortgage providers this week to discuss the impact of rising interest rates on homeowners, but pushed back against calls for intervention he said would undermine the government’s top priority to tackle inflation.
If you want more on the state of the mortgage market, and housing more generally, check out our Q&A session on the topic from yesterday afternoon.
08:01 Traders Set Sights on a Half-Point BOE Rate Hike
Bets for more Bank of England rate hikes continue to ramp up this morning, with traders now seeing 75 basis points of increases by August. That implies expectations for at least one half-point hike either at this week’s rate decision or in a couple of months.
08:10 FTSE 100, 250 Indices Fall as Real Estate Stocks Take a Dive
Both the FTSE 100 and FTSE 250 indices have opened lower, both dragged by real estate stocks as investors come to grips with the impact of potentially higher rates on the broad housing market.
No surprise that gilt yields are surging across the curve, led by two-year rates — the most sensitive to expectations for the BOE. Meanwhile, the pound is just barely staying in the green, with traders still torn over the need for higher rates in the short-term and its likely adverse economic impact longer term.
08:26 Hunt on Inflation
Here’s Jeremy Hunt’s reaction to the data. As Lizzy Burden reminds us:
“Three of the government’s five top priorities are economic. We learnt this morning: inflation isn’t budging, not only is growth anemic but a recession is more likely given it looks like rates will have to climb higher, and for the first time since the 1960s, the debt to GDP ratio is now above 100%.”
And here’s Hunt on the (lack of) prospects of help for homeowners:
08:39 Gilt Market Flashes a Recession Warning
One measure in the gilt market is now flashing the strongest recession warning in more than two decades.
Two-year gilt yields have powered higher to levels well above their ten-year counterparts, leading to the most inverted yield curve since 2000. That’s a phenomenon that occurs when an extraordinary event — in this case, surging bets for BOE rate hikes — pushes shorter-term yields above longer-term rates.
To some investors, it’s a signal that a recession is coming. It certainly aligns with an assessment by Bloomberg Economics that a 6% rate would equate to a 2% plunge in GDP.
As Lizzy said, also expect Sunak’s pledge to halve inflation continues to come under scrutiny, with Jamie Rush from Bloomberg Economics noting that it no longer looks like a sure thing.
09:22 Weakness in the FTSE 250 Reflects Economic Pessimism
The FTSE 250 is tilted toward more domestically-focused companies than the more internationally-exposed FTSE 100. So its big underperformance this morning tells a story about how much more pessimism is being baked in after that hot inflation reading.
The midcap index is down about 0.8% this morning, compared to respective 0.1% declines for the FTSE 100 and for Europe’s Stoxx 600 benchmark. It’s underperformance against the FTSE 100 this year is widening again.
Real estate is weighing the most, with British Land the biggest drag, and that’s being complemented for slides for retailers like Games Workshop, home improvement names like kitchen maker Howden Joinery and by homebuilders like Bellway and Vistry.
The inflation numbers point to more hikes from the Bank of England and that there has been minimal, if any let up in living costs. That’s going to pummel sentiment among consumers even more. Business confidence levels will likely slip too, adding pressure for the commercial landlords also contending with higher debt costs.
09:42 BOE Official Says Housing Crisis Warnings Overblown
Some pushback this morning from David Roberts, chair of the court of directors at the Bank of England, on how severe the situation is for the UK’s housing market.
Roberts said the majority of UK mortgage borrowers can cope with current interest-rate levels and that warnings about a crisis in the housing market are overdone.
Speaking to a House of Lords committee, Roberts said that “some of the press headlines are a little bit over where my own judgment would be about what I think could happen — or quite a lot over.”
10:12 BOE Told It Must Cause Recession to Fight Inflation
One really worrying thing about the inflation reading is that the core number — a proxy for domestically generated inflation that strips out energy and food — is so high while UK growth is so anaemic. That suggests an element of overheating even with an economy that has either expanded or contracted 0.1% in each of the last four quarters.
That is one reason why many think the BOE needs to cause a recession to finally win the war against inflation. Among them is Karen Ward, chief market strategist at JPMorgan Asset Management and a member of Hunt’s economic advisory council.
She told the BBC the BOE had “been too hesitant” in its interest rate rises so far and it was necessary for it to “create uncertainty and frailty” in the economy to stop prices rising as fast. She added:
“It’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’. It’s that weakness in activity which eventually gets rid of inflation.”
10:30 What Inflation Means for Property
A couple of comments from property industry folks on the inflation data today:
Mark Harris, chief executive of mortgage broker SPF Private Clients:
“There is a strong argument for pausing the rate rises for now, giving the market time to settle down and adjust. Consecutive base rate rises have been painful and done little to stem inflation; it’s time for a different approach, letting them take effect, rather than causing continued anxiety and distress for borrowers.”
Tomer Aboody, director of property lender MT Finance:
“Although property prices are still higher than they were a year ago, the pace of growth is slowing, underlining the lack of confidence or ability for buyers to actually buy. With the government pledge of halving inflation by the end of the year looking less likely, is it time to possibly start helping in the push to bring some confidence to the market? Either lower rates and/or assistance in stamp duty are urgently required.”
10:51 UK Banks Are Back in the ‘Danger Zone’
UK bank stocks are sliding today following that hot inflation data, and there’s also a timely warning from an analyst at Exane BNP Paribas who cut his ratings on NatWest, Lloyds and Metro Bank after last night’s close.
British lenders are “back in the danger zone,” wrote Exane’s Guy Stebbings, pointing to a potential increase in loan defaults as well as competition for deposits thanks to the jump in central bank rates.
“Higher rates lift bank earnings but at a certain level this equation breaks down,” added Stebbings, “we are well past this point.”
11:12 Can the Government Meet Its Inflation Goal?
Over on Bloomberg TV UK Treasury Exchequer Secretary Gareth Davies has been discussing how the government is going to get inflation down, in light of its pledge to halve the measure this year. The ultimate answer appears to be “let’s see.”
He also, to Kristine’s delight, did not rule out any impact from Beyoncé tickets on inflation, albeit he felt more confident of the impact King Charles III’s coronation had.
11:33 Inflation Confounds Economists…Again
We’ve talked a lot today about how inflation has been consistently beating expectations, and here’s the chart to prove it.
Each bar represents how much higher (or, more rarely, lower) inflation has been than economist expectations since the start of 2020.
As you can see from the lower section, there have been two prolonged periods where the rate overshot expectations, as economists underestimated how fast inflation would rise on the way up, and overestimated how quickly it would fall on the way down.
12:02 Weak Pound Reflects Economic Pain That Will Come After Rate Hikes
The pound briefly dipped below $1.27 for the first time in four trading days, as the prospect of bigger and faster rate increases revives worries that the Bank of England will hike its way into a recession.
Today’s inflation shock — the latest in a months-long series — drives home the idea that the central bank has underestimated prices and now needs to step up its efforts to catch up. That has fueled bets for borrowing costs to hit 6%, a level that Bloomberg Economics says will equate to a 2% slide in GDP.
This dynamic is exactly what’s weighing on the pound today. As Ian Tew at Barclays noted:
“There’s an argument that if higher rates begin to pressure the UK’s economic growth, the pound will weaken. Feels like today’s higher inflation maybe the start of it.”
12:03 PMQS
Rishi Sunak is on his feet for PMQs. Expect mortgages and inflation to feature strongly…
On that topic, Chancellor Jeremy Hunt has been talking to the Money Saving Expert, Martin Lewis, about mortgages today.
12:15 Starmer Grills Sunak on Mortgages
Predictably, rising mortgage rates were a key part of the Keir Starmer’s questions. Here’s just flavour of the exchange.
Starmer also uses a personal example of James, a police officer in Selby, North Yorkshire.
He does so with the phrase “Tory Mortgage Penalty,” which he repeated a couple of times. Expect that to become a familiar refrain.
And another attack from Starmer, this time on Sunak’s choice of transport. Sunak hit back by accusing Starmer of engaging in “personal attacks and petty point-scoring.”
12:26 More Signs of Housing Strain
More food for thought on the UK’s housing market. Research commissioned by estate agent Nested found 64% of homebuyers are worried about the cost of borrowing increasing. Not surprising.
However, it also found that a quarter of respondents said they would have to pull out of their current house purchase as a result, while 28% would abandon their search altogether. Not necessarily surprising either, but definitely worrying.
13:24 Mortgage Rate Pain to Hit Disposable Income
And the pain just keeps coming for homeowners and homebuyers. The Institute of Fiscal Studies says around 1.4 million people in the UK could see a fifth of their disposable income disappear if mortgage rates remain at current levels.
The IFS found that mortgage holders in the UK will pay an average of £280 extra per month, with that rising to around £360 for around one-in-ten people and those under 40 hit hard.
Tom Wernham, research economist at IFS, says:
“For many, the increase in monthly repayments is going to come as a serious shock. Given the cost-of-living pressures people are already facing due to high food and energy price inflation, these significant increases in mortgage costs could not come at a worse time.”
15:00 The Societal Cost of UK Inflation: Bloomberg Opinion
Fighting inflation is important not just for maintaining economic and market stability, but also for the overall well-being of society — that’s according to Bloomberg Opinion columnist Mohamed A. El-Erian, who writes:
It is critical for maintaining financial stability and countering the erosion of the social fabric that comes with worsening inequality. It is also key for people’s mental health given how unsettled and uncertain families feel when faced with both eroding purchasing power due to persistent inflation and the income insecurity that accompanies struggling economic growth.
Today’s UK data serves as a reminder to all that there is a real cost to falling behind in the inflation battle, and one that increases over time. It erodes the credibility of policymaking when it’s already struggling to respond to more complicated problems. And the damage it wreaks on societal wellbeing is amplified by the poorest segments being hit particularly hard.
15:43 Sunak Facing Calls From Conservatives to Provide Help on Mortgages
Faced with persistent inflation that has pushed up costs for households and which is hammering the mortgage market, Rishi Sunak is facing more pressure from members of his own Cabinet to provide some help.
Sunak and Chancellor Jeremy Hunt have both ruled out any help that would have inflationary effects, and Sunak repeated that forcefully in exchanges with Labour leader Keir Starmer at today’s Prime Minster’s Questions.
But Conservative MPs are fearing a whitewash at the next general election unless something is done. Guarantees for mortgage holders or reintroducing tax-relief on interest payments are said to have been suggested.
15:49 Money Distilled: The BOE Can’t Catch a Break
John Stepek’s idea of a “dovish hike” by the Bank of England has been blown out of the water by today’s inflation data, he writes in today’s Money Distilled:
“In an ideal world, the Bank of England would be able to stall until it’s seen the UK’s July inflation figure (which comes out in August) before deciding on just how much further to raise interest rates.
That’s because July is when the next energy price cap distortion falls out of the “headline” figure, and so we’ll have a much clearer view of just how much worse UK inflation is than its peer group.
Problem is, the Bank has very little — if any — credibility left. It needed a win on today’s inflation figures. It didn’t even get a no-score draw.”
16:02 Pound Feels Heat From Inflation as Recession Risks Rise
On a day like today, the Spotlight Chart had to be on the fallout from the inflation data.
We’ve covered the reaction in the gilt market and BOE bets in detail, but the data also had a surprising impact on the pound. While bets on higher interest rates would usually fuel gains, the currency is set to end the day lower as the data raises the spectre of an economy mired in stagflation.
Traders are also taking no chances ahead of the BOE decision tomorrow. Protection against future swings, measured by one-week implied volatility, for the euro versus the pound have risen to the most expensive level since March, while the pound-dollar equivalent tested its highest levels since April.
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