Introduction: Bank of England interest rate decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK households and businesses could be spared a rise in borrowing costs today, as the British economy creaks under the strain from the Iran war.
The Bank of England is widely expected to leave interest rates unchanged at 3.75% at noon today, after its latest monetary policy committee meeting.
Policymakers at the BoE will try to balance the challenge of containing imported inflation from the Middle East conflict, while avoiding intensifying the squeeze on firms and consumers who have been hit by the rise in energy costs.
With the economy shrinking slightly in April, and inflation lower than forecast in May (we learned yesterday), a hike in borrowing costs appears unnecessary. The City of London money markets indicate there’s a 98% chance that interest rates are left on hold, and just a 2% chance of a rise.
Tomasz Wieladek, chief European macro economist at investment management firm T. Rowe Price, argues that the Bank may not need to tighten monetary policy at all in the coming months.
Monetary policy in the UK appears to be finally working. A prolonged period of restrictive monetary policy has, to a degree, weakened inflation dynamics.
Given the good news on inflation and the recent decline in oil prices, the MPC will likely conclude that no more hikes are necessary to stabilise inflation in the UK.
The agenda
-
7am BST: UK labour market data
-
Noon BST: Bank of England interest rate decision
-
1.30pm BST: US initial jobless claims
-
1.30pm BST: Philadelphia Fed Manufacturing Index
Key events
Gas price fall to lowest since start of Iran war
UK wholesale gas prices have fallen to their lowest level since the start of the Iran war.
The month-ahead UK gas price fell as low as 95p per thern this morning, following the signing of the interim peace deal by the US and Iran.
That’s the lowest since 2 March, the Monday after the conflict began. Reminder: Brent crude oil has also fallen to its lowest since 2 March today (see earlier post).
However, this still leaves UK gas prices above their level just before the start of the war – 78.57p per therm.
Continential European gas prices have also fallen today, down 3% to €40.6 per megawatt hour.
Hopes for a resumption of traffic through the strait of Hormuz are pushing down energy costs, despite concerns that it will take time for the situation to return to pre-war levels.
Oxford Economics say:
With the new US-Iran ceasefire including an agreement to reopen the Strait of Hormuz, Oxford Economics anticipates an initial surge in traffic as ships that have been stuck are finally able to exit. Flows are then expected to slow until confidence builds that the ceasefire is durable. The firm expects the recovery in shipping to be gradual as logistics are adjusted and oil and gas production restarts
Three Saudi-flagged supertankers sail through Hormuz after Iran deal signed
In a sign that oil flows from the Middle East are returning to normal, three Saudi-flagged supertankers with six million barrels of crude onboard have sailed through the Strait of Hormuz, ship tracking data showed on Thursday.
The sailings from Saudi ports were the biggest departures through the strait in weeks, according to Reuters analysis of shipping movements.
Oil prices to ease, not plummet, after US-Iran deal, IMF chief predicts
The head of the International Monetary Fund has predicted that oil prices are likely to ease, not plummet, as the U.S.-Iran interim peace deal lets shipments through the Strait of Hormuz resume.
IMF chief Kristalina Georgieva pointed out that countries will want to replenish oil reserves which were run down during the conflict, and that it will take time for maritime traffic through the Strait to return to normal, Reuters reports.
Georgieva was speaking at a “fireside chat” at a conference hosted by the Austrian National Bank.
Oil has already eased quite a long way in the last week. Brent crude is now trading around $78 a barrel, down from $95.50 a week ago, having hit a peak over $126 a barrel at the end of April. Before the Iran war began, Brent was trading around $72 a barrel.
Norway follows Switzerland by leaving rates on hold
It’s a busy day for central bankers.
In Oslo, Norway’s central bank has kept its policy interest rate on hold at 4.25%, but hinted that rate rises could be on the way.
Governor Ida Wolden Bache says:
Inflation is too high, and the rapid rise in business costs in recent years will contribute to keeping inflation elevated ahead. New information indicates that inflation pressures are slightly stronger than we had anticipated earlier.
We expect that a somewhat tighter monetary policy stance will be needed to bring inflation down to target within a reasonable time horizon. If developments turn out as currently envisaged, the policy rate will be raised at one of the forthcoming monetary policy meetings”.
Switzerland’s central bank has left interest rates on hold.
The Swiss National Bank voted to keep its key interest rate at zero for a fourth quarterly meeting, after inflation rose to 0.6% in May, saying:
Inflation has risen in recent months as a result of higher energy prices. Medium-term inflationary pressure, however, is virtually unchanged compared with the last monetary policy assessment.
The SNB’s monetary policy is appropriate to keep inflation within the range consistent with price stability and it supports economic development. The SNB will continue to monitor the situation and adjust its monetary policy if necessary, in order to ensure price stability.
Sarah Butler
Tesco’s UK sales growth has more than halved as it said the conflict in the Middle East had created “ongoing uncertainty for many households”, knocking its shares in early trading.
The UK’s biggest retailer said comparable sales rose 1.8% to £13.4bn in the three months to the end of May, below both the 4.2% reported in the previous quarter and the 2.3% growth City analysts had expected.
The numbers were, however, lifted by an 8.9% rise in online sales and group sales rose 1% to £16.8bn.
The slowdown in UK sales growth reflected dampened consumer confidence in the face of higher fuel prices linked to the conflict in the Middle East. Exceptionally warm and sunny weather during the same period last year helped to increase sales of food and drink, distorting comparisons with this year.
More here:
Shares in Tesco are down 2.8% in early trading, among the larger fallers on the FTSE 100 share index this morning.
The Resolution Foundation have calculated that private sector pay in the UK continues to shrink, once you account for inflation.
That’s because annual average regular earnings growth was 2.9% for the private sector in February to April, slightly behind the pace of price rises.
Louise Murphy, senior economist at the Resolution Foundation, explains:
“The UK labour market is weaker than it has been in recent years. This weakness is showing up through rising irregular work in the form of self-employment and zero-hours contracts, higher youth unemployment and lower wage growth.
“The real wages of private sector workers have now been falling since last October. With further inflation rises expected over the coming months, these workers should brace themselves for this squeeze to continue over the summer.”
Oil lowest since early March after Trump signs Iran peace plan
The Bank of England will also be pleased to see that the oil price has dropped again today.
Brent crude has hit its lowest level since 2 March – the first week of the Iran war – down over 2% to as low as $77 a barrel.
Oil prices added to their recent losses after Donald Trump signed a 14-point agreement with Iran that will reopen the strait of Hormuz, and hand Tehran a series of political and financial concessions.
It’s clear that the labour market is not out of the woods yet, argues Sanjay Raja, chief UK economist at Deutsche Bank.
And as such, he sees little reason for the Bank of England to rush into raising interest rates.
Raja says:
Survey data remain weak. HR1 advanced redundancy notifications have jumped in April and May. The claimant count rate is also back to its highest level since March last year. And still falling vacancies point to more slack in the jobs market.
We expect the labour market to remain a bit sluggish through the coming months. But there is some light at the end of the long enduring US/Iran conflict. Should the MoU [memorandum of understanding] hold, we would expect employment trends to pick back up on the margins.
For now, today’s mixed data buys the MPC (monetary policy committee) more time to wait and see how the economy evolves and how geopolitics play out. We see little rush for the MPC to push for rate hikes just yet. Instead, the Bank can let the dust settle on the energy conflict before recalibrating policy again.
Worryingly, the number of vacancies in the UK economy has dropped to a five-year low.
The Office for National Statistics estimates that vacancies fell by 19,000 in March to May, to 707,000 – the lowest level since February to April 2021.
Anna Leach, chief economist at the Institute of Directors, blames the government, saying:
“Low levels of employer demand for labour unfortunately reflect a combination of government policies which have increased the cost and risk associated with hiring employees. This is choking off work opportunities for young people in particular, as jobs continue to decline in important youth employment sectors such as accommodation and food and retail.
“The cost of doing business has risen sharply in recent years, driving persistent weakness in hiring.
On the face of it, the latest UK jobs report doesn’t look so bad, says ING economist James Smith:
The unemployment rate ticked down to 4.9%. Payrolled employment rose after three consecutive monthly declines (it increased by a marginal 2000 workers). Average weekly earnings growth was higher than expected.
But the details still look dovish for the Bank of England. And the report is another reminder that the case for higher rates is far from the clear cut.
Take those payroll numbers. April’s atrocious 100,000 fall in employment has been cut in half, after revisions. That’s not a surprise; the latest reading is always prone to change – and usually in an upwards direction. But the newly revised April figure, showing a 53k drop in workers, is still pretty bad. The better May figure should be read in that context – and if you strip out government, private-sector payrolls still fell.
Another encouraging sign in today’s UK jobs report – fewer people fell off company payrolls than first feared in April.
The Office for National Statistics has halved its estimate for payroll losses in April to 53,000, down from its first estimate of a decrease of 100,000.
For May, the ONS estimates payrolls rose by 2,000.
Pay growth stronger than forecast
UK wage growth was stronger than expected in the three months to April, this morning’s labour market data shows.
Basic pay (which excludes bonuses) rose by 3.4% year-on-year in the quarter, while total pay (including bonuses) rose by 4.4%; both measures were unchanged compared with a month earlier.
Average pay rose by 5.1% for the public sector and 2.9% for the private sector. “Public sector pay growth is once again affected by the timing of pay awards varying this year,” the ONS explains.
Unemployment rate falls to 4.9%
Unemployment across Britain has fallen back, as more people either found work or dropped out of the labour market.
The UK unemployment rate dipped to 4.9% in the three three months from February to April, down from 5% a month ago, easing fears that the energy crunch could drive up job losses.
The Office for National Statistics reports that the number of people unemployed dropped by 105,00 in the quarter to 1.764m.
The number of people employed rose by around 100,000 to 34.410m, while the number economically inactive (neither in work nor looking for a job) rose by 137,000 to 9.136m.
ONS director of economic statistics Liz McKeown says:
“The labour market remained broadly stable in the latest quarter, with further softening evident in some measures. Payroll numbers continued to fall over this period, with new recruits at their lowest level in five years. However, overall employment was little changed, with some signs of workers moving into self‑employment.
“Vacancies also continued to fall, further suggesting that firms are becoming more cautious about taking on new staff. The decline has been most persistent among lower‑paying sectors and smaller employers, although the largest fall this quarter was in professional services.
Introduction: Bank of England interest rate decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK households and businesses could be spared a rise in borrowing costs today, as the British economy creaks under the strain from the Iran war.
The Bank of England is widely expected to leave interest rates unchanged at 3.75% at noon today, after its latest monetary policy committee meeting.
Policymakers at the BoE will try to balance the challenge of containing imported inflation from the Middle East conflict, while avoiding intensifying the squeeze on firms and consumers who have been hit by the rise in energy costs.
With the economy shrinking slightly in April, and inflation lower than forecast in May (we learned yesterday), a hike in borrowing costs appears unnecessary. The City of London money markets indicate there’s a 98% chance that interest rates are left on hold, and just a 2% chance of a rise.
Tomasz Wieladek, chief European macro economist at investment management firm T. Rowe Price, argues that the Bank may not need to tighten monetary policy at all in the coming months.
Monetary policy in the UK appears to be finally working. A prolonged period of restrictive monetary policy has, to a degree, weakened inflation dynamics.
Given the good news on inflation and the recent decline in oil prices, the MPC will likely conclude that no more hikes are necessary to stabilise inflation in the UK.
The agenda
-
7am BST: UK labour market data
-
Noon BST: Bank of England interest rate decision
-
1.30pm BST: US initial jobless claims
-
1.30pm BST: Philadelphia Fed Manufacturing Index