Introduction: Japan hikes interest rates to highest since 1995
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The inflationary consequences of the US-Iran war continue to ripple across the global economy, even though the US and Iran have agreed a memorandum of understanding (MOU) to end their conflict.
With price pressures rising, the Bank of Japan has raised interest rates to a 31-year high today, becoming the second G7 bank – after the European Central Bank – to hike borrowing costs since the Iran war began.
Policymakers in Tokyo raised the BoJ’s short-term policy rate to 1% from 0.75%, taking borrowing costs to levels last seen in 1995.
The BoJ said it was taking action because companies were passing on rising oil costs to each other at a “relatively fast pace.” That could lead to a rise in consumer prices across a wide range of items, it said.
It acted despite yesterday’s 4.75% drop in the oil price.
Encouragingly, the BoJ also said the risk of Japan’s economy deteriorating sharply from the Middle East conflict has diminished. It cited the government’s relief package to help households facing high fuel costs.
The agenda
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9.45am BST: Treasury select committee hearing on the Office for Budget Responsibility
-
10am BST: ZEW economic sentiment index
-
1.30pm BST: US housing starts and business permits data
Key events
Reeves hopes to avoid tax rises before next budget
Chancellor Rachel Reeves has said on Tuesday she hoped to get to the next budget without raising taxes.
Reeves argued that the government now had enough fiscal headroom to withstand economic shocks, following last November’s budget.
She told a conference organised by the Financial Times in London:
“We made a decision to significantly increase the headroom against our fiscal rules.
“I believe that that was the right decision.”
Reeves’s allies has been lobbying for her to remain as chancellor even if Keir Starmer is replaced by Andy Burnham, should the Manchester mayor win Thursday’s Makerfield by-election.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, says the economy risks another messy leadership battle.
Pugh says:
The Labour Party would still have an incentive to install a new leader before its annual conference in late September.
A leadership contest focused on tax rises or ideas for borrowing will likely sap business and consumer confidence and spook financial markets, dragging on growth in a similar way to the previous two budgets effectively stalled the economy.
There are signs that things are starting to return to normal in the Gulf.
Offshore marine support firm Gulf Marine Services has told the City that all its support vessels which had been temporarily evacuated due to the Iran war have now successfully returned to hire on the same contracts.
GMS’s “self-propelled, self-elevating support vessels” are used to house workers and equipment at offshore oil and gas installations.
Mansour Al Alami, executive chairman of GMS, commented:
“We are very pleased to confirm that the fourth and final evacuated vessel has now returned to hire. This is a significant milestone, and we are encouraged by the positive momentum we are seeing both operationally and on the geopolitical front.
The swift and safe return of all four vessels is a testament to the professionalism of our crews and the strength of our client relationships, which have remained robust throughout this period.”
BoJ welcomes US-Iran peace memorandum
The Bank of Japan’s deputy governor, Shinichi Uchida, has welcomed the US-Iran peace deal.
Speaking at a press conference following today’s rate hike, Uchida said the deal was a “welcome move”, explaining:
“Compared with our previous meeting in April, the U.S. and Iran have signed a memorandum. That is a welcome move. Having said that, there is uncertainty on the pace of improvement in distribution (of oil).”
Uchida also pointed to inflationary risks, saying:
Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a risk that underlying inflation may deviate from our target.”
“With underlying inflation approaching 2%, it’s important to ensure we achieve our target stably.”
Uchida is standing in for BoJ governor Kazuo Ueda, who was hospitalized last week for treatment of a liver cyst infection.
Investors may be relieved that the Bank of Japan didn’t hike interest rates more sharply today, explains Susannah Streeter, chief investment strategist at Wealth Club.
The Bank of Japan has raised its key interest rate to a 31-year high as a precaution, to try and stop energy costs being embedded more deeply across the economy.
The move – increasing the short-term policy rate to 1% from 0.75% – was widely expected, but it’s a step-change in monetary policy for Japan, given it pushes borrowing costs to levels not seen since 1995. There was some relief that the move wasn’t more hawkish, with even a 50-basis-point hike having been mooted.
That’s why investors responded with relief and stocks rallied even higher
Nikkei hits record closing high
The BoJ’s interest rate hike didn’t prevent Japan’s Nikkei share index from hitting a fresh record high.
The Nikkei soared through the 70,000-point mark for the first time ever, and has ended the day at a new closing high of 69,404.5 points.
Other Asia-Pacific markets have also continued to rise today, amid ongoing optimism over the US-Iran peace deal.
Thames Water rescue at risk as government opposes ‘weak’ deal
Thames Water has moved a step closer to nationalisation after government ministers reportedly formally objected to the £10bn rescue deal proposed by its creditors.
According to The Times this morning, environment secretary Emma Reynolds has written to water regulator Ofwat this week to raise concerns about the plan for the struggling, indebted utility giant.
They explain:
Reynolds is understood to be concerned that the creditors’ offer for Thames Water is “weak”, not least after “15 years of mismanagement and failure”.
Those who support placing Thames into special administration argue that this would give the company a fresh start by forcing existing investors to write off losses and allow the company to be sold without its existing debt pile.
Under the proposed rescue deal, Thames Water’s creditors would inject £3.35bn of fresh equity, and write off a third of their debt.
They are also seeking up to 15 years’ leniency from river pollution rules, arguing that this will make it easier to upgrade the trouble company’s water network.
Reynolds’s intervention comes just days after Manchester mayor Andy Burnham told the Guardian that Thames Water should be nationalised, just days before the Makerfield by-election which – should be win – could lead to a leadership challenge against Keir Starmer.
If the government were to approve the deal with creditors, then Thames Water – which currently has aroun £20bn of debt – would be part-controlled by the billionaire Trump donor and hedge funder Paul Singer.
Introduction: Japan hikes interest rates to highest since 1995
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The inflationary consequences of the US-Iran war continue to ripple across the global economy, even though the US and Iran have agreed a memorandum of understanding (MOU) to end their conflict.
With price pressures rising, the Bank of Japan has raised interest rates to a 31-year high today, becoming the second G7 bank – after the European Central Bank – to hike borrowing costs since the Iran war began.
Policymakers in Tokyo raised the BoJ’s short-term policy rate to 1% from 0.75%, taking borrowing costs to levels last seen in 1995.
The BoJ said it was taking action because companies were passing on rising oil costs to each other at a “relatively fast pace.” That could lead to a rise in consumer prices across a wide range of items, it said.
It acted despite yesterday’s 4.75% drop in the oil price.
Encouragingly, the BoJ also said the risk of Japan’s economy deteriorating sharply from the Middle East conflict has diminished. It cited the government’s relief package to help households facing high fuel costs.
The agenda
-
9.45am BST: Treasury select committee hearing on the Office for Budget Responsibility
-
10am BST: ZEW economic sentiment index
-
1.30pm BST: US housing starts and business permits data