Time to wrap up….

Bank of England policymakers have signalled at least three interest rates cuts this year after seeing “encouraging signs” of falling inflation as they kept interest rates on hold at 5.25% for a fifth time.

The financial markets expect three cuts of 0.25 percentage points this year, forecasting the first to take place in June. The Bank said its survey of financial companies found that they expected rates to fall to 4.5% before the end of 2024.

Inflation has decreased sharply in recent months, with the consumer prices index falling to 3.4% in February. That was still above the Bank’s 2% target, but well below a peak reading of 11.1% in October 2022.

Eight members of the Bank’s rate-setting monetary policy committee (MPC) voted to hold interest rates, while the ninth, Swati Dhingra, backed a cut of 0.25 percentage points. It was the first time since September 2021 that no one on the MPC voted for a rate rise.

The pound fell against the dollar and euro as investors calculated they would get a lower interest rate this year on their UK deposits than was previously forecast. Sterling was down 0.6% against the dollar at $1.27, and down 0.2% against the euro at €1.16 after the announcement.

Shares are rallying in London, though, with the FTSE 100 up around 2% and on track for its best day in over a year.

More here:

Based on the data so far and signals from Thursday’s decision, financial markets expect a first cut in June….

But the BoE has faced criticism from several quarters for not cutting rates today, to help the economy and take some strain off households.

The BoE’s decision came on a busy day for central bank news, in which Switzerland surprised markets with a rate cut, while Turkey hiked its policy rate from 45% to 50%.

In other news:

• Britain’s private sector continued to grow in March, bolstering hopes that the economy is escaping recession this quarter.

• Reddit is floating on the US stock market today

• The US government has filed an antitrust case against Apple, accusing the tech giant of engineering an illegal monopoly in the smartphone market.

Andrew Bailey’s comments today could provide some relief for Rishi Sunak, my colleague Richard Partington writes.

But, the PM may have a few months to wait before he can hail a cut in interest rates….

Richard writes:

Based on the data so far and signals from Thursday’s decision, financial markets expect a first cut in June.

This will however mean a tough waiting game for Sunak, who is leading a government in desperate search of good news on the economy before he takes the plunge to call a general election.

Britain has had three prime ministers since the Bank last cut interest rates in March 2020. Sunak will be hoping for progress in the economy to allow Threadneedle Street to take action before his time in Downing Street runs out.

More here:

The US government has filed a sprawling antitrust case against Apple, alleging that the tech giant has illegally prevented competition by restricting access to its software and hardware.

The case is a direct challenge to the company’s core products and practices, including its iMessage service and how devices such as the iPhone and Apple Watch connect with one another.

The lawsuit, filed in federal court in New Jersey, alleges that Apple has monopoly power in the smartphone market and uses its control over the iPhone to “engage in a broad, sustained, and illegal course of conduct”, the Associated Press reported.

The US Department of Justice’s suit against Apple is a landmark case targeting the most valuable publicly traded company in the world and follows a raft of antitrust suits aimed at big tech. Amazon, Apple, Meta and Google have all faced investigations from regulators in recent years, both in the United States and Europe, over allegations that they have consolidated power while illegally stifling competition. All boast market capitalizations above a trillion dollars.

Central to the case is whether Apple’s strategy of blocking rival companies from accessing various proprietary features such as its iMessage instant messaging service and Siri virtual assistant constitutes anticompetitive practices. The case will also examine whether Apple making its devices easily integrate with each other, but not with non-Apple products, creates unfair hardware limitations that block competitors from the market.

More here:

Bank of England Governor Andrew Bailey has said it was reasonable for financial markets to expect interest rate cuts.

Speaking after today’s interest rate decision, Bailey added that he was very hopeful about the path for inflation.

Responding to questions from broadcasters about whether markets were right to price in two or three rate cuts this year, Bailey said it was reasonable, explaining:

“I’m not going to endorse the market curve, but I think that it’s reasonable that markets are taking that view, given the way inflation has performed.

“That is not a prediction from me as to what’s going to happen, either on timing or amount, but I am encouraged.”

Bailey has also said the fall in inflation was “very encouraging and good news”, but added that there are signs of inflationary persistence – such as service sector inflation running at 6% per year in February.

Over in New York Reddit’s mascot, Snoo, has ceremonially rung the Wall Street opening bell to mark the web platform’s stock market float today.

Snoo appeared to enjoy the appearance, performing a little jig and giving NYSE traders a cheery wave:

Reddit is floating with a market value of $6.4bn today after pricing its shares at the top of its range, $34, last night.

Bank of England governor Andrew Bailey says the ‘global factors’ which drove up inflation are fading, which helped to bring down inflation last month.

But the Bank isn’t yet at a point where it can cut rates, he explains.

In a video released by the Bank of England, Bailey says:

Inflation has continued to fall, and that’s very good news.

Global factors that previously pushed up prices in the UK are fading, and the decisions we have taken on interest rates are also helping to bring inflation down.

Because of this, inflation was down to 3.4% in February, and that’s the lowest it’s been for over two years.

We’ve left interest rates unchanged again today because we need to be sure that inflation continues to fall all the way back to the target of 2%, and stays there.

So we’re not yet at the point where we can cut interest rates. But they signs we’re seeing are encouraging.

Achieving low and stable inflation is the best thing we can do for people and businesses up and down the country.

The pound has dropped against the US dollar today, indicating the markets expect the Bank of England to cut interest rates more quickly than it did before.

Sterling is down 0.5% against the US dollar at $1.2715, losing all its gains yesterday (when the dollar weakened after the US Federal Reserve indicated it still expects to make three rate cuts this year).

Kathleen Brooks, research director at XTB, says the decision of two hawkish BoE policymakers to stop voting for higher rates is significant:

Catherine Mann and Jonathan Haskel, who voted for rate hikes at the February meeting, have folded and joined the majority of the MPC and voted to maintain the interest rate at this meeting. Swati Dhingra, the most dovish member of the MPC, voted to cut rates to 5%.

This is a notable shift, and it is the first time that both Haskel and Mann have not voted for a rate hike to 5.5% for 5 months. This suggests that even the hawks at the BOE can appreciate the progress made on inflation, and feel happy with the current level of rates. This opens the door to rate cuts in the coming months, although the BOE was unwilling to disclose the timing of a potential cut.

The Bank of England is being criticised for today’s decision to leave interest rates at a 16-year high.

Clearly the unnamed Tory MPs quoted by Politico this morning (see earlier post) aren’t alone in thinking the Bank is blundering.

Unite general secretary Sharon Graham says workers need lower borrowing costs:

“It seems that the Bank of England is flatly refusing to recognise the economic reality on the ground. We won’t see a sustainable recovery until workers and their families have some respite from the high interest rates strangling demand throughout the economy.

Workers won’t pay the price for recent years’ sky-high inflation driven by widespread profiteering across the economy.”

Carsten Jung, senior economist at the IPPR thinktank, fears the Bank has raised interest rates too high:

“Inflation is coming down more quickly than many predicted just a few months ago. This is largely due to global supply chains recovering and energy costs falling. But also domestic price pressures are falling quicker than the Bank had anticipated.

“All this shows the Bank of England tightened the screws too much, which is squeezing much needed future growth. The Bank should thus cut rates more quickly than its current plans. The tightening stance by both the Chancellor and the Bank of England contribute to the UK’s growth falling far behind the USA’s fast recovery.”

Suren Thiru, economics director at ICAEW, says an “overly cautious” Bank of England risks prolonging the UK’s economic struggles:

“While interest rates staying on hold again was expected, the more dovish vote split and meeting minutes suggest that rate setters are opening the door for rate cuts later this year.

“Though this interest rate hiking cycle is firmly in the rear-view mirror, the long delay between tightening policy and its impact on the wider economy means that the heavy toll of 14 rate rises has yet to fully crystalise.

“The Bank of England remains overly cautious on the prospect of rate cuts given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long.

“With inflation on track to drop back to the Bank’s 2% target in April, an interest rate cut by August looks a distinct possibility.”

Interest rates could be cut as soon as the Bank of England’s next meeting, in May, says Robert Dishner, senior portfolio manager for multi sector fixed income at investment manager Neuberger Berman.

The Bank of England has moved closer to cuts as it votes to maintain rates at current levels. The 8-1 vote also saw two previous voters for hikes (Catherine Mann and Jonathan Haskel) now voting to hold rates at the current levels.

This is the first time since September 2021 that no member voted for a hike. The Bank did not change the language “monetary policy will need to remain restrictive for sufficiently long,” but we view the vote as a bigger signal towards cuts in the May or June meeting.

Additionally, the Bank is marking to market the freeze in fuel duty as announced in the Spring Budget and 2Q24 CPI is projected to be marginally weaker than forecast back in February at slightly lower than 2%. It noted “some upside risks remained around both the wage and CPI inflation projections,” but we think this seems strange in the context of lowering the 2Q24 inflation forecast.

On net, it is a modestly dovish result which opens the doors to rate cuts.

The latest market pricing suggests a rate cut in May is only a 13% chance, with another hold a 87% probability.

The Bank of England has trimmed its inflation forecast, and now believes it will fall below its 2% target this spring.

Today’s minutes say:

CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.

Last month, the Bank had forecast inflation would fall to 2% in the second quarter of this year.

Andrew Bailey, governor of the Bank of England, says “things are moving in the right direction”, as he explains why the Bank left interest rates on hold today at 5.25%.

Bailey says:

“In recent weeks we’ve seen further encouraging signs that inflation is coming down.

We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.

We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Alert observers may recall that Bailey said last month that “we’re heading in the right direction”, when the Bank also left rates on hold. Yesterday’s drop in inflation, from 4% to 3.4%, has obviously reassured him that the journey is on track.

Today’s decision was almost unanimous, with two policymakers abandoning their call for higher interest rates.

The Bank’s monetary policy committee voted by a majority of 8–1 to maintain Bank Rate at 5.25%.

One member, Swati Dhingra, voted to reduce Bank Rate by 0.25 percentage points, to 5%, maintaining her dovish stance.

But the other eight – Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Jonathan Haskel, Catherine L Mann, Huw Pill, and Dave Ramsden – all voted to leave rates at 5.25%.

Mann and Haskel had previously voted to raise rates to 5.5%, at last month’s meeting, so they’ve changed their vote.

Newsflash: The Bank of England has left UK interest rates on hold, despite yesterday’s drop in inflation.

The Bank’s monetary policy committee has voted to maintain Bank Rate at 5.25%, a 16-year high, and the fifth ‘no change’ decision in a row.

More to follow….

Newsflash: Turkey’s central bank has raised interest rates, hiking by five whole percentage points, taking its benchmark rate up to 50%.

In a surprise move, the Central Bank of the Republic of Türkiye has announced it has raised its policy rate from 45% “in response to the deterioration in the inflation outlook”.

Inflation in Turkey hit 67% in February, which has undermined the central bank’s hopes of pausing its rate rise cycle.

Today, the central bank says:

Tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.

Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.

This means that Turkey has now hiked interest rates by 4,150 basis points since last summer, when interest rates were 8.5%.

The move could stabilise the lira ahead of local elections next week, in which president Recep Tayyip Erdoğan’s ruling party hope to take back control of Istanbul and Ankara.

According to Politico, there is “already some bubbling Tory anger” that the Bank of England is unlikely to start cutting rates today.

Much of that fury is directed toward Bank governor Andrew Bailey, Politico say, with a suggestion that the Bank wants to ‘curry favour’ with the opposition by keeping rates high.

Here’s a flavour from Politico’s London’s Playbook:

GET ON WITH IT: However, there is already some bubbling Tory anger that the BoE is unlikely to start cutting rates today, with much of it directed toward Bank boss Andrew Bailey. There are genuine fears from across the party that a timid Bank of England will strangle economic growth and kill off any hopes the Tories have of winning the next election.

Word from the right: Jacob Rees-Mogg, a frequent Bailey critic, told Playbook that the central bank had been “slow to increase and then to decrease” interest rates. “Inflation is a lagging indicator, but the Bank is reactive to it,” he said. Another right-wing Tory MP said if there is “no movement” on rates by May, there will be “demands for Bailey’s blood.”

Is this the anti-growth coalition? One minister told Playbook the BoE should cut rates today, while also making the rather extraordinary claim that some Tory MPs believe Bailey and co. are “holding back to curry favor with Labour.”

Interest rate cuts could help the Conservative’s to defuse Labour’s attack line that Britons face a mortgage timebomb this year, due to the jump in borrowing costs….

This makes the IMF’s warning about preserving central bank independence (see earlier post) particularly timely…..

Just in: The International Monetary Fund has fired a warning shot at politicians not to interfere with central bank independence, in a busy year for elections.

In a new blog post, IMF chief Kristalina Georgieva warns that central bankers today face many challenges to their independence, as governments press them to cut borrowing costs.

She writes:

Calls are growing for interest-rate cuts, even if premature, and are likely to intensify as half the world’s population votes this year. Risks of political interference in banks’ decision making and personnel appointments are rising. Governments and central bankers must resist these pressures.

But why does this matter? Just consider what independent central banks have achieved in recent years. Central bankers steered effectively through the pandemic, unleashing aggressive monetary easing that helped prevent a global financial meltdown and speed recovery.

Georgieva warns that the battle against inflation has not yet been won, and urges elected leaders not to interfere with central bank independence.

Otherwise, she says, we risk a return to the high inflation suffered five decades ago, when fewer central banks had control over interest rates.

Georgieva explains:

The recent success in bringing down inflation contrasts sharply to the economic instability that prevailed during the high inflation period of the 1970s. Back then, central banks didn’t have clear mandates to prioritize price stability, or clear laws protecting their autonomy. As a result, they were often pressured by politicians to lower interest rates when inflation was high.

This morning’s UK PMI report provides further evidence UK economy may have moved out of recession, says Ashley Webb, UK economist at Capital Economics, adding:

While the composite activity PMI fell a touch in March, it still suggest that the UK economy has probably moved out of recession.

Rhys Herbert, senior economist at Lloyds Bank, says the data provides more evidence that economic conditions are continuing to be optimistic.

“With falling inflation and steady interest rates, some industries – such as the service sector – will be expecting demand to remain positive. However others, including manufacturing as highlighted by our recent UK Sector Tracker, are still experiencing some challenges such as those created by the recent disruption along international shipping routes.

“Markets remain optimistic about rate cuts this year and we will watch today’s decision with interest, although the markets consensus is that changes will not be seen until later this year.”

Newsflash: Britain’s private sector continued to grow in March, bolstering hopes that the economy is escaping recession this quarter.

Data provider S&P Global reports that the growth slowed slightly this month, but manufacturing returned to growth in March after a 12-month slump.

It’s latest poll of purchasing managers, just released, has found another solid upturn in output levels across the UK private sector this month.

The flash UK PMI Composite Output Index has come in at 52.9 in March, down fractionally from 53.0 in February, but still showing expansion for the fifth month running.

Here are the key findings (where 50 points = stagnation)

• Flash UK PMI Composite Output Index at 52.9 (Feb: 53.0). 2-month low.

• Flash UK Services PMI Business Activity Index at 53.4 (Feb: 53.8). 3-month low.

• Flash UK Manufacturing Output Index at 50.2 (Feb: 48.3). 13-month high.

• Flash UK Manufacturing PMI at 49.9 (Feb: 47.5). 20-month high.

Businesses reported that input prices continued to rise at a sharp pace in March. New business increased for the fourth month running, helped by the first increase in total export sales since May 2023.

It suggests the economy returned to growth this quarter, after shrinking in the second half of 2023.

Chris Williamson, chief business economist at S&P Global Market Intelligence, says:

“Further signs of the UK economy having pulled out of last year’s brief recession are provided by the provisional PMI data for March. A further robust expansion of business activity ended the economy’s best quarter since the second quarter of last year.

The survey data are indicative of first quarter GDP rising 0.25% to thereby signal a reassuringly solid rebound from the technical recession seen in the second half of 2023.

More drama! Taiwan’s central bank has raised interest rates, unexpectedly.

The Central Bank of the Republic of China (Taiwan) has startled the markets by lifting its key rate, from 1.875% to 2%.

That’s a surprise – 25 out of 26 economists surveyed by Reuters expected rates would be held.

Taiwan’s central bank says the “mild” rate hike is meant to suppress inflation expectations, as electricity prices are going up in April.

It has also lifted its GDP forecast, due to foreign net demand and domestic consumption.

Here comes Norway’s interest rate decision…

And Norges Bank has… HELD interest rates, at 4.5%, resisting any temptation to follow Switzerland and cut borrowing costs.

Governor Ida Wolden Bache says:

“The policy rate will likely need to be maintained at the current level for some time ahead in order to bring inflation back to the 2 percent target within a reasonable time horizon”.

Newsflash: Switzerland’s central bank has surprisingly cut interest rates!

The Swiss National Bank has just announced it is lowering its policy rate by 0.25 percentage points to 1.5%, from 1.75%.

It makes the SNB the first major central bank to cut interest rates in the current cycle.

That’s surprised the financial markets, who had expected the SNB to hold rates today.

Announcing the move, the SNB says the cut is possible because “the fight against inflation over the past two and a half years has been effective” – Swiss inflation fell to just 1.2% in February.

The SNB adds:

For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability. According to the new forecast, inflation is also likely to remain in this range over the next few years.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The policy rate cut also supports economic activity. Today’s easing thus ensures that monetary conditions remain appropriate.

Stocks in London have opened higher, as investors cheer the dovish words from America’s central bank last night (see earlier post).

The FTSE 100 index of blue-chip companies is up 87 points, or 1.1%, at 7,824 points, its highest level since early May.

Mining stocks are among the risers, as the prospect of three cuts to US interest rates this year should support the global economy, and demand for raw materials.

Shares in fashion and homewares retailer Next have jumped 4% to a record high, after it beat forecasts with a 5% rise in pre-tax profits last year.

Just in: Britain borrowed more than expected to balance the books last month.

Public sector net borrowing (excluding public sector banks) has come in at £8.4bn for February, higher than the £5.95bn which economists expected.

But it’s a drop of around £3.4bn compared to February 2023, when the deficit reached £11.8bn.

Increased tax receipts helped to push down the deficit.

The Office for National Statistics points out that this is the fourth month running when borrowing was lower than a year ago.

This leaves the national debt at £2.659 trillion, or around 97.1% of GDP.

Ruth Gregory, deputy chief UK economist at Capital Economics, says these borrowing figures are “disappointing”, but may not prevent tax cuts later this year.

February’s disappointing public finances figures suggest that the OBR’s new 2023/24 borrowing forecast published in March’s Budget already looks too optimistic. But this may not prevent the government from squeezing in another pre-election tax-cutting fiscal event later this year.

If not now, then when?

Many City analysts predict the Bank of England will start cutting rates by this summer, when inflation could have dropped all the way back to its 2% target.

Modupe Adegbembo, economist at Jefferies, explains:

We expect the MPC to keep rates on hold at 5.25% [today] and think the BoE is likely to begin cutting in August, though cuts could plausibly come earlier if wages fall back faster than anticipated.

Given the resilience of the economy, we think the BoE will cut rates steadily, penciling in 75bp of cuts across this year leaving Bank Rate at 4.50% by end-2024.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

It’s a busy day for central bankers, with the Bank of England expected to leave UK interest rates at a 16-year high at noon.

Despite inflation dropping to a two-and-a-half year low on Wednesday, economists predict BoE policymakers will choose to leave Bank Rate at its current level, 5.25%.

That would fail to bring any relief to UK borrowers, and maintain the pressure on the economy from higher borrowing costs.

According to the money markets this morning, ‘no change’ is a 95% while there’s just a 5% possibility of a quarter-point cut (lowering rates to 5%).

The Bank has been clear in recent weeks that it wants to see further evidence that inflationary pressures are falling'; economists will scrutinise the minutes of this week’s meeting for any hints as to how long policy should remain restrictive.

At last month’s meeting, the Bank’s nine policymakers split three ways – six voted to hold rate, two wanted a rise, and one a cut. That split could change today, as the monetary policy committee weighs up the risks of tightening for too long, versus easing too early.

The Bank will surely have appreciated yesterday’s drop in CPI inflation to 3.4%, neared to its 2% target. But it will also have noted that services inflation – a guide to domestic inflationary pressures – was 6.1%. That could be too high for comfort, for the BoE.

The MPC will also want to see signs that wage pressures are easing – as George Buckley, economist at Nomura, explains:

Annual rates of inflation are likely to fall further over the course of 2024, and pay settlements are running at a slower pace according to XpertHR data.

But calculations of price “momentum” suggest we’re not quite at the settling point we need to be for the annual rate of inflation to migrate all the way back to its target. The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast.

Not cutting has its risks, though. Monetary policy operates with a lag – meaning interest rate changes are like turning the rudder on a supertanker, not the steering wheel of a racing car.

Last month, the Bank’s former chief economist, Andy Haldane, warned that keeping rates high could ‘crush the economy’

Haldane’s successor, Huw Pill, has likened the Bank’s challenge to a trip on Table Mountain. Rates may have reached their highest levels, but there’s more of a plateau to travel before they start falling….

The agenda

• 7am GMT: UK public finances

• 8am GMT: Taiwan’s interest rate decision

• 8.30am GMT: Switzerland’s interest rate decision

• 9am GMT: Norway’s interest rate decision

• 9am GMT: Eurozone ‘flash’ PMI survey of business activity for March

• 9.30am GMT: UK ‘flash’ PMI survey of business activity for March

• Noon GMT: Bank of England interest rate decision

• 12.30pm GMT: US weekly jobless figures