Graeme Wearden 

ECB leaves eurozone interest rates on hold but hints at cut this summer – as it happened

European Central Bank says rate cuts would be appropriate if inflation keeps falling, as BoE policymaker Megan Greene argues UK rate cuts are a way off
  
  

A roller coaster is pictured near the European Central Bank in Frankfurt, Germany.
A rollercoaster near the European Central Bank in Frankfurt, Germany. Photograph: Michael Probst/AP

Closing post

Time for a recap…

The European Central Bank (ECB) has signalled it could start cutting interest rates as soon as this summer, following a sharp fall in inflation across the eurozone.

The ECB left rates on hold today, but president Christine Lagarde revealed a few policymakers had been ready to cut today. The majority, though, chose to leave rates on hold while the bank gathered more evidence that inflationary pressures are easing.

Lagarde told reporters:

“Without being triumphant, or celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress.”

Progress on productivity, falling wage growth and an easing of company profits could help the ECB to start cutting rates.

Financial markets have been reassessing the prospects of rate cuts this year, after US inflation rose faster than expected yesterday.

The City now expects just two cuts to UK interest rates this year, and a similar reduction in the US.

The Bank of England is now expected to move before the Federal Reserve. But, Bank of England policymaker Megan Greene warned that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.

She wrote in the Financial Times today:

Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.

The head of the International Monetary Fund is urging the world’s leading central banks must resist growing pressure for early interest rate cuts amid concerns over stubbornly high inflation on both sides of the Atlantic.

Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs.

Updated

At today’s press conference, President Lagarde sought to strike a balanced tone, explains Max Stainton, senior global macro strategist at Fidelity International:

She highlighted that growth risks remained tilted to the downside, inflation risks were balanced, and labour market tightness was declining.

These factors, combined with profits and wages growing less strongly than anticipated and more timely indicators of wages also showing further moderation are clearly giving her and the Council greater confidence that they are on the brink of the cutting cycle.

Nevertheless, President Lagarde didn’t entirely remove the ECB’s data dependence, making it clear that the June data on profits and wages, as well as updated staff projections would be the critical final inputs into the Council’s decision making.

Updated

Central banks must resist pressure for early rate cuts, says IMF head

Boom. The head of the International Monetary Fund is urging the world’s leading central banks to resist growing pressure for early interest rate cuts.

Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs, amid concerns over stubbornly high inflation on both sides of the Atlantic.

The IMF managing director alluded to the pressure from politicians that central bank chiefs were likely to face in a pivotal election year, ahead of voters going to the polls in the US, UK and EU.

She said:

“On this final stretch, it is doubly important that central banks uphold their independence. As we know, policy credibility is vital in the fight to restore price stability.

“Where necessary, policymakers must resist calls for early interest rate cuts. Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening.”

Speaking before the IMF’s spring meetings in Washington next week, she highlighted a fall in advanced economy headline inflation to 2.3%, from 9.5% 18 months earlier. This trend was expected to continue, Georgieva said, creating the conditions for major central banks to begin cutting rates in the second half of this year.

More here:

Lagarde: Not being triumphant, but inflation is declining

Christine Lagarde rounds off her press conference by outlining the progress the ECB sees in its fight against inflation.

She declares:

Without being triumphant, or celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress.

That progress is comforting the ECB that the monetary policy it has adopted has contributed significantly to this drop in inflation, she explains.

And she repeats that the ECB will continue to assess the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission when deciding when it can start to lower interest rates.

We will be attentive to the evolution of wages, pay close attention to profits for signs that firms are absorbing wage increases as much as possible, and also monitor productivity growth, she explains.

That’s the end of the press conference.

Updated

The ECB is a “bank of all seasons”, says Lagarde

Q: Will the ECB’s policy change by seasons, going from a ‘restrictive season’ to a time of ‘gradual normalisation’?

The ECB is a “bank of all seasons”, Christine Lagarde jokes, channelling Thomas More.

Bur rather than juggling matters of monarchy and ecclesiastical dilemmas, the ECB just has to decide when it is safe to cut interest rates.

And on that, Lagarde says the ECB can’t be tied to a particular season – “we will be data-dependent”.

So, if the data continue to move in a disinflationary path, that will be reflected in the path the ECB takes on interest rates, she pledges.

Updated

Q: Could the ECB press on with an interest rate cut in June, even if services inflation is 4%?

Christine Lagarde says services inflation is still holding at high levels, and has been around 4% for the last five months.

Service sector inflation will be examined closely, but it’s ‘inevitable’ that some elements will be at higher levels than others.

The ECB won’t wait until all the items that make up the inflation basket are down to 2%, she adds, while policymakers will also be “attentive” to how oil prices evolve.

Updated

Christine Lagarde then plays down suggestions that the ECB can draw lessons from the US.

The drivers of inflation in the US are different than in the eurozone, Lagarde points out, as was the fiscal response from governments.

Indeed, consumption by US consumers is different, as are the investment landscapes.

She says:

The two economies are not the same, the political regimes are not the same, the fiscal policies are different.

Thus, the ECB must focus on its jurisdiction, and not assume that what happens in the US will also occur in Europe, she adds.

Q: Is your confidence about falling eurozone inflation lower than a month ago, when you gave your speech to the ECB’s Watchers conference?

Lagarde says that “most if not all” of what she outlined in that speech remains intact, but she won’t say if she’s more or less confidence.

The speech (online here) explained the impotance of building sufficient confidence to dial back policy, and singled out wage growth, profit margins and productivity growth as important factors.

Q: Has the surprisingly hot inflation report from the US yesterday, and the reaction, changed the way you think about the ECB’s policy path?

Christine Lagarde says the ECB is “data dependent”, not “Fed dependent”.

But the latest US inflation, like everything that affects the eurozone, will be fed into the ECB’s next forecasts, she explains.

Q: Are you worried that strong US inflation could push the dollar up to parity against the euro (if it prevents the US Federal Reserve cutting interest rates quickly).

Lagarde says the ECB doesn’t target exchange rates, or comment on them.

But, there are “multiple channels” through which influence can be made, not just through the FX rate.

Lagarde Q&A: Extra data will help make decision in June

Onto questions….

Q: How quickly can the European Central Bank gain enough confidence about falling inflation to start cutting interest rates? Could it come as soon as June?

Christine Lagarde reads out the new sentence whch has been added to the ECB’s monetary policy statement (see earlier post).

In June, the ECB knows that it will get a lot more data, and also a new inflation projection, she explains.

The ECB will analyse that, and then determine if it confirms the hope that inflation will returns to target in a sustained manner, and reinforces its confidence, she explains.

That certainly sounds like the ECB could cut rates in June, if it sees signs that inflationary pressures are easing as it hopes.

Q: Was today’s decision unanimous?

Lagarde reveals that “a few members” of the governing council felt sufficiently confident from the data we have in April to make rate cuts today. But they agreed to rally around the consensus of waiting until there is more evidence, she explained.

Lagarde: Eonomy has been weak, but rising real incomes will help

On the economic outlook, Christine Lagarde warns that the eurozone economy remained “weak” in the first quarter of 2024.

Manufacturing firms are facing weak demand, she warns, while production remains subdued especially among firms who need large amounts of energy.

Rising real incomes (pay rising faster than prices) should help the recovery, she says, thanks to falling inflation and increased wages.

Lagarde points out that the eurozone’s unemployment rate is the lowest since the euro was created, but adds that firms have been cutting back on vacancies.

Lagarde then insists that the ECB is not pre-committing to a particular rate path.

She reads out the point the ECB made earlier, that “it would be appropriate to reduce the current level of monetary policy restriction” if the Governing Council grows more confident that inflation is converging to the target in a sustained manner.

Lagarde press conference begins

ECB president Christine Lagarde is briefing reporters in Frankfurt now about today’s interest rate decision.

She begins by confirming that the central bank left its three key interest rates on hold today, and runs through the statement issued this afternoon.

Inflation has continued to fall, she points out, driven by food and goods price inflation, while wage growth is gradually moderating.

Firms are absorbing part of the rise in labour costs in their profits, she adds (which suggests that a full-blown wage-price spiral isn’t breaking out).

However, Lagarde adds that recent interest rate increases are subduing demand, and pushing down inflation.

Despite that, she cautions that domestic price pressure are strong, and are keeping services price inflation high.

And she insists the ECB is “determined” to bring inflation down to the ECB’s 2% target in a timely manner.

We should hear from ECB president Christine Lagarde in a couple of minutes.

In the meantime, there’s encouraging news on inflation from America.

US producers raised their prices more slowly than expected last month, with the US PPI index only rising by 2.1% in March, below the 2.2% expected.

That suggests inflationary pressures in the US may be lower than thought; which should cheer markets, after the angst caused by the rise in consumer price inflation yesterday.

The latest weekly jobless claims total is also lower than feared:

The ECB is undoubtedly preparing the way for a cut and we will probably see them move well ahead of the Fed, says Neil Birrell, chief investment officer at Premier Miton Investors.

ING: ECB officially opens the door to a June rate cut

This is the first time (in the current cycle) that the ECB has talked about rate cuts in its official policy announcement (see earlier post) points out Dutch bank ING.

They told clients that the ECB has “officially opened the door to a June rate cut”.

ING’s Carsten Brzeski explains:

Even if the policy announcement does not explicitly mention June as the moment for a first rate cut, we think that today’s meeting should mark the final stop before the cut.

In fact, the ECB has gone through a very gradual transition of its communication since December, turning from hawkish to dovish. The faster-than-expected drop in headline inflation, as well as anaemic growth, have opened the door for some rate cuts. Not a full reversal of the rate hikes since July 2022, but rather a soft loosening of a still restrictive stance.

Wage data will help determine how quickly the Europeam Central Bank can cut interest rates.

Richard Carter, head of fixed interest research at Quilter Cheviot, explains that the ECB could be the first of the world’s largest central banks to start cutting rates in the current cycle.

The European Central Bank has predictably opted to hold rates once more. While for the first time it has signalled a clear intention to begin cutting rates if inflation continues to head in the right direction, which could potentially come as soon as June, it stopped short of pre-committing to this.

Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US where just yesterday we saw another unwanted uptick which took headline inflation to 3.5%. Given the Federal Reserve is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move.

Nonetheless, the ECB has maintained its data dependent approach and should something change between now and its next interest rate decision then we could see it row back on this more positive outlook. It will be keeping a close eye on key data between now and its 6 June meeting, particularly the crucial wage data which has been running well above the 3% target the ECB has stated would be conducive with its inflation target.

Updated

Markus Ferber, MEP, is urging the ECB not to wait too long before cutting interest rates.

Ferber points out that the eurozone would benefit from lower interest rates:

The key challenge in monetary policy is getting the timing right. In the beginning of the interest rate cycle, the ECB was far too hesitant to raise rates. Now, the ECB should not make the opposite mistake. Inflation data has been very favourable and monetary policy always takes effect with a considerable time lag. Christine Lagarde has promised to make data-driven decisions. If the inflation data comes in much better than expected, this should have consequences for monetary policy.

The current monetary policy stance has a restrictive effect on economic activity. This is justified in times when inflation is high and the economy is running hot, but the European economy is far away from such a situation. Right now, the European economy would benefit from a more permissive monetary policy.

Updated

The euro has dipped against the US dollar; it’s down 0.2% at $1.072, as traders weigh up the ECB’s hint that rates could be lowered soon.

ECB signals interest rate cut coming

The European Central Bank has also signalled that a cut to interest rates is coming soon, if inflationary pressures continues to fall.

Having left its key interest rates on hold today, the ECB suggests it could cut rates if its next forecasts show inflation pressures are easing.

Those forecasts will be ready for the ECB’s next meeting, in early June, and will show whether inflation is falling towards its 2% target, or not.

The ECB says:

If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.

Updated

ECB leaves interest rates on hold

Newsflash: the European Central Bank has left interest rates across the eurozone on hold.

The ECB has annnounced that borrowing costs will remain unchanged, after the governing council’s latest meeting, in Frankfurt today.

That’s despite inflation falling again last month, to 2.4%, near the ECB’s 2% target.

The means that the rate on the ECB’s main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, remains at 4.5%

The rate on the deposit facility, which banks can use to make overnight deposits with the Eurosystem, sticks at 4%, which is an alltime high.

The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem, remains at 4.75%.

Announcing the decsion, the ECB says:

Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.

Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

Updated

The City watchdog has criticised Neil Woodford over the collapse of his flagship fund in 2019, saying the former star investor had a “defective” view of some of his responsibilities.

The FCA released a warning notice against Woodfood, and against his Woodford Investment Management (WIM) today.

In it, the regulator alleges that Woodford had “a defective and unreasonably narrow understanding of his responsibilities for managing liquidity risks”, but has not yet said what sanctions it could take.

Lawyers for Woodford have said he “disagree(s)” with the FCA’s findings, PA Media reports.

Woodford’s investment empire imploded after a series of bad bets, and investments in illiquid assets which couldn’t be told quickly when investors began trying to withdraw their funds.

Today, the FCA also criticised Link Fund Solutions, the administrators of the fund but decided not to fine LFS – as this would leave less money to distribute to out-of-pocket investors.

Therese Chambers, joint executive director of enforcement and market oversight, explains:

‘Link Fund Solutions’ job was to properly manage the Woodford Equity Income Fund and to protect investors’ interests. Their failings led to losses for those trapped in the fund when it was suspended.

‘It is right that they compensate investors for the losses that resulted from their failings, and we’re pleased that the scheme has started making payments.’

The Bank of England’s next scheduled interest rate decision is in early May, when few in the City expect a change of policy.

The money markets indicate that a cut in rates, from 5.25% to 5%, is just an 8% possibility, with a 92% chance that the Bank’s MPC leaves borrowing costs unchanged.

Updated

As well as floods at home (see earlier post), UK food prices could also be pushed higher by droughts abroad.

Satellite images suggest that Morocco’s second-largest reservoir is drying up. Al Massira Dam contains just 3% of the average amount of water that was there nine years ago, the BBC reports.

The reservoir serves some of Morocco’s major cities, and is also central to farm irrigation.

Amber Sawyer, analyst at the Energy and Climate Intelligence Unit (ECIU) warns that UK consumers depend on Moroccan farmers for a variety of fresh fruit and vegetables.

Last year a third (32%) of our tomatoes and more than two thirds (43%) of our raspberries and Brussels sprouts (41%) came from Morocco. While we can grow some of these crops in the UK, extreme weather has been wreaking havoc here UK too. British farmers have just experienced the wettest 18 months since records began, which has devastated multiple crops including sprouts.

We also get produce from Morocco that we can’t grow here, like a quarter of our mandarins and around a tenth of our clementines and watermelons.

The UK imports around half its food, half of which we can’t grow here. As climate change worsens, the threat to our food supply chains – both at home and overseas – will grow.

Updated

Several investment banks have been cutting their forecasts for how soon, and how rapidly, America’s central ban will cut US interest rates.

After yesterday’s sharper rise in US inflation than expected, economists are ripping up their forecasts.

Jefferies, for example, now expect the first Fed rate cut to come in July, not June. It now expects two cuts in 2024, not three.

Wells Fargo has pushed its forecast for the first rate cut to September, from June, as has UBS.

BNP Paribas now expects two Fed cuts this year, in July and December, having previously pencilled them in for June, September and December.

Inflation in Ireland has fallen.

The Consumer Price Index (CPI) across the Republic rose by 2.9% between March 2023 and March 2024, down from 3.4% in the year to February.

The Central Statistics Office reported that this is the fifth month running where the inflation rate was lower than 5%.

Anthony Dawson, Statistician in the CSO’s Prices Division, said:

Today’s publication of the Consumer Price Index (CPI) shows that prices for consumer goods and services in March 2024 rose by 2.9% on average when compared with March 2023.

This is the fifth time since September 2021 that the annual growth in the CPI was below 5%. It is also the fifth consecutive month where the inflation rate was lower than 5%.

Updated

UK's help for farmers with flooded fields "simply doesn't work"

Efforts to bring down UK inflation could be thwarted by bad weather hitting food production.

UK farmers’ efforts to plant crops this year has been hampered by the exceptionally wet weather in recent months.

Farming groups have warned that production yields will suffer, and that the prices of goods such as bread and other food made using grains are likely to rise further. That wil hurt shoppers.

The government has launched a new fund to help farmers who were caught up in Storm Henk, which caused flooding across England at the start of the year.

The National Farmers Union has just criticised the fund though, saying many farms under water can’t access the money because it excludes farms which are 150 metres or more away from a main river.

NFU vice president Rachel Hallos says there are “major issues” with the new fund:

We are hearing from numerous members who have suffered catastrophic impacts who have been told they are not eligible for the Fund because some of their affected areas are more than 150 metres from ‘main’ rivers. These include members with 90% of their land saturated or underwater, and huge damage to buildings and equipment.

We are taking this up with Defra urgently.

I cannot believe this is what Ministers intended when they launched the Fund, which was a welcome and well-intentioned development which seems to have been fundamentally let down in the detail. While the impact of the weather goes far beyond Storm Henk, this could have been a good start but, as it stands, it simply doesn’t work.

Updated

Ruth Gregory, deputy chief UK economist at Capital Economics, argues that falling UK inflation will allow the Bank of England to start cutting rates this summer.

She told clients:

Even if the US Federal Reserve leaves its policy rate unchanged for longer than we expect, our forecast that inflation in the UK will be lower than in the US suggests this won’t prevent the Bank of England from cutting rates from 5.25% to 5.00% in June and to 3.00% next year.

But the Bank will be alive to the risk that inflation proves more resilient as it has in the US.

June is earlier than the financial markets are now expecting, with the first cut only fully priced in for September.

Updated

City traders are no longer fully pricing in the first UK interest rate cut in August and now expect borrowing costs to begin to fall in either that month or September, the Financial Times reports.

That suggests investors are repricing expectations for rate cuts after reading Megan Greene this morning.

The FT adds:

The two cuts they now expect for this year — one in which Prime Minister Rishi Sunak is hoping to deliver an election-winning economic turnaround — contrast with the more than six cuts markets anticipated in January.

The chart in this post shows why Megan Greene is concerned that UK services inflation is running hotter than in the US:

Bond markets react to expectation of fewer rate cuts

Back in the financial markets, UK government bond prices are weakening as investors brace for interest rates to remain higher for longer than hoped.

The yield, or interest rate, on UK 10-year government debt has risen by eight basis points (or 0.08 percentage points) this morning, to 4.21% from 4.13% last night.

Yields rise when prices fall, and show that bond traders want a higher rate of return for holding government debt, following the higher-than-forecast inflation rate in the US.

The shorter-dated, two-year UK bonds have also weakened, pushing up their yield by 6 basis points to 4.41%.

American Treasury bonds weakened yesterday, after US inflation rose faster than expected to 3.5% for March.

That shows that bond traders are dialling back their interest rate cut forecasts.

Hal Cook, senior investment analyst at Hargreaves Lansdown, says:

“Markets are now pricing in just one or two rate cuts in the US this year - behind Fed projections from March. Reminder: Markets were pricing in six or seven at the start of the year. This shift hasn’t done much damage to equities in recent months, and it still looks like the hope of cuts coming at some point is enough to keep bulls happy.

The primary cause of the shift in expectations has been continued sticky price and wage inflation, both remaining higher than expected in the US. This makes it less likely that the Fed will cut soon, as was expected at the start of the year.

Here’s the state of play this morning, from Reuters’ Andy Bruce:

The total number of online jobs being advertised in the UK has dipped, suggesting some cooling in the labour market.

The latest realtime UK economic data shows that online job ads fell 1% last week, and was 19% below the level recorded a year ago.

The Office for National Statistics also reported that spending on UK credit and debit cards dipped by 1% last week, and was 4% lower than a year ago.

UK lenders expect default rates to rise

Just in: UK banks are expecting more households and small businesses to default on debts this summer.

The Bank of England’s latest money and credit survey shows that default rates on secured loans (such as mortgages) to households increased in the last quarter, and are expect to increase again in the April-June quarter.

Lenders also reported that default rates for total unsecured lending increased in Q1, for both credit cards and other loans – and are also expected to increase in Q2.

This indicates that higher interest rates are hurting borrowers, with more unable to make the interest payments on their loans.

Among businesses, lenders reported that default rates on loans to small and medium businesses increased slightly in the last quarter, with further slight increases expected in the current quarter.

UK banks are also predicting a pick-up in both the supply and demand for mortgages in the current quarter.

UK house prices seen returning to growth

Estate agents and surveyors are predicting the property market will bounce back over the coming months.

The latest survey by the Royal Institution of Chartered Surveyors (Rics), released this morning, shows that buyer demand rose again last month, to its highest level in two years.

With property listings also rising, surveyors expect house prices across the UK to return to growth within the next 12 months.

Falls in mortgage rates since last summer have helped the market, as investors have anticipated cuts from the Bank of England this year….

More here:

Updated

Professor Costas Milas of the University of Liverpool argues that the Bank should pay more attention to money supply when setting interest rates.

He tells us:

Although MPC policymaker Greene is correct that there is a tight labour market in the UK which “undermines” early interest rate cuts, perhaps more important is the lack of liquidity (proxied by Divisia money growth). The latter is in deep negative territory which puts downward pressure on inflation and “hedges” against strong GDP growth (see here)

As I explain in my latest LSE Business Review blog, the BoE’s forecasting models need to take into consideration Divisia money.

Former US central bank chief Ben Bernanke is expected to publish his recommendations to improve the BoE’s forecasting and policymaking operations tomorrow.

The Bank of England can cut UK interest rates by half a percentage point this year, predicts Simon French, chief economist at Panmure Gordon.

But, he warns that the timing of such cuts “remains deeply uncertain”, telling clients:

The recent upswing in economic momentum across all major geographies and a recovery in core price growth means the balance of risks is shifting fast for central banks - led by a Federal Reserve facing off to incontinent US fiscal policy and a positive wealth effect from a strongly performing equity market.

For the Bank of England - facing a rather different domestic backdrop - there is a narrow policy and rhetorical path for it to tread in the coming months that can deliver some easing of domestic interest rates. But the path is narrow because divergences are everywhere. Between US and European growth; between goods and services inflation; between absolute levels of consumer confidence and recent economic momentum.

He’s also posted about Megan Greene’s FT article, pointing out that the five internal members who sit on the Bank’s monetary policy committee are generally more dovish than external members such as Greene (apart from Swati Dhingra, who has been a lone voice voting to cut rates)

Self-storage giant Shurgard to buy UK’s Lok’nStore for £378m

There’s takeover drama in the self-storage world this morning, as another UK company falls to a foreign buyer.

Europe’s Shurgard has agreed a deal to buy London-listed Lok’nStore, in a deal worth £378m.

Shurgard says the deal will accelerate its growth strategy; Lok’nStore has 32 properties in the South East of England, and five more under development, plus five in Manchester and another three on the way.

Shares in Lok’nStore have jumped 17% to a record high of £11.25, slightly above Shurgard’s offer of £11.10 per share.

Lok’nStore chair Andrew Jacobs said the offer represented “significant value” for shareholders, and recognises “the quality of Lok’nStore’s real estate portfolio and operational strength.”

But it’s another example of a UK firm being snapped up by an overseas buyer, at a time of growing concern that the London market is not valuing companies properly.

Just yesterday, UK-based biotechnology group e-Therapeutics PLC announced it was leaving the London Stock Exchange’s junior Alternative Investments Market, blaming a lack of support from U.K. institutional investors.

CEO Ali Mortazavi said the UK markets were “completely broken and closed”

Oil giant Shell has added to the pressure, with Wael Sawan saying it is undervalued in London and dropping some hints that it could shift to New York….

Updated

AstraZeneca hikes dividend ahead of CEO pay vote

AstraZeneca has announced plans to lift its annual dividend for 2024 by 7% to $3.10 per share, up from $2.90.

The UK pharmaceuticals giant says the move underlines its “confidence in its performance and cash generation”.

The news comes just hours before AZ holds its AGM, where investors will vote on whether to approve CEO Pascal Soriot’s £17m pay packet (see opening post).

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, suggests it might dampen some opposition to Soriot’s bumper deal:

Shareholders won’t be blind to the fact that this is a barely disguised sweetener, but it may quell appetites enough to get the divisive package through.

The bigger picture for Astra still centres on the work it does on rarer and more complex treatments – dominating this area of the market takes very deep pockets, and that doesn’t appear to be under threat.

Updated

Heathrow is calling on the government to scrap a new £10 charge for overseas travellers who use UK airports to connect to other flights, warning that it puts UK airports at a competitive disadvantage compared with other European rivals.

The Electronic Travel Authorisation (ETA) was introduced in November for non-UK residents travelling to the UK from Qatar, and now also covers travellers from Bahrain, Kuwait, Oman, the United Arab Emirates, Saudi Arabia and Jordan.

Heathrow says it supports the overall rationale behind the ETA, but argues that transiting passengers needed to be exempted as this was hitting passenger numbers. More here.

Heathrow also reported that nearly seven million passengers passed through in March,

Victoria Scholar, head of investment at interactive investor, explains:

Heathrow enjoyed a boost in March thanks to the earlier-than-normal Easter weekend and school holidays with many families taking the opportunity to go on holiday abroad.

It was the busiest Easter weekend ever for Heathrow, and Good Friday was the busiest ever direct departure day with 118,000 travellers passing through. Despite pressures from inflation and a weak economic backdrop, individuals and families clearly continue to prioritise their travel plans at the expense of other spending.

Plus with cost-of-living pressure easing and wage growth still strong, the economic dynamics in the UK have been improving at the start of 2024 following last year’s recession, encouraging greater spending in the economy, including on air travel.”

Updated

After a volatile day yesterday, the London stock market has opened calmly.

The FTSE 100 has gained just 0.06%, or 5 points, to 7965, inching slightly closer to the alltime high of 8,047 set in February 2023. Yesterday, it nearly hit 8,000 points, before shares fell after the US inflation report was released.

DIY firm Kingfisher (+4.3%) is the top riser after a broker upgrade.

Updated

While Western policymakers fret about inflation, China is struggling with weak price growth.

Chinese consumer prices rose by just 0.1% year-on-year in March, weaker than forecast, and a sharp drop on the 0.7% infllation recorded in February.

On a monthly basis, prices fell by 0.1% during last month.

Such weak price growth will fuel concerns over the strength of China’s domestic demand, a day after credit rating agency Fitch cut its outlook on China’s debts, and warned of “uncertain economic prospects”.

UK seen cutting rates earlier than the US

The latest money market pricing shows that the first cut in UK interest rates is fully priced in by August.

That’s earlier than for the US. After yesterday’s US inflation report, financial markets pushed back their expectations for the first rate cut to September from June, according to CME’s FedWatch Tool.

That’s concerning Megan Greene, who argued in her piece today that “the markets are moving rate cut bets in the wrong direction:.

Updated

Megan Greene is also concerned that wages are rising faster in the UK than in the US – creating an increased risk of persistent inflation.

She writes in the FT:

Higher inflation expectations have translated into higher pay growth, by some metrics now between 6-7 per cent in the UK versus 4-5.5 per cent in the US. Such sticky wage growth is a significant component of services inflation.

It will need to slow further to see services inflation return sustainably to target-consistent levels. This last mile may prove the hardest. UK services inflation remains much higher than in the US.

Yesterday’s hotter-than-expected US inflation report spooked Wall Street, sending the Dow Jones industrial average down by 1.1%, and the broader S&P 500 index 0.95% lower.

Asian markets have followed suit; MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, while Japan’s Nikkei shed 0.45%.

With the dollar strengthening, the yen slumped to its lowest level against the greenback since 1990, at 153.24 yen to the $.

Bank of England's Greene: rate cuts in the UK should still be a way off

A Bank of England policymaker says UK interest rate cuts should be ‘a way off’, a blow to borrowers hoping for cheaper credit soon.

Megan Greene, an external member of the Bank’s monetary policy committee, argues that there is a greater threat of inflation persistence in the UK than in the US (where we know prices are rising faster than expected).

And she fears that market pricing for UK interest rates does not reflect this persistence.

Writing in the Financial Times this morning, after yesterday’s US inflation shock, Greene says the UK economy has faced a “double whammy” of a very tight labour market and a terms of trade shock from energy prices.

Green writes that macroeconomic fundamentals and inflation dynamics differ in the UK and US, and that the markets aren’t fully reflecting this:

She explains:

There has been encouraging news on UK wage growth and services inflation in recent months. The risk of inflation persistence is diminishing as these indicators come down in line with the MPC’s forecast. But they remain higher than in other advanced economies, particularly the US.

Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.

More here:

Traders have cut their forecasts for UK interest rate cut this year, after Wednesday’s US inflation data. They expect at least just two quarter-point cuts this year.

UK Bank rate is now seen falling to around 4.75% by the end of 2023, down from 5.25% today, having previously been expected to drop to 4.5% by December.

Updated

Introduction: Markets slash bets on rate cuts after US inflation rises to 3.5%

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

Investors are growing nervous that central banks will not cut interest rates as soon as they had hoped this year, with inflation remaining suprisingly sticky.

Traders have slashed their bets on Federal Reserve interest rate cuts after US inflation rose by more than expected in March.

They now expect just one or two cuts to US interest rates (which are currently 5.25%-5.5% range) this year, down from three earlier this week – and six at the start of the year.

Yesterday’s CPI data showed US prices rose by 3.5% per year in March, higher than expected, up from 3.2% in February.

The report will be a big disappointment for the Federal Reserve, says Matthew Weller, global head of research at FOREX.com and City Index, addding:

Traders are souring on the potential for a June rate cut from the Fed, with the September/November timeframe now looking more likely.

The data prompted US president Joe Biden to press grocery retailers to lower prices, admitting that “prices are still too high for housing and groceries”.

There’s even some chatter that the Fed’s next move could be another hike, rather than the long-expected cut.

Former Treasury Secretary Lawrence Summers told Bloomberg TV yesterday:

“You have to take seriously the possibility that the next rate move will be upwards rather than downwards.”

Such a likelihood is somewhere in the 15% to 25% range, Summers indicated.

Also coming up today

European monetary policy will be in focus this afternoon, when the European Central Bank sets interest rates for across the eurozone.

The ECB is expected to leave borrowing costs unchanged, but ECB president Christine Lagarde may be pressed about how close her governing council is to cutting interest rates, as eurozone inflation has now dropped to 2.4%

No change in interest rates is anticipated, yet Lagarde will be called upon to clarify what “little more” we have actually learned about inflation and the rate outlook, and whether she will finally hint at a June rate cut.

AstraZeneca shareholders will vote on its CEO’s controversial £1.8m pay rise, which would take Pascal Soriot’s maximum package to £18.7m this year.

The agenda

  • 7am BST: Norway’s GDP report for February

  • 9.30am BST: Latest UK economic activity and social change data

  • 1.15pm BST: European Central Bank interest rate decision

  • 1.30pm BST: US Producer Price Index (PPI) index

  • 1.30pm BST: US weekly jobless claims

  • 1.45pm BST: European Central Bank press conference

 

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