Economy moves to centre stage ahead of UK general election

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Today’s top stories

• The US Federal Reserve left interest rates unchanged at a 23-year high of 5.25 per cent to 5.5 per cent. Officials still expect to make 0.75 percentage points worth of rate cuts this year, signalling confidence that inflation is cooling sufficiently to reduce borrowing costs.

• The US is giving carmakers an extra three years to meet emissions targets, bowing to pressure from manufacturers, auto workers and the oil industry in a move that could slow the adoption of electric vehicles.

• Europe’s largest munitions maker Rheinmetall said EU leaders should consider installing short-range air defence systems similar to Israel’s Iron Dome.

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Good evening.

A bigger than expected fall in UK inflation has bolstered arguments for the Bank of England to start cutting interest rates and allowed Prime Minister Rishi Sunak to seize on the news as proof his economic plan was working.

The consumer prices index fell from 4 per cent to 3.4 per cent in February, the lowest since 2021. Core inflation, which excludes volatile food and energy prices, also fell more than expected from 5.1 per cent to 4.5 per cent.

The Bank of England, which makes its next decision on interest rates tomorrow, is however likely to keep them on hold for now at 5.25 per cent until it is convinced inflation and pay growth, particularly after recent increases in the minimum wage, are cooling. 

In the meantime, elevated borrowing costs are still hitting Britons badly. New data today showed rental costs rising by a record 9 per cent as landlords take properties off the market or pass on higher mortgage payments to their tenants.

Labour’s Rachel Reeves, would-be successor to chancellor Jeremy Hunt, last night laid out her own plans for the economy, pledging to borrow only to invest and to match existing fiscal rules.

Stephen Bush in his Inside Politics newsletter (subscribers can sign up here) says Reeves’ approach is to highlight three big things that the Conservatives have got wrong: the role of the state in helping to drive growth, the austerity of 2010-2017, and the failure to borrow more at a time of ultra-low interest rates. The key political message being that Labour will inherit “a big, awful hole, and that it needs two terms (aka ‘a decade of national renewal’) to fix it”.

Sunak was keen to use today’s data as part of his fightback after a dismal few weeks of headlines but his party only has until October — if we are to be guided by Hunt’s hint on election timing — to turn things around.

At the moment the task looks like a tall one, given that the party seems likely to lose many of the seats it gained from Labour in 2019 after failing to deliver on “levelling up” left-behind areas, especially in the “Red Wall” of post-industrial seats across northern England, the Midlands and north Wales, as our Big Read explains. 

As the FT editorial board writes, the gap between the government’s rhetoric and the reality will not go unnoticed by these voters when it comes to choosing the next government.

Need to know: UK and Europe economy

Leo Varadkar is unexpectedly stepping down as Ireland’s prime minister and leader of the Fine Gael party although government sources said it would not trigger an immediate general election.

European Central Bank chief Christine Lagarde refused to commit on ECB plans to cut interest rates, despite signs that wage growth has peaked in the eurozone.

Germany and the EU announced plans to fast-track military aid to Ukraine while a US package remains stuck in Congress. Chief economics commentator Martin Wolf says a potential betrayal of Ukraine, most likely under a Donald Trump presidency, would be proof that the US is in “irreversible decline”. Arms producer Nammo said Europe needed to step up to a war footing.

The EU agreed to reduce imports of Ukrainian foodstuffs including poultry, eggs and honey to appease protesting farmers. The move could cost Kyiv tens of millions of euros in tariffs if it cannot find alternative markets. 

Need to know: global economy

The Bank of Japan ended an era of negative interest rates, lifting borrowing costs for the first time since 2007. Asia editor Robin Harding says its big test is yet to come: “The BoJ has signed an armistice with unconventional monetary policy, not a peace treaty,” he writes.

Delinquencies on US credit card loans are running at their highest level in 13 years and consumers are paying much more in interest and fees than before Joe Biden became president, a fact seized upon by opposition Republicans.

Vietnam’s President Vo Van Thuong became the second to resign in 14 months, heightening concerns among investors already worried about the consequences of a landmark $13bn embezzlement case involving one of the country’s property tycoons.

Former Brazilian president Jair Bolsonaro faces criminal charges over claims he faked Covid-19 vaccine certificates and over “criminal association”. The attorney-general must now decide whether to pursue the case.

Aid agencies warned of a humanitarian catastrophe as armed rebels close in on Goma in the Democratic Republic of Congo, risking a wider regional war. Goma is the capital city of the strategically important and mineral-rich eastern province that has been beset by conflict for decades.

Need to know: business

Growing economic confidence in Europe, as evidenced in Germany’s ZEW survey, is being reflected in markets, with investors upping their bets on stocks linked to discretionary spending such as travel and carmakers.

Shares in French luxury group Kering however dived after it issued a rare profit warning because of falling sales at its Gucci brand, in contrast with improving fortunes at bigger rivals LVMH and Hermès.

Intel will get $8.5bn in direct funding and $11bn in loans from the US government to help it expand in high-end chips and compete with the likes of Taiwan’s TSMC and South Korea’s Samsung.

European artificial intelligence start-ups are becoming targets for rival nations in a global competition to develop cutting-edge technology. Microsoft has hired DeepMind co-founder Mustafa Suleyman to run its new consumer AI unit.

Nvidia unveiled a more powerful artificial intelligence chip in a bid to extend its dominance in the growing industry. The chips massively increase the computing power available to drive the large language models that train AI applications.

US banks are in uproar over new banking rules that are stricter than globally agreed standards. A Big Read explains. Europe’s investment banks are cutting bonuses for the second year in a row following the slump in dealmaking and listings.

TerraPower, a company founded by Bill Gates, is planning to build the first US next-generation nuclear plant, joining Russia and China in the search to develop and export lower-cost reactors. The biggest producer of reactors that run on natural uranium warned that western countries were mishandling nuclear projects.

The World of Work

Young workers are refusing to leave their job quietly. Clips with titles such as “quit my job with me” or the hashtag #layoffseason are part of a wave of “Quit-Tok” videos that aim to take what would usually be a private chat in a side room with managers and make it as public as possible.

Are working hours a thing of the past and can a company function if we’re rarely online at the same time as our colleagues? Listen to the new Working It podcast.

Some good news

Cancer deaths in middle-aged men and women in the UK have dropped substantially during the past 25 years, thanks to prevention strategies, earlier detection, improved testing and more effective treatment.