Aurelia Butler

Bank of England governor Andrew Bailey on Tuesday pledged to bring down inflation to the BoE target, “no ifs or buts”, adding that the central bank could raise interest rates more sharply than previously in response to surging price rises.Talking at a meeting organised by OMFIF, a central banking think-tank, Bailey said that the monetary policy committee “will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response”.He added that “bringing inflation back down to the 2 per cent target sustainably is our job, no ifs or buts”.UK inflation reached a 40-year high of 9.1 per cent in May and the BoE projects it to increase further, to above 11 per cent by October.Bailey said the bank used the word “forcefully” because “we want people to see that there are more options on the table than another 25 basis points”.The BoE has raised interest rates by 25 basis points five consecutive times to 1.25 per cent. Markets have priced a 60 per cent probability of a 50 basis points interest rate increase at the next BoE monetary policy announcement on August 4, with a 40 per cent probability of another 25 basis points rise.The US Federal Reserve has tightened monetary policy more aggressively, with a 75 basis points increase in June, the biggest jump since 1994. Bailey said that the Federal Reserve and the European Central Bank were facing different types of price pressures, with the UK placed in the middle. He explained that the UK had “the labour market shock” in common with the US, and both the BoE and the ECB were facing the shock resulting from surging energy prices after Russia’s invasion of Ukraine. He reiterated that businesses were still very focused on the difficulty of recruiting and that the BoE “is very focused on that point”, suggesting the risk of a more persistent domestic inflationary pressure. Bailey said that the BoE would set out plans for reversing quantitative easing at the next meeting, emphasising that the bank aimed to make the move “gradual and predictable”. He also reassured that the bank “would not sell gilts actively in very distressed markets” when asked if it would start selling bank assets in August, a period of high political uncertainty as the Conservative party selects a new prime minister following the resignation of Boris Johnson.

“Getting a predictable path of active sales means that the market should be able to discount that,” he explained. Bailey added that the central bank balance sheet “should not remain permanently large”. The governor used his speech to focus mostly on longer-term questions facing the UK economy, particularly the accounting of intangible assets and their role in the missing investment puzzle. He said his comments did not represent a signal about the BoE’s next moves.  More

Economists polled by Reuters expect the Labor Department’s Consumer Price Index (CPI), which tracks the prices that urban consumers spend on a basket of goods, to have accelerated in June on both a monthly and annual basis, by 1.1% and 8.8%, respectively.But so-called “core” CPI, which strips away volatile food and energy prices, is seen repeating May’s 0.6% monthly increase and cooling down to 5.7% year-on-year.An easing of annual core CPI is likely the most crucial element of the report, as investors look for further confirmation that inflation has peaked, which could potentially convince the Federal Reserve not to become even more aggressive in its interest rate hikes.The market expects the central bank to raise the key Fed funds target rate by 75 basis points at the conclusion of its July policy meeting, which would be its third consecutive rate hike, totaling 2 percentage points.CPI and other indicators suggest that while core inflation peaked in March, the long journey back to the Fed’s average annual 2% inflation target has only just begun:(Graphic: U.S. Inflation: https://graphics.reuters.com/USA-STOCKS/egpbkxywlvq/inflation.png)But looking beyond accelerating CPI, metals, agricultural commodities and oil prices have lost some altitude in recent weeks.The CRB Commodity Equity index dropped 15.6% in June, while front-month WTI crude futures fell 7.8%.Even so, the American consumer, who is responsible for about 70% of U.S. economic growth, is feeling the heat. Putting gasoline in the tank and food on the table is dampening demand for discretionary goods.It’s likely that the numbers from last month will not have captured recent indications costs for American households may not be rising as fast as before.Through May, energy and food & beverage CPI components grew faster than core CPI. But commodity prices, including crude, have been paring since early June.(Graphic: U.S. CPI and commodities: https://graphics.reuters.com/USA-STOCKS/lgvdwzkejpo/cpicommodities.png) More

Network Rail, which owns Britain’s train infrastructure, has offered workers at two unions pay rises in a bid to avert further crippling strikes this summer. The state-owned company said it had offered the RMT union a 5 per cent pay rise in a two-year deal, which also included a promise of no compulsory redundancies.The offer was contingent on members accepting far-reaching reforms, particularly for maintenance workers.Negotiators for the RMT, which brought large parts of Britain’s railways to a standstill when its members went on strike for three days last month, said it would put the offer to its executive committee on Wednesday. If the committee accepts the deal, the offer would be put to members. But in a sign it might not be enough for the union, the RMT said the Network Rail offer still amounted to a real terms pay cut, would involve cutting a third of frontline maintenance roles and was worse than deals agreed with some transport operators.“Railway workers have lost thousands of pounds in earnings due to a pay freeze in recent years and they refuse to be short-changed again,” RMT boss Mick Lynch said.The Network Rail offer included a 4 per cent pay rise in the first year, backdated to January, and 2 per cent the following year, with a further 2 per cent on offer that year if modernisation targets were met, as well as cash bonuses, which would take the pay rises to around 5 per cent. The public body said the lowest-paid staff, deemed those earning under £30,000, would receive the biggest rises.The RMT leadership had been pushing for pay rises of 7 to 8 per cent to compensate for inflation that is expected to hit 11 per cent in the autumn.The union is still in separate negotiations with train operating companies in a similar dispute over pay, working practices and potential job losses.Staff at two other transport unions, Aslef and TSSA, have in recent days also backed industrial action without setting dates for walkouts, setting up the possibility of co-ordinated strikes at most train operators bringing the railways to a virtual standstill this summer. The TSSA on Tuesday also said Network Rail had offered pay rises, but said they “don’t come close to what our members expect”.The company offered pay rises of 3 per cent for management grades and 4 per cent for general staff, with the potential for more if “productivity targets” are met. Only around 20 per cent of train services ran when RMT members went on strike in June, largely because there are few contingency plans to replace signallers.Industry executives believe that strikes at train operating companies would be more manageable, except if drivers walked out, when there would be virtually no services on affected lines. Mick Whelan, general secretary of drivers’ union Aslef, told the Financial Times last week that a strike by his members would cause “massive disruption”.

The pay offers from Network Rail are the first sign of a possible way out of the labour disputes that have gripped the railways in recent weeks. “While money is extremely tight because of the railway’s financial troubles following the pandemic, we can afford to make this offer if our people accept change and compromise, which will fund it,” Network Rail said of the RMT offer.Unions have called on the government, which sets the industry’s budgets, to become directly involved in the negotiations and offer more public money for pay rises. Ministers have said the government has poured £16bn into the industry since the start of the coronavirus pandemic, and sweeping reforms and modernisations were needed. More

“I am one of the guys who like the option value of deciding the week of the meeting as opposed to two weeks before the meeting,” he told reporters Tuesday after a speech in Charlotte, North Carolina. “But I thought Jay’s guidance the last time was very sound. We’ll get a little bit more information before the meeting and importantly we’ll get CPI. I’ll reserve judgment.” The consumer price index for June will be released on Wednesday. It is expected to show an 8.8% increase from a year earlier, marking the largest jump since 1981, according to the median forecast in a Bloomberg survey.Fed Chair Jerome Powell said after last month’s meeting of the US central bank that either a move of 50 or 75 basis points was on the table when policy makers gather July 26-27. Since then a majority of the 18 officials who sit on the Federal Open Market Committee have either backed the larger move, or said they are open to debating both options.“We want to get back to somewhere in the range of neutral as expeditiously as we can without inadvertently causing damage we don’t want to cause,” Barkin said.©2022 Bloomberg L.P. More

Spain became the largest eurozone country to impose a windfall tax on banks in a sign of European governments’ search for funds to lessen the painful impact of price rises.The move by Socialist prime minister Pedro Sánchez — which the government said was designed to limit banks’ gains from rising interest rates — triggered sharp falls in the stocks of Spanish banks.Shares in CaixaBank, Bankinter and Sabadell fell by about 10 per cent after the levy was announced while those of Santander and BBVA, the country’s two biggest banks by market cap, dropped by nearly 4 per cent.The bank levy came without warning and drew strong criticism from analysts.“This is a crude form of populism. The government argument is that banks are benefiting from rising interest rates,” said José Ramón Iturriaga, an analyst at Abante Asesores. “But there was no state compensation during the long period when rates were negative.”Among other measures, the government plans to use the funds raised to build 12,000 homes in Madrid, make most state railway journeys free between September and December, and provide €2bn in scholarships for over-16s.Sánchez, who leads a coalition government with radical left lawmakers, said a similar tax would be levied on energy utilities as part of the package aimed at protecting the less well-off from the impact of inflation and soaring energy prices.“We are asking big companies to ensure that any exceptional benefits obtained during the current circumstances are channelled back to workers,” Sánchez said in the opening address of a three-day state-of-the-nation debate.Inflation in Spain rose to a 37-year high of 10 per cent in June, up from 8.5 per cent in May.Sánchez’s move comes as his party seeks to regain the initiative in the face of a resurgent opposition Popular party.The temporary taxes on banks and energy groups, which are to be applied in 2023 and 2024, are projected to raise a total of €7bn — €1.5bn a year from the financial sector and €2bn a year from utilities.Windfall taxes on energy companies profiting from high oil and gas prices have been on the political agenda across Europe, but only a few countries have considered imposing new levies on banks in the wake of Russia’s invasion of Ukraine.Hungary introduced a similar measure to Spain’s in May. In Poland, whose rightwing government introduced a tax on banking assets in 2016, the leader of the ruling Law and Justice party warned earlier this month that banks could be hit with a new windfall tax if they mistreated their customers.The Spanish government did not explain how the new levies on banks and energy groups would be applied.The share prices of utilities Iberdrola and Naturgy fell less than 1 per cent, suffering less than the banks because the government had previously indicated it would levy charges on energy companies.In September, the government targeted €2.6bn in “excess profits” from utilities that do not use gas but benefit from rising gas prices. It later backtracked on the measure under pressure from energy groups.The new taxes and other measures, Sánchez said, were designed to “protect workers and the most vulnerable”.

The prime minister’s popularity has been damaged by the rising cost of living, with the conservative People’s party overtaking his Socialists in national polls and winning a decisive victory in a regional election in Andalucía last month. “I know it’s getting harder and harder to make ends meet,” Sánchez told parliament. “I understand the distress, the frustration and the anger because I share it.”Additional reporting by Raphael Minder in Warsaw and Stephen Morris in London More

The UK Financial Conduct Authority has warned banks it will act if they fail to improve their treatment of small and medium businesses struggling with the cost of living crisis after it found “repeated instances” of poor practice.Sheldon Mills, the FCA’s executive director for consumers and competition, wrote to the heads of lenders on Tuesday urging them to improve the way they deal with SMEs. “We were disappointed to find repeated instances of these customers not being treated fairly by banks when they’re struggling,” he wrote. “We expect the whole sector to act quickly to improve this. We will take action if problems continue.”The review identified a number of common failings among lenders, including inadequate training, poor record keeping and a lack of clear policies to help staff identify and support vulnerable businesses.The Bank of England warned last week that SMEs had lower cash buffers and higher levels of debt than before the pandemic. At least 70 per cent of their outstanding debt was issued outside of government loan schemes, the BoE said, with a large proportion exposed to further bank rate increases within a year.Mills warned in the letter that the regulator would use its “supervisory and enforcement powers” to ensure lenders acted. This could include forcing them to compensate customers or imposing fines on the worst offenders.

Alex Veitch, director of policy and public affairs at the British Chambers of Commerce, said his members, especially SMEs, faced a “tsunami of costs” and the FCA’s findings should act as a “wake-up call” for banks. “While there are a number of examples of good practice contained in the review, we were particularly concerned to read that some banks had not provided suitable forbearance options to their SME customers. We were also concerned to hear examples of banks rejecting offers of settlement and arrangements to pay without a clear rationale,” he said.He added that the survival of SMEs should be seen as a “top priority” for lenders and any recovery action should only be taken when it was clear all other suitable avenues have been exhausted.The Federation of Small Businesses warned earlier this year that its members were disproportionately affected by inflation given they were less able to pass on cost increases.UK Finance, the trade body representing lenders, said that its members were committed to treating small business customers fairly. “While the FCA’s report highlights good practices, the industry will carefully consider the regulator’s findings and address the areas of concern,” it said, adding that its members strive to offer a “customer-focused” approach for businesses.The FCA’s warning over the treatment of SMEs follows a similar intervention in June in which it called on lenders to ensure they treat retail customers fairly as they grapple with the cost of living crisis.The watchdog said at the time it was especially concerned by the “inconsistent practice” among lenders in the way they used data to help them identify the most vulnerable customers. More

PepsiCo predicted inflation would stay elevated for the rest of the year, and said it remained open to raising prices further after seeing limited pushback from consumers so far.The New York-based drinks and snacks group experienced a rate of inflation during its second quarter that was “well in the teens”, chief financial officer Hugh Johnston told the Financial Times. “We certainly do expect that to persist,” Johnston said, and that “further” actions to raise product prices or cut costs may be needed.PepsiCo raised prices on its portfolio of products, which includes Gatorade and Doritos, by 12 per cent overall in the three months to mid-June. That increase was below the inflation rate it experienced, Johnston said, because it had been able to cut internal costs and lean on its digital investments to manage inventory more precisely at individual stores.“So far for us, there hasn’t been much reaction from the consumer [to the price increases],” Johnston said, noting that its volumes were up by between 3 and 6 per cent around the world. The company’s products represented “an affordable treat . . . that lots of people are still finding ways to afford”, he added.Consumers’ willingness to stomach the price increases helped underpin a forecast-beating second quarter in which PepsiCo reported a 5.2 per cent year-on-year jump in net revenue to more than $20.2bn, beating Wall Street’s forecast for $19.5bn. PepsiCo said it now expected revenue to increase 10 per cent in 2022 on an organic basis, which adjusts for acquisitions, divestitures and currency fluctuations. That is up from the 8 per cent it forecast three months ago and marked the second quarter in a row in which it has boosted its organic revenue growth target.The company exercised some caution and kept its forecast for core full-year earnings steady at $6.63 a share, 6 per cent above 2021.While sales volume growth in the second quarter matched that of the first, markets in Latin America, the Middle East, Africa and Asia Pacific helped offset contractions in its main markets of Europe and North America. Snack and beverage volumes in Europe were down 7 per cent and 8 per cent, respectively, compared with a year earlier.However, the impact of Russia’s war against Ukraine led to a $1.4bn pre-tax impairment charge, higher than PepsiCo had flagged three months ago, which pushed net income down to $1.43bn. Analysts surveyed by Refinitiv had expected about $2.4bn, excluding those charges. Johnston said the non-cash charge was due to the higher weighted average cost of capital currently prevailing in Russia, which had reduced the value of its assets there.

Chief executive Ramon Laguarta said he was “pleased” with the latest results “as our business momentum continued despite ongoing macroeconomic and geopolitical volatility and higher levels of inflation across our markets”.PepsiCo shares were up 0.4 per cent to $171.20 in morning trading on Tuesday, leaving them about 3.5 per cent below a record high struck in late April following the company’s first-quarter results. More