Aurelia Butler

Investors have pared back their expectations for further rises in UK interest rates after the Bank of England warned the economy would stall at the end of the year as double digit inflation squeezed household incomes.While the US Federal Reserve and European Central Bank policymakers have signalled that they are likely to move aggressively to rein in soaring inflation, the message from the BoE’s Monetary Policy Committee following Thursday’s rate rise was more ambiguous. A majority of the committee still felt “some degree of further tightening” was likely to be needed in the coming months — and three members voted to raise interest rates by 50 basis points this week, rather than the 25 basis point move the MPC settled on. But two members thought the worsening growth outlook made it unclear if any further moves would be needed. Huw Pill, the BoE’s chief economist, said on Friday that these differing opinions on the committee reflected the “narrow path” it was trying to steer “between the inflationary risk . . . and the risk of unnecessary weakness in activity and employment on the other side”.The BoE’s new forecasts, set out alongside the central bank’s policy decision, suggest that although inflation is set to climb above 10 per cent in the autumn, when energy prices rise again, it would fall well below the 2 per cent target by 2025 if interest rates were to rise in line with recent market expectations.Paul Hollingsworth, economist at BNP Paribas, said this was a “clear warning sign that markets have gone too far in their expectations for rate hikes over the coming quarters”, adding that the MPC’s forecast of rising unemployment and near-stagnation in GDP in 2023-24 was “a far cry” from the Federal Reserve’s relatively robust outlook for the US economy.In the run-up to Thursday’s decision, market pricing implied the BoE would raise interest rates to 2.25 per cent by the end of the year, with its benchmark rate peaking at 2.6 per cent in 2023. By Friday, investors’ views had changed, with pricing suggesting one fewer rate increases over the course of 2022 and rates peaking closer to 2.5 per cent next year. Analysts at RBC Capital Markets said the BoE’s pessimistic outlook could prove to be “a tipping point” where investors switched their focus from high inflation to deteriorating growth, and had “at least begun to consider that the window for tightening may be closing”.

Anna Titareva, economist at UBS, said the forecasts suggested that the BoE was “unlikely to up the tempo on the pace of hikes given the weakening growth outlook” and that “its terminal rate would be lower than current market pricing and what the Fed would eventually deliver”.The peak in UK inflation will come later than in the US or the eurozone because its six monthly adjustment of regulated energy prices means the impact of the Ukraine conflict on oil and gas markets has not yet fully fed through to consumers.Pill said the coming hit to real incomes would be “a very large squeeze reflecting a very large shock to the economy”, and that some parts of society would inevitably lose spending power. “I don’t want to downplay the magnitude of the shock the UK is facing and the fact that this will have adverse consequences in terms of growth, inflation and ultimately real incomes,” he added. More

The risk of a slowdown in the UK housing market is growing as interest rate rises by the Bank of England, the threat of recession and soaring inflation put a squeeze on household finances, economists warned. The BoE increased its main interest rate on Thursday by a quarter point to 1 per cent to curb price rises. It warned that inflation was likely to soar to 10.2 per cent by the fourth quarter and that the British economy would go into recession, with real incomes declining and unemployment rising. Economists and housing market professionals said higher bills for energy, goods and services, as well as pressure from rises in both the BoE interest rate and those charged by mortgage lenders, would put the brakes on housing market growth. “The risks to the housing market are rising. The cost of living crisis is squeezing household finances, especially for those towards the lower end of the income distribution, typically renters. Meanwhile, interest rates are rising, which will eventually feed through to higher mortgage rates and higher housing costs for mortgaged homeowners,” said Neal Hudson, director at housing market research firm Residential Analysts.

Sellers and buyers have in recent months confounded the bleak outlook for the economy, with purchasers rushing to seal house deals while mortgages remain relatively good value. Homes lender Halifax on Friday said prices in April rose by an annual 10.8 per cent, with price growth accelerating in the past two years.House prices soared during the pandemic after the government cut stamp duty on property transactions, mortgage interest rates fell to new lows and lifestyle changes drove house moves. But economists said pressures on the housing market were now piling up. The BoE on Thursday suggested it would not need to raise interest rates to the levels it had previously predicted, since an economic slowdown would do more of the work of driving down inflation. But Andrew Wishart of consultancy Capital Economics said the BoE may still have to raise rates next year to 3 per cent, which would push up mortgage rates, douse buyer demand and cause house prices to fall by a total of 5 per cent in 2023 and 2024. “House price growth will slow sharply later this year,” he said.While they remain low in historic terms, mortgage interest rates have edged up further in recent days. NatWest, Yorkshire Bank, Clydesdale Bank, Metro Bank and Newcastle Building Society raised rates on selected mortgage products this week.Simon Gammon, managing partner at mortgage broker Knight Frank Finance, said the BoE decision and possible future increases would ensure a “steady and sustained” upward trajectory for mortgage rates. “Lenders are repricing their product ranges on a weekly basis, which gives borrowers very little time to act,” he said.

Most mortgaged homeowners are on fixed-rate deals that protect them from the immediate impact of rate rises. But first-time buyers, owners remortgaging, or those taking out a larger loan or holding variable rate deals are likely to face higher mortgage costs. David Hollingworth, associate director at broker L&C Mortgages, said the rise to 1 per cent could leave borrowers on a 25-year repayment mortgage at a standard variable rate of 4.24 per cent paying an extra £756 a year. If the main interest rate went to 1.75 per cent and this was passed on, it would mean an additional £3,108. As energy bills and inflation squeeze living standards, the increased perception of risk and declining real incomes could further dent house prices, said Anthony Codling, chief executive of property platform Twindig.But he added that property had been an attractive investment in times of high inflation, when the value of cash was more rapidly eroded. “In the context of longer history, mortgage rates are still very low indeed,” he added. “I wouldn’t panic.” More

This week, the economic mood music changed into a more anxious minor key, as recent shocks to developed world economies have echoed longer and louder than had been expected. Whatever you thought about the economy a week ago, you should be a little more worried than you were.Inflation has been grinding up for a while — largely a sign of post-pandemic economies running a little out of kilter. Real household incomes fell sharply in many big economies at the end of last year. But following the war in Ukraine and China’s recent lockdowns, the latest US consumer price inflation rate stands at 8.5 per cent. It is at 6.2 per cent for the UK and estimated at 7.5 per cent for the eurozone.Forward-looking economic indicators had hinted at the risk of a slowdown for some time already — particularly as households found their salaries would go less far. What started as a shock to prices was expected to lead to a hit to spending. But, one-by-one, indicators are now turning red. New manufacturing orders in Germany fell 4.7 per cent in March. Shipping companies fear a dip. First-quarter economic growth numbers showed stagnation or outright contraction in several European economies. The US economy, too, shrank in the first quarter. The Bank of England forecasts a contraction this year. Central banks, therefore, face a terrible set of circumstances. They need to get to a tighter monetary policy: rates are still very low and are stimulating activity even as inflation in the UK, for example, is expected to hit double digits. But the odds are rising that they will end up trying to lower the tempo on economies that are already shrinking. This week, both the Fed and BoE raised rates and signalled that more is to follow. In the UK, the central bank also forecast a severe fall in household incomes and economic contraction. The problem right now is not just that rate rises into a weak economy can cause a lot of misery. Making unpopular decisions is part of the job; it is why central bank independence is so important. It is also that the right pace of normalisation is particularly hard to call.This is a time of incredible complexity: each week has thrown up a new shock or revealed that the problems we saw coming were bigger than we thought. Markets whiplashed back and forth this week in response to the Fed’s announcements, as participants tried to work out how to weigh the swirl of information and to position themselves in a still-expensive stock market. As Jay Powell, chair of the Fed, said this week: “It is a very difficult environment to try to give forward guidance 60, 90 days in advance.” He is right: 90 days ago, the world was still just anxiously eyeing up a Russian build-up on Ukraine’s borders and Shanghai was yet to discover the ill-fated local coronavirus outbreak. The staccato of recent crises has created astonishing uncertainty. We do not know what China’s response to further outbreaks will be. We have yet to see how far the still-thickening sanctions net for Russia will sideswipe other economies. We do not yet know the full effects of disrupting food supplies from Ukraine and Russia for the world’s poorest nations. Inflation — and the need to guard the vulnerable from it — will upend politics in lots of states. And no one can say when this will all be over. Central banks need to be nimble. Investors should be clear that policymakers’ signals about what they intend to do in the future cannot be very trustworthy when the future is so murky. And all leaders should be honest that, right now, they cannot stick rigidly to their sheet music. All that anyone can do is play it by ear. More

The writer is professor of finance at the University of Chicago’s Booth School of BusinessA perfect economic storm engulfs industrial countries. Even before the pandemic, US-Chinese geopolitical rivalry impeded global trade and cross-border investment. The pandemic skewed demand towards bicycles and away from gym memberships. Then rolling lockdowns across the world disrupted production of those bicycles. Ordinarily, the rise in prices of bicycles would have quelled demand, but the enormous fiscal and monetary response to the pandemic in advanced economies kept household spending power strong. Even as jobs came back to cater to this demand, workers became harder to find, because older workers decided to retire and immigration slowed. The mix of strong demand and limited supply ignited inflation, which has spread well beyond the narrow set of goods that set it off. The war in Ukraine and spreading lockdowns in China add to the turmoil. Both slow growth, while the war fuels food and energy inflation and the Chinese lockdowns drive goods price inflation. Of course, the war could spread further in catastrophic ways.Spare a thought for developing countries, where matters are, if anything, worse than in industrial countries. Public spending in the pandemic has been very constrained. Many middle-class households have lost livelihoods and slipped into poverty. Now they face higher energy and food prices that threaten to reduce consumption below subsistence levels. With interest rates rising, their governments are hamstrung by past borrowing and do not have the capacity to help. All this presages more protest and political conflict across the developing world, and more emigration to safer climes.On current trends, the future looks challenging. Sustained growth depends on innovations that allow us to produce more at lower cost. While the pandemic has forced firms to rethink work processes — working from home saves time on dressing below the waist and on commuting — substantial gains will probably come only when the impediments to delivering services at a distance are reduced; telemedicine will not grow if local licensing requirements stand in the way of doctors prescribing at a distance. Absent reforms, productivity growth is unlikely to be higher than the pre-pandemic pace.Similarly, population ageing will continue shrinking the labour force, further slowing growth. Deglobalisation through reshoring and friend-shoring, and the consequent fall in global trade and investment, will make it harder for developing countries to grow and substitute their demand for falling industrial country demand. Military spending will increase everywhere, but that will detract from much-needed investment, most importantly in combating climate change. Variants of secular stagnation therefore loom once the storm passes — no wonder 10-year real rates in the US are still around zero.At best, if central banks raise rates enough that everyone believes inflation will come under control, but not so much that the economy craters, they will slow demand gently. The labour market will come off the boil, even while supply chains stabilise. We will land softly, but into growth lower than before the pandemic. At worst, we will have a recession augmented by financial stress, as the world chokes on high rates and high levels of debt. Central banks cannot get us out of our predicament.To get better outcomes, we need to revitalise growth through policies to raise investment and productivity. Ending this destructive war would be a first step, but let us discuss what comes after.The easiest solution economically, and the hardest politically, is to reverse the trend to deglobalisation. By all means, firms should diversify every element of their supply chain. They should also embed flexibility so they can minimise chokepoints. But firms and governments should not aim to do business only among friends. And the IMF and the World Trade Organization should work on rules of conduct and penalties for violation that will protect global trade and investment even as the world divides into political blocks.Indeed, we should find ways to enhance global trade in services that the pandemic, Zoom and other technologies have made possible. That will require negotiations in areas such as licensing requirements, data privacy and protection, and dispute resolution, but can bring competition and productivity gains to sectors that have long been resistant to change. A collateral benefit is that this could reduce income inequality within countries and across the world.Perhaps most important, we should band together to fight a war we are losing, against climate change. Much of the world’s emission-heavy capital needs to be replaced. Embarking on this task can be the boost the global economy needs to jump start its way out of stagnation. The world’s major economic powers need to come together, with clear plans for their own actions over the next decade and for the ways they will allocate responsibility for financing climate responses in the developing world.More generally, we need bold policy action, breaking free of growing political constraints that limit our ambition. It will not be easy, but it is necessary, perhaps to our very existence. More

WASHINGTON (Reuters) – U.S. House of Representatives Speaker Nancy Pelosi said the House will set a minimum annual pay for its staff at $45,000, months after a non-profit report found that over 12% of congressional staffers did not have a living wage.”I am pleased to announce that ….. the House will for the first time ever set the minimum annual pay for staff at $45,000,” Pelosi said in a letter to lawmakers dated Friday.The step would go into effect from September, she added.A report from a non-profit earlier this year found that one in eight congressional staffers in Washington, DC, are not paid a living wage.The report had compared staff salaries in Congress to the living wage in Washington, D.C., which is $42,610 for an adult without children, according to the Massachusetts Institute of Technology.In her letter on Friday, Pelosi also acknowledged that young staffers “often earn the lowest salaries.” The letter was first reported by Punchbowl News.”This is also an issue of fairness, as many of the youngest staffers working the longest hours often earn the lowest salaries”, Pelosi said.Last year, over 100 U.S. lawmakers, led by Representative Alexandria Ocasio-Cortez, had called for higher wages for congressional staffers in order to better retain employees working for members of Congress.(This story refiles to fix typo in paragraph 1) More