BoE's Bailey: We expect recession will be very small
Q: So, now inflation is down to 4%, and forecast to hit 2%, and the economy is in recession, what would it take for you to cut interest rates now? What indicators do you want to see?
Andrew Bailey tells MPs that the Bank expects inflation to fall to its 2% this spring, but he warns that it won’t stay there – as the inflation rate is being moved by changes in energy prices which won’t be permanent.
The Bank, thus, expects inflation to pick up by the end of this year (as it forecast earlier this month).
Bailey says monetary policy has been restrictive in the run-up to the current recession, but also points out that supply side growth has been unusually weak in the period (a hint that the Bank won’t take all the blame for the recession).
Bailey also points out that Britain is at “full employment”, which is a “very good story”.
And he tells the Treasury committee that the Bank expects it will only be “a very small recession”, adding;
We think the economy is already showing distinct signs of an upturn.
[Reminder, the economy shrank by 0.3% in October-December, after a 0.1% contraction in July-September].
He adds that the Bank wants to see sign that inflation persistence easing. So it will look at services prices, pay rises, and “quantities in the labour market”, when assessing when interest rates could be cut.
The Bank of England governor has said that Britain is showing signs of recovery from its mild recession and will receive a boost when interest rates start coming down later this year,
Andrew Bailey rejected accusations that Threadneedle Street’s reluctance to cut borrowing costs despite falling inflation meant it was “behind the curve” and made it clear rate cuts were coming.
“We don’t need inflation to come back to target before we cut interest rates,” Bailey said as he came under pressure from Conservative members of the Treasury committee to respond to news that the UK fell into recession in the second half of 2023.
"We don't need, obviously, inflation to come back to target before we cut interest rates"
The Bank was also told that its 14 interest rate rises had tipped the UK into recession; Bailey, though, pointed out that the weak supply side of the UK was also a factor.
Britain’s insecure jobs market and high housing costs are creating a precarious middle class struggling to maintain a decent living standard on household incomes as high as £60,000 a year, a report has found.
People living in Notting Hill, west London, received more in capital gains from 2015 to 2019 than the combined population of Liverpool, Manchester and Newcastle according to an analysis of capital gains tax.
Union leaders have warned business groups against pushing Keir Starmer to dilute plans for sweeping reforms of workers’ rights and for a ban on zero-hours contracts.
The cost of infant milk remains at “historically high” levels despite some price falls in recent months, Britain’s competition watchdog has said, as it launched a full-scale investigation into baby and toddler formula.
And…Britain’s flying taxi pioneer, Vertical Aerospace, has been handed another £8m grant from the government, taking its total taxpayer backing to £37m as it tries to get its electric aircraft off the ground.
The Body Shop to cut 300 jobs at head office and dozens of stores could close
Sarah Butler
Newsflash: The Body Shop is to cut 300 jobs at head office while dozens of its 198 stores in the UK could close with the likely loss of hundreds more jobs as the business battles for survival.
Administrators told staff today that seven stores would close immediately but promised no more than half of its total would close over time, while numbers at its offices in London and Littlehampton in Sussex were being cut by 40% to 400.
It is not clear if jobs at the group’s warehouse, also in Littlehampton, will be affected.
The retailer, which employs more than 2,200 people in the UK, called in administrators last week, less than two months after being taken over by restructuring specialist Aurelius.
US retail giant Walmart has beaten Wall Street expectations, reporting revenue growth of 5.7% in the final quarter of last year.
Walmart posted revenues of $173.4bn for October-December 2023, including a 23% increase in global ecommerce sales, in a sign that the US consumer remained
Doug McMillon, president and CEO at Walmart, says:
Our team delivered a great quarter, finishing off a strong year. We crossed $100 billion in eCommerce sales and drove share gains as our customer experience metrics improved, even during our highest volume days leading up to the holidays.
Shares in Walmart are up 4.2% in pre-market trading.
But the company has also flagged that sales growth will slow this year. It expects net sales to increase by 4.0% to 5.0% in the first quarter of 2024, but only by 3.0% to 4.0% in 2024 as a whole.
As the US’s largest retailer, Walmart can give us a valuable insight into consumer trends.
Kathleen Brooks, research director at XTB, explains:
The number of transactions at Walmart rose by 4.3% in the previous quarter, however, the average ticket value fell by 0.3%. This suggests that consumers in the US are buying more things, but they are spending slightly less. This is not a sign of disinflation, according to Walmart, which suggests that the US consumer is getting slightly cautious and trading down to cheaper brands of goods.
The cautious US consumer may not be a reason to panic, however, it is why Walmart issued softer than expected guidance for the rest of this year. Walmart is forecasting consolidated net sales growth to rise by 4-5% this year, which is slower than recent quarters. Consolidated operating income is forecast to register growth of 3-4.5%, this year’s full year adjusted EPS is expected to be $6.70 to $7.12, which is a wide range, and the lower end of this range is well below the estimate of $7.09. Thus, while the headline earnings for the last quarter are stronger than expected, there are some cracks appearing in Walmart’s future outlook.
Over in Wall Street, shares in credit card issuer Discover Financial Services have jumped almost 13% in pre-market trading after U.S. consumer bank CapitalOne announced a takeover bid last night.
CapitalOne, backed by Warren Buffett, plans to acquire Discover in an all-stock transaction valued at $35.3bn.
The deal would give Capital One access to Discover’s network of payments processing and settlement services, and could allow it to lower its reliance on Visa and Mastercard.
It would form the sixth-largest U.S. bank by assets, so could receive intense antitrust scrutiny.
Andrew Bailey and the Bank of England would be taking “a big risk” in cutting rates too soon, despite pressure from MPs today, says Pieter Staelens, portfolio manager at CVC Credit Partners.
Staelens says:
“It’s definitely welcome that the Bank believes inflation is easing, but significant cuts to base rates before the 2% target is reached feels like a big risk.
The Bank was criticised for being too slow to cut rates at the start of this cycle, and they need to be careful not to repeat this mistake in reverse.
Although the immediate inflation picture is improving, there are still a number of pressures on the horizon, including half the world electing new governments, conflict in the Middle East and unemployment in the UK remains very low.”
Investors slightly raised their bets for a first BoE rate cut in June, Reuters reports, as Andrew Bailey and fellow policymakers spoke today.
A quarter-point reduction was fully priced in only for August, they add.
The pound slipped to a one-month low against the euro this morning, suggesting traders were pricing in earlier cuts to UK interest rates (it’s recovered much of its losses since, though).
This may be the key point from Andrew Bailey today:
Andrew Bailey on the UK recession (he’s in front of the Treasury Select Committee today): “If you look at recessions going back to the 1970s, this is the weakest by a long way. -0.5% is a very weak recession.”
