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Bailey: We will get inflation down
Harriet Baldwin MP continues to challenge the Bank over its record in controlling inflation.
Q: Inflation was running at 6% in this country on the day Russia invaded Ukraine, and interest rates were at 0.5%. Do you think now that the risk to inflation was always more to the upside than downside, given monetary policy at the time?
Andrew Bailey says the Bank of England was still ‘wrestling’ with the question about how transitory the shocks hitting the UK economy would be.
We changed our view on that as we went through the summer, the BoE governor adds.
Q: How can people be confident that the Bank has made the right judgements, at the right time? Public polling shows there’s quite a high degree of public dissatisfaction over the Bank’s track record.
Governor Bailey says he can “quite understand” the public polling.
Our job is to get inflation back down to target.
The public will, of course, expect us to do that. And we will do it.
I’d expect that to be reflected in public polling, he adds:
I would, of course, expect the public to say ‘it’s your job to get inflation down to target’ and my response is ‘yes it is, and we will do it’.
Baldwin won’t let the governor get away with that!
“Actually, it’s your job not to let inflation get to this level of second-round effect”, she points out. [’second round effect’ mean the increase in wages as workers chase inflation-matching pay rises].
Bailey challenges this, insisting that there are plenty of first-round effects driving inflation at the moment.
The Bank expects annual inflation rate to fall this year, as ‘base effects’ unwind (as we catch up with price surges a year earlier).
Bailey predict inflation will be below 5% by the end of this year.
Please forgive the committee for being “slightly sceptical”, Baldwin shoots back, given how often the Bank’s projections have been incorrect in the past.
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The pound has jumped by over a cent against the US dollar today, despite suggestions that UK interest rates are close to peaking.
Sterling has risen to $1.219, up almost 1% today.
Mizuho senior economist Colin Asher said the pound was benefitting from increased risk appetite, as stocks rose to record levels in London.
He adds:
The new high for the FTSE has likely attracted some interest from overseas buyers.
Over in the US, new claims for unemployment benefits have risen slightly but are still low by historic standards.
There were 196,000 new ‘initial claims’ for jobless support last week. That’s an increase of 13,000 from the week before.
It suggests the US labor market is still pretty strong, despite recent increases in interest rates. In January, America’s economy added over 500,000 new jobs, much more than forecast.
The number of mortgage-holders getting into arrears increased in the final three months of 2022, according to a body representing lenders.
Across the UK, 75,170 homeowner mortgages were in arrears of 2.5% or more of the outstanding balance in the fourth quarter of 2022, which was 1% higher than in the previous quarter, UK Finance said.
There were also 6,060 buy-to-let mortgages in arrears of 2.5% or more of the outstanding balance in the fourth quarter of 2022, which was 5% higher than in the previous quarter.
It is far from certain that interest rates will go up on the 23rd of March, Professor Costas Milas of the University of Liverpool’s management school tells us.
Before deciding on the next interest rate move, MPC members will study carefully the forthcoming Bank of England Inflation Attitudes Survey which will be published on the 17th of March.
As things stand, and based on last November’s Survey, the public expects UK inflation to remain at 3.4% two years into the future. This is creating additional demand for higher wages and therefore higher inflation. The question is whether the public will believe the Bank’s latest assessment that UK inflation will be end up below 1% two years down the road.
If the public buys into that, the 17th of March Inflation Attitudes Survey will record a significant drop in public expectations of inflation which give MPC members a good excuse NOT to push with another interest rate hike!
Budget airline easyJet has seen a shareholder revolt today over its executive pay policies.
Almost 20% of votes cast at its Annual General Meeting today opposed easyJet’s remuneration report. That wasn’t enough to stop the report being approved, though.
The boss of easyJet, Johan Lundgren, was paid almost £3m in 2022, in the year when the airline made a £208m loss and cancelled thousands of flights because of staffing and other problems.
Lundgren received a £1.2m annual bonus and £925,000 in shares on top of his £833,000 fixed salary and benefits. The total package represented a pay rise of about 273% from 2021, when no bonus was paid during the Covid pandemic, as our transport correspondent Gwyn Topham reported here:
The boss behind the Lucky Strike and Dunhill cigarette brands has said that thousands of jobs at the company’s traditional business will be lost in the coming years as the firm focuses on vapes and other new products.
British American Tobacco chief executive Jack Bowles told PA Media that thousands of people will lose their jobs at the company within the next few years, but he is also recruiting others for the new categories business.
Bowles said:
“We have to adapt our structure as we go along, and we have to make sure that we hire a lot of new capabilities and a lot of new people.
“In the course of the next two years a few thousand people will have to go because we continue to reorganise and optimise.”
Bowles also said that sanctions are making it more difficult to sell the Russian part of the business, having pledged to pull out of the country in March 2022 after the Ukraine war began.
Volvo: no plans to cut EV car prices
Jasper Jolly
Volvo chief executive Jim Rowan has said the company has no plans to cut prices of electric cars, after moves by Tesla and Ford led some analysts to predict the first battery vehicle “price war” was brewing.
The Swedish carmaker reported today that 11% of its total sales were electric in 2022, up from 4% the year before, as it aims to sell only electric vehicles by 2030.
Volvo’s revenues rose 17% year-on-year to 330bn Swedish krona (£26bn), although its pre-tax profits dipped by 16% amid “supply constraints, lockdowns in China and elevated material and logistics costs”, it said.
Rowan said “we don’t have any intention at this point in time” when asked about the possibility of price cuts. He said companies making “entry-level” cars might need to drive demand amid slowing economies, but said the more expensive, premium market targeted by Volvo was not as affected.
He said:
“Our demand is backlogged, so we have more demand than in a very long time.”
The car industry is braced for its first taste of falling demand for electric vehicles as the economies of major markets slow. While that could harm carmakers’ earnings, it could also benefit consumers if it leads to lower prices for electric cars, which are still more expensive to make than their petrol or diesel equivalents.
However, Volvo’s chief financial officer, Johan Ekdahl, acknowledged that lithium price increases prompted by Russia’s invasion of Ukraine may have delayed the point when it costs the same to make a battery car as it does to make an electric vehicle. Lithium is a key material for batteries.
“It’s making it harder to reach cost parity,” Ekdahl said on a call, adding:
“We firmly believe over time the cost of lithium will come down.”
Rowan, who joined Volvo from vacuum cleaner maker Dyson, said traditional carmakers still had “a lot of engineering opportunities to take out costs” when transitioning to designs and factories dedicated to electric vehicles.
AstraZeneca CEO say UK business climate deterring investment
Away from parliament, the boss of AstraZeneca has warned that the UK’s business climate and tax rates is deterring pharma companies from investing in the country.
Pascal Soriot said that Britain’s uncompetitive fiscal policies led the pharmaceuticals giant to shift plans for a $400m new manufacturing facility from the UK to Ireland.
Reuters has the details:
CEO Pascal Soriot gave list of reasons why the UK government’s ambition to be a global life sciences hub has hit snags, telling a news conference: “We want to invest in the UK… but we need to see supporting policies for the whole industry.”
While Britain has world-class research capabilities, he said it lacked other requirements to make it a life sciences centre – such as regulatory experts, manufacturing incentives, and access to green energy.
Without those elements, he said, companies like his will develop drugs in other markets “where you know you’re going to get access and you’re going to get a price that can justify the investment”.
Britain’s “discouraging” tax policies have led AstraZeneca to shift plans for a $360 million investment in a new manufacturing facility from Britain to Ireland, the group’s chief executive has revealedhttps://t.co/0uvTCE7XcR
— Alex Ralph (@alexralph) February 9, 2023
Britain’s business climate is deterring pharma companies from making investments in the country, the CEO of AstraZeneca said on Thursday, citing his company’s decision to shift plans for a new manufacturing plant to Ireland https://t.co/pKTtcWDQmI
— Padraic Halpin (@padraichalpin) February 9, 2023
Soriot said access to clinical trials was also an obstacle, saying trials were delayed because the NHS is overwhelmed.
He explained:
“It’s also a question of can we execute our clinical trials, do we want to invest and are we going to get the appropriate returns?”
Conservative MP Danny Kruger has asked the Bank of England what it’s doing to make Brexit a success.
Andrew Bailey says that as a public official, he is neutral on the issue, and the question was decided by the people in the 2016 referendum.
The governor says it’s been hard to tell the impact of Brexit on trade – but the negative impact does seem to have come through “rather more quickly” than expected.
Over time, the economy will adjust, he says.
MPS member Silvana Tenreyro says the Bank’s job is to get inflation down to the 2% target, that’s how it helps the economy. It can’t affect the productive side of the economy, the supply side – that’s for government to do.
Tenreyro: I would consider voting to cut rates
Bank of England rate-setter Silvana Tenreyro says she would consider backing a cut in interest rates.
She repeats her earlier point that interest rates are too high, as most of the tightening of policy has yet to feed though.
Tenreyro, who voted to leave interest rates at 3.5% last week, tells the Treasury committee she won’t commit to the timing of such a vote:
“Where things stand right now, I would see myself considering a cut.
I don’t want to talk about the particular meeting, because meeting to meeting doesn’t make much of a difference.
The Bank’s next interest-rate meeting is in late March. The money markets suggest a quarter-point rate rise, to 4.25%, is a 55% chance, while ‘no change’ is a 45% possibility.
Bailey won’t say he’s ‘vindicated’ over pay rise warning
Andrew Bailey is then asked whether he feels ‘vindicated’ after calling for workers not to seek big pay rises a year ago.
That was in the context of “excessive pay rises” that were ahead of inflation, the BoE governor replies firmly.
He explains that the energy price shock has made the UK poorer.
Unfortunately the nature of the UK’s terms of trade shocks are that the country is worse off, as a whole.
No I won’t say I’m vindicated. It is a very difficult situation for people in this country, particularly for those on low incomes.
Q: What is your message to the public, given you’ve raised interest rates again this month despite predicting that inflation has peaked?
Andrew Bailey replies that he does think inflation has ‘turned the corner’, as it is lower than expected back in November.
Plus, ‘very strong negative base effects’ (the surge in energy prices a year ago) will bring inflation down this year.
But, he reiterates, there is ‘substantial uncertainty’ over where the labour market, and price-setting, are going.
His view is that the risks are to inflation being higher than forecast – thus another rate rise was justified.
Huw Pill also says it’s possible that public sector pay rises at, or above, the rising cost of living would add to inflation.
The bank’s chief economist says:
There is certainly the potential for that to happen.
If that happens, our job is to ensure it does not lead to inflation, by responding to it with tighter monetary policy.
It’s not unreasonable to look for perfection from the Bank of England, says chief economist Huw Pill.
Pill, who joined the Bank in September 2021, tells the committee:
Of course we strive for perfection, but we will fall short.
Pill argues that the Bank has got “the big questions right” – by starting to raise interest rates at the end of 2021, and then accelerating that tightening in response to the energy shock.
Pill then warns of the risk of doing too much on interest rates, and ‘oversteering’ the economy.
Q: What would be the impact on inflation if the government agreed inflation-matching public sector wage claims, paid for through borrowing?
Andrew Bailey says this would cause a stimulation, due to fiscal effects. And the Bank would have to take that into account in its decisions.
Bailey says:
So yes, it would have an effect if we do that.
Q: Would that effect include higher interest rates?
Bailey says he only wants to “lay out the channels”, as this is a “very sensitive subject”. He’s not advocating government policy.
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