UK interest rates expected to rise ‘for final time’ in May; consumer firms under pressure over price hikes – business live

The cost of insuring United States sovereign debt against default has risen to the highest level since 2011 today.

The move comes amid those market jitters that the government could hit its debt ceiling sooner than expected.

Spreads on U.S. five-year credit default swaps widened to 49 basis points, data from S&P Global Market Intelligence showed. This is more than double the level they stood at in January this year.

HSBC: We showed bravery in buying SVB UK after five hours diligence

Kalyeena Makortoff

The boss of HSBC UK said the bank “definitely helped” UK taxpayers through its “bravery” in deciding to save Silicon Valley Bank’s local subsidiary after just five hours of due diligence during last month’s banking crisis.

Speaking at TheCityUK conference in London this morning, HSBC UK CEO Ian Stuart used the end of his speech to comment on the government-orchestrated deal that not only saved thousands of British tech startups and investors from big losses, but also allowed HSBC to buy up the crisis-hit bank and its 4,000 customers for just £1.

Stuart said:

“Let me go back to that weekend in March when an opportunity came across our desk at HSBC. I’m really grateful to the close partnership we had with authorities in the UK and the US, the tireless efforts of our people.

And I know we’ve had some criticism on [doing just] five hours of due diligence, but sometimes you just have to be brave. Nobody has asked me about the quality of the due diligence we did, which was exceptional, but at some point the papers came on my desk and it said is it ‘go’? Or is it ‘no go’? And I thought it was a ‘go’.

And I hope that little bit of bravery serves us very, very well. And I hope it serves the 4,000 customers that we brought in, very well. The one person that [was] definitely helped was the UK taxpayer…. I hope that bravery pays off.”

Jitters are rising in the markets about the looming crisis over the US debt ceiling.

JP Morgan expects the US debt ceiling to become an issue as early as next month with the Wall Street bank ascribing a “non-trivial risk” of a technical default on U.S. Treasuries, Reuters reports.

In a note published to clients late on Wednesday, JPMorgan said it expected both the debate over the debt ceiling as well as the one on the federal funding bill to run “dangerously close” to their final deadlines.

The bank said its U.S. rates strategy team expects the Treasury could run out of available resources by the middle of August.

The debt ceiling is the maximum amount the U.S. government can borrow to meet its financial obligations. When the ceiling is reached, the Treasury cannot issue any more bills, bonds or notes, and must rely on tax revenues to fund spending and repay maturing debt.

The X-date – or the date by which the federal government can no longer meet all its obligations in full and on time absent actions by Congress – is currently early June, but could be revised in the next few days.

Congress is (predictably) split on the issue, with Republicans seeking to tie raising the debt ceiling to steep budget cuts, while Democrats are pushing for a higher federal borrowing limit without conditions.

Yesterday Kevin McCarthy, the Republican speaker of the House, outlined a proposal to raise the debt ceiling by $1.5tn, but included measures which Democrats are likely to resist including capping government spending at fiscal year 2022 levels.

Jim Reid of Deutsche Bank told clients:

Also on the debt ceiling, House Speaker McCarthy released a plan yesterday to raise the debt ceiling by $1.5tr, which would push the “x-date” out into March 2024.

The GOP hope to vote on the bill in the coming days as an opening salvo in talks with the White House.

Moderate members of both parties also pushed forward an idea that would suspend the debt ceiling until December 31 and then possibly February 2025 if certain conditions were met. The plan is likely dead-on-arrival given the slim GOP majority and the weakened position of Speaker McCarthy, who would have to put the bill up to a vote.

UK tenants have been squeezed by higher rental costs over recent years, new data today shows.

The Office for National Statistics reports that in March, the average proportion of gross income spent on rent in the UK was 26.8%.

This is slightly higher than in March 2022, when it was 26.6%. Four years ago, rent took less than 25% of gross income.

The ONS says:

The data indicate that rent is now less affordable than it was in 2019 though it has been broadly stable for the last two years.

(The calculation excludes renters with annual incomes below £10,000 and over £500,000.)

Loyal savers are losing out as banks fail to pass on interest rate increases to their existing customers, the head of the UK’s financial watchdog has told MPs.

Nikhil Rathi, chief executive of the Financial Conduct Authority, told the Treasury Committee that banks typically offer less attractive savings rates to existing customers.

That means they have missed out on the benefits of the last 11 increases in UK interest rates.

Answering questions from MPs, Rathi says:

It is, and has been, standard practice for firms to offer more attractive rates to new savers, while leaving existing savers earning less competitive rates.

We expect that the harm from this practice (and the loyalty penalty faced by longstanding customers) will have increased as the base rate has risen.

Rathi also explains that the new UK Consumer Duty, which comes into force on 31 July, will challenges firms to tackle practices which make switching provider unnecessarily burdensome.

He adds:

We would encourage consumers to actively consider switching should they be dissatisfied with the value they are getting from their current provider.

Higher interest rates tend to boost bank profits, as it raises their net interest margins [the gap between low savings rates and the high interest charged to mortgage and loan borrowers].

Harriett Baldwin MP, chair of the Treasury Committee, says parliament has its eye on the banking sector:

“The regulator has now given us official confirmation that the UK’s biggest banks are profiting from interest rate rises and that loyal savers are being increasingly harmed.

While it’s welcome to hear the financial regulator is monitoring this situation, we will be keeping a close eye to ensure they act on these assurances. Consumers should continue to shop around to get the best rates possible.

“With banks set to release their first quarter results in the coming weeks, we will be monitoring whether firms are continuing to squeeze profits from their loyal savings customers.

Analysts at Swiss bank UBS agree with Michael Saunders’s prediction.

They also forecast the Bank of England will lift interest rates by a quarter-of-one-percent in May.

And that could be the last rise in the current cycle, with any future increases ‘highly dependent’ on the path of inflation, and the jobs market.

UBS economist Anna Titareva told clients that “We now expect one more 25bp hike from the BoE on 11 May”, explaining:

After the last meeting on 23 March, when the BoE delivered a 25bp hike bringing the policy rate to 4.25% and has, in our view, turned more balanced/dovish around the inflation outlook, we said that this was probably the last hike of the cycle with our base case foreseeing no rate change at the next meeting on 11 May.

However, in light of the strong March labour market report and CPI inflation data, both signalling slower-than-expected improvement, we now expect the BoE to deliver one more 25bp rate hike in May, bringing Bank Rate to 4.5% with the policy rate decisions after that remaining highly data dependent on the labour market and inflation data.

Larry Elliott: Companies must show restraint on price rises

Larry Elliott

Inflation is proving hard to shift, and that spells big trouble for a government fast running out of excuses for why the cost of the weekly grocery shop is rising at its fastest rate since 1977, our economics editor Larry Elliott writes.

Global energy prices have collapsed, and the price of food on international commodity markets is coming down too, so it’s hard any longer to blame Vladimir Putin for inflation being so sticky. Nor is it immediately obvious why junior doctors should be the fall guys.

Despite attempts by ministers to finger workers for the persistence of the cost of living crisis, there is no real evidence that this is the case. Both the International Monetary Fund and the European Central Bank have looked at whether higher wages are driving up prices, and neither of those august bodies thinks that is happening.

What they have found is that companies have been able to use the crisis to drive up prices and boost profit margins. The IMF and the ECB wouldn’t put it in these terms, of course, but both support the idea that companies are gouging their customers when they can. The non-technical term for what is going on is greedflation…

More here:

Michael Saunders, a former policymaker at the Bank of England, predicts inflation will force one more increase in UK interest rates, next month.

Saunders told Radio 4’s Today Programme that the surge in energy prices was the overwhelming factor driving up inflation, pushing up household bills, business costs, and food production prices.

But Saunders hopes that we are “now, just about, finally at the turning point”, and that inflation will fall “pretty sharply” over the rest of this year.

The BoE’s target is to keep inflation at 2% in the medium term.

Saunders predicts the Bank’s monetary policy committee will vote to raise interest rates in May, for the 12th time in a row, from 4.25% to 4.5%. But that could be a “final hike”, he predicts, followed by a long period where interest rates are fairly stable.

He says:

I think they’re probably almost done now….

The big tightening cycle, of interest rates going up meeting after meeting, I think that’s largely over.

The money markets, though, show investors predict rates could rise to almost 5% by the end of this year.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Major goods makers are under pressure to rein in price rises, after UK inflation stuck in double-digit levels last month.

Yesterday’s news that UK consumer prices climbed by 10.1% in the year to March, with food prices rocketing 19%, has focused attention on ‘greedflation’, the process where firms use rising costs and supply chain bottlenecks as an excuse to pump up their profits.

Yesterday, Dr George Dibb, head of the Centre for Economic Justice at the IPPR thinktank, suggested authorities should take a closer look at corporate profits.

“While families struggle to make ends meet, some companies continue to make higher profits from these price hikes, ignoring the impact on consumers.

It’s time for policymakers to look at ‘greedflation’ and prioritise reining in corporate profits, instead of blaming workers’ wages for driving up inflation.

Major consumer goods makers have been hit by rising energy costs and commodity prices, and also lifted wages as workers sought protection from inflation.

Profit margins have been protected by price hikes, though.

Unilever, for example, recently reported underlying sales growth of 9.0% for 2022, driven by price growth of 11.3%. Volumes declined 2.1%, suggesting that many consumers swallowed these price hikes on goods such as Dove, Ben & Jerry’s and Marmite.

But now, wholesale energy prices are much lower than early in the Ukraine war, and supply chain problems are easing after China ended pandemic restrictions. And some investors are now pushing corporates to ease their price increases.

Tineke Frikkee, a fund manager at Unilever and Reckitt investor Waverton Asset Management, told Reuters:

“What have (price hikes) done to volumes and thus to margins? What has that done to their market share as competitors may be pricing lower and gaining share?”

Frikkee added that companies should instead be investing in product innovation, saying:

“Price rises should gradually decelerate as input costs do the same.”

Supermarkets, who must choose whether to pass on these increases to shoppers, or absorb it into their margins, will be pushing goods makers to hold back on price rises.

Andrew Choi, a portfolio manager at San Francisco-based Parnassus Investments, explains:

“Staples companies are getting pressure to ease up on price increases because it hurts foot traffic for retailers, and some retailers have a lot of leverage.”

Tesco blamed “significant operating cost inflation” as it reported a halving in profits last year, with inflation forcing consumers to cut back.

Wednesday’s UK inflation report showed that food and non-alcoholic beverages costs are up 19.1% over the last year, while restaurants & cafes have put their prices up by ‘just’ 10.4%. That suggests supermarkets have found it easier to persuade customers to swallow higher prices.

Wholesale food prices worldwide have been falling since their surge after the invasion of Ukraine, according to the UN, but this is not yet noticable in UK shops.

As the Office for National Statistics told the BBC.

“You would expect to see [global food price falls] reflected in supermarkets but we’re not there yet.”

Helen Dickinson, chief executive of the British Retail Consortium, predicts that food price inflation is likely to slow in the coming months.

The BRC said:

“As food production costs peaked in October 2022, we expect consumer food prices to start coming down over the next few months.”

Consumers will hope they’re right….

The agenda

• 9.30am BST: Realtime UK economic activity and business insights data

• 10am BST: Eurozone trade balance for February

• 12.30pm BST: ECB Monetary Policy Meeting Accounts

• 1.30pm BST: US weekly jobless figures