UK interest rates forecast to jump above 5% this year after higher-than-expected inflation – business live | Inflation
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Markets predict 100% chance of Bank of England rate hike in June

The inflation data has meant that a further interest rate hike at the Bank of England’s next monetary policy meeting is guaranteed, according to financial markets at least.

Economics correspondent Richard Partington reports:

Markets are fully pricing in another Bank rate increase of a quarter point in June, with an outside chance of an even bigger half point rise. Markets anticipate the base rate could reach a peak of almost 5.4% before the end of the year, almost a whole percentage point higher than the current level.

You can see what investors are thinking in the below table. The Bank of England’s bank rate rose to 4.5% earlier this month. Derivatives trades show that markets are fully pricing in a further increase on 22 June, with bank rate expected to rise to above 5.35% by December before dropping back.

A table showing that investors are predicting UK interest rates will rise above 5% by the end of the summer.
Investors are predicting UK interest rates will rise above 5% by the end of the summer. Photograph: Refinitiv

Key events

Mark Sweney

Mark Sweney

Benjamin Walker, from left, Morfydd Clark and Robert Aramayo from The Lord of the Rings: The Rings of Power, a TV series by Amazon Studios.
Benjamin Walker, from left, Morfydd Clark and Robert Aramayo from The Lord of the Rings: The Rings of Power, a TV series by Amazon Studios. Photograph: AP

Shares in Embracer, the gaming group with rights to Lord of The Rings, The Hobbit and Tomb Raider, plunged more than 40% after the company said a $2bn partnership had fallen through.

The publicly-listed Swedish gaming giant, which had been valued at more that $4.6bn (SKr49.19bn), plunged 44% as the company slashed its earnings forecast for the year as a result.

The company, which has spent billions snapping up gaming studios and valuable intellectual property in the last few years, said that it was informed on Tuesday that a strategic partnership it had been negotiating for seven months that would deliver $2bn in revenue over six years “will not materialise”.

Lars Wingefors, chief executive at Embracer, said:

It has been a challenging year, adversely impacted by game delays, weaker consumer demand and lackluster reception for certain notable releases. Late last night, we were informed that one major strategic partnership that has been negotiated for seven months will not materialise.

As a result, Embracer said it now expects to generate SKr7bn ($658mn) to SKr9bn in adjusted earnings before interest and tax in the current financial year, down from SKr10.3bn to SKr13.6bn. “In as far as failure to conclude deals go, a ‘miss is as good as a mile’, and unfortunately, this is what Embracer has delivered,”said Thomas Singlehurst, analyst at Citi. “We would hope this will be a clearing event.

Deliveroo riders gather outside 100 Bishopsgate, London, to protest against the company's working conditions and low pay.
Deliveroo riders gather outside 100 Bishopsgate, London, to protest against the company’s working conditions and low pay. Photograph: Flora Bowen/PA

Deliveroo workers have staged a protest outside the takeaway delivery company’s annual meeting in London calling for higher pay.

The company has faced a long-running campaign by workers represented by the Independent Workers’ Union of Great Britain (IWGB) for higher pay, although it last year agreed a deal with another union, the GMB.

From a corporate point of view Deliveroo’s meeting passed off without a hitch: it received 97% or more of the votes for every shareholder resolution.

Press Association was at the protest and spoke to some riders. It reported:

Joe Durbidge, 31, who has worked for Deliveroo for four and a half years, told the PA news agency on Wednesday he has worked 50-hour weeks and been paid around as little as £2.90 per delivery. “Conditions are deteriorating constantly but my fees have never gone up since I started,” he said. “Nobody’s satisfied with the job. It’s crazy. “It’s very hard work, it takes a lot out of you and it’s hard to make a living.

Ahead of the meeting, a Deliveroo spokesperson said:

Deliveroo offers riders flexible work, attractive earning opportunities and security while they work. We see thousands of applications from people wanting to be riders each week, high satisfaction rates and very strong retention rates of those who sign up. We work closely with riders to make sure the work we offer reflects what they tell us they value.

Postal workers’ union delays vote on deal with Royal Mail

A photo of Dave Ward, general secretary of the Communication Workers Union, speaking in 2022 to Royal Mail postal workers as they stand on a picket line outside a delivery office.
Dave Ward, general secretary of the Communication Workers Union, speaking in 2022 to Royal Mail postal workers as they stand on a picket line outside a delivery office. Photograph: Justin Tallis/AFP/Getty Images

The main postal workers’ union has said it will not put an agreement with Royal Mail to its members for confirmation until the company stops “attacks” on its members.

The Communication Workers Union (CWU) on Wednesday said it will suspend the previous timetable for a member vote until it is satisfied.

Royal Mail agreed a new deal with the union in April after months of hard-fought and often acrimonious negotiations. Royal Mail blamed the strikes for a £1bn loss reported last week, and Simon Thompson resigned earlier in the month.

In a letter to its members, Dave Ward and Andy Furey, the union’s general secretary and his deputy, wrote:

The position reached with Royal Mail Group is the right agreement for this moment in time. Set against the most brutal dispute in our history, a self-inflicted but very real financial crisis for the company and jointly agreed need for change, this agreement will secure the future of the company, jobs, and the service.

However, what has become clear is the environment we are attempting to deliver this agreement in remains toxic.

The CWU said it still backed the deal, but wanted Royal Mail to bring in “immediate measures” to “restore quality of service”. That would likely include steps to address missed delivery targets highlighted this month by Ofcom, the regulator.

The union also wanted a “mass zoom meeting” between the company and every CWU representative, and for the company to give every branch their proposed finishing times.

Royal Mail Group National Agreement – ballot timetable suspended.

We will put the agreement out to vote – but only when Royal Mail stop their attacks on our members.

Full info: https://t.co/3a6bdFRegg

— The CWU (@CWUnews) May 24, 2023

Carpenters working on the roof of a new house.
Carpenters working on the roof of a new house. Photograph: Roger Bamber/Alamy

The FTSE 100 is now down 1.75% for today. That has pushed it to its lowest since early April, at one point hitting 7,621 points, its lowest since the end of March.

Housebuilders are still at the bottom of the pile for London’s benchmark index today. Higher interest rates are likely to dampen demand for houses – even if big price decreases are unlikely given the long-running lack of new supply.

Of the housebuilders, Persimmon lost 5.3%, Taylor Wimpey lost 5.1%, Barratt Developments lost 4.9% and Berkeley Group lost 4.2% at the time of writing.

The pound is also down by 0.2%. A fall in sterling usually helps to ease the pains of the FTSE 100, but it won’t make up for the bigger dent in company profits if interest rates are tighter.

Joanna Partridge

Joanna Partridge

A person takes a photograph from Greenwich Park, with the Canary Wharf financial district in the distance, in London.
A person takes a photograph from Greenwich Park, with the Canary Wharf financial district in the distance, in London. Photograph: Henry Nicholls/Reuters

The UK’s competition watchdog has provisionally found that five major banks broke competition law by unlawfully exchanging sensitive information about British government bond trading in online chatrooms.

In an investigation, the Competition and Markets Authority has found that the banks – Citi, Deutsche Bank, HSBC, Morgan Stanley and Royal Bank of Canada – shared competitively sensitive information on pricing and aspects of their trading strategies through multiple one-to-one online chats.

These discussions could have prevented taxpayers, savers and other financial institutions from getting the full benefit of competition for these products, according to the CMA.

In the aftermath of the global financial crisis, and at varying times between 2009 and 2013, a small number of traders working at the banks exchanged information in chatrooms on Bloomberg terminals relating to the buying and selling of UK government bonds, commonly referred to as gilts, according to the CMA.

You can read the full report here:

Bailey did not address anything to do with inflation or interest rates during his brief speech – although we must surely expect that later in a “fireside chat” (not this reporter’s favourite term for an interview) about “inflation and the economy”.

Today’s inflation surprise should certainly make for some good questions.

This chart from the Bank of England’s latest monetary policy report shows what markets expected for the path of interest rates at the end of April. You can see the turquoise line for the UK’s bank rate peaking well below 5% later this year and then dipping.

A chart showing international forward interest rates.
Markets had expected interest rates to peak well below 5% at the end of April. Photograph: Bank of England

For comparison, here is a table from data company Refinitiv which shows what markets now expect. Bear with me: each number in blue in the below is the implied probability (assigned by financial market) that the Bank of England’s main interest rate will hit the number at the top. Circled in red you can see that there is a combined probability of just over 50% that bank rate will be 5.5% or even 5.75% by November.

A table showing market-implied interest rate probabilities for the Bank of England.
Markets predict the Bank of England’s bank rate is more likely than not to rise above 5.5%. Photograph: Refinitiv

The upshot is that markets now expect interest rates to peak 0.5 percentage points higher than they did at the end of last month. That will mean a whole lot more pain for mortgage holders and other borrowers – and could choke off growth in the broader economy as businesses find borrowing more expensive.

Andrew Bailey says the financial sector still has some way to go before it understands the full impacts of the transition to a net zero economy.

It is important for financial markets to play their part and “phase out assets that are not aligned to net zero in a controlled way”, he says.

He says:

This is important, because it’s actually about risks to our economies today.

A photo of the governor of the Bank of England, Andrew Bailey.
Governor of the Bank of England Andrew Bailey. Photograph: Tolga Akmen/EPA

Bank of England governor Andrew Bailey has said that green transition investments can help to raise growth in rich, industrialised countries such as the UK.

The Bank is interested in the climate crisis because of the “greater occurrence of extreme weather events”, the potential effects on financial stability, and the role of the financial sector, he said, speaking at a net zero conference hosted by the City of London Corporation.

“The underlying rate of economic growth in industrialised countries has fallen. It’s true here,” he said, but investments in green technology can “help to raise the potential growth rate of the economy”.

Germany businesses are getting more pessimistic, according to an indicator closely watched by economists.

The Ifo Institute’s longstanding survey index slid to 91.7 points in May, from a revised 93.4 in April, well below the consensus expectation of 93.

UK bond investors are scrambling to readjust to this morning’s surprise inflation data. Very few economists were expecting it to come in quite so high.

UK bond yields (which move inversely to prices) have risen sharply as investors sold. The yield on 10-year UK government bonds (known as gilts) rose above 4.3% on Wednesday, up from 4.2% on Tuesday.

That was the highest level for the 10-year since October 2022, when a certain Liz Truss was in power. The disastrous “mini-budget” delivered by her former chancellor Kwasi Kwarteng prompted 10-year yields to surge above 4.6%.

The yield dropped back to below 3% after Rishi Sunak and Jeremy Hunt were installed by a stricken Tory party. But yields have crept up over the last three months as inflation has hung around. The 10-year yield started the week below 4%.

Higher interest rates tend to mean the stable earnings from bonds are less valuable, so bond prices fall and yields rise.

UK 10-year gilt yields rose sharply on Wednesday following higher-than-expected inflation data.
UK 10-year gilt yields rose sharply on Wednesday following higher-than-expected inflation data. Photograph: Refinitiv

Meanwhile the pound has given up all of its previous gains. It is now down by 0.04% against the US dollar for the day at $1.2405.

Usually higher interest rates also make the local currency more attractive. But that only works up to a point. If rates rise too high then traders can start to fear that it will choke off economic growth.

Bloomberg News has some handy analysis:

The pound has undone all of its advance following the inflation data and then some. That’s likely due to traders weighing the prospect of more Bank of England rate hikes – typically positive for the currency – against the economic slowdown that could follow soon after.

Sarah Butler

Sarah Butler

A photo of a Marks and Spencer store on Oxford Street in London.
Marks and Spencer reported that profits increased by a fifth on Wednesday. Photograph: Charlotte Ball/PA

Sticking with corporate news for a moment, the share price of Marks & Spencer has surged by 12% in the first two hours of trading after it smashed forecasts.

Marks & Spencer profits have increased by more than a fifth, beating City expectations, with the retailer crediting the rise to improvements to the style credentials of its clothing and more affordable food.

However, the company warned that it faced a challenging year ahead as costs continued to increase. It expects to spend £100m more on staff wages and £50m on energy.

It said those rises would be offset by measures such as more automated tills and the closure of about 20 stores, as already announced, about half of which will be relocated, including new flagship stores in Liverpool, Leeds, Manchester, Birmingham and Thurrock.

You can read the full report here:

Energy firm SSE reports near doubling of annual profits

Jillian Ambrose

A photo of electricity pylons holding power cables leading away from the SSE (Scottish and Southern Energy) gas-fired Keadby Power Station near Scunthorpe in northern England.
Electricity pylons hold power cables leading away from the SSE (Scottish and Southern Energy) gas-fired Keadby Power Station near Scunthorpe in northern England. Photograph: Lindsey Parnaby/AFP/Getty Images

SSE has reported a near doubling of its annual profits compared with the year before after soaring energy market prices led to a boom for its fossil fuel power plants.

The Perth-based company said its adjusted pre-tax profits climbed to £2.18bn for the 12 months to the end of March, up from almost £1.16bn the year before.

The sharp increase in full-year profits came as earnings from its gas-fired power plants surged almost four-fold to £1.24bn for the last financial year, up from £331.1m the year before.

The company has sought to downplay the soaring profits generated by its gas plants in the wake of Russia’s invasion of Ukraine, which triggered the jump in global energy market prices that has ignited calls for a windfall tax on the excess profits made by power generators and oil companies.

Shares in the company rose by 1.4% on Wednesday morning.

You can read the full report here:

A picture of former Bank of England monetary policy committee member Sushil Wadhwani.
Former Bank of England monetary policy committee member Sushil Wadhwani. Photograph: Linda Nylind/The Guardian

A former member of the Bank of England’s monetary policy committee has said he fears that inflation is becoming “embedded” in the UK economy – particularly in signs that wages are continuing to rise.

Sushil Wadhwani, who is now chief investment officer at PGIM Wadhwani, said the latest inflation data was “incredibly disappointing”, highlighting high inflation in services prices. (Wadhwani is a former member of the Scott Trust, the body that controls the Guardian.)

Wadhwani told the BBC’s Today programme:

The key thing is about these numbers today is not only that they were disappointing today, but they’ve been disappointing for several months. What’s beginning to worry me – and perhaps more importantly to worry the Bank – is that inflation is becoming embedded, that people are expecting inflation to stay high for longer. That obviously a dangerous development.

It would appear that wage growth is staying stubbornly high – understandably, I should say, given how high headline inflation is. But wage inflation is remaining high.

Markets predict 100% chance of Bank of England rate hike in June

The inflation data has meant that a further interest rate hike at the Bank of England’s next monetary policy meeting is guaranteed, according to financial markets at least.

Economics correspondent Richard Partington reports:

Markets are fully pricing in another Bank rate increase of a quarter point in June, with an outside chance of an even bigger half point rise. Markets anticipate the base rate could reach a peak of almost 5.4% before the end of the year, almost a whole percentage point higher than the current level.

You can see what investors are thinking in the below table. The Bank of England’s bank rate rose to 4.5% earlier this month. Derivatives trades show that markets are fully pricing in a further increase on 22 June, with bank rate expected to rise to above 5.35% by December before dropping back.

A table showing that investors are predicting UK interest rates will rise above 5% by the end of the summer.
Investors are predicting UK interest rates will rise above 5% by the end of the summer. Photograph: Refinitiv

The financial market reaction on Wednesday morning has been focused not on inflation falling, but on it falling less than expected – consumer price index inflation hit 8.7% compared to average forecasts of 8.2% from economists.

That has prompted a flurry of buying sterling on currency markets as traders reposition. The bet is that higher inflation persuades the Bank of England to raise interest rates further. That makes sterling more attractive because investors can make higher returns.

You can see the effects in this chart showing the pound’s performance against the dollar overnight. It jumped as high as $1.2465 after the data was released, before dropping back.

The pound spiked against the US dollar after UK inflation was higher than expected in April.
The pound spiked against the US dollar after UK inflation was higher than expected in April. (Please note times on the chart are one hour behind at GMT, rather than BST.) Photograph: Refinitiv

At the time of writing sterling was up by 0.15% against the US dollar.

It’s a selling day on the FTSE 100 – likely as traders adjust to the expectation of higher interest rates. The index has dropped by 1.6%.

Only two companies have increased share prices so far today: product testing company Intertek after it reported higher sales, and energy firm SSE, which reported big profits.

The biggest fallers are property companies: Taylor Wimpey, Persimmon, Barratt Developments and British Land are all down by between 3.6% and 4.6%.

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