BoE’s Dhingra warns against delaying interest rate cuts; ‘limited room’ for tax cuts after record UK budget surplus – as it happened (2024)

Time to recap…

Bank of England policymaker Swati Dhingra has warned that there are real economic costs to delaying interest rate cuts until we see more signs that underlying inflation pressures are easing.

Dhingra, the most dovish rate-setter at the BOE, warned that delaying interest-rate cuts comes at a cost for living standards and could trigger a hard landing for the UK economy.

She says today:

“Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates comes with a cost of foregone improvements in living standards and a risk of lowering supply capacity for the future.”

Economists have said the chancellor has ‘limited’ room for tax cuts in next month’s budget, after the UK recorded its biggest budget surplus for a January since records began in 1993.

Falling interest costs on the UK national debt helped the UK post a surplus of £16.7bn last month, and means the government has borrowed over £9bn less than expected this financial year.

Economist Dr Roger Gewolb explains:

“Jeremy Hunt has been handed a pre-budget tax boost of £9.2 billion today, which he could - and had certainly better - use for his upcoming Budget next month.

Today’s data sees the UK recording its biggest budget surplus in at least 30 years. Hunt has some room for tax cuts, but perhaps not enough for a significant giveaway. The government is expected to borrow £10 billion less this financial year compared to the £123.9 billion predicted by the OBR during the Autumn Statement.

I predict that Hunt will have enough extra funds to decrease income tax by at least 2p and/or move thresholds and also cancel the planned increase in fuel duty”.

But, the Resolution Foundation has warned that any tax cuts next month will come between £20bn of tax increases already implemented and a further £17bn of hikes pencilled in for after polling day.

Shares in HSBC have tumbled over 8% today after the bank took a $3bn charge on its stake in a Chinese bank amid mounting bad loans in the country, knocking its profits in the last quarter.

BT’s iconic telecommunications tower in London is to become a hotel, in a £275m deal.

Increased military spending prompted by Russia’s war on Ukraine and the Israel-Gaza conflict have helped the British weapons manufacturer BAE Systems to record profits last year.

The cost of filling up a family car in the UK increased by about £2 this month as the jump in the oil price caused by the Red Sea attacks is felt at the pumps.

Food businesses sending products to the EU have had to fork out an extra £170m in export costs because of Brexit red tape, data shared with the Guardian shows:

Banknotes featuring King Charles will be issued for the first time on 5 June, prompting the Bank of England to warn businesses that they need to make sure their machines are ready to accept them.

Swati Dhingra has also pointed out today that UK consumption had still not recovered to levels seen before Covid-19, unlike in other major economies.

She says:

Despite an easing in inflation and some real wage recovery, consumption remains below its pre-pandemic level. This is in striking contrast to the Euro area and the United States where consumption bounced back some time ago.

Dhingra also points out that the impact of the recent run of 14 rate hikes in a row would still continue to be felt for some time.

Yesterday, governor Andrew Bailey estimated that around 70% of that impact has been felt.

MPs on the Treasury committee have heard that UK economic growth will remain weak this year, while inflation is expected to fall.

The committee is holding a hearing on economic forecasting – as covered earlier, they are disappointed that neither the IMF nor the OECD would attend and discuss their own forecasts for the UK.

But they do have three UK experts.

Nina Skero, chief executive of the Centre for Economics and Business Research, tells the committee that the CEBR expects growth of 1.1% this year.

That’s a pick-up compared to 2023, but still “historically low”, Skero points out.

The CEBR expect inflation to approach but not return to the Bank’s 2% target, with headline inflation forecast to be 2.2% at the end of 2024.

Charlie Bean, the former BoE and OBR economist, predicts UK output will “pretty much flatline” this year, and possibly pick up a bit through the year.

He doesn’t believe the 0.3% drop in GDP in October-December is the start of a “deeper downturn”, as it’s partly due to a fall in retail sales in December which unwound in January.

On inflation, Bean says it’s “pretty much baked in” that inflation will come near to the 2% target in the spring, as large increases in price levels a year ago drop out of the comparison.

But he (like the BoE) expects inflation to pick up in the second half of 2024.

Jack Meaning, chief UK economist at Barclays, predicts growth will be “pretty stagnant” in the first quarter, and doesn’t see the recession carrying on.

He forecasts sub-trend growth all though this year, with the economy ticking along and stagnating rather than accelerating.

But growth will pick up in 2025, he believes, ending next year above trend.

And on inflation, Meaning predicts it will fall below 2% in April when the energy price cap changes, and stays below 2% through 2024 and first half of 2025.

Swati Dhingra also criticises claims that wages and services prices are rising too fast for the Bank to hit its 2% inflation target (as other policymakers have argued)

She says:

This is based on summary reasoning that multiplying the labour share of about 60 percent with wage growth rates above 3.5 would take us above target. This reasoning is inconsistent with recent historical evidence. The pre-GFC era in the 2000s was marked with high wage growth of 4-5 percent and yet inflation was subdued.

The UK economy has already “flatlined over the last year”, points out Swati Dhingra.

She says some other advanced economies have not faced “the difficult trade-off between lowering inflation and sacrificing recovery to the same degree as the UK”.

Swati Dhingra argues in her speech that there is little risk of a wage-price spiral, saying:

Nominal wage growth remains stronger than in recent history, but the collective steer from several sources of data suggests wage growth is easing, including in higher frequency and forward-looking indicators.

Quantity-based measures of the labour market that are available in a timely manner provide further evidence of the reduced likelihood of tight labour markets pushing up on wages and hence prices in the future.

Swati Dhingra, the most dovish member of the Bank of England’s Monetary Policy Committee, is warning of the risks of leaving interest rates high for too long.

In a speech titled Money’s Too Tight (To Mention) [a nod to the pop hit from The Valentine Brothers, covered by Simply Red in 1985], Dhingra is explaining that the outlook for headline inflation is “bumpy but downwards”.

She argues that delaying the first rate cut until there is more evidence that inflation is easing risks hurting households, and the economy.

Dhingra tells an event organised by Market News International Connect:

Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates comes with a cost of foregone improvements in living standards and a risk of lowering supply capacity for the future.

Dhingra was the only MPC member to vote to cut interest rates, from 5.25% to 5%, last month – two members wanted to raise rates, and the other six voted to leave them unchanged.

The other members of the MPC want to see more signs that inflation is moving sustainably to the Bank’s 2% target.

Dhingra, though, points out that policy would still be ‘restrictive’ even if rates were cut slightly. It would be a mistake, she says, to favour keeping policy too tight:

Going forwards, the restrictive stance of monetary policy is expected to continue weighing on economic growth and living standards for more time, even if moderation starts now.

In my view, the evidence to err on the side of overtightening is not compelling as it often comes with hard landings and scarring of supply capacity.

The financial markets expect the Bank to cut rates to 4.5% by the end of this year, with the first cut pencilled in by June.

Yesterday, BoE governor Andrew Bailey said he was comfortable with an interest rate profile that has cuts in it, but wouldn’t say by how much rates would be cut, or when.

Over in the US, demand for mortgages took a hit last week as borrowing costs jumped.

Total application volume plunged 10.6% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The drop came as the average contract interest rate for 30-year fixed-rate mortgage rose back over 7%.

Mike Fratantoni, the MBA’s chief economist, says:

“Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near term rate cut.”

Parliament’s Treasury Committee have fired a blast at the International Monetary Fund for not attending their session today on economic forecasting.

Chair of the Treasury Committee, Harriett Baldwin, says both the IMF and the OECD were invited to take part, and she’s “disappointed” neither has accepted the invitation.

The committee had hoped that both groups would discuss the assumptions which underpin their forecasts on the UK economy, ahead of next month’s budget.

Baldwin says it is “incredible” that the IMF won’t show up today, despite issuing forecasts about the UK, but reports that the OECD were more forthcoming.

She says:

“I’m disappointed neither has accepted our invitation to come to Westminster ahead of the Spring budget and discuss the assumptions which underpin their forecasts on the UK economy.

“I am heartened, however, by the positive intent and engagement shown by the OECD during our discussions. We will continue to work with them to find a suitable time for a public session when schedules allow, to ensure proper democratic scrutiny of their work can be carried out.

“On the contrary the IMF’s outright refusal to let us scrutinise their forecasts of the UK economy in public is infuriating. Yet they continue to utter public pronouncements about the UK from their perch in Washington. As the IMF is a public body partly funded by the UK as a shareholder, I find this incredible.”

Last November, the OECD predicted that UK growth would remain “stable but low”, with national output rising by 0.5% in 2023 and by 0.7% in 2024.

The IMF has ruffled feathers in Westminster; first it predicted the UK would go into recession last year, then changed its mind last May. Then in January it issued a strong warning to Jeremy Hunt against cutting taxes in the budget.

The session starts at 2.15pm today, with MPs hearing from Professor Sir Charles Bean (a former member of the Monetary Policy Committee and the OBR Budget Responsibility Committee), Dr Jack Meaning, the chief UK economist of Barclays, and Nina Skero, chief executive of the Centre for Economics and Business Research

Heathrow Airport has reported its first annual profit since the Covid-19 pandemic.

Heathrow made an adjusted pre-tax profit of £38m in 2023, up from a loss of £684m in 2022, and the first profit since 2019.

It handled 79.2m passengers last year, making 2023 the third-busiest in Heathrow’s history. It hope to break the record this year, and is aiming to welcome a record 81.4m passengers.

Barely a day goes by, it seems, without downbeat economic news from Germany.

And today’s is that Berlin’s government has slashed its growth forecast for this year.

The German government expects the economy to grow 0.2% this year, far less than a previously forecast 1.3%, as weak global demand, geopolitical uncertainty and persistently high inflation dent hopes for a swift rebound.

The revised forecast was approved by the cabinet on Wednesday as part of the government’s annual economic report, government sources told Reuters.

A draft of the report seen by Reuters says:

“The German economy continues to find itself in difficult waters at the beginning of the year.”

Germany’s economy shrank by 0.3% in the final quarter of 2023, and would enter a technical recession if it shrinks in the current quarter too.

We want to hear people’s memories of the BT Tower following the news that it will be converted into a hotel.

Did you visit the restaurant or work there?

Speaking of UK manufacturers…weapons manufacturer BAE Systems has reported record profits last year, thanks to increased military spending prompted by Russia’s war on Ukraine and the Israel-Gaza conflict.

BAE Systems made underlying profits before interest and tax of £2.7bn on record sales of £25.3bn in 2023.

Charles Woodburn, the BAE chief executive, said the weapons manufacturer was expecting “sustained growth in the coming years”.

He told reporters on Wednesday:

“Instability in Europe, the Middle East and other parts of the world brings into sharp focus the vital role that we play in protecting national security.”