Bank of England chief economist says further interest rate rises needed; retail sales rise – business live

The former Bank of England governor has criticised the UK’s central bank for allowing inflation to surge to its highest in 40 years.

Mervyn King told Sky News that Britons must brace themselves for a “very unpleasant period”, with “considerable” interest rate hikes now needed to prevent a re-run of the 1970s.

Lord King, who ran the BoE during the financial crisis, blasted central bankers for fuelling a rise in inflation by printing hundreds of billions of pounds and dollars during the pandemic.

He said they would have to raise interest rates immediately to prevent an inflationary spiral, following a “failure of the economics profession”, with interest rates kept too low for too long, and too much “quantitative easing” (buying bonds with newly created money).

In a highly critical intervention, King says:

They shouldn’t have been printing the extra money; what governments were doing was enough to deal with the consequences of COVID. They’re now worried about inflation, when they weren’t before…

[But] it’s not all the result of the Russian invasion of Ukraine. This was foreseeable, because there was a mistaken diagnosis of what needed to be done with the pandemic.”

Nationwide: Inflation surge could hit house prices

Kalyeena Makortoff

Nationwide Building Society has warned that the UK’s rocketing inflation could send British house prices into reverse.

Nationwide executives said this morning they are “highly concerned” about the outlook for inflation, a signal that the cost of living crisis could drag down house prices, as customers struggle.

Chief executive Joe Garner told journalists.

“Obviously we are highly concerned about the outlook environment.

And we are very focused on leaning into our members, and really underlining the emphasis of contacting us as early as possible.”

Garner said the building society was ready to offer a range of options to struggling customers, including interest-only payment holidays.

However, the building society, which is the UK’s second largest mortgage lender behind Lloyd’s Banking Group, explained that higher property prices, rising interest rates, and the “steep increase” in the cost of living meant housing had already become less affordable for consumers, so activity is likely to slow.

More here:

Kalyeena Makortoff

A new membership body has been launched as part of efforts to bring people from less privileged backgrounds into senior roles across the City.

The group, which will be known as “Progress Together”, will offer workshops, resources and mentoring schemes to people who might otherwise struggle to reach top-tier positions in financial services.

It comes as a new survey found that employees whose parents did not have professional careers themselves were 30% less likely to reach a senior position in their firms compared with their colleagues. More here.

European stock markets have rallied strongly this morning, after China cut its mortgage lending rate by a record amount (see previous post).

In London, the FTSE 100 index has jumped by 118 points, or 1.6%, recovering most of Thursday’s slide. Asia-Pacific focused insurer Prudential are the top riser. up 5.3%.

Germany’s DAX (+1.4%) and France’sa CAC (+0.8%) are also higher, while China’s CSI 300 index rallied by almost 2% on relief that the government was providing more support.

Pierre Veyret, technical analyst at ActivTrades, explains:

Markets surged higher everywhere from Asian shares to US Futures contracts on Friday, mostly led by Utilities and the Energy sector, as investors welcomed reassuring major monetary news from Beijing.

The “Risk-on” trading mood has registered a solid rebound during the last couple of hours as traders cheered the significantly dovish monetary decision from China after the PBoC cut one of the key interest rates by a record amount. This will provide a fresh boost to the economy, helping small businesses and mitigate the negative impacts of lockdowns in the world’s second-largest economy.

The Bank of England’s chief economist has admitted that the central bank faces its toughest challenge since independence in 1997, and signalled that interest rates need to rise further.

Speaking in Cardiff this morning, Huw Pill said that inflation’s surge to a 40-year high of 9% in April put him in a “very uncomfortable situation”, given the Bank is meant to keep inflation around 2%.

But Pill says this discomfort is ‘as nothing’ compared to the challenges facing poorer familier who are most hit by the current cost of living crisis.

These are difficult times for many people, especially for the less well off, who spend a higher proportion of their income on energy and food, where recent price rises have been most significant.

Current challenges are thus a salutary reminder of the importance of price stability as an anchor for wider economic stability, and a bulwark to sustaining people’s livelihoods, especially for those on lower pay and fixed incomes.

Pill explains that the Bank’s most recent inflation forecast “does not make for pretty reading”, with inflation expected to rise over 10% by the end of the year.

That’s why the Monetary Policy Committee voted to raise interest rates to 1% this month.

And Pill gives a clear sign that interest rates will need to rise further, as the Bank walks a ‘narrow path’. Underlying wage growth is currently strong, he says, but rising inflation will hit disposable incomes, slowing the economy.

Pill says:

On the one hand, headline inflation is clearly too high, the UK labour market is tight, wages are growing at stronger rates than would normally be deemed consistent with the inflation target, and business confidence is resilient, in part in anticipation of being able to re-establish profit margins. In short, inflationary momentum in the UK is currently strong.

On the other hand, significant increases in international energy, food and goods prices over the past year imply a substantial squeeze in UK residents’ real incomes, which will weigh on future demand and employment. Looking beyond the shorter term, UK inflation is set to fall as global commodity prices stabilise, bottlenecks in global supply chains ease, and domestic inflationary pressure dissipates as the real income squeeze opens up a margin of economic slack.

Pill says the Bank must avoid “self-sustaining, expectationally-driven” price rises -taking hold (where current high inflation drives up expectations for wages and prices)

He concludes by saying inflation is now the biggest challence since the Bank of England was given responsibility for setting interest rates, 25 years ago this month.

That celebration has come at a testing time for UK monetary policy, for the reasons I have outlined in my remarks today. With inflation forecast to rise into double digits following the very sharp rise in international energy and goods prices, this is biggest challenge the MPC has faced over the past quarter of a century.

It is in these testing times that the anchor represented by the 2% inflation target comes to the fore. Supported by the independence accorded to the MPC to pursue that target, we are able to take the sometimes tough decisions to bring inflation back to 2% and keep it there sustainably.

It is that commitment that has led me to support a tightening of monetary policy since I joined the Committee last September, and to signal today that this tightening still has further to run.