UK interest rate cut this summer ‘possible’ says BoE deputy governor, as house asking prices hit record – as it happened

Time to wrap up… here are today’s main stories:

Analysts at HSBC have raised their view on UK stocks to “overweight”, saying shares are undervalued.

HSBC give four reasons for their new optimism:

First, the FTSE 350 index is cheap relative to its own history and to other markets. Meanwhile, M&A could become a stronger catalyst with total transaction values this year likely to be higher than last.

Second, higher commodity prices and bond yields along with US dollar strength are tailwinds for performance. Third, the combined dividend and buyback yield significantly outstrips that of other markets. Fourth, the long-term structural overhang of UK pension fund selling is at an end; they simply have no more UK equities left to sell.

HSBC also reckon that a Labour victory in the upcoming general election is unlikely to surprise the market, adding:

In the near term, with public sentiment so depressed, it would not take much for optimism to return in our view.

Arguably, this note would have been more timely a month ago, before the FTSE 100 index of blue-chip shares began rallying to record highs….

UK consumer confidence has improved, according to data provider YouGov, as people grow more optimistic about their economic prospects.

YouGov’s consumer confidence index, just released, has risen to 108.9 this month, up from 107 in April.

Here’s the details:

• Increases in short-term financial confidence (+2.9) as well as in outlook (+4.4)

• Perceptions of job security among workers improves for retrospective (+0.6) and forward-looking metrics (+4.1)

• Mixed bag for business activity, with improvements in outlook (+2.8) but declines over past 30 days (-1.1)

Demand for business travel to and from the UK has dropped by nearly a third compared to pre-pandemic levels, as companies have embraced home working and cut back on environmentally damaging measures.

Analysis from the New Economics Foundation (NEF) released today shows that flights for business purposes fell by 29 per cent last year compared with 2019, meaning 3.9m fewer trips were made.

The NEF also examined data from the Office for National Statistics (ONS), and found that businesses spent £2.9bn less on air travel in 2023 compared with 2019 (in 2023 prices), a drop of 22%. That, they argue, undermines the aviation industry’s claims that increasing the number of flights will drive economic growth.

Alex Chapman, senior economist at the New Economics Foundation, said:

Business use of air travel peaked in 2007 and has fallen further since the pandemic. Today, growth causes major damage to our climate while benefiting only a tiny group of airport owners and wealthy frequent flyers.

The next UK government should take a fresh look at its approach to travel and tourism, and focus on re-invigorating the UK’s neglected domestic tourism economy and coastal areas and the zero-carbon public transport network which will support them.”

Lloyd’s chair: become climate resilient or catastrophe insurance will become unaffordable

Kalyeena Makortoff

The chairman of insurance market Lloyd’s of London has warned that unless clients become more climate resilient, insurance against natural catastrophes is going to become unaffordable.

On a panel at the City Week conference this morning, Bruce Carnegie Brown said Lloyd’s of London were happy to continue to provide cover for customers but said insurance was there to deal with unexpected – not predictable – risks.

Carnegie Brown said::

“What needs to happen is that customers build more resilience…if insurance is to play a valuable role. Because, simplistically, insurance is there to support unexpected risks and if the risks become expected, then at some point the premium and the claim become the same number, and that’s not particularly helpful for customers.

“Another way of looking at it is insurance either becomes unaffordable or unobtainable, so the mitigation on that is to build resilience so that the expectation bar is raised and insurance can keep doing what it does best, which is protecting customers against unexpected risk.”

However, he said he recognised that insurance was based on historical data, and if something “exponential” was happening, as it most certainly was with climate, there was a risk that the insurance industry was “permanently behind the curve.”

He added:

“That is one of the challenges that we are concerned about.”

One former Bank of England policymaker, Michael Saunders, agrees that the BoE is likely to cut interest rate this summer.

In a new research note just released, Saunders says the choice on whether the first cut comes at Bank’s June or August meetings is “narrowly balanced”.

Saunders, who left the Bank’s monetary policy committee in 2022 and now works for Oxford Economics, argues that the MPC can move ahead of the US Federal Reserve, for a change, as the UK economy has weaker recent growth and rising spare capacity.

He adds:

As a result, and in a departure from practice in recent decades, we think the MPC is likely to ease ahead of the Fed in the summer.

Here’s the key points from Saunders’ note:

• Historically, the UK has tended to cut rates slightly after the US central bank. It’s often been tempting – and usually wrong – to argue that “this time is different”. However, we think this time really is different and expect the UK will cut a little before the Fed in coming months, and cut a bit faster over the year ahead.

• Unlike the US, UK inflation in recent quarters has undershot the central bank’s expectations and is likely to return to target in the next month or two. What’s more, recent economic growth has been much weaker in the UK than the US, and as a result, labour market tightness has faded faster in the UK. For example, unlike the US, the UK vacancy/unemployment ratio is back to pre-pandemic levels.

• To be sure, the UK is sensitive to external monetary policy decisions and prospects. But the Bank of England would not be alone if it eased before the Federal Reserve. The Swiss National Bank and Sweden’s Riksbank have already done so, and the European Central Bank is likely to cut in early June.

• We expect the BoE’s Monetary Policy Committee will cut rates soon, with a narrowly-balanced choice between June and August for the first cut and rates falling by 75bps by year end. This is a little earlier than our forecast for US easing, with a first cut expected in September and rates coming down by 50bps by year end.

Speaking of not giving China the cold shoulder…..

Sky News are reporting that Sajid Javid, the former chancellor of the exchequer, has been approached about taking a role at Shein, the online fashion giant which is progressing plans for London’s biggest stock market float for years.

They say that Javid is among a number of senior City figures who have held talks with Donald Tang, Shein’s executive chairman, in recent weeks.

Sky News’s Mark Kleinman adds:

City sources said that if the appointment of Mr Javid proceeded, it could see him either join Shein’s board or become an adviser to the Chinese-founded company.

They added that Baroness Fairhead, the former BBC Trust chair, was also on a list of candidates drawn up by headhunters advising Shein.

One person close to the company said the identities of those being approached reflected both the seriousness with which Shein was taking the issue of corporate governance and the extent of its focus on a London listing.

Kalyeena Makortoff

Back at the CityWeek conference in London, the FCA has tried to assure City bosses that the regulator will take time and care in deciding whether to charge ahead with so-called ‘naming and shaming’ proposals, where the regulator would announce who it is investigating, earlier on in the process.

While public notification is common in some other industries, it has caused a stir in the City and backlash from the Treasury.

However, Sarah Pritchard, an FCA executive director in charge of markets and international matters, told the CityWeek conference:

“I know that there have been some concerns around our proposals to announce the fact of some enforcement investigations earlier on in the process where it’s in the public interest to do so.

Now we recognise that this is a sensitive and emotive issue, so we will take time to consider the feedback to engage further with industry and explore thoroughly the concerns and evidence shared with us with the aim of reaching a broad consensus.

Be assured that we do listen. We are evidence led and so will only act when a failure to do so would cause harm to consumers and undermine the integrity of our markets.”

Whether that will do anything to assuage concerns in the City, though, remains to be seen.

Ben Broadbent’s speech is his thirty-eighth, and last one, since he joined the Bank of England’s monetary policy committee in 2011

He tells his audience at the Bank today that the UK economy was hit by several large, global shocks during those 13 years, which affected supply and costs more than demand.

As Broadbent puts it:

It’s certainly been an eventful time. I joined the Committee in 2011, when the economy was still feeling the effects of the global financial crisis (GFC) three years earlier.

That was then followed by the Euro area debt crisis, which perpetuated the credit squeeze in this country. After a period of relative calm we then went through the EU referendum and the negotiations that ensued, followed at the start of the current decade by the enormous effects of the pandemic and Russia’s war in Ukraine.

He then reminds us that former governor Mervyn King once described the years preceding the GFC as the “NICE” decade (standing for “Non-Inflationary and Consistently Expansionary”).

Broadbent suggests he has lived through a NASTY time, saying:

I’m not sure how one would characterise the period since (“Not-AS-Tranquil Years”?). But, if his description was designed as a warning that we couldn’t expect such stability to last indefinitely, he’s certainly been proved right.

Newsflash: The Bank of England’s outgoing deputy governor has suggested that UK interest rates could be cut this summer.

Ben Broadbent, the Bank’s deputy governor for Monetary Policy, said in a speech this morning that if the economy evolves as expected, borrowing costs could possibly be lowered this summer.

Broadbent explained that the direct effect on inflation of the Covid-19 pandemic and the Ukraine war have now faded – what matters now is how long the effects of that earlier surge on domestic inflation linger.

Broadbent explains that the nine members of the Bank’s Monetary Policy Committee must assess how those “second-round effects” in domestic prices and wages change.

One argument is that these second-round effects will take longer to unwind than they did to emerge. The alternative view is that firms are less able to pass on higher wages to their customers through increased prices.

He says:

There is a range of views across the Committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.

Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer.

This month, the MPC voted 7-2 to leave interest rates at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for ‘no change’.

The money markets currently indicate that there’s a 57% chance that rates are lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.

Broadbent himself will only get one more chance to vote for a cut, at the June meeting, as he is leaving next month and will be replaced by Clare Lombardelli, the chief economist at the Organisation for Economic Co-operation and Development (OECD), on 1 July.

LSE CEO pushes for higher executive pay

Kalyeena Makortoff

The London Stock Exchange CEO Julia Hoggett has continued the bourse’s campaign for UK companies to offer higher – and what they claim is more globally competitive – executive pay.

Speaking to attendees of the CityWeek conference today, Hoggett praised company board members for sticking their necks out and offering bigger payouts to bosses this year, even if it proved unpopular with some shareholders.

“We’ve also seen a far greater willingness of remuneration committees to sit on what I call ‘the naughty step’ by accepting that some resolutions will gather more than 20% of votes cast against them, thus requiring an explanation from the company under the corporate governance code and inclusion in the IA’s [Investment Association] public register.

This creates an arbitrarily high 80% threshold for resolutions, which is something that CMIT [Capital Markets Industry Taskforce] has called to be removed.

Although we’ve started to see a change in mindset from some very significant asset managers, such that the number of companies with significantly enhanced remuneration packages have, nevertheless, this season received 80% support.”

She also suggested that more companies should be hiking pay – since the consequences of doing so would be less problematic if every boardroom was moving in the same direction:

“It remains my belief, however, that this remains more in our hands than we think. As parents we all know that the naughty step is not a naughty step if everybody’s sitting on it.”