The pound had its worst day of Thursday’s two years after the Bank of England admitted that all central banks did not want to admit. Some problems are that they are too big to solve.
The World Bank has sternly warned that it “cannot prevent” the decline in profit margins and household income due to the sharp rise in energy prices. However, he admitted that he needed to increase pain at a higher rate to prevent the formation of a destructive wage and price spiral.
The World Bank’s report shows what private sector analysts and Governor Andrew Bailey have so far acknowledged. The UK combines the worst parts of the US and eurozone economic outlook with consumer spending hampered by rampant inflation and labor market suffering. A serious shortage of human capital.
The World Bank has raised its major interest rate by 0.25% for the fourth consecutive time, raising it to 1%, the highest in 13 years. But analysts say the expected slowdown has already been seen in a plunge in consumer confidence and a decline in retail sales, meaning that the end of monetary tightening may already be visible. There is.
In a note to clients, ING analyst James Smith said, “The cautious tone of the meeting and a series of new dovish predictions suggest that the World Bank’s tightening cycle is far less aggressive. I have. ” “We expect a further rate hike in June, and perhaps another rate hike in August, before the Commission presses the pause button.”
In regular updates, the World Bank has lowered its growth forecasts for the next few years, saying the economy will shrink in the summer and then recover weakly. Meanwhile, the unemployment rate is expected to rise from the current 3.8% to 5.5% within three years.
At the same time, rising global energy prices have forced regulator Ofgem to raise household caps again, and the BoE expects inflation to peak above 10% in the fourth quarter of this year. Deputy Governor Ben Brode Bent told journalists at a World Bank press conference that this “external” shock accounted for 80 percent of inflation’s overshoot.
Soaring energy prices will inevitably put further pressure on the real incomes of most UK households and the profit margins of many UK companies, the World Bank said.
The worst outlook in both worlds was reflected in the deep division within nine powerful monetary policy-making meetings. Some have now urged more rigorous action against inflation, but others have found it inappropriate to warn that further interest rate hikes may still be needed. In parallel with the Federal Reserve’s decision on Wednesday, three out of nine voted to halve bank rates.
Such sectors could pose serious problems for the World Bank to communicate policies in the coming months. However, it appeared to be reasonably prepared for criticism that it added to the growing cost of living crisis by raising borrowing costs.
“I’m worried about the impact of the second round,” Bailey said, warning that if wages and prices start to catch up with each other, “the one with the least bargaining power will suffer the most.”
Average earnings growth, including bonuses, accelerated to 5.4% in March, ahead of what the World Bank believes is in line with its 2% inflation target.
Market downturn
The financial markets took the news badly. Sterling, which has been under pressure since the International Monetary Fund lowered its forecasts for the UK economy last month, fell nearly three cents against the resurrected dollar as foreign exchange traders bid on widening interest rates with the U.S. It was below $ 1.2350.
In contrast to BoE, Federal Reserve Chairman Jerome Powell suggested on Wednesday that U.S. interest rates could be cut in half, significantly increasing the relative appeal of dollar holdings. Did. Against the euro, the pound fell nearly 1.5 cents.
In the bond market, yields on UK government bonds fell sharply and then were reduced to US Treasuries later in the session.
A more pessimistic growth outlook means that it is almost certain that the World Bank will not start selling the pile of government debt it has acquired during the pandemic for at least another four months. Staff will present active bond sales proposals at the MPC meeting in August. Actual sales are unlikely to start before September.
In another market announcement, the World Bank announced that it would begin selling its £ 20 billion corporate bond portfolio at the same time, aiming to complete the process by early 2024 at the latest.
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