ECB keeps interest rates on hold, warns of ‘transitory’ higher inflation - as it happened

Last modified: 03: 28 PM GMT+0

Closing summary

Wrapping up after a busy day of news...
Here’s a look back at today’s main stories

  • The day after the chancellor’s autumn budget, Rishi Sunak was warned that a big squeeze on wages will leave the average worker £13,000 a year worse off by the middle of this decade. This is according to the Institute for Fiscal Studies (IFS), the UK’s leading tax and spending thinktank, which said an unprecedented two-decade hit to earnings would leave average household disposable income 42% lower than it would have been had wages grown at pre-2008 financial crisis rate.

My colleagues Larry Elliott and Richard Partington have the full story here:

  • The European Central Bank kept interest rates in hold, in the face of rising inflation in the euro zone, but ECB President Christine Lagarde pushed back against market bets that the bank will have to hike rates early next year.
  • Economic growth in the US in the third quarter of the year came in lower than forecast, leading to some concerns about the strength of the country’s recovery from the pandemic.
  • Oil prices fell to their lowest level in two weeks, after Iran said it expected to resume talks on its nuclear programme by the end of next month, and US crude stocks rose more than expected.
  • Carmakers Volkswagen and Stellantis both took financial hits in the third quarter as they grappled with the ongoing global shortage of computer chips.

You can find more reaction to yesterday’s budget over on the Politics Live blog, as well as all the political discussions around the detention of a British fishing trawler by French authorities.

In other news, toymaker Lego has launched a handbook ahead of the Cop26 climate conference, featuring children’s views on how to build a better world. My colleague Zoe Wood has the story:

And as many as 1m British households could have received unsolicited packages from sellers on Amazon Marketplace. The practice, which is known as “brushing”, involves firms sending what are often cheap and small packages to people to artificially increase their sales figures, allowing them to rise up seller rankings.

Consumer organisation Which? has been looking into this and said a survey of 1,839 people across the UK found that 4% of people said a member of their household had received a package they did not order and was not sent by a known person or held for a neighbour.

Which? said that on a national scale, as many as 1.1m households may have been targeted.

You can read the whole story here:

Please do join me again tomorrow, same time same place, for more live action from the world of business, economics and the financial markets. JP

Updated

In other news today - the competition watchdog has again backed plans by Ofgem, the energy regulator, to clamp down on the returns energy network companies can make at the expense of customer bills.

The Competition and Markets Authority (CMA) said there is nothing to prevent Ofgem from slashing returns that returns that shareholders in the energy networks are allowed to take.

The CMA first sided with Ofgem in August over these plans, and has now upheld its previous finding in its final determination on the issue.

This is despite appeals from energy firms including National Grid and Scottish Power, after the regulator set out plans to limit their returns on investing in the UK’s gas pipes and electrical cables.

It will now allow Ofgem to cut these investor returns to 4.55% over the next five years.

Citizens Advice chief executive Dame Clare Moriarty said:

This decision is good news for consumers and a major step forward in fixing the problem of excessive profits made by network companies. It sends a clear signal to the companies still to go through the price control process (electricity distribution networks) that they won’t be getting the same bumper payday as last time round.

However, the CMA’s decisions did not all go Ofgem’s way.

The watchdog did not find in favour of another of the regulator’s proposed changes, the so-called “outperformance wedge”.

This is where Ofgem said that energy networks would likely outperform over the coming five years, and used this as a basis for calculating how much they could charge customers. The CMA said that Ofgem was wrong on this issue, and ordered it to remove the outperformance wedge.

You can read more about the CMA’s previous findings in this issue in an article from my colleague Jillian Ambrose from August:

A quick recap on what was said at the European Central Bank news conference, where inflation and future interest rate hikes were in focus.

ECB President Christine Lagarde took the opportunity to push back against market expectations that policymakers will have to hike rates as early as next year, after she insisted that inflation and price pressures will have eased by that time.

🇪🇺 #ECB LAGARDE: INFLATION EXPECTED TO RISE FURTHER - BBG
*LAGARDE: INFLATION PRESSURES SHOULD EASE IN COURSE OF 2022

— Christophe Barraud🛢 (@C_Barraud) October 28, 2021

Lagarde told the news conference that one things has been on ratesetters’ minds: “We talked about inflation, inflation, inflation,” she said.

The more Lagarde insists that market has it wrong, the more the market thumbs its nose - check out Dec 2022 Euribor - collapsing and pricing in #ECB rate hikes as Lagarde bangs podium on why inflation will drop next year... pic.twitter.com/8zE4SZXygb

— John J. Hardy (@johnjhardy) October 28, 2021

Lagarde also listed the three main things currently driving euro zone inflation: higher energy prices, a global disconnect between supply and recovering post-pandemic demand, and also one-off effects including the end of a temporary cut in German sales tax.

On to inflation: expected to increase further, and last longer than expected, but to decline next year. Inflation is due to energy, demand < supply, and base effects

The supply < demand is new

— Antoine Bouvet (@AntoineBouvet2) October 28, 2021

Lagarde also pushed back against market bets on when the ECB will raise rates again.

...and what are markets doing?Pricing an even earlier liftoff pic.twitter.com/FueDM7Xs23

— Antoine Bouvet (@AntoineBouvet2) October 28, 2021

US Q3 GDP comes in below forecast, stoking concerns about strength of the US economy

More economic data out today - US third quarter GDP has just disappointed, coming in below forecasts.

US economic output grew at an annualised rate of 2%, compared with forecasts of 2.6% between July and September.

This is the slowest quarter of growth seen since the first three months of 2020.

Some analysts are suggesting that the slowdown could be a result of the wave of Covid Delta cases during the period, as well as impact of global supply chain disruption.

US GDP came in below estimates in the 3rd quarter — signaling the Delta wave did more damage than expected https://t.co/EQRFhuzEW3

— Business Insider (@BusinessInsider) October 28, 2021

However, the drop in economic output comes at a time of rising inflation, leading some to utter the dreaded word: stagflation - a toxic combination of rising prices, and slowing growth.

“Today’s disappointing GDP data will increase investor concerns about strength of the US economy,” said Richard Flynn, managing director at financial services firm Charles Schwab UK.

Since the broad reopening of the economy, demand has outpaced the recovery of supply causing shortages and rising inflation. These supply bottlenecks continue to weigh on companies’ future expectations, as both labour and materials have become scarcer and more expensive.

Flynn adds that workers’ wages are rising in the US, but this is putting pressure on firms when they are also paying more for transport and logistics, and raw materials, leading to concerns about companies’ profit margins.

“Risk has undoubtedly risen for investors, as there are now more questions—including about fiscal and monetary policy—than there are answers,” said Flynn.

Updated

While we’re looking at inflation in the euro zone, Germany’s preliminary CPI inflation for October has just been released.

Inflation is running at 4.5% in Europe’s largest economy, ahead of the forecast of 4.4%.

This is well-ahead of the European Central Bank’s 2% target, although the central bank regards this surge in inflation in the bloc as only temporary.

Annual inflation has hit 5.5% in Spain, for example.

#Inflation in #Germany accelerated further in October and reached its highest level in 28 years. Consumer prices rose by 4.5% YoY. An inflation rate of 4.5 percent was last measured in October 1993. #ECB #QEForever

— Christof Schürmann (@SchuermannChris) October 28, 2021

Meanwhile, ahead of the ECB’s interest rate decision, Austria’s finance minister had called on the bank to hike rates, as inflation has been causing him sleepless nights, according to Bloomberg.

Austrian Finance Minister Gernot Bluemel says inflation has been causing him sleepless nights and calls on the ECB to hike interest rates https://t.co/kBjTedIkVp

— Bloomberg (@business) October 28, 2021

ECB keeps interest rates on hold, says inflation may temporarily remain above target

News just in from the European Central Bank: policymakers in the euro zone are keeping interest rates unchanged.

This means the headline interest rate, the main refinancing operations rate, remains at 0.0%.

The central bank has confirmed a “moderately lower pace” of PEPP purchases - its Pandemic Emergency Purchase Programme.

On inflation, the ECB has said it expects key interest rate to “remain at their present or lower levels” until it sees inflation reaching 2% “well ahead of the end of its projection horizon and durably for the rest of the projection horizon”.

Nothing new from the ECB in the Oct statement. No new forward guidance around rate hikes - which is where we could have possibly seen a dovish surprise (most weren't expecting anything). Now over to Lagarde to convince the market that inflation in Europe is transitory $EUR pic.twitter.com/r5wnLBPpIr

— Viraj Patel (@VPatelFX) October 28, 2021

The ECB also said:

The governing council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.

The ECB noted there may be a “transitory period in which inflation is moderately above target”.

#ECB has left policy unch as expected. PEPP Total Envelope €1.85tn. Will run at least through end of March 2022. Focus tdy is how ECB's Lagarde will pushback against mkt expectations of interest rate increases or any reconsideration of sequencing ending QE ahead of hiking rates. pic.twitter.com/O9i4xuWA0T

— Holger Zschaepitz (@Schuldensuehner) October 28, 2021

Christine Lagarde, the ECB President, will be explaining the Bank’s policy decisions, coming up at 13.30 BST...

In more reaction to yesterday’s budget - the verdict of the Institute for Fiscal Studies is that Sunak’s tax raises, combined wth rising inflation, will cause “real pain” for low-income households amid a squeeze on living standards.

The UK’s leading tax and spending thinktank said a middle earner was likely to be worse off next year as weak wages growth is cancelled out by high rates of inflation and tax increases.

Paul Johnson, the director of the IFS, said the outlook for living standards jarred with the chancellor’s upbeat tone.

“Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards,” he said.

“High inflation, rising taxes, and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”

The thinktank said the chancellor’s plans came after a tough decade for households after weak levels of economic growth and austerity.

Here’s the rest of Richard Partington’s story about the IFS’s view of the budget:

Oil prices slump to a two-week low on rising US stocks and hopes for Iran talks

Oil prices have only been going in one direction in recent weeks, at least, until today.

The price of Brent crude fell by just over 1.5% to $83.20 by mid-morning trading, after hitting a two-week low of $82.32 earlier in the day.

Meanwhile, US West Texas Intermediate (WTI) crude also tumbled by around 1.5% to edge just over $81. It has also rebounded somewhat from its earlier level of a two-week low of $80.58.

Reason for the falls appear to be two-fold: after Iran said that talks with world powers over reviving its nuclear programme would restart by the end of November, while US crude inventories were also revealed to have risen much more than expected.

A deal with Iran could potentially open the door to lifting sanctions imposed on the country’s oil exports by former US President Trump in 2018.

Beyond the semiconductor shortage, a string of companies’ earnings reports have highlighted other difficulties in the global supply chain in recent weeks.

However, planemaker Airbus said earlier it had overcome some obstacles in its supply chain, allowing it to meet its forecast of 600 jet deliveries in 2021.

The world’s biggest planemaker has also raised its full-year profit and cash targets, as profits held up better than anticipated in the third quarter.

The news boosted Airbus shares, which opened around 3% higher on Thursday, before trimming some of their gains.

Airbus chief executive Guillaume Faury said the recovery towards pre-pandemic levels of output was underway, after it had to avoid producing too many planes during Covid, when international travel almost ground to a halt.

We observe labour shortages around the world impacting all sectors -Airbus chief executive Guillaume Faury

Airbus boosted its earnings and cash-flow targets for the second time this year, banking on a recovery in air travel to support its push to boost jetliner output https://t.co/lQDoPh3uYK

— Bloomberg (@business) October 28, 2021

The global semiconductor shortage and ongoing disruption to supply chains continue to knock carmakers’ profits.

Volkswagen and Stellantis both suffered financial hits in the third quarter the year, as a result of the global shortage of computer chips, which has prevented the firms from producing as many vehicles as they had originally planned.

Operating profits at Volkswagen, the world’s largest carmaker by output, fell by €500m in the third quarter of 2021. It made €2.8bn (£2.4bn) before one-off items between July and September, down from €3.2bn in the same period last year.

Stellantis, formed from a merger of Fiat and Peugeot in January, reported a 14% decline in revenues as it produced 600,000 fewer vehicles than planned because of the chip shortage.

Car companies around the world have been badly hit by the persistent shortage of computer chips, which are made from semiconductors. As the extent of the coronavirus pandemic became clear in early 2020, carmakers cut back on orders to chip manufacturers, only to find themselves at the back of the queue when demand roared back.

More computer chips than ever are used in cars to control everything from engines to door locks to autonomous driving capabilities.

You can read the rest of Jasper’s article here:

A booming mortgage market and an economic recovery that made it less likely that Covid-hit borrowers would default on loans helped Lloyds Banking Group double its profits in the three months to September.

The group, which owns Halifax and is the UK’s largest mortgage lender, benefited from an increase in demand for larger homes linked to the pandemic “race for space”, and last-ditch efforts by consumers to take advantage of the stamp duty holiday, which finished last month after reducing at the end of June.

There was a £2.7bn net increase in its home loans in the quarter, bringing mortgage lending to £15.3bn over the nine months to September – the strongest rise in that measure at the bank in more than a decade.

It contributed to a 96% rise in pre-tax profits to £2bn in the third quarter compared with £1bn a year earlier. That beat average analyst estimates of £1.3bn.

You can read the rest of Kayleena’s story here:

Royal Dutch Shell has set out a target to halve its emissions by the end of the decade as it revealed worse-than-expected profits for the third quarter despite a global surge in oil and gas markets.

The Anglo-Dutch group, which announced a profit of $4.13bn (£3bn) for the last quarter, is under pressure to continue paying out hefty shareholder dividends from its fossil fuel business while cutting its total greenhouse gas output in line with tougher climate standards among many of its investors.

However, its new climate target falls short of including the bulk of the emissions from the oil and gas it produces and is unlikely to satisfy green campaigners who have called on Shell to urgently reduce its total global heating impact.

The worse-than-expected profit announcement emerged after a major US investor called on the company to break itself up to put an end to its “incoherent” strategy and conflicting stance on climate action.

You can read energy correspondent Jillian Ambrose’s story here:

There’s been a flurry of corporate results this morning, here’s a quick roundup of some which stand out.


Sainsbury's boss reassures customers over Christmas availability

In a normal year, few would expect the boss of one of Britain’s biggest supermarket chains to write to customers to tell them that they should be able to buy everything they want this Christmas, including fresh and frozen turkeys.

But with a backdrop of supply chain disruption, staff and lorry driver shortages and gaps on supermarket shelves (in some cases disguised by cardboard cutouts of fruit and veg), that’s exactly what Sainsbury’s chief executive Simon Roberts has done.

“Following reports that some popular products will be hard to find this Christmas, I want to let you know we’re working flat out to make it a Christmas to remember,” Roberts wrote in a letter to customers.

I’m writing to let you know what we’re doing at Sainsbury’s to help you plan and manage your Christmas budget. I also want to reassure you that there will be plenty of food and that we are confident that even if the exact product you are looking for isn’t available, there will be a good alternative - Simon Roberts, Sainsbury’s CEO

Sainsbury’s says there is no need to worry about getting a turkey this year, because they will have “plenty available” and “expect to sell more fresh turkeys this year than ever before”. But the grocer highlights that frozen turkeys are already in store as well as frozen party food.

Sainsbury's CEO Simon Roberts has written to customers about Christmas availability: 'I want to reassure you that there will be plenty of food and that we are confident that even if the exact product you are looking for isn’t available, there will be a good alternative'...

— George MacDonald (@GeorgeMacD) October 28, 2021

Sainsbury's nudging customers toward frozen food this Christmas. CEO Simon Roberts says they'll have "plenty" of fresh turkeys, but tells customers if they can't wait until they arrive on 19th December, frozen turkeys are already in store, as well as frozen party food.

— Hannah Uttley (@huttleyjourno) October 28, 2021

The run-up to Christmas is of course the crucial trading period of the year for retailers, but some of us will be forgiven for not thinking about the 25th December just yet, given it’s not even November...

For a digest of exactly what the chancellor announced on budget day, the Guardian’s Politics Weekly podcast is out, with analysis from the dream team of our political editor Heather Stewart, economics editor Larry Elliott and columnist and senior economics commentator Aditya Chakrabortty.

Listen here:

Plus, the podcast also takes a look at Alok Sharma, the man leading the Cop26 summit.

Updated

Questioned about the judgement of the OBR that Brexit is doing twice as much damage to the UK economy than the pandemic - 4% lowering of GDP growth from Brexit vs 2% from Covid - “That’s their view,” Sunak told the BBC.

“What I am doing is making sure we capitalise on the opportunities that Brexit has brought, whether my colleagues Liz Truss before and now Anne-Marie Trevelyan, will be doing a lot on the trade agenda and we are seeing the benefits that will bring to the economy, our ability to sign trade deals,” Sunak said.

The chancellor has been out on the media round this morning, speaking to broadcasters. Questioning about rising inflation and the squeeze on living standards, he’s insisting that the government made announcements in the budget designed to help household budgets.

Inflation is “largely down to global forces, one is the impact of rapidly reopening economies putting pressure on global supply chains and the other factor is of course energy prices,” Sunak told BBC Radio 4’s Today programme.

I wish I did, but I don’t have a magic wand that can make those global challenges disappear, they are going to be with us for a little while, but where the government can make a difference we are, whether it’s the tax cut, freezing fuel duty, whether it’s helping people with energy bills through the winter where we have put support in place, we are doing what we can” - Rishi Sunak, chancellor

Interesting to note that Sunak is again today calling the changes to the universal credit taper a “tax cut”, which many are pointing out is, more precisely, a benefit change.

.@RishiSunak trying to spin hard that the Universal Credit tape change is a 'tax cut', mainly because he has few real tax cuts to talk about. And cos he's jacked up taxes overall.@Marthakearney rightly picks him up that it's a benefit change

— Paul Waugh (@paulwaugh) October 28, 2021

Rishi Sunak trying to describe changes to the Universal Credit taper rate as a "tax cut" as many times as he possibly can on #Today

— Lizzy Buchan (@LizzyBuchan) October 28, 2021

On Wednesday Sunak announced a reduction from 63p in the pound to 55p in the universal credit taper rate – the amount in benefits a claimant loses for each pound they earn above a set work allowance. The move was intended to soften the blow of the withdrawal this month of the £20-a-week universal credit uplift.

You can read the full story on the universal credit taper rate changes announced yesterday here:

The impact of Brexit on the UK economy is worse than Covid - that’s the verdict of the chair of Britain’s fiscal watchdog.

The Office for Budget Responsibility’s (OBR) chair said they thought the UK’s departure from the EU would lower the country’s GDP by about 4%.

But Richard Hughes also said: “We think that the effect of the pandemic will reduce that (GDP) output by a further 2%,” in comments made to the BBC.

“In the long term it is the case that Brexit has a bigger impact than the pandemic,” Hughes told the broadcaster.

You can read the full story here:

Updated

Introduction: Rishi Sunak’s budget ‘will lead to flat recovery’; Shell profits sink

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Many of the UK’s economists and analysts will be bleary-eyed this morning, after a night spent crunching the numbers from the chancellor’s budget yesterday.

The Resolution Foundation think tank is, as ever, one of the first out of the blocks with its overnight analysis of the government’s economic plans.

Their view: “The chancellor set the stage for a new high tax economy – rather than the high wage economy pledged by the Prime Minister, or the low tax one favoured by many Conservative MPs”.

However, the think tank is warning that the combination of upcoming tax rises, combined with rising inflation and growth could actually result in a “flat recovery for household living standards”.

The chancellor was given a slightly better-than-anticipated outlook for the public finances yesterday, but the outlook is less positive for people’s personal financial situation. With inflation on the up, household incomes are forecast to stagnate.

We’ll be taking a look at all the reaction to Wednesday’s budget and spending review during the day.

Meanwhile, oil giant Royal Dutch Shell has just reported a 25% slump in third quarter profits compared with the prior three months, taking them to $4.1bn. The firm’s earnings came in below analysts’ expectations.

The company has also set itself some new emissions targets, pledging to cut absolute emissions from its operations and electricity it uses by half by 2030, when compared with 2016.

Shell has already set the goal of reaching net zero emissions by 2050.

The agenda:

  • 08.45 BST Germany unemployment rate
  • 12.45 BST ECB interest rate announcement
  • 13.30 BST ECB press conference
  • 13.30 BST US Q3 GDP figures
  • 13.30 BST US weekly unemployment claims
  • 21.30 BST Quarterly results from US firms including Amazon, Comcast, and Starbucks

Updated

Contributors

Joanna Partridge

The GuardianTramp

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