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

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

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.

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

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.

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

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.

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.

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.

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.

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”.

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”.

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.

28 Oct 202107.06 EDT

Richard Partington

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 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.

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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