FTSE 100 falls back from record high as BoE chief economist warns against cutting interest rates too soon – business live | Business

UK banks need to improve their risk management frameworks so they can access the risks from private equity, the Bank of England has warned.

The BoE has written to chief risk officers at UK banks, giving them until the end of August to benchmark their risk management frameworks, and devise a plan to fix any gaps.

This follows a review by the Bank’s Prudential Regulatory Authority, which found that “very few” banks carry out “routine, bespoke and comprehensive stress testing” of their exposure to private equity firms.

That is a concern for the Bank, as the private equity market – which is highly leveraged – has grown considerably over the past decade. Banks’ exposures to the sector have also grown considerably, by offering them a range of financial products.

Rebecca Jackson, executive director for Authorisations, Regulatory Technology & International Supervision at the Bank, says firms need to improve their risk management swiftly.

In a speech to UK Finance this afternon, Jackson explains:

The strong growth and attractive return profile of private equity over the last 10 years has emerged during a period of relatively benign market, economic and liquidity conditions for the sector. Though the economy has seen some major bumps in the road, particularly during covid, we have avoided extended market and economic downturns. While of course this is a very good thing, it does mean that the sector remains untested. Yet the trends that this review has identified; of creeping leverage, large exposures, complicated structures, and poor risk aggregation, all suggest that banks may not be prepared for such a test, if or when it emerges.

And there is the broader and longer-term question of whether developments in the industry constitute a ‘displacement’ – a change in the macro environment or ‘technology’ of Banking, that would be a necessary albeit not sufficient condition for more systemic issues to emerge.

In any event, the need for significant improvements in risk management is clear, and it’s clear that these need to happen now; it’s better, as Shakespeare said, to be 3 hours too soon than a minute too late.

Newsflash: growth across the US private sector has slowed this month, amid signs that demand is weakening as firms cut staff.

That’s according to the latest survey of purchasing managers at American companies, from S&P Global.

The flash US PMI composite output index, which tracks activity across US companies, has dropped to a four-month low of 50.9 this month, down from 52.1 in March. That takes it close to the 50-point mark showing stagnation.

The PMI report shows that firms suffered a drop in new orders for the first time in six months in April. Firms scaled back employment for the first time in almost four years, with business confidence falling to its lowest since last November.

Chris Williamson, chief business economist at S&P Global Market Intelligence, says:

“The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.

The more challenging business environment prompted companies to cut payroll numbers at a rate not seen since the global financial crisis if the early pandemic lockdown months are excluded.

That might dampen speculation that the US Federal Reserve could raise interest rates even higher….

Kalyeena Makortoff

NatWest bosses were blessed with a snappy sub-one hour AGM this morning (likely helped by Nigel Farage only throwing criticism via social media [see earlier post], rather than in Edinburgh).

But its new chairman, Rick Haythornthwaite, was pushed to weigh in on the planned sell-off of the government’s remaining 28.9% stake. It comes ahead of a much-trailed plan to sell NatWest shares to the public later this summer, with a ‘Tell Sid’-style campaign.

The chairman told shareholders on Tuesday, that once NatWest was fully privatised, it would end a “sorry tale” for taxpayers and the banking group (which was bailed out with £46bn of taxpayer cash in 2008, when it was still known as Royal Bank of Scotland).

Haythornthwaite explained:

“I think there’s a perception there is more intervention from His Majesty’s Treasury than there actually is. I think removing that overhang is of value. It also brings to an end what is a sorry tale for the UK and a sorry tale for the bank.”

Meanwhile, Haythornthwaite also revealed that NatWest had launched an AI review, that identified where they could automate work across the banking group.

“With the use of artificial intelligence, there are material opportunities to pursue further customer benefits and increase efficiency. A bank wide exercise in 2023 identified over 100 priority use cases for AI to address manual operations processes and wider controls.

Ultimately, we want to build a NatWest Group that is simpler and more productive to better serve our customers.”

And despite some slight controversy over the CEO’s salary (for being set at the same level as his predecessor Alison Rose), all of the company’s resolutions, including those regarding pay, passed with flying colours.

Swedish streaming service Spotify is having a good day, after reporting record income in the last quarter.

Shares in Spotify have jumped by 14% at the start of trading on Wall Street, after it reported record high operating income of €168m in the last quarter.

Spotify, which announced 1,500 job cuts at the end of last year, reported today that monthly active users grew 19% year-on-year to 615 million, in the first quarter of this year

Subscribers increasing by 14% year-on-year to 239 million, while total revenue rose 20% compared with a year before.

Daniel Ek, Spotify founder & CEO, says:

“We’ve talked about 2024 as the year of monetization and we’re delivering on that ambition. Now as we’ve shifted to focus on strong revenue growth and margin expansion, we see a clear opportunity to ensure we are also continuing to grow the top of our funnel.

I feel good about the changes we are implementing and remain very confident in our ability to reach the ambitious plans we’ve outlined.”

Huw Pill appears to have driven the FTSE 100 away from its new alltime high!

The blue-chip share index has now shed all its earlier gains, and is now flat at 8023 points, where it closed last night.

That wipes out all the earlier rally that pushed the Footsie to a new intraday high of 8076 points early this morning.

The FTSE 100 is sliding as the pound strengthens by half a cent, back to $1.24.

That is hitting the share price of mining giants listed in London, as they make their earnings in dollars.

The BoE chief economist seems to have done the damage, by arguing this lunchtime that conditions haven’t changed in the last few weeks. That is dampening hopes of early interest rate cuts, as is Huw Pill’s warning that it would be riskier to cut too early than too late.

Bank of England chief economist Huw Pill predicts that inflation is likely to fall to the Bank’s 2% target, or even lower, in the coming months.

But, he also tells his audience in London that the rate of inflation could bounce back up again.

So we shouldn’t get too excited if CPI falls to 2% or lower, he argues.

He also warns that it could be riskier to cut interest rates too soon, rather than leaving borrowing costs high for too long.

As Pill puts it:

In my view there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate.

Newsflash: The Bank of England’s chief economist, Huw Pill, is speaking in London now.

And he says that the first cut in UK interest rates is “somewhat closer” than at his last speech, at the start of March… but mainly due to the passage of time since!

Pill begins by telling his audience at the London campus of the University of Chicago Booth School of Business that he doesn’t believe much has changed since his last speech, on 1st March, when he said the BoE was “some way off” cutting interest rates.

Today, Pill argues that the picture has changed little in the seven weeks since.

He says:

In my view, against the background of a welcome decline in headline inflation, the outlook for UK monetary policy in the coming quarters has not changed substantially since the beginning of March.

Pill outlines how events in the Middle East are a reminder of potential external risks (although they haven’t yet had a major impact on energy prices), while the UK’s inflation rate dipped in March, as expected.

Pill explains that the Bank’s monetary policy committee needs to keep policy sufficiently restrictive to ensure inflation falls to 2% and stays there. But, he add, a cut in Bank Rate from current levels would not entirely undo the restrictive stance of policy.

And in conclusion, Pill hammers home his message that a “lack of news” means little has changed between St. David’s Day (1st March) and St. George’s Day (today).

Against a welcome backdrop of declining headline inflation anticipated by the MPC, the flow of conjunctural data since I last spoke on the monetary policy stance in Cardiff in early March has offered modest relevant news. This suggests little need to amend the assessment of the economic, inflation and policy outlook that I offered then.

In Cardiff, I concluded that, while we are making satisfactory progress in returning inflation to target, in my baseline scenario the time for cutting Bank Rate remained some way off.

That justified my vote to keep Bank Rate unchanged at the MPC’s February meeting and underpinned my subsequent decision to vote similarly in March.

The combination of little news and the passage of time have brought a Bank Rate cut somewhat closer. But the same lack of news gives me no reason to depart from the baseline that I already established on St. David’s Day.

Motorists have been hit by a jump in fuel costs, the AA has warned, with petrol across the UK now averages above 150p a litre for the first time since November.

Data collated by website Fuel Prices Online shows typical pump prices reached 150.1p per litre yesterday.

The average price of a litre of diesel is also at the highest level since November 2023, at 158.3p.

Luke Bosdet, the AA’s spokesman on pump prices, says:

“Inflation has been heading downwards at quite some speed but petrol’s rebound to 150p a litre leaves a big boulder in the road. Government data shows that for the fourth week petrol prices have been higher than at the same time a year ago. This last happened in February 2023.

Five days of falling wholesale costs, with the value of oil coming off the boil, offers hope that pump prices may not get much worse in the short-term. However, road fuel priced above 150p a litre grabs the attention of drivers and will lead some to re-tighten their belts on other spending.”