April 12, 2024 • 21 mins
Your morning briefing, the business news you need in just 15 minutes.
On today's podcast:
(1) Morgan Stanley shares fell the most in five months after a report that a cadre of US regulators are scrutinising the firm’s efforts to prevent potential money laundering by wealthy clients.
(2) The European Central Bank held interest rates steady for a fifth meeting, while sending its clearest signal yet that cooling inflation will soon allow it to commence cuts.
(3) The UK economy grew for a second month in February, suggesting a recovery from recession is now under way. Gross domestic product rose 0.1% from January, the Office for National Statistics said Friday, in line with the gain forecast by economists.
(4) Ex-Federal Reserve Chair Ben Bernanke is set to deliver his verdict on the Bank of England’s forecasting process on Friday at noon London time. Ahead of publication time, we look at the three most important questions the review poses for markets
(5) Credit traders at Barclays and HSBC are among those making a market for clients to bet against the debt of Thames Water amid an escalating crisis at the UK’s largest water utility.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
This is the Bloomberg Daybreak podcast, available every morning on Apple,
Spotify or wherever you listen. It's Friday, the twelfth of
April here in London.
Speaker 2 (00:09):
I'm Caroline Hitki and I'm Stephen Carroll. Coming up today.
Shares in the Wall Street Giant Morgan Stanley fall on
reports of multiple investigations into its US wealthy units.
Speaker 1 (00:20):
Global rates repricing puts the European Central Bank contract to
cut interest rates before the FED and the Bank of England.
Speaker 2 (00:27):
Plus putting big tech on notice. The UK's Competition watchdog
says it's watching AI investments by Apple, Alphabet and Amazon.
Speaker 1 (00:36):
Let's start with a roundup of our top stories. Morgan
Stanley's shares have fallen by more than five percent or
reports that a number of US regulators are scrutinizing the
firm's efforts to prevent potential money laundering by wealthy clients.
The Wall Street Journal says these Securities and Exchange Commission,
the Officer of the Control of the Currency and other
Treasury Department offices are looking into this issue, and Morgan
(00:59):
Stanley spokesperson a client to comment on the story. Bloomberg
Intelligences Elliot Stein says the investigation has been in the
works for some time.
Speaker 3 (01:07):
We already knew from November that the Federal Reserve was
investigating more instantly on this very issue. This story suggests
that the probe is a little broader and other agencies
are looking to including the SEC. The ROCC inserts, you
know it's more than just a FED rate now.
Speaker 1 (01:24):
Elliott Stein says the probes come as the US government
ramps up pressure on the industry to tighten money laundering
controls as authorities make greater use of sanctions.
Speaker 2 (01:35):
The European Center Bank Policy measor Mark and kazakhs says
the ECB is on track to start cutting interest rates
in June. He was speaking after the Central Bank held
interest rates on Thursday. Kazaks says if nothing really changes
on the inflation outlook, then the ECB will move at
its next meeting. Speaking after yesterday's decision, President Christine Laguard
insisted the Central Bank is not pre committing to a
(01:56):
rate path.
Speaker 4 (01:57):
We are determined to ensure that inflation returns to our
two percent medium term target in a timely manner. We
consider that the key ECB interest rates are at levels
that are making a substantial contribution to the ongoing disinflation process.
Our future decisions will ensure that our policy rate will
(02:18):
stay sufficiently restrictive for as long as necessary.
Speaker 2 (02:23):
Christine Leguard also reiterated the ECB doesn't take its queue
from the Federal Reserve, although she had concedes that quote
anything that happens matters to us. While the Greek Central
Bank Governor Janis Joanares has said now is the time
to diverge, as the situations in the Euro Area and
the US are completely different.
Speaker 1 (02:42):
Well, in the United States, there is increasing uncertainty about
when the Federal Reserve will cut interest rates. The Boston
Fed President Susan Collins says that rat cars may need
to come later than previously thought. Here's what she told
the Economic Club of New York or.
Speaker 5 (02:57):
Recent data had not materially changed my outlook, but they
do highlight uncertainties related to timing and the need for patients.
Recognizing that disinflation may continue to be uneven, and this
also implies that less easing of policy this year than
previously thought may be warranted.
Speaker 1 (03:19):
Susan Collins she does not vote on the Monetary Policy
Committee this year, but her comments come as if vests
become increasingly hawkish on the prospects of FED cuts this year,
Traders now expect the center band to reduce interest rates
just twice in twenty twenty four, starting in September.
Speaker 2 (03:36):
Just some breaking news this hour, the UK economy grew
byzo point one percent in the month of February, pointing
to the country emerging from recession in the first quarter.
It follows growth for January being revised upwards to zero
point three percent. After long period of stagnation over the
past two years, Boomberg Economics sees the outlook brightening in
the UK. High frequency indicators like PMI and retail sales
(03:59):
suggest momentum has gathered pace in the beginning of this year.
Speaker 1 (04:03):
The form of Federal Reserve Chair Ben Bonanki will deliver
his recommendations on the Bank of England's forecasting process today.
Bloomberg understands that Bananki will suggest the BANG adopt a
flexible set of scenarios. His report was commissioned last July
after the Bank of England failed to predict inflation would
hit a four decade high of more than eleven percent.
(04:25):
But Bloomberg Economics, Suzanna and Rode says that the bank
wasn't alone in that failure.
Speaker 6 (04:31):
We look at the forecast record of the BUECB and
the FED, and we actually see that there's nothing particularly
wrong with the BWE. The scale of the forecast errors
was very similar across the three central banks and also
close to our own forecast errors in the private sector.
So what we think that the report will focus on,
it's not so much on the ways to improve the forecast,
(04:52):
because forecast errors are sort of inevitable in the area
where we're in, but more on the communication of the BWE,
because the BUE, I think one of the challenges of
the Jewish communication is that it doesn't really give markets
a say about what it thinks it's the right path
for rates over the long term.
Speaker 1 (05:10):
Anna and dar Day and the rest of the Bloomberg
Economics team will be here to offer reaction to that
report when it's released at mid date London time.
Speaker 2 (05:18):
Today, oil prices are continuing to rise as Israel braces
for a potential attack from Iran. Brent Krude is trading
over ninety dollars a barrel after closing lower in the
previous session. The news comes as the US and its
Allies are anticipating an attack on Israel in response to
a strike on Iran's diplomatic compound in Syria last week. Elsewhere,
(05:40):
Russian attacks on Ukrainian energy infrastructure have also spurred bullish
activity in the oil options market. The International Energy Agency
will provide a snapshot of the market later today, giving
more insight into global balances.
Speaker 1 (05:54):
Credit traders at Barclays and HSBC are making a market
for bets against the day of Thames Water, according to
people familiar with the matter, amid an escalating crisis at
the UK's largest water utility. Short interest on some of
Thames's bonds has surged in the past week as trade
is bet the company is headed for restructuring. Parent company,
(06:16):
Kember Water Holdings, defaulted last week after shareholders refused to
inject more capital into the business following a standoff with
the water regulator off What. Representatives for HSBC and Barcley's
declined to comment.
Speaker 2 (06:30):
Big tech investments into AI are sparking scrutiny from the
UK's Competition and Markets Authority. The CMA says it has
real concerns about deals involving the technology. Bloombergs TEMA at
a Bio has the details.
Speaker 7 (06:42):
Britain's antitrust watchdogs says it's uncovered an interconnected web of
partnerships and investments that could be allowing big firms to
shape the AI market in their own interest. The CMA
looked into deals around AI foundation models by tech giants
including Google, Apple and Microsoft. These firms have been pouring
money into some of the most promising AI startups globally.
(07:05):
The CMA says it will be watching development closely and
may use its existing powers to intervene or wait until
those are reinforced in the New Digital Markets Act, which
comes into force this summer. In London, to you add
a bio Bloomberg Radio.
Speaker 8 (07:20):
Now on to the Bank of England.
Speaker 2 (07:22):
The former Federal Reserve chair Ben Bernanki was asked last
July to lead a review of the BOEES forecasts after
the bank failed to predict inflation would hit a four
decade high of more than eleven percent and subsequently raised
interest rates to a fifteen year high of five and
a quarter percent. It's thought Bernanki will suggest the Bank
of England adopt a new innovation, a flexible set of scenarios,
(07:44):
in a bid to update its forecasting process and repair
its battered reputation. Joining us now to discuss as Michael Saunders,
former Bank of England policymaker and now a senior advisor
at Oxford Economics.
Speaker 8 (07:54):
Michael, good morning to you.
Speaker 2 (07:56):
I wanted to start by actually asking for your reaction
to the latest growth figures we've had out for the
UK point one percent growth in February, or a vision
upwards for the January figure as well. It looks like
we're moving out of that recession, yes.
Speaker 9 (08:09):
But it was never much of a recession to start with,
was it?
Speaker 10 (08:12):
A look at the big pictures, the UK economy has
been pretty flat since late twenty twenty two. My minor
dip in the second half of last year, very low
growth in the first half of this year, but it's
a pretty flat economy and I think that's going to.
Speaker 9 (08:25):
Be the picture for much of the rest of this
year as well.
Speaker 1 (08:28):
Okay, so the reaction to the GDP data then this morning,
perhaps we can get onto how the UK gets out
of that little later in our conversation, Michael, in terms
of the ben Banankee review that will come out at
twelve noon today, we know little about actually what is
going to emerge. Andrew Bailey Ben BANANKIV said nothing about
(08:49):
it really, but we expect from the Banankee Review to
see perhaps the idea of ditching the fan shot. So
this is the kind of long held method that the
Bank of England uses to present the probability distribution around
the Bank of England's inflation forecast, and that that could
be replaced by scenarios. Is that what you expect the
(09:11):
review to come up with and would that be a
good move in a more uncertain economic world.
Speaker 10 (09:18):
Yes, it is one of the changes which I think
the review will propose, and it would be a good idea.
That the fan charts are an attempt to try to
convey the uncertainties around the central forecast.
Speaker 9 (09:32):
The problem is that.
Speaker 10 (09:33):
The fan charts are so wide by the end of
the forecast period two to three years ahead that they
really serve no purpose. They sort of say, well, anything
could happen that far ahead. I think the advantage of
scenarios allows the Bank of England to illustrate what might
happen to the economy and interest rates if some of
the key risks which the NPC talk about were to materialize.
(09:58):
Right now, you can imagine for exam, there might be
around the central forecast an upside scenario of perhaps sticky
paid growth growth, pay growth being higher than the NPC expects. Well,
that will probably be more persistent inflation for a period
and interest rates staying higher for longer. You can imagine
the downside scenario, perhaps one in which the economy is weaker,
(10:19):
slips back into recession. Maybe then inflation falls quicker and
interest rates come down quicker. To me, that's a much
more useful way to illustrate the uncertainty than just fan
chance of ever increasing width sits change, which I hope
he'll propose.
Speaker 2 (10:36):
Is there a risk though that that makes the bank's
communication more complex and perhaps more difficult to read if
you think about the headlines that could be produced by
a particular downside scenario forecast and how that might affect
perceptions of the Bank of England.
Speaker 9 (10:53):
Well, the NPC.
Speaker 10 (10:55):
Always talk about risks around the central forecast in their
regular report. What they haven't done previously is to sort
of produce an illustrative path for what might happen if
those forecasts were to come through. Now, look, all forecasts,
all scenarios have the limitations that they may not cover
(11:15):
the actual shocks which occur. Right, you can imagine a
scenario in late twenty twenty one would not have included
Russia's invasion of Ukraine and the big surge of energy prices,
So in that sense, the scenarios wouldn't have covered all
of the risks which actually materialized. But perhaps in early
twenty twenty two, when that invasion was occurring, you might
(11:37):
have had a scenario which showed a much more persistent
and greater rise in energy prices than energy markets then implied,
and the resultants pressures on inflation, and that would have
been a useful device to illustrate, well, look, if this
risk comes through, then the economic outlook could have been
very different to what we expected now. Of course, if
(11:58):
people externally eat all these things as promises, then they're
going to say, well, you told us this was going
to happen.
Speaker 9 (12:05):
And that's not what's happened. But provided you t beat them.
Speaker 10 (12:08):
As forecasts based on current information and assumptions, and with
the inherent limitations of any forecasts, I think it's an
improvement on what we've had previously.
Speaker 1 (12:20):
Okay, so potential improvement. Michael, we mentioned at the beginning
of the introduction the Bank of England's battered reputation, and
this is partly why the Banankie reviews come about. I
suppose do you think that BANANKI will be as lenient
on the Bank of England as supportive of the Bank
of England as some have talked about in terms of
(12:42):
the difficulties of the Bank of England's inflation forecasting being
basically no worse than others. That was what Andrew Bailey
has talked about that actually that surge in inflation very
few banks managed to predict.
Speaker 10 (12:54):
Well.
Speaker 1 (12:55):
Do you think that BANANKI will be as lenient on
the Bank of England?
Speaker 10 (12:59):
Okay, I think it's fair to say that all central
banks missed the strong rise in inflation that we saw
over the last few years, all of the major ones,
and I think the Bankinger's record on that is really
no better or worse than the other.
Speaker 9 (13:14):
Major central banks. Look.
Speaker 10 (13:16):
I also think that you shouldn't think of a review
as being solely a response to forecast error. The Central
Bank of New Zealand does regular expert led external reviews
of its forecast process, its comms, and its policy decisions.
Speaker 9 (13:34):
These reviews take place every five years or so.
Speaker 10 (13:37):
As a regular thing, and I think for the Bank
of England and indeed other central banks, the idea of
having a regular, expert led external review will be a
very useful idea. You don't do it only when things
have gone wrong, but you just do it as a
regular process in order to try to ensure that the
(13:58):
Central Bank is keeping up with practice, learning the lessons
from its own experience, in the experience of other central banks.
The Banking has been publishing forecast for twenty five years.
They've tweaked things a bit along the way. We should
just view this review as a chance to learn the
lessons from that period and improve things accordingly.
Speaker 2 (14:19):
I want to come back to the challenges currently facing
the Bank of England though as well. It's been a
big week of repricing of what markets are expecting from
central banks. Looking now at just two interest rate cuts
being priced in for the Bank of England this year,
does that sound right to you?
Speaker 9 (14:37):
Personally?
Speaker 10 (14:38):
I think they'll cut a little bit more than that.
I would be more in the camp of thinking that
they'll cut about three times, with a first cut in
the next few months, probably not May, more likely June,
conceivably August. There's a difference between the inflation paths in
Europe and the UK on one side and the US
on the other. In Europe and the UK, inflation is
(14:59):
returning quick target. In the UK will probably get back
to two percent inflation in the April figures, the figures
for this month, which will be published in the middle
of May. Inflation then probably is below the target in
the rest of the second quarter, en the d probably
for the rest of this year. And that's a slightly
different path to the US, where inflation is a little
(15:20):
stickier and settling a little bit further above target. Now
the FED it matters a little bit for the UK
in the sense that anything that matters around the world
matters to the UK because we're an open economy. But
the MPC are not slavishly following the FED. And if
the UK economic output outlook is different and more sluggish
(15:44):
economy fas to drop in inflation than in the US,
I think it's quite reasonable to expect the NPC will
cut a little earlier than the US.
Speaker 9 (15:53):
I don't think interest.
Speaker 10 (15:54):
Places in the UK will come rattling down very quickly,
but we're in a pretty restrictive stance at the moment. Moment,
there's an ongoing sizeable lagged effects of the previous tightening
as people with fixed rate mortgages have to reset, and
I think they can afford to ease back to a
somewhat less restrictive stance over the rest.
Speaker 9 (16:13):
Of this year.
Speaker 1 (16:15):
There are doubts though, certainly when it comes to the ECB,
and we saw Christine Laguard yesterday have to moderate her
language around that idea that the ECB could could move
and diverge significantly from the FED. I mean there is
that threat to the UK also that the UK can't
ignore the Federal Reserve.
Speaker 10 (16:36):
No correct, So it's a balance between the NPC and
not slavishly following the FED, but nor do they ignore them.
It's a factor to take into account. Now, if you
want to make a channel under which the Federal Reserve's
behavior would matter a lot for the UK, it would
have to be through the exchange rate, right, so if
exchange differentials, so if interest rate differentials were to cause
(16:58):
the pound to weaken significantly, than that would limit the
NPC's room for action. But if that doesn't happen, because
the economies themselves one slightly divergent paths weaker growth, weaker
inflation in the UK, then it's reasonable to expect that
interest rates also would diverge slightly. I should stress I
think the FED will probably still be cutting interest rates
(17:20):
over the rest of this year. So if you like,
the broad direction of both central banks is the same,
it just may not be exactly the same timing.
Speaker 2 (17:28):
Would those cuts if they come earlier as you're expecting,
help to boost that anemic growth outlook that you see
for the UK.
Speaker 3 (17:38):
Not much?
Speaker 10 (17:39):
And you know, one of the reasons for the MPC
to cut is that the munch policy lags in the
UK are much longer than they used to be because
of the widespread shifts of household mortgages from variable rate
debts to five year fixed which means that there's still
a sizable ongoing lag defects. The pre is tightening coming through.
(18:02):
If bank rate is unchanged at current levels, the average
interest rate on the stock of mortgage debt will continue
to rise all the way through this year all the
way through next year. This household's refinance on it from
expiring mortgages onto more expensive mortgages. So just to prevent
that ongoing tightening, you need to trim back the current
(18:24):
level of interest rates a little bit.
Speaker 1 (18:26):
Are you concerned? It's all about the narrowness of the
impact of interest rate increases of speaking to ALBERTA. Gallow
yesterday see Andromedic Capital Management, and you know he was
saying that largely the interest rate increases only affect a
very small slice of the population. That's been quite a
deep concern.
Speaker 10 (18:45):
Well, this is part of the way in which the
munt policy transmission process has changed in the UK. Fewer
households have a mortgage at all, and obviously the channel
from the banking and changing in rates onto household mortgage
payments used to be a powerful part of the monkey
policy transmission mechanism is less powerful now and it's slower
(19:06):
because households more households have fixed mortgage debt. That doesn't
mean that munket policy doesn't work, but it probably is
a bit less powerful and more slower acting than.
Speaker 9 (19:19):
It used to be.
Speaker 10 (19:20):
The NPC, I think, probably need to ensure that they
take that into account in their policy decisions. The risk
of delaying interest rate cuts until pay growth is back
to a target consistent pace is that then with the
slower pass through of easing, you would condemn the economy
(19:41):
to unnecessary period of weakness and end up with inflation
below target. So the NPC, i think, need to take
account to the fact that the science are that the
pay growth is slowing towards a target consistent pace and
the lagged effects of typing a still working through and
will be able to cut rates a little bit over
the US this year.
Speaker 2 (20:01):
Another difficulty the Bank of England is facing this year
is the timing of the general election expected before the
end of the year and when interest rate.
Speaker 8 (20:09):
Cuts will fall.
Speaker 2 (20:11):
How much of a political risk is the election to
the Bank of England's outlook and how worried do they
need to be to be accused of being politicized and
when they decide to cast okay.
Speaker 9 (20:23):
So for the NPC, this is just a nun issue.
The NPC will not be.
Speaker 10 (20:30):
Influenced in the infant rate decisions by political factors or
the approach of the election or whatever the political cycle says.
Speaker 9 (20:38):
So just disregard that it doesn't matter. For the NPC.
Speaker 10 (20:42):
They will be steering by the path of the economy
and the inflation outlook political factors who really don't matter.
Speaker 8 (20:50):
For this is Bloomberg Daybreak Europe.
Speaker 2 (20:53):
You're morning brief on the stories making news from London
to Wall Streets and beyond.
Speaker 1 (20:58):
Look for us on your podcast feed every morning, on Apple, Spotify,
and anywhere else you get your podcasts.
Speaker 2 (21:04):
You can also listen live each morning on London Dab Radio,
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Speaker 1 (21:10):
Our flagship New York station, is also available on your
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I'm Caroline Hepka and.
Speaker 8 (21:19):
I'm Stephen Carol.
Speaker 2 (21:20):
Join us again tomorrow morning for all the news you
need to start your day right here on Bloomberg Daybreak
Europe
This is the Bloomberg Daybreak podcast, available every morning on Apple,
Spotify or wherever you listen. It's Friday, the twelfth of
April here in London.
Speaker 2 (00:09):
I'm Caroline Hitki and I'm Stephen Carroll. Coming up today.
Shares in the Wall Street Giant Morgan Stanley fall on
reports of multiple investigations into its US wealthy units.
Speaker 1 (00:20):
Global rates repricing puts the European Central Bank contract to
cut interest rates before the FED and the Bank of England.
Speaker 2 (00:27):
Plus putting big tech on notice. The UK's Competition watchdog
says it's watching AI investments by Apple, Alphabet and Amazon.
Speaker 1 (00:36):
Let's start with a roundup of our top stories. Morgan
Stanley's shares have fallen by more than five percent or
reports that a number of US regulators are scrutinizing the
firm's efforts to prevent potential money laundering by wealthy clients.
The Wall Street Journal says these Securities and Exchange Commission,
the Officer of the Control of the Currency and other
Treasury Department offices are looking into this issue, and Morgan
(00:59):
Stanley spokesperson a client to comment on the story. Bloomberg
Intelligences Elliot Stein says the investigation has been in the
works for some time.
Speaker 3 (01:07):
We already knew from November that the Federal Reserve was
investigating more instantly on this very issue. This story suggests
that the probe is a little broader and other agencies
are looking to including the SEC. The ROCC inserts, you
know it's more than just a FED rate now.
Speaker 1 (01:24):
Elliott Stein says the probes come as the US government
ramps up pressure on the industry to tighten money laundering
controls as authorities make greater use of sanctions.
Speaker 2 (01:35):
The European Center Bank Policy measor Mark and kazakhs says
the ECB is on track to start cutting interest rates
in June. He was speaking after the Central Bank held
interest rates on Thursday. Kazaks says if nothing really changes
on the inflation outlook, then the ECB will move at
its next meeting. Speaking after yesterday's decision, President Christine Laguard
insisted the Central Bank is not pre committing to a
(01:56):
rate path.
Speaker 4 (01:57):
We are determined to ensure that inflation returns to our
two percent medium term target in a timely manner. We
consider that the key ECB interest rates are at levels
that are making a substantial contribution to the ongoing disinflation process.
Our future decisions will ensure that our policy rate will
(02:18):
stay sufficiently restrictive for as long as necessary.
Speaker 2 (02:23):
Christine Leguard also reiterated the ECB doesn't take its queue
from the Federal Reserve, although she had concedes that quote
anything that happens matters to us. While the Greek Central
Bank Governor Janis Joanares has said now is the time
to diverge, as the situations in the Euro Area and
the US are completely different.
Speaker 1 (02:42):
Well, in the United States, there is increasing uncertainty about
when the Federal Reserve will cut interest rates. The Boston
Fed President Susan Collins says that rat cars may need
to come later than previously thought. Here's what she told
the Economic Club of New York or.
Speaker 5 (02:57):
Recent data had not materially changed my outlook, but they
do highlight uncertainties related to timing and the need for patients.
Recognizing that disinflation may continue to be uneven, and this
also implies that less easing of policy this year than
previously thought may be warranted.
Speaker 1 (03:19):
Susan Collins she does not vote on the Monetary Policy
Committee this year, but her comments come as if vests
become increasingly hawkish on the prospects of FED cuts this year,
Traders now expect the center band to reduce interest rates
just twice in twenty twenty four, starting in September.
Speaker 2 (03:36):
Just some breaking news this hour, the UK economy grew
byzo point one percent in the month of February, pointing
to the country emerging from recession in the first quarter.
It follows growth for January being revised upwards to zero
point three percent. After long period of stagnation over the
past two years, Boomberg Economics sees the outlook brightening in
the UK. High frequency indicators like PMI and retail sales
(03:59):
suggest momentum has gathered pace in the beginning of this year.
Speaker 1 (04:03):
The form of Federal Reserve Chair Ben Bonanki will deliver
his recommendations on the Bank of England's forecasting process today.
Bloomberg understands that Bananki will suggest the BANG adopt a
flexible set of scenarios. His report was commissioned last July
after the Bank of England failed to predict inflation would
hit a four decade high of more than eleven percent.
(04:25):
But Bloomberg Economics, Suzanna and Rode says that the bank
wasn't alone in that failure.
Speaker 6 (04:31):
We look at the forecast record of the BUECB and
the FED, and we actually see that there's nothing particularly
wrong with the BWE. The scale of the forecast errors
was very similar across the three central banks and also
close to our own forecast errors in the private sector.
So what we think that the report will focus on,
it's not so much on the ways to improve the forecast,
(04:52):
because forecast errors are sort of inevitable in the area
where we're in, but more on the communication of the BWE,
because the BUE, I think one of the challenges of
the Jewish communication is that it doesn't really give markets
a say about what it thinks it's the right path
for rates over the long term.
Speaker 1 (05:10):
Anna and dar Day and the rest of the Bloomberg
Economics team will be here to offer reaction to that
report when it's released at mid date London time.
Speaker 2 (05:18):
Today, oil prices are continuing to rise as Israel braces
for a potential attack from Iran. Brent Krude is trading
over ninety dollars a barrel after closing lower in the
previous session. The news comes as the US and its
Allies are anticipating an attack on Israel in response to
a strike on Iran's diplomatic compound in Syria last week. Elsewhere,
(05:40):
Russian attacks on Ukrainian energy infrastructure have also spurred bullish
activity in the oil options market. The International Energy Agency
will provide a snapshot of the market later today, giving
more insight into global balances.
Speaker 1 (05:54):
Credit traders at Barclays and HSBC are making a market
for bets against the day of Thames Water, according to
people familiar with the matter, amid an escalating crisis at
the UK's largest water utility. Short interest on some of
Thames's bonds has surged in the past week as trade
is bet the company is headed for restructuring. Parent company,
(06:16):
Kember Water Holdings, defaulted last week after shareholders refused to
inject more capital into the business following a standoff with
the water regulator off What. Representatives for HSBC and Barcley's
declined to comment.
Speaker 2 (06:30):
Big tech investments into AI are sparking scrutiny from the
UK's Competition and Markets Authority. The CMA says it has
real concerns about deals involving the technology. Bloombergs TEMA at
a Bio has the details.
Speaker 7 (06:42):
Britain's antitrust watchdogs says it's uncovered an interconnected web of
partnerships and investments that could be allowing big firms to
shape the AI market in their own interest. The CMA
looked into deals around AI foundation models by tech giants
including Google, Apple and Microsoft. These firms have been pouring
money into some of the most promising AI startups globally.
(07:05):
The CMA says it will be watching development closely and
may use its existing powers to intervene or wait until
those are reinforced in the New Digital Markets Act, which
comes into force this summer. In London, to you add
a bio Bloomberg Radio.
Speaker 8 (07:20):
Now on to the Bank of England.
Speaker 2 (07:22):
The former Federal Reserve chair Ben Bernanki was asked last
July to lead a review of the BOEES forecasts after
the bank failed to predict inflation would hit a four
decade high of more than eleven percent and subsequently raised
interest rates to a fifteen year high of five and
a quarter percent. It's thought Bernanki will suggest the Bank
of England adopt a new innovation, a flexible set of scenarios,
(07:44):
in a bid to update its forecasting process and repair
its battered reputation. Joining us now to discuss as Michael Saunders,
former Bank of England policymaker and now a senior advisor
at Oxford Economics.
Speaker 8 (07:54):
Michael, good morning to you.
Speaker 2 (07:56):
I wanted to start by actually asking for your reaction
to the latest growth figures we've had out for the
UK point one percent growth in February, or a vision
upwards for the January figure as well. It looks like
we're moving out of that recession, yes.
Speaker 9 (08:09):
But it was never much of a recession to start with,
was it?
Speaker 10 (08:12):
A look at the big pictures, the UK economy has
been pretty flat since late twenty twenty two. My minor
dip in the second half of last year, very low
growth in the first half of this year, but it's
a pretty flat economy and I think that's going to.
Speaker 9 (08:25):
Be the picture for much of the rest of this
year as well.
Speaker 1 (08:28):
Okay, so the reaction to the GDP data then this morning,
perhaps we can get onto how the UK gets out
of that little later in our conversation, Michael, in terms
of the ben Banankee review that will come out at
twelve noon today, we know little about actually what is
going to emerge. Andrew Bailey Ben BANANKIV said nothing about
(08:49):
it really, but we expect from the Banankee Review to
see perhaps the idea of ditching the fan shot. So
this is the kind of long held method that the
Bank of England uses to present the probability distribution around
the Bank of England's inflation forecast, and that that could
be replaced by scenarios. Is that what you expect the
(09:11):
review to come up with and would that be a
good move in a more uncertain economic world.
Speaker 10 (09:18):
Yes, it is one of the changes which I think
the review will propose, and it would be a good idea.
That the fan charts are an attempt to try to
convey the uncertainties around the central forecast.
Speaker 9 (09:32):
The problem is that.
Speaker 10 (09:33):
The fan charts are so wide by the end of
the forecast period two to three years ahead that they
really serve no purpose. They sort of say, well, anything
could happen that far ahead. I think the advantage of
scenarios allows the Bank of England to illustrate what might
happen to the economy and interest rates if some of
the key risks which the NPC talk about were to materialize.
(09:58):
Right now, you can imagine for exam, there might be
around the central forecast an upside scenario of perhaps sticky
paid growth growth, pay growth being higher than the NPC expects. Well,
that will probably be more persistent inflation for a period
and interest rates staying higher for longer. You can imagine
the downside scenario, perhaps one in which the economy is weaker,
(10:19):
slips back into recession. Maybe then inflation falls quicker and
interest rates come down quicker. To me, that's a much
more useful way to illustrate the uncertainty than just fan
chance of ever increasing width sits change, which I hope
he'll propose.
Speaker 2 (10:36):
Is there a risk though that that makes the bank's
communication more complex and perhaps more difficult to read if
you think about the headlines that could be produced by
a particular downside scenario forecast and how that might affect
perceptions of the Bank of England.
Speaker 9 (10:53):
Well, the NPC.
Speaker 10 (10:55):
Always talk about risks around the central forecast in their
regular report. What they haven't done previously is to sort
of produce an illustrative path for what might happen if
those forecasts were to come through. Now, look, all forecasts,
all scenarios have the limitations that they may not cover
(11:15):
the actual shocks which occur. Right, you can imagine a
scenario in late twenty twenty one would not have included
Russia's invasion of Ukraine and the big surge of energy prices,
So in that sense, the scenarios wouldn't have covered all
of the risks which actually materialized. But perhaps in early
twenty twenty two, when that invasion was occurring, you might
(11:37):
have had a scenario which showed a much more persistent
and greater rise in energy prices than energy markets then implied,
and the resultants pressures on inflation, and that would have
been a useful device to illustrate, well, look, if this
risk comes through, then the economic outlook could have been
very different to what we expected now. Of course, if
(11:58):
people externally eat all these things as promises, then they're
going to say, well, you told us this was going
to happen.
Speaker 9 (12:05):
And that's not what's happened. But provided you t beat them.
Speaker 10 (12:08):
As forecasts based on current information and assumptions, and with
the inherent limitations of any forecasts, I think it's an
improvement on what we've had previously.
Speaker 1 (12:20):
Okay, so potential improvement. Michael, we mentioned at the beginning
of the introduction the Bank of England's battered reputation, and
this is partly why the Banankie reviews come about. I
suppose do you think that BANANKI will be as lenient
on the Bank of England as supportive of the Bank
of England as some have talked about in terms of
(12:42):
the difficulties of the Bank of England's inflation forecasting being
basically no worse than others. That was what Andrew Bailey
has talked about that actually that surge in inflation very
few banks managed to predict.
Speaker 10 (12:54):
Well.
Speaker 1 (12:55):
Do you think that BANANKI will be as lenient on
the Bank of England?
Speaker 10 (12:59):
Okay, I think it's fair to say that all central
banks missed the strong rise in inflation that we saw
over the last few years, all of the major ones,
and I think the Bankinger's record on that is really
no better or worse than the other.
Speaker 9 (13:14):
Major central banks. Look.
Speaker 10 (13:16):
I also think that you shouldn't think of a review
as being solely a response to forecast error. The Central
Bank of New Zealand does regular expert led external reviews
of its forecast process, its comms, and its policy decisions.
Speaker 9 (13:34):
These reviews take place every five years or so.
Speaker 10 (13:37):
As a regular thing, and I think for the Bank
of England and indeed other central banks, the idea of
having a regular, expert led external review will be a
very useful idea. You don't do it only when things
have gone wrong, but you just do it as a
regular process in order to try to ensure that the
(13:58):
Central Bank is keeping up with practice, learning the lessons
from its own experience, in the experience of other central banks.
The Banking has been publishing forecast for twenty five years.
They've tweaked things a bit along the way. We should
just view this review as a chance to learn the
lessons from that period and improve things accordingly.
Speaker 2 (14:19):
I want to come back to the challenges currently facing
the Bank of England though as well. It's been a
big week of repricing of what markets are expecting from
central banks. Looking now at just two interest rate cuts
being priced in for the Bank of England this year,
does that sound right to you?
Speaker 9 (14:37):
Personally?
Speaker 10 (14:38):
I think they'll cut a little bit more than that.
I would be more in the camp of thinking that
they'll cut about three times, with a first cut in
the next few months, probably not May, more likely June,
conceivably August. There's a difference between the inflation paths in
Europe and the UK on one side and the US
on the other. In Europe and the UK, inflation is
(14:59):
returning quick target. In the UK will probably get back
to two percent inflation in the April figures, the figures
for this month, which will be published in the middle
of May. Inflation then probably is below the target in
the rest of the second quarter, en the d probably
for the rest of this year. And that's a slightly
different path to the US, where inflation is a little
(15:20):
stickier and settling a little bit further above target. Now
the FED it matters a little bit for the UK
in the sense that anything that matters around the world
matters to the UK because we're an open economy. But
the MPC are not slavishly following the FED. And if
the UK economic output outlook is different and more sluggish
(15:44):
economy fas to drop in inflation than in the US,
I think it's quite reasonable to expect the NPC will
cut a little earlier than the US.
Speaker 9 (15:53):
I don't think interest.
Speaker 10 (15:54):
Places in the UK will come rattling down very quickly,
but we're in a pretty restrictive stance at the moment. Moment,
there's an ongoing sizeable lagged effects of the previous tightening
as people with fixed rate mortgages have to reset, and
I think they can afford to ease back to a
somewhat less restrictive stance over the rest.
Speaker 9 (16:13):
Of this year.
Speaker 1 (16:15):
There are doubts though, certainly when it comes to the ECB,
and we saw Christine Laguard yesterday have to moderate her
language around that idea that the ECB could could move
and diverge significantly from the FED. I mean there is
that threat to the UK also that the UK can't
ignore the Federal Reserve.
Speaker 10 (16:36):
No correct, So it's a balance between the NPC and
not slavishly following the FED, but nor do they ignore them.
It's a factor to take into account. Now, if you
want to make a channel under which the Federal Reserve's
behavior would matter a lot for the UK, it would
have to be through the exchange rate, right, so if
exchange differentials, so if interest rate differentials were to cause
(16:58):
the pound to weaken significantly, than that would limit the
NPC's room for action. But if that doesn't happen, because
the economies themselves one slightly divergent paths weaker growth, weaker
inflation in the UK, then it's reasonable to expect that
interest rates also would diverge slightly. I should stress I
think the FED will probably still be cutting interest rates
(17:20):
over the rest of this year. So if you like,
the broad direction of both central banks is the same,
it just may not be exactly the same timing.
Speaker 2 (17:28):
Would those cuts if they come earlier as you're expecting,
help to boost that anemic growth outlook that you see
for the UK.
Speaker 3 (17:38):
Not much?
Speaker 10 (17:39):
And you know, one of the reasons for the MPC
to cut is that the munch policy lags in the
UK are much longer than they used to be because
of the widespread shifts of household mortgages from variable rate
debts to five year fixed which means that there's still
a sizable ongoing lag defects. The pre is tightening coming through.
(18:02):
If bank rate is unchanged at current levels, the average
interest rate on the stock of mortgage debt will continue
to rise all the way through this year all the
way through next year. This household's refinance on it from
expiring mortgages onto more expensive mortgages. So just to prevent
that ongoing tightening, you need to trim back the current
(18:24):
level of interest rates a little bit.
Speaker 1 (18:26):
Are you concerned? It's all about the narrowness of the
impact of interest rate increases of speaking to ALBERTA. Gallow
yesterday see Andromedic Capital Management, and you know he was
saying that largely the interest rate increases only affect a
very small slice of the population. That's been quite a
deep concern.
Speaker 10 (18:45):
Well, this is part of the way in which the
munt policy transmission process has changed in the UK. Fewer
households have a mortgage at all, and obviously the channel
from the banking and changing in rates onto household mortgage
payments used to be a powerful part of the monkey
policy transmission mechanism is less powerful now and it's slower
(19:06):
because households more households have fixed mortgage debt. That doesn't
mean that munket policy doesn't work, but it probably is
a bit less powerful and more slower acting than.
Speaker 9 (19:19):
It used to be.
Speaker 10 (19:20):
The NPC, I think, probably need to ensure that they
take that into account in their policy decisions. The risk
of delaying interest rate cuts until pay growth is back
to a target consistent pace is that then with the
slower pass through of easing, you would condemn the economy
(19:41):
to unnecessary period of weakness and end up with inflation
below target. So the NPC, i think, need to take
account to the fact that the science are that the
pay growth is slowing towards a target consistent pace and
the lagged effects of typing a still working through and
will be able to cut rates a little bit over
the US this year.
Speaker 2 (20:01):
Another difficulty the Bank of England is facing this year
is the timing of the general election expected before the
end of the year and when interest rate.
Speaker 8 (20:09):
Cuts will fall.
Speaker 2 (20:11):
How much of a political risk is the election to
the Bank of England's outlook and how worried do they
need to be to be accused of being politicized and
when they decide to cast okay.
Speaker 9 (20:23):
So for the NPC, this is just a nun issue.
The NPC will not be.
Speaker 10 (20:30):
Influenced in the infant rate decisions by political factors or
the approach of the election or whatever the political cycle says.
Speaker 9 (20:38):
So just disregard that it doesn't matter. For the NPC.
Speaker 10 (20:42):
They will be steering by the path of the economy
and the inflation outlook political factors who really don't matter.
Speaker 8 (20:50):
For this is Bloomberg Daybreak Europe.
Speaker 2 (20:53):
You're morning brief on the stories making news from London
to Wall Streets and beyond.
Speaker 1 (20:58):
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Speaker 2 (21:04):
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Speaker 1 (21:10):
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I'm Caroline Hepka and.
Speaker 8 (21:19):
I'm Stephen Carol.
Speaker 2 (21:20):
Join us again tomorrow morning for all the news you
need to start your day right here on Bloomberg Daybreak
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