Jeremy Hunt backs interest rate hikes even if they cause recession; UK retail sales rise faster than expected – business live | Business

The half-term holiday plans for thousands of families have been thrown into disarray after British Airways cancelled at least 42 more flights today, due to the impact of an IT failure.

Most of the affected flights were on short haul routes to and from Heathrow Airport on what was expected to be the busiest day for UK air travel since before the coronavirus pandemic.

Friday’s chaos was caused by planes and crew being out of position after an IT problem caused around 80 flights to be grounded on Thursday.

Around 16,000 passengers have been affected by the cancellations, PA Media reports.

At least 50 BA flights from Heathrow were cancelled on Thursday afternoon, while a large number of inbound flights were delayed for more than an hour.

BA say in a statement:

While the vast majority of our flights continue to operate today, we have cancelled some of our short-haul flights from Heathrow due to the knock-on effect of a technical issue that we experienced yesterday.

We’ve apologised to customers whose flights have been affected and offered them the option to rebook to an alternative flight with us or another carrier or request a refund.

The Bank of England has no choice but to keep hiking interest rates to fight inflation, argues Mohamed A. El-Erian, President of Queens’ College, Cambridge, and chief economic adviser at Allianz.

El-Erian told BBC Radio 4’s Today programme that the risk of stagflation (weak growth and persistently high inflation) has increased, after inflation fell by less than hoped in April (to 8.7%, data on Wednesday showed).

El-Erian, a highly respected economist, says:

I don’t think the Bank of England has any choice but to increase interest rates further.

It could well take interest rates from four and a half percent [today] all the way to five and a half percent. That’s what the market is anticipating [see earlier chart].

And that’s understandable because it has one target, to reduce inflation to 2%, and we’re well above.

But whatever the Bank of England does will be “necessary but not sufficient”, El-Erian warns. That’s because the UK economy suffers from “longer-term issues” which mean inflation here is higher than in other countries.

El-Erian says:

We have a productivity problem. We have a problem of supply chains and our changing relationship with the rest of the world. And of course, we have a labour market issue.

Unless the government steps up its efforts to increase productivity and improve supply chains and labour market functioning, we will end up in a situation where the Bank of England pushes us into recession, El-Erian warns firmly.

El-Erian also suspects that the IMF would not have sounded so optimistic on Tuesday, had it known that Wednesday’s inflation report would have been disappointing (with core inflation rising, and headline inflation higher than countries such as the US, Germany and France).

Chancellor Jeremy Hunt has pledged to support the Bank of England’s decisions on interest rates, even if rising mortgage costs push the UK into a recession.

Hunt told Sky News there could be no trade-off between cutting inflation and the risk of provoking a recession, arguing that the “only path to sustainable growth” is to bring down the high prices behind the cost-of-living crisis.

Asked by Sky News whether he was comfortable with the BoE doing whatever was needed to bring down inflation, even if that could cause a recession, Hunt said:

“Yes, because in the end, inflation is a source of instability.”

“If we want to have prosperity, if we want to grow the economy, if we want to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”

The government has pledged to halve inflation by the end of the year, which would mean CPI inflation dropping to 5% from over 10% at the start of 2023. That target looks more stretching, after inflation fell by less than expected in April.

When pressed about the danger that interest rate hikes cause a recession, Hunt stuck to his guns, saying:

“We will deliver this task and we will make sure that the government plays its part, the Bank of England plays its part. But it is not a trade-off between tackling inflation and recession. In the end the only path to sustainable growth is to bring down inflation.”

Just three days ago, Hunt was celebrating an upgraded growth forecast from the IMF, which no longer expects the UK to drop into recession this year.

That, though, was before Wednesday’s inflation data put more pressure on the Bank of England to tighten monetary policy.

Full story: Brace for 5%-plus mortgage rates….

Miles Brignall

Households looking for a new mortgage deal have been warned to expect 5%-plus fixed-rate deals in the coming weeks, after Wednesday’s inflation figures sent the money markets back into turmoil.

Nick Mendes, the mortgage technical manager at the broker John Charcol, said on Thursday that he doubted there would be any two-year fixed-rate mortgages and probably few five-year deals priced at less than 5% in the coming weeks, as lenders are forced to reprice their mortgages upwards.

Within hours of his comments, one of the UK’s biggest lenders, Nationwide, said it was increasing selected fixed and tracker rates by up to 0.45%, from Friday.

UK mortgage lenders are hiking their borrowing rates as higher-than-expected UK inflation drives up the interest rate on UK government debt.

Nationwide, the UK’s biggest building society is increasing some of its mortgage rates for new borrowing from today, saying this will ensure its rates “remain sustainable” in the current economic environment.

Other lenders have also been scrambling to raise mortgage rates, or temporarily taking products off the market to reprice them.

The rate increases, of up to 0.45 percentage points, only affect customers taking out a new mortgage deal.

The move comes as the yield (or interest rate) on UK government bonds hits the highest level since last year’s mini-budget crisis.

The yield on two-year bonds, which is used to price fixed mortgages, closed at 4.53% last night, up from 4% at the end of last week.

This is being driven by Wednesday’s disappointing inflation report, which showed prices were 8.7% higher in April than a year ago – higher than hoped. That is expected to prompt several more interest rate rises from the Bank of England.

The money markets are predicting the UK interest rates will hit 5.5% by November, up from 4.5% today, amid choppy trading in the bond markets.

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

British retail sales picked up last month, and by more than expected, as the grim weather which hit spending in March abated and people enjoyed the Easter holidays.

Retail sales volumes are estimated to have risen by 0.5% in April, new figures from the Office for National Statistics show. That follows a fall of 1.2% in March, when wet and windy conditions kept shoppers off the high street.

Sales at “non-food stores” such as department stores jumped by 1%, following a fall of 1.8% in March. The ONS says there were “strong sales in watches and jewellery, and sports equipment stores”.

This morning’s data also shows the impact of the cost of living crisis on households. Compared with April 2020, sales volumes dropped by 3% – but the value of retail sales rose by 4.7%. People spent more, to get less stuff, due to high inflation.

Also coming up today

Investors are hoping that a deal to lift the US debt ceiling, avoiding a catastrophic default, is close.

Last night, Joe Biden and Republican lawmakers appeared to be nearing a deal to cut spending and raise the debt limit.

The deal under consideration by negotiators would raise the government’s $31.4tn debt ceiling for two years while capping spending on most items, a US official told Reuters. It would also increase funding for discretionary spending on military and veterans while essentially holding non-defense discretionary spending at current year levels, the official said.

The agenda

• 7am BST: UK retail sales for April

• 7.45am BST: French consumer confidence for May

• 1.30pm BST: US PCE inflation report

• 3pm BST: University of Michigan’s US consumer confidence report