Another surprise fall in UK inflation muddies Bank of England rates message

Bank of England Governor, Mark Carney, attends the central bank's quarterly Inflation Report press conference in London, on May 10, 2018. The Bank of England on Thursday left its key interest rate at 0.50 percent as it slashed the growth forecast for the British economy less than one year before Brexit. The decision met expectations following a raft of gloomy economic data pointing to slowing growth and weaker inflation as Britain readies for its exit from the European Union in March 2019. / AFP / POOL / Frank Augstein
Updated 23 May 2018
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Another surprise fall in UK inflation muddies Bank of England rates message

  • British inflation fell unexpectedly in April, according to figures on Wednesday
  • Consumer price inflation cooled to 2.4 percent last month
LONDON: British inflation fell unexpectedly in April, according to figures on Wednesday that added to doubts about when the Bank of England will raise interest rates again and pushed sterling to its lowest level against the dollar this year.
Consumer price inflation cooled to 2.4 percent last month, its weakest increase since March 2017, and down from 2.5 percent this March.
The figure was below economists’ average expectation in a Reuters poll for it to hold steady at 2.5 percent and represented the second surprise fall in a row after a drop in March’s figures. “It’s a conundrum for the Bank of England which has struggled to read the direction of price changes recently,” Ed Monk, associate director for personal investing at fund manager Fidelity International, said.
“With inflation trending lower, it only makes it harder for the Bank of England to raise rates.” Investors were now pricing in a one-in-three chance of a BoE rate hike in August — the next time it updates its forecasts on the economy — down from 50/50 before Tuesday’s data.
High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers through last year, and although it has receded from its December peak of 3.1 percent, the BoE is keeping a close eye on price pressures.
PIPELINE PRESSURE
Wednesday’s data pointed to some signs of inflation pressure still in the pipeline. Prices of goods leaving British factories increased at a faster rate than expected last month. And while consumer price inflation cooled again, the timing of the Easter holidays and their impact on air fare prices was a big contributor.
On Tuesday Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation “probably tips up a bit” in the coming months before resuming a decline. The ONS said soft drink prices increased sharply over the last couple of months but the overall impact on inflation was minimal.
The latest data on prices in British factories, which eventually feed through onto the high street, were stronger than anticipated. Manufacturers increased the prices they charged by 2.7 percent year-on-year, matching March’s increase. Economists had expected a fall to 2.3 percent. Among manufacturers, the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.
A surprise drop in consumer price inflation in March, along weak economic growth figures for early 2018, had called into question whether the BoE would raise interest rates more than once before the end of the year.
Earlier this month it refrained from an interest rate hike that had at one point been widely expected. The BoE’s latest forecasts show inflation dropping to 2.1 percent in a year’s time, and returning to its 2.0 percent target a year later — but only if interest rates rise by 25 basis points about three times over three years.
The latest Reuters poll of economists suggests the BoE is most likely to raise interest rates at its August meeting.


Foreign investors hope India dials back policy shocks after Modi win

Updated 24 May 2019
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Foreign investors hope India dials back policy shocks after Modi win

  • Modi’s pro-business image and India’s youthful population have lured foreign investors
  • After Modi’s win, about a dozen officials of foreign companies in India and their advisers said they hoped he would ease his stance and dilute some of the policies

NEW DELHI: Foreign companies in India have welcomed Prime Minister Narendra Modi’s election victory for the political stability it brings, but now they need to see him soften a protectionist stance adopted in the past year.
Modi’s pro-business image and India’s youthful population have lured foreign investors, with US firms such as Amazon.com , Walmart and Mastercard committing billions of dollars in investments and ramping up hiring.
India is also the biggest market by users for firms such as Facebook Inc, and its subsidiary, WhatsApp.
But from around 2017, critics say, the Hindu nationalist leader took a harder, protectionist line on sectors such as e-commerce and technology, crafting some policies that appeared to aim at whipping up patriotic fervor ahead of elections.
“I hope he’s now back to wooing businesses,” said Prasanto Roy, a technology policy analyst based in New Delhi, who advises global tech firms.
“Global firms remain deeply concerned about the lack of policy stability or predictability, this has sent a worrying message to global investors.”
India stuck to its policies despite protests and aggressive lobbying by the United States government, US-India trade bodies and companies themselves.
Small hurdles
Modi was set to hold talks on Friday to form a new cabinet after election panel data showed his Bharatiya Janata Party had won 302 of the 542 seats at stake and was leading in one more, up from the 282 it won in 2014.
After Modi’s win, about a dozen officials of foreign companies in India and their advisers told Reuters they hoped he would ease his stance and dilute some of the policies.
Other investors hope the government will avoid sudden policy changes on investment and regulation that catch them off guard and prove very costly, urging instead industry-wide consultation that permits time to prepare.
Protectionism concerns “are small hurdles you have to go through,” however, said Prem Watsa, the chairman of Canadian diversified investment firm Fairfax Financial, which has investments of $5 billion in India.
“There will be more business-friendly policies and more private enterprise coming into India,” he told Reuters in an interview.
Tech, healthcare and beyond
Among the firms looking for more friendly steps are global payments companies that had benefited since 2016 from Modi’s push for electronic payments instead of cash.
Last year, however, firms such as Mastercard and Visa were asked to store more of their data in India, to allow “unfettered supervisory access,” a change that prompted WhatsApp to delay plans for a payments service.
Modi’s government has also drafted a law to clamp similar stringent data norms on the entire sector.
But abrupt changes to rules on foreign investment in e-commerce stoked alarm at firms such as Amazon, which saw India operations disrupted briefly in February, and Walmart, just months after it invested $16 billion in India’s Flipkart.
Policy changes also hurt foreign players in the $5-billion medical device industry, such as Abbott Laboratories, Boston Scientific and Johnson & Johnson, following 2017 price caps on products such as heart stents and knee implants.
Modi’s government said the move aimed to help poor patients and curb profiteering, but the US government and lobby groups said it harmed innovation, profits and investment plans.
“If foreign companies see their future in this country on a long-term basis...they will have to look at the interests of the people,” Ashwani MaHajjan, an official of a nationalist group that pushed for some of the measures, told Reuters.
That view was echoed this week by two policymakers who said government policies will focus on strengthening India’s own companies, while providing foreign players with adequate opportunities for growth.
Such comments worry foreign executives who fear Modi is not about to change his protectionist stance in a hurry, with one offical of a US tech firm saying, “I’d rather be more worried than be optimistic.”