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Bank of England keeps main interest rate at 16-year high
LONDON | The Bank of England on Thursday kept its main interest rate at a 16-year high of 5.25% even though inflation has fallen to its target of 2%, with several policymakers warning that a premature cut could stoke another bout of price rises.
For the second meeting in a row, seven of the nine members of the bank’s policymaking Monetary Policy Committee voted for no change while two backed a rate cut. Interest rates have been unchanged since August after a series of hikes.
It was clear in the statement accompanying the decision that there was a divergence of opinion over the outlook for inflation, with some clearly concerned over still-high price rises in the services sector, the primary motor of the British economy.
“It’s good news that inflation has returned to our 2% target,” said Bank of England Gov. Andrew Bailey, who voted for no change in policy. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
The decision is likely to disappoint the governing Conservative Party ahead of the U.K.’s general election in two weeks time. A cut would have been seized upon by Prime Minister Rishi Sunak as positive economic news, especially as it would have been accompanied by a fall in mortgage rates.
The panel insisted that the imminent election, which the main opposition Labour Party led by Keir Starmer is widely expected to win, had no bearing on its decision. It said the decision was, as always, based on achieving the 2% inflation target “sustainably in the medium term.”
Economists believe that a cut is imminent, either at the bank’s next policymaking meeting in August or the following one in September. They expect there will be clear evidence by then that inflation is set to remain around the target over the coming year or two.
“We continue to think that the MPC will start dialling down restrictive policy from summer and deliver two rate cuts this year,” said Sanjay Raja, chief U.K. economist at Deutsche Bank.
The decline in the main inflation measure to a near 3-year low of 2% in the year to May does not mean that prices are falling — they are just rising at a slower rate than they have for the past few years during a cost of living crisis that has seen living standards drop for millions across Britain.
Central banks around the world dramatically increased borrowing costs from the lows seen during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up during the pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.
Higher interest rates — which cool the economy by making it more expensive to borrow — have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
Critics of the Bank of England say it is being overly cautious about inflation and that keeping interest rates too high for too long will unnecessarily weigh on the economy. It is a charge that’s also been levelled against the U.S. Federal Reserve, which has also kept rates unchanged in recent months.
“Given that the U.K. has moved onto a milder inflationary trajectory, rate setters remain too circumspect over the likelihood of loosening policy, risking unnecessarily impeding the U.K.’s growth prospects,” said Suren Thiru, economics director at The Institute of Chartered Accountants in England and Wales.
Some central banks, including the European Central Bank, have started to cut rates as inflationary pressures have eased. The Swiss National Bank on Thursday reduced its main rates by a quarter of a percentage point to 1.25%.
Yellen announces sanctions against Mexican cartel
WASHINGTON | In Atlanta to promote the Biden administration’s efforts to quell the import of illegal drugs into the U.S., Treasury Secretary Janet Yellen announced new sanctions against members of a Mexican drug cartel accused of trafficking fentanyl, cocaine, meth and migrants through the southern border.
Included in the sanctions are eight members of the La Nueva Familia Michoacana drug cartel, a notoriously violent group that wars for territorial control with a slate of other Mexican cartels.
Also Thursday, Yellen issued an advisory to banks to help them identify and report suspicious transactions related to the sale an purchase of chemicals and equipment used to manufacture fentanyl and other synthetic opioids.
“Combatting the trafficking of fentanyl is a significant challenge,” she said in a speech at the Richard B. Russell Federal Building in Atlanta Thursday afternoon. “It will not be solved overnight. But let me be clear: The President and I will do everything we can to combat this crisis.”
La Nueva Familia Michoacana is among Mexico’s most powerful drug cartels, dominating big chunks of southern and central Mexico, especially areas known for drug production. It’s known for manufacturing and distributing drugs like fentanyl and methamphetamine. The group is among those that have rapidly pushed into the increasingly lucrative migrant smuggling industry amid a historic wave of migration to the U.S.
The cartel is based in the southern state of Guerrero and is often known as “The New Michoacan Family,” to distinguish it from an older gang that was largely expelled from the western state of Michoacan in the mid-2010s.
In 2022, the Biden administration sanctioned leaders of the cartel, known as the Hurtado brothers, for manufacturing “rainbow” fentanyl pills, which the US Treasury Department said was “part of a deliberate effort to drive addiction amongst kids.”
Yellen’s trip also comes after President Joe Biden signed into law the FEND off Fentanyl Act as part of the supplemental spending package signed in April, which among other things, declares that the international trafficking of fentanyl is a national emergency.
Fentanyl, a powerful opioid, is the deadliest drug in the U.S. today. The Centers for Disease Control and Prevention states that drug overdose deaths in the U.S. have increased more than sevenfold from 2015 to 2021.
Mexico and China are the primary sources of fentanyl and fentanyl-related substances trafficked directly into the U.S., according to the Drug Enforcement Administration, which is tasked with combating illicit drug trafficking. Nearly all the precursor chemicals that are needed to make fentanyl come from China.
Average long-term U.S. mortgage rate falls again
LOS ANGELES | Home loan borrowing costs eased again this week as the average rate on a 30-year mortgage declined to its lowest level since early April.
The rate fell to 6.87% from 6.95% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.67%.
This is the third straight weekly decline in the average rate, which has mostly hovered around 7% since April. Higher mortgage rates can add hundreds of dollars a month in costs for borrowers, limiting homebuyers’ purchasing options.
Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, also eased this week, lowering the average rate to 6.13% from 6.17% last week. A year ago, it averaged 6.03%, Freddie Mac said.
“Mortgage rates fell for the third straight week following signs of cooling inflation and market expectations of a future Fed rate cut,” said Sam Khater, Freddie Mac’s chief economist.
Home loan rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate policy and the moves in the 10-year Treasury yield, which lenders use as a guide to pricing home loans.
Yields have mostly eased recently following some economic data showing slower growth, which could help keep a lid on inflationary pressures and convince the Federal Reserve to begin lowering its main interest rate from its highest level in more than 20 years.
Federal Reserve officials said last week that inflation has fallen further toward their target level of 2% in recent months and signaled that they expect to cut their benchmark interest rate once this year. The central bank had previously projected as many as three cuts in 2024.
Until the Fed begins lowering its short-term rate, long-term mortgage rates are unlikely to ease significantly, economists say.
Even then, mortgage rates “are likely to remain well above the 3.5% to 5% range that prevailed in the decade before the pandemic,” said Jiayi Xu, an economist with Realtor.com.
The average rate on a 30-year mortgage remains near a two-decade high, discouraging many would-be homebuyers. The elevated rates contributed to a lackluster spring homebuying season. Sales of previously occupied U.S. homes fell in March and April as home shoppers contended with rising borrowing costs and prices.
Another factor constraining the housing market is a tight supply of homes for sale. While it has risen this year, partly because properties are taking longer to sell, the inventory of homes on the market remains well below its pre-pandemic levels. A major factor is many homeowners who bought or refinanced more than two years ago are reluctant to sell now and give up their fixed-rate mortgages below 3% or 4% — a trend real estate experts refer to as the “lock-in” effect.
As of the end of last year, more than 50% of homes with a mortgage had a rate that was 4% or lower, and 87% had a rate at 6% or lower, according to Realtor.com.
“While it’s unlikely for mortgage rates to fall below 4%, a rate around 6% could strongly motivate many sellers to list their homes, thereby increasing overall inventory and exert downward pressure on housing prices,” Xu said.
U.S. jobless claims fall to 238,000 from 10-month high
WASHINGTON | The number of Americans applying for unemployment benefits slipped last week as the U.S. labor market remained resilient.
The Labor Department reported Thursday that jobless claims fell by 5,000 to 238,000 from a 10-month high of 243,000 the week before. The four-week average of claims, which evens out weekly ups and downs, rose by 5,500 to 232,750, highest since September.
Weekly unemployment claims — a proxy for layoffs — remain at low levels by historical standards, a sign that most Americans enjoy unusual job security. Still, after mostly staying below 220,000 this year, weekly claims have moved up recently.
“Layoffs are still low overall suggesting businesses remain reluctant to reduce headcount in large numbers,’’ said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “However, there has been a gradual increase in recent weeks that merits watching for signals about a more material weaking in demand for workers going forward.’’
Nearly 1.83 million people were collecting unemployment benefits the week of June 8, up by 15,000 the week before and the seventh straight weekly uptick.
The U.S. economy and job market have proven remarkably resilient in the face of high interest rates. Employers are adding a strong average of 248,000 jobs a month this year. Unemployment is still low at 4%.
But the economy has lately showed signs of slowing, perhaps offering evidence that higher borrowing costs are finally taking a toll. For instance, the Commerce Department reported Tuesday that retail sales barely grew last month.
The Federal Reserve raised its benchmark interest rate 11 times in 2022 and 2023, eventually bringing it to a 23-year high to combat a resurgence in inflation.
Inflation has come down from a mid-2022 peak 9.1% but remains stubbornly above the Fed’s 2% target. Fed policymakers announced last week that they have scaled back their intention to cut the rate three times this year. Now they are anticipating only one rate cut.
—From AP reports
