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The Bank of England is asking for views on how to make its corporate QE programme more environmentally friendly.
It has launched a consultation, looking at options for “greening” the Corporate Bond Purchase Scheme, which buys £20bn of debt issued by UK companies. It’s part of the much wider £895bn QE programme, which mainly buys UK gilts.
The BOE wants to hear how it can use its balance sheet to incentivise bond issuers to support transition, and encourage other investors to do the same.
You can have your say here
One option would be for the Bank to sell bonds held by polluters.
Then it could buy debt issued by greener companies, pushing down their borrowing costs and rewarding their efforts to lower emissions.
Andrew Hauser, the BoE’s executive director for Markets, argued this morning that the situation is more complicated, though.
In a speech at Bloomberg, he said:
At first sight it might seem the answer is simple: just sell all our high-emission bonds, and use the proceeds to buy low-emission ones. The carbon footprint of the CBPS would fall sharply. And, to the extent the Bank’s actions were influential, the financing costs of high-emissions firms should rise, sending a powerful wakeup call. But indiscriminate ‘portfolio decarbonisation’ of this kind cannot be the best strategy for investors like the Bank seeking to incentivise economy-wide transition to net zero, for two key reasons:
First, the high-emissions firms whose bonds we would be selling are the ones we most need to be at the vanguard of emissions reduction. But selling their bonds doesn’t destroy them as assets, it simply transfers them to other investors. And if investors seeking to incentivise transition are all decarbonising, those left holding the bonds are by definition going to be those with a weaker commitment to net zero; Second, simply selling anything with a high carbon footprint penalises those with strong and credible emissions reductions plans just as much as it does those with no such plans.
But excluding high-emission bonds from the CBPS should be an option, Hauser added:
Divestment is a powerful tool, and should remain squarely in the toolkit. But it should be used as a credible threat to reinforce incentives, not an indiscriminate ‘quick fix.
Frank van Lerven of New Economics Foundation, who has conducted research into this issue, has welcomed the Bank’s move:
Last month was the busiest April in the UK housing market since the financial crisis, despite sales cooling after March’s surge.
HMRC has reported there were 111,260 residential property transactions last month – the highest total for an April since 2007, just before the credit crunch.
But, it’s also 35% lower than March 2021, when sales hit a 16-year peak in the rush to complete transactions before the stamp duty freeze ended (before it was extended into the summer).
April was also almost three times busier than a year ago, when the first lockdown forced the property sector to a temporary halt.
Jeremy Leaf, north London estate agent, reports that housing activity is still strong, with the rollout of Covid-19 vaccines boosting confidence:
’Although these figures reflect many sales agreed several months ago, they show a reduction in activity as many buyers did not expect to still take advantage of the stamp duty holiday. However, activity has picked up strongly since the deadline was extended, allowing many to continue where they left off, as well as encourage new entrants to the market.
’Transactions are always a better measure of housing market strength than prices which tend to fluctuate. On the ground, supply is still a problem even though listings have improved as rollout of the second jab in particular is encouraging sellers to make their properties available.
‘It is not only some sellers who are trying to profit from the home buying frenzy but certain solicitors are charging exorbitant fees to take on work, whereas others are working evenings and weekends to make sure they get over the line in time.’
On a seasonally adjusted basis, there were 117,860 house sales in April, 179.5% higher than April 2020 and 35.7% lower than March 2021:
Nick Leeming, Chairman of estate agents Jackson-Stops, also says business is brisk:
“Transactions are down by a third month on month in April, as competition from buyers tailed off slightly after the rush to meet the initial stamp duty deadline. But, on the ground, we are not seeing activity slow down at all and our agents are as busy as ever. The number of new applicants that registered with our branches in April was on par with the number that signed up when the market reopened last June, and we now have 22 buyers chasing every instruction across our network of branches.
“Sales across our branches in London’s new 90-minute commuter belt were the busiest in April – with Chichester, Ipswich and Northampton leading the way.
The pound has rallied, with the jump in retail sales and private sector activity boosting optimism in the UK recovery.
Sterling has jumped almost half a cent against the US dollar to $1.423, its highest since February (when it hit a near–three–year high).
The pound is also higher against the euro, at €1.163 (the highest level since Monday).
Both sterling and the euro have been gaining against the US dollar recently, thanks to signs of economic recovery in the UK and the eurozone.
Expectations that America will keep stimulating its economy through very loose monetary policy, and high government spending, continue to weigh on the dollar.
Today’s UK PMIs are the sign that Britain’s economy is already in a better place than after the first wave last summer, says ING economist James Smith.
Smith points out that hiring is clearly picking up quickly, global demand is making up for Brexit disruption, and rising cost pressures may be temporary (as the BoE suggests).
Overall, the UK’s growth prospects look good this year. Unless concerns surrounding the India-originating Covid variant start to reverse the recent rise in consumer/business confidence, we expect just-shy of 7% growth this year, including 5% growth in the second quarter.
It’s worth noting that this latter figure is mainly a function of the April/May reopenings, and we don’t think a delay to the final lifting of restrictions in June necessarily needs to make a significant impact on near-term GDP.
Rising demand from consumers, high commodity costs and creaking supply chains are likely to add up to higher inflation, warns Jai Malhi, global market strategist at J.P. Morgan Asset Management:
“Today’s UK PMI release showed that last month’s strong reading was not a one-off. With the economic reopening still underway the rise in the manufacturing PMI showed there is still more growth to come.
Appetite from consumers to spend is clearly booming, but at the same time UK businesses have faced even more acute supply bottlenecks this month – causing input prices to reach their highest level on record. This kind of mismatch between demand and supply usually leads to higher prices for the end customer.
“The services industry may well face the same fate too, with a clear surge in demand for in-person rather than virtual services. The success of the vaccine rollout appears to be giving people more confidence that it is now safer to enjoy the more service oriented parts of the economy but ongoing social distancing is restricting capacity in areas such as restaurants and leisure, creating price pressures there too.
“Overall this release will do little to ease recent market fears that inflation will be an unwelcome guest at the party.”
On Wednesday, we saw that UK inflation more than doubled in April to 1.5%, driven by rising energy costs.
The Bank of England has predicted that any overshoot over its 2% inflation target will be temporary, but governor Andrew Bailey also told a House of Lords committee that the BoE is watching “extremely carefully” for signs of a persistent increase.
However…. among the encouraging signs of a flowering recovery, we also have this thorn:
The PMI report shows that delivery times lengthened as supply chains became even more stretched this month, leading to parts shortages and freight disruption.
In response, many manufacturers stocked up on raw materials and components, to protect themselves against running out.
Severe delays continued across global supply chains in May, as signalled by a steep lengthening of vendors’ delivery times. Goods producers responded by accumulating stocks of purchases for the first time in 2021 to date.
Strong demand for manufacturing inputs, higher transport bills and a spike in commodity prices resulted in the fastest increase in overall purchasing costs since this index began in January 1992.
UK manufacturers also reported a jump in new export orders, Markit says:
Workloads were also boosted by a turnaround in export sales, with new orders from abroad rising at the strongest pace since this index began in January 1996. Manufacturers noted a sharp improvement in demand from the US and China, alongside an easing in Brexit-related difficulties with exporting to EU clients.
Today new orders also increased at the strongest pace since data collection began almost 30 years ago, driving the overall manufacturing PMI to its highest since 1992.
UK firms are also taking on more staff to handle this surge in activity
Private sector employment is rising this month at the quickest pace since June 2014, as this chart from the PMI report shows:
Understandably, hotels, restaurants and other consumer-facing services reported the biggest upturn in demand this month.
But, improvements were reported across the board in all sectors, leading to the fastest growth since the Composite PMI began in 1998.
Chris Williamson, chief business economist at IHS Markit, says the UK is enjoying an “unprecedented growth spurt” as the economy reopens.
Factory orders are surging at a record pace as global demand for goods continues to revive, and the service sector is reporting near-record growth as the opening up of the economy allows more businesses to trade. Business confidence has meanwhile hit an all-time high as concerns about the impact of the pandemic continue to fade.
It indicates a surge in growth this quarter, Williamson adds:
“The output and order book growth seen in May, and record level of business optimism, are consistent with GDP rising sharply in the second quarter and for strong momentum to be sustained through the rest of the year, albeit with the current quarter likely representing a peak in the growth rate.
UK business confidence hit a record high this month, as concerns about the impact of the pandemic continue to fade.
However, May’s PMI report also shows some firms are still concerned about Brexit disruption, and Covid-19 travel restrictions.
Business expectations for the next 12 months edged up to a new record high during May, largely reflecting a surge in order books and a faster than anticipated recovery in demand since the lockdown period.
Among the small minority of firms citing downbeat expectations, this was mainly attributed to Brexit-related issues. Some also cited worries about the prospect of prolonged international travel restrictions. However, there was a notable easing of concerns about future lockdowns and adverse impact on business activity from COVID-19.
UK companies also reported that their costs jumped at the fastest rate since August 2008, Markit adds.
Manufacturers blamed shortages of raw materials and high shipping costs — which have been a global problem amid the surge in commodity prices.
Service providers often pointed to increased staff salaries, suggesting a tightening jobs market as hospitality firms and non-essential shops reopened, and more workers are unfurloughed.
Duncan Brock, group director at CIPS, explains:
“Manufacturers keen to secure raw materials for the coming months were forward buying with greater intensity and contributing to the ongoing poor performance of supply chains as delivery times increased to record-levels.
This in turn compounded the number of shortages and impacted on the costs of goods and raw materials. Manufacturing sector inflation rose to the highest since this index began in January 1992 as 76% of supply chain managers paid more for their goods.
As the services sector opened up further, the rush to secure staff gave rise to the fastest increase in jobs since May 2015 and businesses competed to build capacity in their operations by paying higher wages.
UK private sector is growing at its fastest pace in at least two decades this month, as the reopening of the economy drove business confidence to a record.
But UK companies are also hiking their prices at a record speed, in response to the surge in commodity costs and other rising prices such as increased salaries
Data firm IHS Markit reports that business activity across the UK private sector grew strongly in May, at the fastest pace since its survey began in January 1998.
Service sector activity surged, following the easing of restrictions on shops and hospitality firms, while manufacturers continued to benefit from strong demand as the global economy recovers.
This is another sign that the UK economy is rebounding strongly from its contraction in January-March.
Looser pandemic restrictions and high levels of pent up demand meant that a swift turnaround in labour market conditions continued in May, with private sector employment rising at the quickest pace since June 2014.
However, cost pressures were the strongest for nearly thirteen years. Subsequent efforts to protect margins resulted in the sharpest increase in average prices charged by UK private sector firms since this index began in November 1999.
This lifted Markit’s flash UK Composite Output Index to 62.0 in May, from 60.7 in April, which shows the fastest expansion since the index was first compiled more than two decades ago.
Survey respondents widely commented on a post-lockdown bounce in business and consumer confidence, alongside higher output levels due to the phased reopening of customer-facing areas of the UK economy.
The survey found that both services and factories grew strongly (any reading over 50 shows growth):
- Flash UK Services Business Activity Index May: 61.8, 91-month high (up from April’s 61.0)
- Flash UK Manufacturing Output Index May: 63.2, 93-month high (up from April’s 59.2)
- Flash UK Manufacturing PMI May: 66.1, record high since Jan 1992 (up from April’s 60.9)
More to follow…