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Speaker 1: This is Bloomberg Daybreak you up for this Wednesday, the

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Speaker 1: twenty first of June in London. Coming up today, Harto

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Speaker 1: van Hart.

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Speaker 2: UK inflations shows no sign of easing, with traders now

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Speaker 2: pricing in six percent.

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Speaker 1: Bank of England rates reinflating tensions. Biden likens she to

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Speaker 1: a dictator kept in the dark about the alleged Chinese

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Speaker 1: spy balloon.

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Speaker 2: Lacking oversight, thehead of the New York Fed says company

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Speaker 2: directors need to take responsibility for management.

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Speaker 1: Plus, with less than thirty hours of air remaining, noises

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Speaker 1: have been detected in the search for the missing Titanic sub.

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Speaker 1: We have the latest.

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Speaker 3: That's all straight ahead on Bloomberg Daybreak Europe. The business

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Speaker 3: news you need to start your day in just one

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Speaker 3: fifteen minute podcast on Apple, Spotify, the Bloomberg Business app

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Speaker 3: and everywhere you get your podcasts.

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Speaker 2: Good morning, I'm Stephen Carroll and I'm Caroline Hepger.

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Speaker 1: Here are the stories that we're following today. UK inflation

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Speaker 1: rose eight point seven percent from a year ago in May.

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Speaker 1: That's the same as the previous month. The heart of

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Speaker 1: than expected print has prompted traders to price in Bank

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Speaker 1: of England rates hitting six point one percent in February.

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Speaker 1: Bloomberg Economics says that rates at that level would lead

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Speaker 1: to a two percent drop in UK gdp our. UK

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Speaker 1: correspondent Lizzie Burden says that the data makes for grim reading.

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Speaker 4: Economists that expected a drop to eight point four percent.

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Speaker 4: Core inflation crucially is up from six point eight percent

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Speaker 4: to seven point one percent. Services up from six point

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Speaker 4: nine percent to seven point four percent. Is driven by

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Speaker 4: rising prices for air travel, recreational and cultural goods and services,

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Speaker 4: secondhand cars as well, and this is really a big surprise.

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Speaker 1: Bloomberg's Lizzie Burdens spoke to us as the Chancellor, Jeremy Hunt,

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Speaker 1: released this statement on the data. He says the government

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Speaker 1: will not hesitate and it's resolved to support the Bank

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Speaker 1: of England as it quotes seeks to squeeze inflation out

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Speaker 1: of our economy. This is core inflation reached a thirty

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Speaker 1: year high. The last time that happened, the Bank of

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Speaker 1: England took the base rate to fifteen percent.

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Speaker 2: The head of the Bank of France, as the European

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Speaker 2: Central Bank, has completed most of its interest rate increases,

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Speaker 2: in an interview with the French newspaper Les Echo Fransai

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Speaker 2: de Gallos says any additional hikes will depend on the

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Speaker 2: inflation data. The policymakers' comments add caution to a heated

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Speaker 2: debate at the ECP over the outlook for interest rates

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Speaker 2: ahead of their next meeting in July.

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Speaker 1: So that on central banks, and now to geopolitics. The

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Speaker 1: US President Joe Biden says that his Chinese counterpart, Sheijinping,

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Speaker 1: was unaware that the alleged spy balloon had floated over

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Speaker 1: the continental United States until it became an international incident.

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Speaker 1: Speaking to Donus, Biden compared the Chinese leader to an

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Speaker 1: embarrassed dictator kept in the dark. The comments come after

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Speaker 1: the US Sectory of State Anthony Blincoln used a visit

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Speaker 1: to Beijing to try to ease the fractured diplomatic relationship.

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Speaker 5: The relationship in the communication between the two leaders between

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Speaker 5: president by the president, she is most important of all.

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Speaker 5: That's why they've had a number of communications and meetings today,

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Speaker 5: and that's why I expect you'll see more of that.

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Speaker 1: Blincoln speaking there, he met on Monday with Hijinping, who

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Speaker 1: said that he welcomed the studying of bilateral ties well.

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Speaker 2: Meanwhile, the European Union has set out its plans to

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Speaker 2: align itself more closely with US policy on China. The

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Speaker 2: bloc's new economic security strategy includes export controls and increasing

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Speaker 2: oversight of critical technologies. European Commission President or Slavonderlin says

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Speaker 2: it's a bold plan.

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Speaker 6: Europe becomes the first major economy to set out a

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Speaker 6: strategy on economic security. It builds on three policy strand

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Speaker 6: we want to promote, we want to protect, and we

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Speaker 6: want to partner.

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Speaker 2: Vonderline says that EU is looking at limiting access to

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Speaker 2: some cutting edge technology to avoid it being used by

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Speaker 2: QUOTE countries of concern. The proposal will now need to

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Speaker 2: be approved by EU member countries.

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Speaker 1: The president of the New York Fed says that boards

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Speaker 1: of directors need to ensure management are doing their jobs properly.

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Speaker 1: Speaking out the Governance and Culture Reform Conference, John Williams

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Speaker 1: said that it's an issue that needs to be looked

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Speaker 1: at more closely.

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Speaker 7: You need to be forward looking, need to think outside

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Speaker 7: the box, if you will, if you're planning a strategy.

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Speaker 7: I also think the boards. You know, the board of

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Speaker 7: Directors plays a very important role of all this. We

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Speaker 7: tend not to talk about them as much as I

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Speaker 7: think we should. They do have an important role to

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Speaker 7: make sure that senior management is actually not only doing

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Speaker 7: their job every day, but also doing that kind of

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Speaker 7: thinking and bringing that you know into the room.

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Speaker 1: John Williams also told the conference he believes companies need

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Speaker 1: to be more transparent regarding director's roles. His comments come

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Speaker 1: after a string of US Bank failures raise questions about

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Speaker 1: the leadership of some lenders.

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Speaker 2: Underwater noises have been detected in the search for the

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Speaker 2: sub that was headed to the wreck of the Titanic.

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Speaker 2: The US Coast Guard says a Canadian plane with sonar

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Speaker 2: capabilities detected sounds and attempts are being made to explore

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Speaker 2: their origin. Speaking earlier, Coastguard Captain Jamie Frederick said efforts

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Speaker 2: to locate the vessel face a number of challenges.

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Speaker 8: This is a very complex search and the unified teams

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Speaker 8: working around the clock to bring all available assets and

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Speaker 8: expertise to bear as quickly as possible, and an effort

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Speaker 8: to solve this very complex problem. Today, those search efforts

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Speaker 8: have not yielded any results.

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Speaker 2: The US Coast Guard says the diving vessel has five

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Speaker 2: people on board and is estimated to have less than

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Speaker 2: thirty hours of oxygen remaining. The five crew members include

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Speaker 2: the UK billionaire chairman of Action Aviation, Hemus Harding.

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Speaker 1: Okay, those are a few of our top stories end

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Speaker 1: this morning. Now I want to return to the story

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Speaker 1: around the inflation data that's just out here in the

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Speaker 1: UK are Bloomberg UK senior economist Dan Hansen joins us

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Speaker 1: in studio. This is a fourth CPI surprise to the upside.

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Speaker 1: Good morning, Dan, morning. Why are we seeing this in Britain?

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Speaker 9: It's a really I mean, that's a really good question

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Speaker 9: because everywhere else we're getting slightly bit of news on

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Speaker 9: inflation in the US and in Europe. I think it

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Speaker 9: does go to this. It's a well trodden path explaining this,

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Speaker 9: but the sort of this the worst of both worlds.

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Speaker 9: You've got the energy shock and food price shock, I

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Speaker 9: should say in there, and also you've got this tight

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Speaker 9: labor market, and I think the surprise this morning it's

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Speaker 9: actually a little bit different to what we've seen in

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Speaker 9: the past. This has been the surprise, at least relative

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Speaker 9: to our forecast. We had eight point six percent, so

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Speaker 9: we weren't quite as far off as consensus, but we

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Speaker 9: were still beaten by the number. It has been in

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Speaker 9: services inflation. That's sort of the bit of inflation that's

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Speaker 9: linked to the domestic economy and of course that will

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Speaker 9: be of most concern to the Bank of England. So

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Speaker 9: that you had services coming in hot and above the

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Speaker 9: Bank of England's forecast, and of course the headline was

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Speaker 9: above the Bank of England's forecast as well, so there's

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Speaker 9: again it's not a good news story here and I

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Speaker 9: think it's the services core inflation bit that will really

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Speaker 9: worry the bank.

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Speaker 2: When we were looking at the detail of where that

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Speaker 2: inflation is coming from, the concern had been food, as

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Speaker 2: you say, now moving to services in terms of that's

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Speaker 2: how important is that?

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Speaker 1: Yeah?

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Speaker 9: Really important?

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Speaker 1: I think.

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Speaker 9: I mean, what's what's interesting is that consumer expectations tend

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Speaker 9: to be most driven by energy and food, and we've

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Speaker 9: had we haven't had very good news on food, but

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Speaker 9: there's a bit slightly better news on energy coming down

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Speaker 9: the line, and we've had we had some better news

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Speaker 9: in April. But that what happens then, of course, is

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Speaker 9: that it feeds across and now we're seeing what the

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Speaker 9: Governor of the Bank of England what economists call second

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Speaker 9: round effects, where you see this people see high prices,

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Speaker 9: they bargain up there at push up their wages, and

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Speaker 9: because the economy is actually holding up broadly okay at

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Speaker 9: the moment, firms feel confident about passing that price on

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Speaker 9: to consumers, so they can they can afford to push

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Speaker 9: up people's wages. So you get into this, into this

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Speaker 9: spiral or this ratcheting effect, and it's something that obviously

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Speaker 9: the banking needs to do something about.

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Speaker 1: Yeah, and I want to come back to that in

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Speaker 1: just a minute in terms of where we see the

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Speaker 1: path for UK interest. But there's also of course been

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Speaker 1: reaction from the government now that two of the top

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Speaker 1: five priorities for government is growing in the economy and

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Speaker 1: halving inflation by the end of the year. Here is

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Speaker 1: the Chancellor, Jeremy Hunt, talking about the impact that this

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Speaker 1: is going to have on people in terms of families

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Speaker 1: and mortgages. Have a listen to what the chancell has

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Speaker 1: to say.

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Speaker 10: Well, today's figures strengthen the case for the government to

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Speaker 10: stick to its guns no matter what the pressure from left,

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Speaker 10: right or center. We won't be pushed off course because

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Speaker 10: if we're going to help families. If we're going to

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Speaker 10: relieve the pressure on people with mortgages on businesses, we

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Speaker 10: need to squeeze every last drop of high inflation out

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Speaker 10: of the economy. And if you look at what's happening

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Speaker 10: in other countries, you can see that rises in interest

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Speaker 10: rates do bring down inflation over time. That will happen here.

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Speaker 1: That will happen here. So that's the chance to HEMI hunt.

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Speaker 1: I mean talking about squeezing every last drop of high

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Speaker 1: inflation out of the economy is the absolute opposite of

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Speaker 1: what the data is showing today.

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Speaker 9: Yeah, it's not a good picture at the moment, to

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Speaker 9: be honest, but I think one thing at least in

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Speaker 9: the UK, and the transmission mechanism is different in every

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Speaker 9: single country, but in the UK it does feel like

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Speaker 9: the pain is beginning to ramp up. And I know

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Speaker 9: we've had a lot of stories about mortgage rates skyrocketing recently,

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Speaker 9: but we know this year that a lot of people

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Speaker 9: who hold mortgages are rolling off their fixed rate mortgage

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Speaker 9: onto a new rate and they're in for a big

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Speaker 9: income shock. There's no doubt about that. And I think

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Speaker 9: that is coming and it will be something that plays

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Speaker 9: into the bank of England's thinking. It looks like it's

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Speaker 9: just a completely obvious thing to do to continue to

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Speaker 9: lift interest rates. But at some point you need to

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Speaker 9: make a decision that what you've done will have the

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Speaker 9: desired effects. And you said at the top of the

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Speaker 9: show there we've done some work about the sort of

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Speaker 9: pain that rates at this level will deliver to the economy,

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Speaker 9: and it will be significant. I guess. I guess the

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Speaker 9: point you'd make around that is that it might actually

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Speaker 9: be necessary though, to break this inflation problem in the UK,

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Speaker 9: you might need to deliver that level of pain to

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Speaker 9: bring inflation down over a reasonable timeframe.

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Speaker 2: Dan the Chanceller was also asked about the question of

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Speaker 2: the government stepping in with people's increased mortgage cast. Let's

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Speaker 2: listen to what Jeremy Hunt had to say about that.

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Speaker 10: We know there is enormous pressure for families with mortgages

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Speaker 10: and it's a really big deal for family finances. But

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Speaker 10: the one thing that would not help those families is

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Speaker 10: to step in with short term support. That meant that

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Speaker 10: inflation stayed higher for longer and those mortgage rates stayed

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Speaker 10: higher for longer. So I'm meeting the mortgage lenders later

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Speaker 10: this week to ask what else can be done to

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Speaker 10: relieve pressure in very difficult times. But we won't do

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Speaker 10: anything that means that high inflation stays around for longer,

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Speaker 10: because that is the root cause of the pressure they're facing.

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Speaker 2: That's the trancelor Jeremy Hunter Dan This, I suppose speaks

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Speaker 2: to the government leaving this to the Bank of England

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Speaker 2: and as sort of giving some message of certainty to

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Speaker 2: markets that they're not going to be stepping in with

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Speaker 2: a fiscal measure on this set.

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Speaker 9: Yeah, I think that's right. I mean, it's really interesting,

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Speaker 9: isn't it. So since the pandemic or the pandemic i

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Speaker 9: should say, has created this precedent whereby the government rise

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Speaker 9: to the rescue, we had it, We had it then

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Speaker 9: obviously with massive intervention. You had it with the energy

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Speaker 9: crisis as well, and there were strong arguments for doing something.

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Speaker 9: I think the blanket measure, the energy price cap, probably

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Speaker 9: should have been better targeted. But every time you do this,

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Speaker 9: what you do you end up storing up the problem

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Speaker 9: for later down the line. And there the fundamental point

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Speaker 9: here is that there is an imbalance in the economy.

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Speaker 9: It needs to be addressed, and there needs to be

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Speaker 9: some pain to address that imbalance.

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Speaker 2: Now.

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Speaker 9: Unfortunately, where it's landed now it seems to be that

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Speaker 9: the government has decided that mortgage holders are the ones

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Speaker 9: that are going to take the brunt of it. But

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Speaker 9: I think the fundamental point is that continuing to intervene

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Speaker 9: only delays the problem. So I have to I've got

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Speaker 9: I mean, I agree with what Jeremy Hunt said there,

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Speaker 9: and I think that he's sort of looking what he's

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Speaker 9: looking at is the right approach with this, not least

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Speaker 9: because the cost of borrowing any money right now is

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Speaker 9: going to cost the government a significant amount of money

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Speaker 9: given where guilt yields are. So I think it's it's

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Speaker 9: the right it's the right policy. This adjustment needs to happen.

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Speaker 1: Yeah, on mortgages, I think that there's also a great

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Speaker 1: back and forth that Neil Callanan has written. Remember but

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Speaker 1: you know, more than a year ago, is writing about

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Speaker 1: the house price paying to come and he sort of

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Speaker 1: did an updated piece talking about how five percent interest

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Speaker 1: rates for homeowners mortgage holders actually feels like thirteen percent,

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Speaker 1: you know, the nineteen eighties because the house prices are

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Speaker 1: so much more expensive and people have borrowed a lot

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Speaker 1: more in terms of pete rates, though the market's now

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Speaker 1: pricing is six point one percent. There's even this idea

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Speaker 1: of could you does there need to be a signal

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Speaker 1: from the Bank of England that there's going to be

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Speaker 1: a hard stop at some point or is that counter

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Speaker 1: to what markets need?

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Speaker 9: I think I think there's a It's a really good

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Speaker 9: question because it fundamentally comes down to how quickly the bank,

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Speaker 9: or how much the bank wants to squeeze the economy

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Speaker 9: and how quickly they want to pull inflation down. Because

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Speaker 9: I think if you do, if you do go to

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Speaker 9: a six percent level, you're going to bring forward the

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Speaker 9: point at which you have to start bringing rates back down,

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Speaker 9: because I think that will impart an enormous amount of

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Speaker 9: pain on the economy. And it'll do it'll definitely do

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Speaker 9: the job, but I think you run the risk later

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Speaker 9: down the line you create a problem being blamed for

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Speaker 9: a rise in unemployment and the sort of other side

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Speaker 9: of the of the trade off. The Bank of England's

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Speaker 9: facing the hit to the real economy. So I think

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Speaker 9: for us, you know, going into today, we thought rates

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Speaker 9: would peak at five percent. That's obviously one hundred bases

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Speaker 9: points lower than where the market is. I think the

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Speaker 9: risks are they probably go a little bit higher than

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Speaker 9: what we expect now do I think they'll get to

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Speaker 9: six percent? If you keep getting these inflation numbers and

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Speaker 9: core inflation going higher, then then it becomes increasingly likely.

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Speaker 8: Though.

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Speaker 9: I think my view is, as I said in an

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Speaker 9: answer earlier, that the bank will at some point, as

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Speaker 9: you say, Caroline, say look this is enough, and it's

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Speaker 9: going to be enough to deliver deliver what we're trying

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Speaker 9: to do.

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Speaker 2: So what is the kind of calculation now for the

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Speaker 2: bank in terms of, you know that, how high do

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Speaker 2: they go? The fifty basis point has been sort of

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Speaker 2: a question mark floating around for a while. Does it

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Speaker 2: need to be tomorrow or is it a wiser strategy

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Speaker 2: for them to wait and see, as you say, how

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Speaker 2: the lag effects are playing out.

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Speaker 9: I think the worry we're doing fifty tomorrow is that

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Speaker 9: it sparks a very strong market reaction where you go

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Speaker 9: from looking at six point one percent six point twenty five,

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Speaker 9: maybe six and a half, and the market takes a

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Speaker 9: very hawkish signal from that. I don't think the bank

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Speaker 9: will want to push back on it now, given the

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Speaker 9: way they've been surprised. I think they can't come out

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Speaker 9: and look, but they certainly can't come out and look dubbish.

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Speaker 9: But I think at some point they're going to have to,

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Speaker 9: similar to the FED, say look, we've done enough. We're

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Speaker 9: going to have a look at it for a longer

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Speaker 9: period of time, rather than being constantly pushed about by

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Speaker 9: the data. And maybe that means as a sort of

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Speaker 9: interim step that they signal their moving to a sort

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Speaker 9: of quarterly rate hike or a quarterly move rather than

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Speaker 9: just constantly go meeting to meeting. Because you know, in

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Speaker 9: the world, where you get a downside inflation surprise, you

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Speaker 9: know that seems like a distant prospect. At the moment

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Speaker 9: you get a downside data surprise, how does the bank

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Speaker 9: react to that? And you don't want this stop start

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Speaker 9: monetary policy. I think you want to get to a

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Speaker 9: level where you feel you're squeezing the economy and sit there.

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Speaker 1: Okay, a last final thought then around the Liz Trust

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Speaker 1: era where we really did have a terrible market impact

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Speaker 1: from government policy, in some senses, we are sort of

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Speaker 1: back to that sort of volatility.

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Speaker 9: In terms of markets, we are a beer, but it's

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Speaker 9: a very different shock isn't it. I think that the

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Speaker 9: list trust period was what you would sort of call

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Speaker 9: a risk premium shock. You had yield surging, sterling falling.

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Speaker 9: This time around, it's essentially an inflation shock that the

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Speaker 9: market is responding to and rationally, if you like, in

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Speaker 9: the sense that there's not this panic about what's going

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Speaker 9: on with fiscal policy solvency of the government. It's purely

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Speaker 9: about delivering what's needed to bring inflation back to target.

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Speaker 9: And it may well be the case that the Bank

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Speaker 9: of England finds itself having to go all the waves

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Speaker 9: where markets expect. We don't think they will, but I

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Speaker 9: think the reaction isn't something that will worry the Bank

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Speaker 9: of England like it would have done back in November.

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