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Rate rise likely as inflation stays above 10%

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Inflation dipped to 10.1% in March, defying expectations it would fall to a single digit. However, the annual cost of living is down from the surprise jump to 10.4% recorded in February.

A drop to 9.8% had been expected but it was kept higher by a 19.2% rise in food prices. The latest figure is likely to swing Bank of England sentiment towards another small hike in interest rates next month.

“Inflation eased slightly in March, but remains at a high level,” said Office for National Statistics chief economist Grant Fitzner.

“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year. Clothing, furniture and household goods prices increased, but more slowly than a year ago.

“However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high. The overall costs facing business have been largely stable since last summer, although prices remain high.”

Chancellor Jeremy Hunt said: “These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses.

“We are on track to do this – with the OBR forecasting we will halve inflation this year – and we’ll continue supporting people with cost-of-living support worth an average of £3,300 per household over this year and last, funded through windfall taxes on energy  profits.”

Alpesh Paleja, CBI lead economist, said: “February’s uptick in inflation proved to be short-lived, with the CPI rate having fallen back in March. Inflation should continue to fall over the rest of this year, thanks to lower energy prices and base effects unwinding.

“But with the CPI rate set to stay above the Bank of England’s target, this will still be a tough year for many households – in particular, the strength in food price inflation will continue to have a big impact on peoples’ pockets.

“Monetary policy is now facing a renewed trade-off, with the inflation outlook looking more benign against the backdrop of some resilience in economic activity. With domestic price pressures still stubbornly strong, it’s plausible that the Bank of England will raise interest rates again at its May meeting. Nonetheless, we’re likely close to the peak in this rate-tightening cycle.” 

The prospect of a rate rise saw investors ditch rate-sensitive property stocks, including British Land, which fell by 5.25p to 385.75p, and Land Securities, which fell by 8.5p to 637.5p. Persimmon, the housebuilder, slid 14p to 1273p.

Consumer stocks were also down. JD Sports Fashion fell 3p to 163,5p. Marks & Spencer was 4.25p lower at 165p.

Scottish retail

Scottish retail sales remained flat in March with a small drop by 0.1% in real terms on the previous year. The 8.8% rise in sales was offset by increased inflation.

Ewan MacDonald Russell, deputy head of the Scottish Retail Consortium, said: “The figures show consumers cutting back on discretionary spending to focus on essentials, with food sales rising by over 14% compared to 2022; which is still a real terms fall in spending.

“Consequently, high street retailers continue to find trading challenging with shoppers spending focused on sales and discounts.

“Retailers will hope Easter brings a small boost. However, the outlook remains very difficult for all businesses. 

Glencore letter

Mining giant Glencore has written an open letter to shareholders in Canadian bid target Teck stating: “We continue to believe that the proposed merger demerger being a merger and not a takeover, is demonstrably superior to the proposed Teck separation.

“It provides the most compelling value proposition to Teck shareholders, who would fully and disproportionately participate in the value creation, synergies and upside.”

The Swiss firm’s revised all-share proposal also includes a cash component, to buy shareholders out of their coal exposure such that Teck shareholders would receive up to US$8.2 billion in cash or 24% of CoalCo.

Global markets

In the US on Tuesday, bank earnings were mainly well-received though lacklustre figures from Goldman Sachs dented the positive moiod. The Dow Jones Industrial Average and Nasdaq Composite were both flat and the S&P 500 rose 0.1%.

Tokyo’s Nikkei 225 index was down 0.3%. The Shanghai Composite was 0.1% lower and the Hang Seng index in Hong Kong was off 0.6%.

There were big gains in London for miners Fresnillo, Anglo American, Endeavour and Glencore which benefited from strong growth from China in the first three months of the year as Covid restrictions were lifted and the country splashed out with a fresh bout of revenge shopping.

China’s post-Covid recovery is firmly on track, according to data showing the economy expanded 4.5% in the first quarter year-on-year, accelerating from the previous 2.9% reading and outstripping forecasts for 4% growth.

Economic activity was driven up by a boost in household spending and rising factory activity. Retail sales surged by 10.6%, giving hope that subdued domestic demand could also turn around.

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