It will be accompanied by an independent assessment of the fiscal and economic impact of the policies by the Office for Budget Responsibility, a government watchdog.

While markets have cheered the government’s promise to have its policies independently reviewed, questions remain about how the gap in the public finances can be closed. Economists say there is very little room in stretched department budgets to make cuts. That has led to concerns of a return to austerity measures, reminiscent of the spending cuts after the 2008 financial crisis.

There is a danger,” Mr. Chadha said, “that we end up with tighter fiscal policy than actually is appropriate given the shock that many households are suffering.” This could make it harder to support people suffering amid rising food and energy prices. But Mr. Chadha argues that it’s clear what needs to happen next: a complete elimination of unfunded tax cuts and careful planning on how to support vulnerable households.

The chancellor could also end up having a lot more autonomy over fiscal policy than the prime minister, he added.

“The best outcome for markets would be a rapid rallying of the parliamentary Conservative Party around a single candidate” who would validate Mr. Hunt’s approach and the timing of the Oct. 31 report, Trevor Greetham, a portfolio manager at Royal London Asset Management, said in a written comment.

Three days after the fiscal statement, on Nov. 3, Bank of England policymakers will announce their next interest rate decisions.

Bond investors are trying to parse how the central bank will react to the rapidly changing fiscal news. On Thursday, before Ms. Truss’s resignation, Ben Broadbent, a member of the central bank’s rate-setting committee, indicated that policymakers might not need to raise interest rates as much as markets currently expect. Traders are betting that the bank will raise rates above 5 percent next year, from 2.25 percent.

The bank could raise rates less than expected next year partly because the economy is forecast to shrink over the year. The International Monetary Fund predicted that the British economy would go from 3.6 percent growth this year to a 0.3 percent contraction next year.

That’s a mild recession compared with some other forecasts, but it would only compound the longstanding economic problems that Britain faced, including weak investment, low productivity growth and businesses’ inability to find employees with the right skills. These were among the challenges that Ms. Truss said she would resolve by shaking up the status quo and targeting economic growth of 2.5 percent a year.

Most economists didn’t believe that “Trussonomics,” as her policies were called, would deliver this economic growth. Instead, they predicted the policies would prolong the country’s inflation problem.

Despite the change in leadership, analysts don’t expect a big rally in Britain’s financial markets. The nation’s international standing could take a long time to recover.

“It takes years to build a reputation and one day to undo it,” Mr. Bouvet said, adding, “Investors will come progressively back to the U.K.,” but it won’t be quickly.

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U.K. Live Updates: Liz Truss Resigns as Prime Minister

LONDON — For Liz Truss, the end came on Thursday in a midday meeting with grandees of the Conservative Party. But Ms. Truss’s fate as prime minister was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal program by torpedoing the pound and other British financial assets.

The market’s swift, withering verdict on Ms. Truss’s tax-cutting agenda shattered her credibility, degraded Britain’s reputation with investors, drove up home mortgage rates, pushed the pound down to near parity with the American dollar, and forced the Bank of England to intervene to prop up British bonds.

That repudiation, measured in the second-by-second fluctuations of bond yields and exchange rates, mattered more than the noisy departures of Ms. Truss’s cabinet ministers or the hothouse anxieties of Conservative lawmakers that ultimately made her position untenable.

For that reason, world leaders, buffeted by economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself. Interest rates, energy costs and inflation are rising around the world. Labor unrest is proliferating across borders. Non-British pension funds potentially face the same financial stresses that afflicted those in Britain. The last thing leaders want is for Ms. Truss’s woes to be a harbinger for other countries.

President Emmanuel Macron of France, who recently mended fences with Ms. Truss after she refused last summer to characterize him as a friend or foe, said: “I wish in any case that Great Britain will find stability again and moves on, as soon as possible. It’s good for us, and it’s good for our Europe.”

Credit…Henry Nicholls/Reuters

Ms. Truss, economists said, is correct to argue that markets are driven by global trends broader than her tax cuts. Central banks worldwide are raising rates to battle inflation, which has been fueled by a surge in demand as the coronavirus pandemic ebbed and a spike in gas prices driven by Russia’s war in Ukraine.

“The problems are by no means all Truss’s doing but she should have known that getting blamed for everything comes with the territory,” said Kenneth Rogoff, a professor of economics at Harvard and a scholar of financial upheavals.

“What is really worrisome now,” he said, is that the situation in Britain “might be the canary in the coal mine as global interest rates keep soaring, especially as they do not seem likely to come down anytime soon.”

Ms. Truss long cultivated a reputation as a disrupter and a free-market evangelist in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals made her an outlier among leaders of big economies fighting inflation. But she made no apologies for offending either economic orthodoxy or the expectations of financial markets in pursuit of her vision of a “low-tax, high growth” Britain.

“Not everyone will be in favor of change,” a defiant Ms. Truss said a week ago at the annual meeting of the Conservative Party, even though one of her planned tax cuts, for high-earning people, had already been reversed. “But everyone will benefit from the result: a growing economy and a better future.”

The prime minister’s fatal miscalculation, experts said, was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.

“It was the combination of the wrong fiscal policy at the wrong time — borrowing when rates were rising rather than, as in 2010s, when they were low,” said Jonathan Portes, a professor of economics and public policy at Kings College London.

He cited what he called Ms. Truss’s “institutional vandalism,’’ in particular the way she and her ousted chancellor of the Exchequer, Kwasi Kwarteng, broke with custom by announcing sweeping tax cuts without subjecting them to the scrutiny of the government’s fiscal watchdog, the Office of Budget Responsibility.

In that sense, he said, Ms. Truss was following in the footsteps of her predecessor, Boris Johnson, who resigned as prime minister barely three months earlier after a series of scandals prompted a wholesale walkout of his ministers.

Credit…Oli Scarff/Agence France-Presse — Getty Images

Mr. Kwarteng’s budget maneuvering led many in the markets to suspect the government was engaged in a kind of fiscal sleight of hand, which would inevitably require massive borrowing to cover a hole in the budget estimated at 72 billion pounds ($81.5 billion).

Mr. Kwarteng, who studied the history of financial crises as a doctoral student at Cambridge University, brushed off the blowback in financial markets as a temporary phenomenon. Like Ms. Truss, he is a believer in disruptive change. Together, they were among the authors of “Britannia Unchained,” a manifesto for a Thatcher-style, free-market revolution in post-Brexit Britain. Among other things, the authors described Britons as “among the worst idlers in the world.”

When, or even whether, Britain can fully recover from this period of political and economic turbulence is not yet clear. On Thursday, as news of Ms. Truss’s resignation broke, the pound rose against the dollar and yields on British government bonds fell.

Virtually all the government’s planned tax cuts have been reversed, and the next prime minister, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline. Some fear a return to the bleak austerity of Prime Minister David Cameron in the years after the 2008 financial crisis.

“Rishi or another can steady the ship and calm the markets,” Professor Portes said, referring to Rishi Sunak, a former chancellor who ran unsuccessfully against Ms. Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservatives, any Tory prime minister can repair the longer-term damage.”

Much of that damage is to Britain’s once-sterling reputation in the markets. Economists have begun mentioning Britain in the same breath as fiscally wayward countries like Italy and Greece. Lawrence H. Summers, the former U.S. Treasury secretary, told Bloomberg News, “It makes me very sorry to say, but I think the U.K. is behaving a bit like an emerging market turning itself into a submerging market.”

That is a humbling comedown for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.

“If you’re an American fund manager, you’re not going to put Britain in the super-safe category you might have earlier,” said Jonathan Powell, who served as chief of staff to Prime Minister Tony Blair. “It’s not about Britain’s standing in the world, but what category we’ve put ourselves in.”

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As UK’s Truss fights for job, new finance minister says she made mistakes

  • Truss sacked finance minister on Friday
  • New chancellor Hunt warns of tough decisions
  • ‘I’ve listened, I get it’, Truss says
  • BoE’s Bailey says agrees with Hunt on need to fix finances
  • Some Conservative lawmakers say Truss will be ousted

LONDON, Oct 15 (Reuters) – Britain’s new finance minister Jeremy Hunt said on Saturday some taxes would go up and tough spending decisions were needed, saying Prime Minister Liz Truss had made mistakes as she battles to keep her job just over a month into her term.

In an attempt to appease financial markets that have been in turmoil for three weeks, Truss fired Kwasi Kwarteng as her chancellor of the exchequer on Friday and scrapped parts of their controversial economic package.

With opinion poll ratings dire for both the ruling Conservative Party and the prime minister personally, and many of her own lawmakers asking, not if, but how Truss should be removed, Truss is relying on Hunt to help salvage her premiership less than 40 days after taking office.

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In an article for the Sun newspaper published late on Saturday, Truss admitted the plans had gone “further and faster than the markets were expecting”.

“I’ve listened, I get it,” she wrote. “We cannot pave the way to a low-tax, high-growth economy without maintaining the confidence of the markets in our commitment to sound money.”

She said Hunt would lay out at the end of the month the plan to get national debt down “over the medium term”.

But, the speculation about her future shows no sign of diminishing, with Sunday’s newspapers rife with stories that allies of Rishi Sunak, another former finance minister who she beat to become leader last month, were plotting to force her out within weeks.

On a tour of TV and radio studios, Hunt gave a blunt assessment of the situation the country faced, saying Truss and Kwarteng had made mistakes and further changes to her plans were possible.

“We will have some very difficult decisions ahead,” he said.”The thing that people want, the markets want, the country needs now, is stability.”

The Sunday Times said Hunt would rip up more of Truss’s original package by delaying a planned cut to the basic rate of income tax as part of a desperate bid to balance the books.

According to the newspaper, Britain’s independent fiscal watchdog had said in a draft forecast there could be a 72 billion pound ($80 billion) black hole in public finances by 2027/28, worse than economists had forecast.

Truss had won the leadership contest to replace Boris Johnson on a platform of big tax cuts to stimulate growth, which Kwarteng duly announced last month. But the absence of any details of how the cuts would be funded sent the markets into meltdown.

She has already ditched plans to cut tax for high earners, and said a levy on business would increase, abandoning her proposal to keep it at current levels. But a slump in bond prices after her news conference on Friday still suggested she had not gone far enough.

‘MEETING OF MINDS’

Kwarteng’s Sept. 23 fiscal statement prompted a backlash in financial markets that was so ferocious the Bank of England (BoE) had to intervene to prevent pension funds being caught up in the chaos as borrowing costs surged.

BoE Governor Andrew Bailey said he had spoken to Hunt and they had agreed on the need to repair the public finances.

“There was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said in Washington on Saturday. “Of course, there was an important measure taken yesterday.”

He also warned that inflation pressures might require a bigger interest rate rise than previously thought due to the government’s huge energy subsidies for homes and businesses, and its tax cut plans.

Hunt is due to announce the government’s medium-term budget plans on Oct. 31, in what will be a key test of its ability to show it can restore its economic policy credibility.

He cautioned spending would not rise by as much as people would like and all government departments were going to have to find more efficiencies than they were planning.

“Some taxes will not be cut as quickly as people want, and some taxes will go up. So it’s going to be difficult,” he said. He met Treasury officials on Saturday and will hold talks with Truss on Sunday to go through the plans.

‘MISTAKES MADE’

Hunt, an experienced minister and viewed by many in his party as a safe pair of hands, said he agreed with Truss’s fundamental strategy of kickstarting economic growth, but he added that their approach had not worked.

“There were some mistakes made in the last few weeks. That’s why I’m sitting here. It was a mistake to cut the top rate of tax at a period when we’re asking everyone to make sacrifices,” he said.

It was also a mistake, Hunt said, to “fly blind” and produce the tax plans without allowing the independent fiscal watchdog, the Office for Budget Responsibility, to check the figures.

The fact that Hunt is Britain’s fourth finance minister in four months is testament to a political crisis that has gripped Britain since Johnson was ousted following a series of scandals.

Hunt said Truss should be judged at an election and on her performance over the next 18 months – not the last 18 days.

However, she might not get that chance. During the leadership contest, Truss won support from less than a third of Conservative lawmakers and has appointed her backers since taking office – alienating those who supported her rivals.

The appointment of Hunt, who ran to be leader himself and then backed Sunak, has been seen as a sign of her reaching out, but the move did little to placate some of her party critics.

“It’s over for her,” one Conservative lawmaker told Reuters after Friday’s events.

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Editing by Emelia Sithole-Matarise, Helen Popper, Ros Russell and Diane Craft

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EXCLUSIVE Fed’s Bullard favors ‘frontloading’ rate hikes now, with wait-and-see stance in 2023

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WASHINGTON, Oct 14 (Reuters) – A “hotter-than-expected” September inflation report doesn’t necessarily mean the Federal Reserve needs to raise interest rates higher than officials projected at their most recent policy meeting, St. Louis Fed President James Bullard said on Friday, though it does warrant continued “frontloading” through larger hikes of three-quarters of a percentage point.

In a Reuters interview, Bullard said U.S. Consumer Price Index data for September, which was released on Thursday, showed inflation had become “pernicious” and difficult to arrest, and therefore “it makes sense that we’re still moving quickly.”

After delivering a fourth straight 75-basis-point hike at its policy meeting next month, Bullard said “if it was today, I’d go ahead with” a hike of the same magnitude in December, though he added it was “too early to prejudge” what to do at that final meeting of the year.

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If the Fed follows through with two more 75-basis-point hikes this year, its policy rate would end 2022 in a range of 4.50%-4.75%.

In what were tempered remarks for one of the Fed’s most hawkish voices recently, Bullard said that at that point he would let further increases rest on incoming data.

“I do think 2023 should be a data-dependent sort of year. It’s two-sided risk. It is very possible that the data would come in a way that forces the (Federal Open Market) Committee higher on the policy rate. But it’s also possible that you get a good disinflationary dynamic going, and in that situation the committee could keep the policy rate and hold it steady,” Bullard said a day after the U.S. government reported that consumer price inflation remained above 8% last month.

The possibility of a fifth larger-than-usual increase in December is “a little more frontloading than what I’ve said in the past,” he added.

But the trajectory mapped out by Bullard would still leave the target policy rate at the median level that Fed officials projected last month they would need to reach – evidence of a broad consensus at the central bank around at least a temporary stopping point after a year in which they have ratcheted rate expectations steadily higher.

Even if some of Bullard’s colleagues want to reach that point in smaller interim steps and not until early next year, Bullard said he regards faster increases as warranted because the U.S. labor market remains strong, and “there’s just not much indication that we’re getting the disinflation that we’re looking for.”

Though some investors and economists expect the Fed will need to lift its policy rate even further, to 5% or higher, Bullard said, “I wouldn’t predict that now … If that happens it will be because inflation doesn’t come down the way we’re hoping in the first half of 2023 and we continue to get hot inflation reports.”

The level he has penciled in for the end of the year is adequate, he believes, to lower the Fed’s closely-watched core personal consumption expenditures inflation index to below 3% next year, a long way back to the central bank’s 2% target.

‘SOFT LANDING’

Bullard said that despite the sense of turbulence in financial markets, there was “still a fair amount of potential for a soft landing,” with the United States likely to avoid a recession and companies reluctant to lay off workers who have been hard to hire during the post-pandemic economic reopening.

Warnings about recession risk may be distorted in part by inflation itself, Bullard said, with short-term bond yields driven higher than longer-term ones not for lack of faith in the economy, an “inversion” of the yield curve that shows investors betting on a recession, but because of the premium charged for the inflation taking place now.

Volatility in markets is to be expected when rates rise, he said, but may settle after a period of adjustment.

“It’s the transition that throws everybody for a loop,” Bullard said. But after that, the economy “could grow just as fast at the higher interest rates,” he said.

Asked about the sense that overseas events, such as the tension between the Bank of England and the current British government, may risk broader financial problems, Bullard said that his regional bank’s index of financial stress showed it to be low.

Compared to the sorts of serious market seizures seen during the financial crisis in 2008 or the start of the COVID-19 pandemic in early 2020, “I don’t think we’re in a situation where global markets are facing a lot of stress of that type.”

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Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao

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Howard Schneider

Thomson Reuters

Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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Bank of England governor has ‘meeting of minds’ with Hunt

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  • Bailey says he talked to new finance minister on Friday
  • ‘Very clear and immediate meeting of minds’ on fiscal challenge
  • Rates likely to rise by more than thought in August – Bailey
  • Recent bond-buying not about targeting yields

WASHINGTON, Oct 15 (Reuters) – Bank of England Governor Andrew Bailey said there was an “immediate meeting of minds” when he spoke with finance minister Jeremy Hunt about the need to fix the public finances after the tax cut plans of Hunt’s predecessor unleashed market turmoil.

Bailey, speaking in Washington where British officials attending International Monetary Fund meetings have been put on the spot about the crisis engulfing the country, said he had spoken to Hunt on Friday after he replaced Kwasi Kwarteng.

“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said.

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“Of course there was an important measure taken yesterday,” he said at an event where he also hinted at a big interest rate rise by the central bank next month.

Prime Minister Liz Truss, seeking to save her term in office which is barely a month old, said on Friday that Britain’s corporation tax rate would increase, reversing a key pledge made during her bid for Downing Street.

Hunt said earlier on Saturday that some taxes might have to rise and others might not fall as much as planned, signalling a further shift away from Truss’s original plans.

Bailey, speaking at an event organised by the Group of Thirty, which comprises financiers and academics, welcomed the role that Britain’s independent budget watchdog would have in assessing the budget plan that Hunt will publish on Oct. 31.

The Office for Budget Responsibility was not tasked with weighing up the impact of Kwarteng’s “mini-budget” which set off a slump in the value of the pound and government bonds when he announced it on Sept. 23.

“Flying blind is not a way to achieve sustainability,” Bailey said.

Truss criticised the BoE during her leadership campaign, saying she wanted to set a “clear direction of travel” for the central bank. BoE officials pushed back at those comments saying their independence was key to managing the economy.

‘STRONGER RESPONSE’ WITH RATES

Bailey said the BoE might raise interest rates by more than it previously thought because of the government’s huge energy bill support – which could lower inflation in the short term but push it up further ahead – and whatever it decides to do on tax cuts and spending.

“We will not hesitate to raise interest rates to meet the inflation target,” Bailey said. “And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

The BoE raised rates by half a percentage point in August – at the time its biggest increase in 27 years – and then did so again in September with inflation around 10%, far above the BoE’s target of 2%.

It is due to announce its next decision on Nov. 3 and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%.

In the shorter term, the BoE will be keeping a close eye on how financial markets behave on Monday after it ended its emergency bond-buying programme on Friday.

Bailey said the now-completed intervention was “not about steering market yields towards some particular level, but rather preventing them from being distorted by market dysfunction”.

He said the BoE had acted after the violent market moves which exposed the “flaws in the strategy and structure” of a lot of pension funds.

The intervention was different to the much bigger and longer-running bond-buying that the BoE undertook during the coronavirus pandemic and earlier as a monetary policy tool.

“In these difficult times, we need to be very clear on this framework of intervention,” Bailey said.

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Reporting by Howard Schneider in Washington and William Schomberg in London; Additional reporting by Michael Holden in London; Editing by David Clarke

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Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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Engine parts makers must cross ‘valley of death’ to reach EV era

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KIDDERMINSTER, England, Oct 5 (Reuters) – Auto engine parts makers eyeing the promising electric-vehicle market are dealing with a severe case of delayed gratification.

Until EVs truly take off, engine parts makers face a perilous few years where they must invest heavily in new machinery, while struggling with falling sales of fossil-fuel cars.

Evtec Aluminium, a small supplier with two plants in England, is a case in point. It barely survived.

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Within the last decade in the European Union – when Britain was still a member – diesel was the green fuel of the future. Carmakers, including Evtec’s main customer Tata Motors (TAMO.NS)-owned Jaguar Land Rover (JLR), invested tens of billions of dollars in new diesel models and production capacity.

Suppliers followed suit. Evtec, then known as Liberty Aluminium, invested tens of millions of pounds in new machines, some of which sit idle but are still being paid off.

Then the EU, spurred on in part by Volkswagen’s (VOWG_p.DE) “Dieselgate” emissions cheating scandal, swiftly abandoned diesel in favour of EVs and now plans to effectively ban combustion-engine car sales by 2035.

“We went in thinking diesel is the future,” said Evtec’s business director, Brett Parker, on a tour of the company’s half-empty foundry in Kidderminster in England’s Midlands, the historical heart of Britain’s car industry. “We backed the wrong horse, unfortunately.”

Evtec was saved last year when a group led by investor David Roberts bought it. Roberts says Evtec’s foundry in Kidderminster is Britain’s most modern – vast machines here pump molten aluminium heated to around 660 degrees Celsius (1,220°F) into castings to make complex shapes – and stands to benefit as UK carmakers look to build EVs that need aluminium parts.

“For me it was a no-brainer to invest in that business,” Roberts said.

As recently as 2015, diesel made up nearly 52% of EU car sales. After Dieselgate and the shift in favor of EVs, diesel fell to 19.6% of EU sales in 2021 and has fallen further this year. In Britain, diesel car sales halved to just 8.2% in 2021.

Petrol car sales in the EU declined to around 40% in 2021 from over 45% in 2015 and will fall further as Europe goes electric.

Major engine parts suppliers like Vitesco Technologies Group AG (VTSCn.DE) and Schaeffler (SHA_p.DE) are already investing in transitioning to electric, but smaller players like Evtec – for which tracking data is not widely available – must adapt or die.

“Engine parts makers are ground zero for the most amount of pain in this transition because they have the least amount of portability into EV world,” said Mark Wakefield, global co-leader of consultancy AlixPartners’ automotive and industrial practice.

Some major carmakers have warned of huge job losses, as EV motors have only a third of the parts of a combustion engine and require less labour.

Fewer parts also mean fewer suppliers.

Engine parts suppliers must either transform into an EV-focused business, or diversify into other industries making parts for anything from heavy equipment to hair dryers.

Or go out of business.

“People have to realize this transition comes at a cost,” Evtec investor Roberts said. “We all have our own valley of death to get to EVs, but for some suppliers it will be so much harder.”

‘CAN’T GROW WITHOUT MONEY’

Declining combustion-engine car sales have already cost jobs.

World No. 4 carmaker Stellantis NV (STLA.MI), for instance, is shifting its plant in Tremery, France – long the world’s largest diesel engine plant – over to EV motors.

Tremery employs 2,400 people now, down from 3,000 in 2019. Many others will not be replaced when they retire.

German supplier Bosch (ROBG.UL) is transforming its plant in Rodez in southern France away from diesel injectors to new products including hydrogen fuel cells, cutting 750 of 1,250 jobs.

Auto industry consultant Bernd Bohr said larger, deep-pocketed suppliers will likely be the “last man standing” for delivering a particular part.

“A lot of companies are fighting for a piece of a smaller and smaller cake and the question is, who’s getting that volume?” he said.

Powertrain supplier Vitesco is focused on combustion engines, but by 2030 the company expects EVs will account for 70% of sales.

In January, the German supplier will split its business into two main divisions, one focused on EV components and the other on higher-value technology that can also be used in combustion engines to bring in cash as that business winds down.

Some parts of the business no longer considered to be core will be shut down or sold off.

“We have to generate the necessary funds so we can invest in the future,” Vitesco CEO Andreas Wolf said. “I can’t grow without money.”

Parts supplier Schaeffler expects its future EV business will be smaller than today’s combustion-engine sales, so the German company is focused on diversifying its customer base.

For instance, the ball bearings Schaeffler sells to carmakers could be sold to other industries.

‘OTHERS WILL DROP OUT’

Smaller suppliers are already struggling with soaring raw material and energy costs, plus the need to invest in greener products to meet carmakers’ climate goals.

Funding new equipment for EV parts could be tough.

Evtec’s investor Roberts said the company has around 330 million pounds’ worth ($363.8 million) of business lined up for EV parts for JLR over a seven-year contract, plus around another 250 million pounds with other carmakers.

But because of long auto industry lead times, the models in those contracts will not start production for two to three years.

Evtec must spend up to 70 million pounds for new tools and machines for those contracts, of which Roberts will pay half, long before any revenue comes in.

Evtec also has support from JLR, which considers it a strategic supplier.

“Our suppliers play a pivotal role in our transformation,” a JLR spokesperson said. “We are working closely with them during the automotive industry’s transition … to electrification.”

AlixPartners estimates carmakers have committed $526 billion to go electric and if they do not proactively address supplier problems they could end up spending another $70 billion to fix them.

Suppliers making key components could get rescued, but carmakers cannot afford too many bailouts, Wakefield said.

Evtec’s Parker said with an investor backing its transition, in the short term the company is looking to “plug the gaps” in revenue.

Earlier this year, when an Israeli supplier folded, Evtec took over some of its business. As suppliers struggle after two years of pandemic, supply shocks and inflation, Parker expects more such opportunities.

“If you can hang on long enough, others will potentially drop out,” Parker said. “Then you’ve got more chance of picking up business.”

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(This story has been corrected to fix paragraph 27 and 28 to remove reference to third division )

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Additional reporting by Gilles Guillaume in Paris
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U.K. Borrowers React to Soaring Interest Rates in Mortgage Market

LOUGHTON, England — After nearly two decades of renting in one of the world’s most expensive cities, the Szostek family began the week almost certain that they would finally own a home.

Transplants to London who fell in love as housemates, Laetitia Anne, an operations manager from France and her husband, Maciej Szostek, a chef from Poland, had long dreamed of being homeowners. They had waited out the uncertain pandemic years and worked overtime shifts to save up for the deposit for a mortgage on a three-bedroom apartment in a neighborhood outside London. Their 13-year-old twins were excited they could finally paint the walls.

That was before British financial markets were upended, with the pound briefly hitting a record low against the dollar on Monday and interest rates soaring so rapidly that the Bank of England was forced to intervene to restore order. The economic situation was so volatile that some mortgage lenders temporarily withdrew many products.

By Tuesday evening, the Szostek family learned the bad news: The loan that they were close to securing had fallen through. Suddenly, they were scrambling to find another lender as interest rates climb higher.

loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

Rising home prices and income inequality priced many out of the market, but for strivers who aspired to homeownership, the latest ruptures to the economy hit hard. The release of the new government’s sweeping plan for debt-funded tax cuts led to a big uptick in interest rates this week that roiled the mortgage market. Many homeowners are calculating their potential future mortgage payments with alarm, amid soaring energy and food prices and a general cost-of-living crisis.

Before they were informed they were no longer eligible, the family had been in the final stages of applying for a five-year fixed-rate mortgage on an apartment priced at £519,000, or around $576,000, in the leafy parish of Loughton, a town about 40 minutes north of London by train where the streets fill with students in the afternoon and the properties span from lower-end apartments to million-pound mansions.

according to the Financial Conduct Authority. And more than a third of all mortgages are on fixed rates that expire within the next two years, most likely exposing those borrowers to higher rates, too. By contrast, the vast majority of mortgages in the United States are locked in for 30-year fixed terms.

And the abrupt surge in interest rates could threaten to set off a housing market crisis, analysts at Oxford Economics wrote in a note on Friday, adding that if mortgage rates stayed at the levels now being offered, that would suggest that house prices were around 30 percent overvalued “based on the affordability of mortgage payment.”

“This just adds a significant further strain to finances in the order of hundreds of pounds a month,” said David Sturrock, a senior research economist at the Institute for Fiscal Studies, adding that the squeeze on household budgets will affect the broader economy.

Uncertainty and even panic was clear this week, with many homeowners seeking financial advice. Mortgage brokers said they were receiving a higher volume of inquiries than normal from people stressed about refinancing their loans.

“You can feel the fear in people’s voices,” said Caroline Opie, a mortgage broker working with Ms. Anne who said she had not seen this level of worry in a long time. One couple this week even called her the morning of their wedding, she said, to set an appointment to refinance their mortgage next week.

the war in Ukraine. “Something has got to give,” he said. “Prices are too high anyway.”

To save for the deposit, Mr. Szostek, 37, picked up construction shifts and cleaning jobs when restaurants closed during Covid-19 lockdowns. A £5,000 inheritance from Ms. Anne’s grandfather went into their deposit fund. At a 3.99 percent interest rate, the mortgage repayments were set to be about £2,200 a month.

“I wanted to feel at home for real,” said Ms. Anne, adding she would have been the first in her family to own a property. Mr. Szostek called it “a lifelong dream.”

On Wednesday night, that dream still seemed in reach: The mortgage dealer Ms. Opie had found another loan, which they rushed to apply for.

The higher interest rate — 4.6 percent — will mean their new monthly mortgage payment will be £2,400, the upper limit of what the Szostek family can afford. Still, they felt lucky to secure anything at all, hoping it will mean their promises to their children — of bigger bedrooms, more space, freedom to decorate how they like — will materialize.

They would wait to celebrate, Mr. Szostek said, until they had the keys in hand.

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Bank Of England Raises Rates But Avoids Bolder Hike Like Fed

By Associated Press
September 22, 2022

Surging inflation is a worry for central banks because it saps economic growth by eroding people’s purchasing power.

The Bank of England raised its key interest rate Thursday by another half-percentage point to the highest level in 14 years, but despite facing inflation that outpaces other major economies, it avoided more aggressive hikes made by the U.S. Federal Reserve and other central banks.

It is the Bank of England’s seventh straight move to increase borrowing costs as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation. Despite facing a slumping currency, tight labor market and inflation near its highest level in four decades, officials held off on acting more boldly as they predicted a second consecutive drop in economic output this quarter, an informal definition of recession.

The bank matched its half-point increase last month — the biggest in 27 years — to bring its benchmark rate to 2.25%. The decision was delayed for a week as the United Kingdom mourned Queen Elizabeth II and comes after new Prime Minister Liz Truss’ government unveiled a massive relief package aimed at helping consumers and businesses cope with skyrocketing energy bills.

The new measures have eased uncertainty over energy costs and are “likely to limit significantly further increases” in consumer prices, the bank’s policymakers said. They expected inflation — now at 9.9% — to peak at 11% in October, lower than previously forecast.

“Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back,” the monetary policy committee said.

The bank signaled it is prepared to respond more forcefully at its November meeting if needed. Its decision comes during a busy week for central bank action marked by much more aggressive moves to bring down soaring consumer prices.

The U.S. Federal Reserve hiked rates Wednesday by three-quarters of a point for the third consecutive time and forecast that more large increases were ahead. Also Thursday, the Swiss central bank enacted its biggest-ever hike to its key interest rate.

Three of the British bank’s nine committee members wanted a similar three-quarter-point raise but were outvoted by five who preferred a half-point and one who voted for a quarter-point.

The decision “suggests the Bank of England is concerned about the U.K.’s economic deteriorating outlook amid the looming threat of recession,” said Victoria Scholar, head of investment at interactive investor. “The timid increase will do little to stem the slide in sterling but may avoid inadvertently inducing unnecessary pain for the economy which is already grappling with slowing demand and deteriorating confidence.”

Surging inflation is a worry for central banks because it saps economic growth by eroding people’s purchasing power. Raising interest rates — the traditional tool to combat inflation — reduces demand and therefore prices by making it more expensive to borrow money for big purchases like cars and homes.

Inflation in the United Kingdom hit 9.9% in August, close to its highest level since 1982 and five times higher than the Bank of England’s 2% target. The British pound is at its weakest against the dollar in 37 years, contributing to imported inflation.

To ease the crunch, Truss’ government announced it would cap energy bills for households and businesses that have soared as Russia’s war in Ukraine drives up the price of natural gas needed for heating.

The Treasury is expected to publish a “mini-budget” Friday with more economic stimulus measures, and the bank said it won’t be able to assess how they will affect inflation until its November meeting..

The Bank of England expects gross domestic product to fall by 0.1% in the third quarter, below its August projection of 0.4% growth. That would be a second quarterly decline after official estimates showed output fell by 0.1% in the previous three-month period.

The weakness partly reflects a smaller-than-expected rebound after an extra June holiday to celebrate the queen’s 70 years on the throne and the impact of another public holiday Monday for her funeral, officials said.

The bank avoided pressure to go bigger even as other banks around the world take aggressive action against inflation fueled by the global economy’s recovery from the COVID-19 pandemic and then the war in Ukraine.

This month, Sweden’s central bank raised its key interest rate by a full percentage point, while the European Central Bank delivered its largest-ever rate increase with a three-quarter point hike for the 19 countries that use the euro currency.

But British policymakers signaled they will “respond forcefully, as necessary” if there are signs that inflationary pressure is more persistent than expected, “including from stronger demand.”

The bank said it’s also moving ahead with plans to trim its bond holdings built up under a stimulus program, selling off 80 billion pounds ($90 billion) worth of assets over the next year to bring its portfolio down to 758 billion pounds.

Additional reporting by The Associated Press.

Source: newsy.com

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Federal Reserve Attacks Inflation With Another Big Hike, Expects More

The central bank raised its key short-term rate by a substantial three-quarters of a point for the third consecutive time.

Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come — an aggressive pace that will heighten the risk of an eventual recession.

The Fed’s move boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.

The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year’s end, a full percentage point higher than they had forecast as recently as June. And they expect to raise the rate further next year, to about 4.6%. That would be the highest level since 2007.

On Wall Street, stock prices fell and bond yields rose in response to the Fed’s projection of further steep rate hikes ahead.

The central bank’s action Wednesday followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Fed officials have said they’re seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet economists increasingly say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. It expects the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, any time the unemployment rate has risen by a half-point over several months, a recession has always followed.

Fed officials now see the economy expanding just 0.2% this year, sharply lower than its forecast of 1.7% growth just three months ago. And it expects sluggish growth below 2% from 2023 through 2025.

And even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1% at the end of next year, well above its 2% target.

Chair Jerome Powell acknowledged in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2% target was “unconditional.”

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Declining gas prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans. The economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession. On Sunday, though, President Biden said on CBS’ “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health care legislation would lower prices for pharmaceuticals and health care.

Some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than necessary to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation — are levelling off and by some measures even declining a bit.

Surveys also show that Americans are expecting inflation to ease significantly over the next five years. That is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then help moderate price increases.

Konczal said there is a case to be made for the Fed to slow its rate hikes over the next two meetings.

“Given the cooling that’s coming,” he said, “you don’t want to rush into this.”

The Fed’s rapid rate hikes mirror steps that other major central banks are taking, contributing to concerns about a potential global recession. The European Central Bank last week raised its benchmark rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all carried out hefty rate increases in recent weeks.

And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If recession sweeps through most large economies, that could derail the U.S. economy, too.

Even at the Fed’s accelerated pace of rate hikes, some economists — and some Fed officials — argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.

Many economists sound convinced that widespread layoffs will be necessary to slow rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.

Only a downturn that harsh would reduce wage growth and consumer spending enough to cool inflation, according to the research, by Johns Hopkins University economist Laurence Ball and two economists at the International Monetary Fund.

Additional reporting by The Associated Press.

Source: newsy.com

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