The International Monetary Fund (IMF) has warned the UK Government that it is on course to miss its debt target and should not cut taxes before an election with tax rises likely to be needed in future. However, the IMF increased its projection for UK economic growth in 2024 to 0.7%, from an April forecast of 0.5%. The IMF said that the Bank of England (BoE) should cut interest rates two or possibly three times this year, although it saw inflation only returning to the BoE’s target on a durable basis in early 2025.
Meanwhile the consensus view of the latest Reuters monthly poll of economists is that the Bank of England (BoE) will start bringing down interest rates in August, although only slightly fewer of them have predicted a rate cut in June. BoE Governor, Andrew Bailey, said after the May meeting of the Monetary Policy Committee (MPC) that policymakers needed to see more evidence that inflation will stay low but said he was optimistic things were moving in the right direction and did not rule out a June cut.
The latest monthly S&P Global UK Purchasing Managers’ Index (PMI) for the dominant UK Services sector indicates that growth among services businesses eased in May from April and that inflation pressures have dropped to their lowest level in three years – potentially easing the way for a Bank of England (BoE) interest rate cut later this year. The index touched a six-month low of 52.9, down from 55.0, in April. S&P said the data was consistent with gross domestic product (GDP) growth of 0.3% in the second quarter of 2024 which is half the pace of the first quarter of the year. The data is likely to boost the BoE’s confidence that the time for a cut in the Bank Rate is getting nearer.
The UK’s competition regulator, the Competition and Markets Authority (CMA), has started a probe into Nationwide Building Society’s proposed £2.9 billion all-cash deal to buy Virgin Money UK plc. The deal, which was announced in March is expected to close in the fourth quarter of this year and would create the country’s second-largest savings and mortgage provider after Lloyds Banking Group. The CMA is considering whether the deal could result in a “substantial lessening of competition” in the UK.
Further claims have emerged in the U.S. that Standard Chartered Bank handled billions of dollars of previously undisclosed transactions involving sanctioned Iranian entities and foreign terrorist organisations. Shares in the FTSE 100 emerging markets lender fell by 5.3% on the news after Julian Knight and Robert Marcellus, two former bankers, claimed in court filings in the U.S. that between 2008 and 2013 the bank had overseen “hidden” dealings worth about $100 billion in breach of sanctions against Iran. U.S. The Bank had previously reached settlements with authorities over allegations that it breached sanctions and agreed to pay $667 million to American regulators. In 2019 the Bank agreed to pay a further $1.1 billion to authorities in America and in the UK to settle allegations that it had violated sanctions on Iran and other countries between 2008 and 2014.
During the month, both S&P and Fitch lowered their outlooks for Toronto Dominion Bank to “Negative” to reflect uncertainty regarding the impact on the Bank’s franchise, earnings and risk profiles from the various investigations by regulators on the deficiencies of the Bank’s anti-money laundering (AML) practices. Fitch also upgraded the long-term credit ratings of both major Japanese banks and major Australian banks with “Stable” outlooks as part of general rating actions to to reflect their build-up of qualifying junior debt instruments and equity to meet loss absorbing capacity requirements that should protect third-party senior creditors and depositors; while Moody’s has upgraded the long-term credit ratings of Commonwealth Bank of Australia for similar reasons. Moody’s also upgraded the long-term credit rating of Danske Bank AS with a “Stable” outlook to reflect the agency view that the work to identify and remediate deficiencies regarding its previous breaches relating to AML compliance in its Estonian operations have been completed allowing the Bank to focus on its core franchise. In addition, Moody’s raised the outlook for Emirates NBD Bank PJSC to “Positive” to reflect its strong profitability and improving asset quality as well as a reduction in related-party concentration risk. In addition, Moody’s also lowered the outlook for Société Générale SA to “Negative” to reflect the agency view that profitability may fall short of levels consistent with the current credit ratings.