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Bank of England announces biggest rate hike in 30 years

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The Bank of England made its biggest interest rate increase in three decades on Thursday, joining the U.S. Federal Reserve and other central banks worldwide in rapid hikes as it tries to beat back stubbornly high inflation fuelled by Russia’s invasion of Ukraine and the disastrous economic policies of former prime minister Liz Truss.

The central bank boosted its key rate by three-quarters of a percentage point, to three per cent, after consumer price inflation returned to a 40-year high in September. The aggressive move comes even as the bank predicted a two-year economic contraction through June 2024, which would be the longest recession since at least 1955, according to the Office for National Statistics.

“If we don’t take action to bring inflation down, it gets worse,” Bank of England governor Andrew Bailey told reporters. “There’s no easy outcome in this sense.”

Even so, the central bank should not increase its key rate too far, he said, but with uncertainties ahead, policymakers will “respond forcefully” if needed.

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The interest rate decision is the first since Truss’s government announced 45 billion pounds ($69 billion Cdn) of unfunded tax cuts that sparked turmoil on financial markets, pushed up mortgage costs and forced Truss from office after just six weeks. Her successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills.

“High energy, food and other bills are hitting people hard. Households have less to spend on other things. This has meant that the size of the U.K. economy has started to fall,” the bank said in its November monetary policy report.

The rate increase is the Bank of England’s eighth in a row and the biggest since 1992. It comes after the U.S. Federal Reserve on Wednesday announced a fourth consecutive three-quarter point jump as central banks worldwide combat inflation that is eroding living standards and slowing economic growth.

Response from central banks intensifies

Central banks have struggled to contain inflation after initially believing that price increases were being fuelled by international factors beyond their control. Their response intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.

The war in Ukraine boosted food and energy prices worldwide as shipments of natural gas, grain and cooking oil were disrupted. That added to inflation that began to accelerate last year when the global economy began to recover from the COVID-19 pandemic.

 

British pound hits record low against U.S. dollar, before bouncing back

The British pound fell to its lowest level against the U.S. dollar since 1985, before bouncing back on Monday. At one point, it was trading nearly at par with the greenback.

Europe has been particularly hard hit by a jump in natural gas prices as Russia responded to Western sanctions and support for Ukraine by curtailing shipments of the fuel used to heat homes, generate electricity and power industry, and European nations competed for alternative supplies on global markets.

The U.K. also has struggled as wholesale gas prices increased fivefold in the 12 months through August. While prices have dropped more than 50 per cent since the August peak, they are likely to rise again during the winter heating season, worsening inflation.

The British government sought to shield consumers with a cap on energy prices. But after the turmoil caused by Truss’s economic policies, Treasury chief Jeremy Hunt limited the price cap to six months instead of two years, ending on March 31.

Food prices jump, home ownership out of reach

Meanwhile, food prices have jumped 14.6 per cent in the year through September, led by the soaring cost of staples such as meat, bread, milk and eggs, the Office for National Statistics said. That pushed consumer price inflation back to 10.1 per cent, the highest since early 1982 and equal to the level last reached in July.

Increases in the cost of tea bags, milk and sugar mean that even the “humble” cup of tea, which people across the country turn to when they need a break from the pressures of daily life, is getting more expensive, the British Retail Consortium said Wednesday.

In the foreground, a woman's hand holds five British five-pound banknotes, fanned out. In the background, more cash and two calculators are spread out on a table.
‘While some supply chain costs are beginning to fall, this is more than offset by the cost of energy, meaning a difficult time ahead for retailers and households alike,’ said Helen Dickinson, chief executive of the British Retail Consortium. (Dado Ruvic/Reuters)

“While some supply chain costs are beginning to fall, this is more than offset by the cost of energy, meaning a difficult time ahead for retailers and households alike,” said Helen Dickinson, the consortium’s chief executive.

Truss’s failed economic plan made things worse, driving the pound to a record low against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England would boost interest rates higher than expected. That increased mortgage costs as lenders repriced their products.

The economic turmoil is putting home ownership further out of reach for many young people, according to research released this week by Hamptons, a U.K. real estate agency.

Mortgage rates average around 6.5 per cent, compared with two per cent a year ago.

That means the average first-time homebuyer would have to make a down payment equal to 41 per cent of the purchase price to keep their monthly repayments at the same level as a similar buyer who made a 10 per cent down payment last year, Hamptons said.

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Tesla adds another recall to a ‘Total Recall’ year

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Tesla issues a recall on 80,000 cars in China adding another one to a year with a lot of recalls, but most of them are easily fixed with software updates.

 

Earlier this year, NHTSA issued a series of recalls on Tesla vehicles that were highly reported in the media.

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What was less reported, though, is that almost all of those recalls were fairly simple software issues that Tesla has been able to fix through over-the-air software updates.

Whenever there’s a safety-related issue, NHTSA has to issue a “safety recall,” even if the automaker doesn’t have to physically recall any vehicle, which leads to some confusion.

Again last month, a Tesla recall of “1 million vehicles” made many headlines when the recall simply consisted of Tesla changing how its software handled window operations. These instances have led Tesla CEO Elon Musk to complain about the term “recall” and how it is used against Tesla by the media.

Today, Tesla also announced more recalls in China on about 80,000 vehicles.

According to Chinese authorities, the recall includes 67,698 imported Model S and Model X vehicles with a software problem related to the battery pack. Again, the fix is a simple software update.

However, this time there’s also a physical recall due to a seat belt issue on about 13,000 Model 3 vehicles: 2,736 imported and 10,127 made in China.

With now over 20 recalls in 2022, it has been a “Total Recall” year for Tesla – pun intended:

But Tesla is not the only automaker affected by large recalls this year. Ford just confirmed that it is recalling another half a million vehicles due to a fire risk, and many automakers have also recalled millions of vehicles this year.

If anything, the fact that the large majority of Tesla’s recalls are quickly fixed with over-the-air software updates – rather than having to bring the cars back to the dealership like other automakers – shows that Tesla’s level of connectivity in its vehicles is a major advantage in the industry.

It makes for an easier experience for the customers, and it is much cheaper and more efficient for Tesla.

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Flair flight from Vancouver overshoots Ontario runway

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Vancouver couple Charissa Landicho and Mac Bradley just wanted a quick and cheap getaway, but a turbulent landing was not on their itinerary.

“I was definitely in shock because it was an overnight flight. I woke up, just, ‘What’s going on?'” Landicho said.

“We touched down and we could hear a loud thud. And it lifted up and it (went) down again,” she recalled.

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It was a frightening experience for the 134 passengers on the Flair Airlines Boeing 737, which went off the runway just before 6:30 a.m. Friday morning in southern Ontario.

The flight from Vancouver was landing at the Kitchener-Waterloo airport when it overshot the runway and ended up in the grass.

“To me, it felt like we pulled right and then next thing you know, we’re off the tarmac, in the field pretty much, bouncing around, smacking around,” said Bradley.

“We probably went like 50 to 100 metres off the runway,” he continued.

He said their plane tickets cost about $100 each, roundtrip, potentially saving them hundreds by going with the budget airline.

With no announcement or warning, the couple said they were only told to stay put and waited an hour to finally get off the plane.

“It was a little bit questionable because it seemed like nobody really knew what to do on the plane other than just trying to keep calm. So that was a little bit unnerving,” said Bradley.

“And the fact that we just got an automated text after asking us to leave a Google review on our experience was a little satirical,” he added.

In a statement, Flair Airlines said there were no reported injuries and passengers were taken to the terminal by bus.

There is no word on what caused the aircraft to overshoot the runway, but the Transportation Safety Board (TSB) has been deployed to investigate.

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Black Friday impacted by changing shopping habits

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When Shopify Inc.’s Harley Finkelstein surveys November’s retail landscape, he finds it hard to see where Black Friday stops and Cyber Monday begins.

The annual pre-holiday sales blitzes meant to encourage customers to drop cash on discounted goods have bled together in recent years, with stores extending Black Friday promotions beyond a single day and online retailers offering Cyber Monday deals all week — or all month.

“Black Friday/Cyber Monday used to be a weekend, now it’s more of a season,” said the president of the Ottawa e-commerce giant.

Many in the retail industry feel the divisions will be even more hazy this Cyber Monday as the COVID-19 health crisis continues to reshape shopping habits.

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During the pandemic, which saw stores temporarily close and people retreat inside their homes, there was a surge in online shopping.

As measures meant to quell the virus eased, many kept shopping online — but not at the rate some brands anticipated.

“Online shopping grew in popularity, obviously, through the pandemic, but it’s actually fallen off now because people are returning back to the store,” said Lisa Hutcheson, managing partner at J.C. Williams Group, a consulting firm.

“E-commerce spending is actually down year-to-date 11.5 per cent.”

The consumer shift back to brick-and-mortar stores blindsided Shopify, which had banked on online shopping continuing to accelerate at pandemic rates.

“It’s now clear that bet didn’t pay off,” chief executive Tobi Lutke said in a July statement announcing the company was laying off 10 per cent of staff as a result of the misjudgment.

The company’s stock traded for as high as $212 in the past year but has averaged closer to $50 in recent days.

So there’s a lot riding on the Black Friday/Cyber Monday weekend.

“Black Friday/Cyber Monday is sort of our Super Bowl,” said Finkelstein. “The culture and the energy at the company is really high right now.”

Black Friday

A survey his company conducted with 24,000 consumers and 9,000 small and medium businesses around the world found 59 per cent of Canadians planned to spend the same amount as or more than last year on Black Friday and Cyber Monday weekend. That figure rose to 74 per cent for those between the age of 25 and 34.

Finkelstein finds it hard to predict how the weekend will go, though he suspects it will be very different from last year, when the country was consumed with product shortages and the Omicron wave of COVID-19.

“This Black Friday/Cyber Monday seems far less frantic than last year,” he said. “There are less supply chain issues, more physical stores are open, there’s more inventory. There’s better capacity planning at the shipping companies.”

However, there is a new problem: inflation remains stubbornly high.

Michelle Wasylyshen of the Retail Council of Canada says “consumers tightened their belts a little” in recent months but still plan to spend the same as they did last holiday season, roughly $790.

“The difference this year is that they will be looking for more meaningful or practical gifts,” she wrote in an email. “They might also decrease the number of people they buy for or will give fewer gifts per person, but they do plan to shop.”

Finkelstein also foresees a more measured approach.

“They may not buy five things they have mediocre love for. They may buy two things they deeply want,” said Finkelstein.

“And they may also be thoughtful about how they buy … Is there a discount coming? I’ll wait until Thursday night or until Cyber Monday.”

The term Cyber Monday was coined in 2005 by the National Retail Federation, which noticed the Monday after Black Friday had delivered a big spike for online sales and traffic in the prior two years.

“We won’t be seeing quite the same spike that we have in the past,” Hutcheson predicted.

Some of that forecast comes from the stretched shopping window but also because some people are going to stick with their pandemic habits of online shopping.

Moneris is predicting Cyber Monday will be the busiest online shopping day, following a trend set in 2019 and 2020. However, Black Friday is still expected to be the busiest day in terms of total transaction count and dollars spent across all mediums.

Hutcheson said the week will play out as an “omnichannel view.”

Omnichannel is an industry term referring to making shopping seamless across online and mobile platforms as well as brick-and-mortar stores.

Finkelstein likes the term because the retail industry “is no longer online versus offline.”

“Saying omnichannel is a strategy will soon be akin to saying colour TV,” he said. “It is the norm and so consumers are shopping everywhere and everywhere.”

This report by The Canadian Press was first published Nov. 25, 2022.

Companies in this story: (TSX:SHOP)

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