Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Before early yesterday morning, investors were pretty convinced that the Bank of England would raise interest rates today, for the 15th time in a row.
But Wednesday’s surprise fall in UK inflation, from 6.8% to 6.7%, has shaken the City, leaving traders – and businesses and households across the country – unsure what to expect from the BoE at noon today.
The money markets are currently indicating that the odds of a rate rise, or a hold, are roughly 50% each. That suggests the Bank’s monetary policy committee will have a fierce debate at this month’s meeting over whether to pause their hiking cycle today, or not.
Many analysts think we will get another rate hike today, taking borrowing costs to a 15-year of 5.5%.
Not all, though. Goldman Sachs yesterday predicted that the BoE will keep bank rate unchanged today, and that rates are already at their peak, after “the August inflation print surprised meaningfully to the downside.”
But other experts fear that leaving rates on hold today could be declaring victory too soon.
Kim Crawford, global rates portfolio manager at J.P. Morgan Asset Management, explains that a pause at this meeting “could backfire”, arguing:
‘The Bank of England’s decision is more finely balanced as activity data weakens more clearly, but a pause at this meeting could backfire.
‘Since the last meeting, services inflation has come in lower than the Bank of England’s forecasts, and there has been clearer demand-led loosening in the labour market, but wage growth has still continued to surprise to the upside.
Last night, the US Federal Reserve delivered a hawkish pause, by maintaining US interest rates on hold but keeping the door open for future hike.
That helped to push the US dollar to a five-month high against the pound overnight, at just over $1.23.
We actually hear from ten central banks today, including interest rate decisions in Turkey, Sweden, Switzerland and Norway, as well as the UK.
7am BST: UK public finances for August
8.30am BST: Sweden’s Riksbank interest rate decision
8.30am BST: Swiss National Bank interest rate decision
9am BST: Bank of Norway interest rate decision
12pm BST: Bank of England interest rate decision
12pm BST: Bank of Turkey interest rate decision
1.30pm BST: US weekly jobless claims
Just FIVE minutes to go…. and the money markets are indicating that there’s a roughly 61% chance that the Bank of England raises interest rates again, at noon.
Here’s another photo of the protests outside the Bank of England today, with just 10 minutes until one of the most uncertain interest rate increases in some time….
The Prime Minister said he is focused on bringing inflation down as quickly as possible when asked about high interest rates.
Asked when people would start to feel better off, Rishi Sunak told broadcasters:
“I know things are tough right now for families and businesses with the cost of living, and that is why my number one priority coming into this year was to halve inflation.
“We had very welcome news yesterday which people might not have seen, but inflation yesterday fell faster than many people were expecting.
“That shows that our plan is working. We have got to stick to the plan to bring inflation down.
“That is what my number one economic priority is and that is what we are delivering, and in the meantime we have got support in place to help families that are struggling, whether it is those on welfare or those with mortgages.
“The most important thing I can do to help people is to bring inflation down as quickly as possible. Yesterday’s figures show that the plan is working.”
UK inflation fell to 6.7% in August from 6.8% in July, due to weaker growth in food prices and monthly falls in the cost of hotels and air travel.
The head of UK retailer Next has declared that he can’t see any reason for the Bank of England to raise interest rates.
The Sun’s Ashley Armstrong has the details:
Lord Wolfson has been speaking to reporters after Next raised its profit forecasts again this morning (see earlier post)
Tension is rising in the City of London, with less than an hour until the Bank of England reveals its interest rate decision.
The money markets are still indicating that rates are more likely to rise than not at noon, to a new 15-year high.
A quarter-point increase, from 5.25% to 5.5%, is currently seen as a 61% possibility, with no change a 39% chance. (That’s based on interest rates futures)
Another increase in rates would add to the pressure on borrowers, as Alastair Douglas, CEO of TotallyMoney, explains:
“Halloween may be a month away, but the Bank of England has already had a Nightmare on Threadneedle Street this year. It’s no surprise that public confidence in the Bank is at a record low — the forecasts have failed, and the rate hikes have struggled to slow the cost of living at the planned pace. However, for the third month in a row, the dial has moved — and in the right direction.
“It’s unlikely that interest rates will come down any time soon, and lenders must provide customers with support and value. Some have been reluctant to pass on the benefits of the hikes to savers, while others are charging the UK’s 679k Standard Variable Rate mortgage customers up to 9.49% interest on their borrowing.
“Sustained financial stress has already pushed people to breaking point — they’re missing bills and slipping into mortgage arrears. Support is slim, and more people are taking out more credit — including a third of renters who have used it to keep a roof over their heads.
Over at the Bank of England, a protest is taking place to urge the central bank to stsop raising interest rates.
It’s organised by Positive Money, the campaign group, who warns that higher interest rates are transferring billions of pounds to commercial banks, while harming millions of households.
Protestors wearing masks of Andrew Bailey and Rishi Sunak are demanding that the Bank of England stops trying to respond to inflation with policies that make the cost of living crisis worse.
They are als urging the government to introduce a windfall tax on the unearned profits banks are making from interest rate rises.
Positive Money says a poll held by YouGov has found that only 12% of UK adults oppose a windfall tax on banks, whereas 58% support it.
Fran Boait, co-executive director, at Positive Money, says:
“Banks’ record profits are coming at the direct expense of the public, who are footing the bill for higher interest rates. These profits aren’t being reinvested back into the economy or creating new jobs, with banks shutting down branches across the country.
“After the crash an extra tax on banks’ profits was introduced to help ensure the sector makes a fair contribution, but the government has actually recently cut this surcharge, just when it is needed more than ever.
“Jeremy Hunt should take a leaf from the Thatcher government’s book and introduce a windfall tax on banks’ unearned profits in the upcoming Autumn Statement, which could help fund support for households during the cost of living crisis.”
Furniture retailer DFS has been hit by the cost of living squeeze, with earnings halving last year.
DFS reported this morning that pre-tax profits fell by 49% to £29.7m in the year to 25 June, down from £58.5m.
DFS said it was “continuing to win share in a very tough market”, and that the last year had been a significant challenge due to the weak economic backdrop.
The company also says it is confident the market will recover, but can’t predict how quickly that will happen; it expects a “modest” rise in profits next year.
The Bank of England’s decision at noon today “is a coin toss”, says Marios Hadjikyriacos, senior investment analyst at XM, after UK inflation eased in August.
Following the latest inflation report that was colder than expected, markets are pricing this rate decision almost as a 50-50 coin toss.
Admittedly, the data pulse argues for no action. The labor market lost jobs in July while economic growth stagnated, and business surveys suggest these trends will persist or worsen.
The only real argument in favor of a rate increase is wage growth, which is extremely hot and continues to accelerate.
More central bank action: Taiwan’s central bank has kept interest rates on hold.
In a unanimous decision, Taiwan’s central bankers left their key rate at 1.875%, where it has stood since March.
They also cut their growth forecast for 2023, fearing that slugging global demand will hit Taiwan’s export-heavy economy.
Taiwan is a major producer of semiconductors used in everything from cars to smartphones, but with global consumer demand hit by high inflation, rising interest rates and the impact of the Ukraine war on global demand, its economy slipped into recession in the first quarter, Reuters points out.
Sterling remains weak this morning, as the City braces to learn whether the Bank of England has raised interest rates again, or hit the pause button.
The pound has traded as low as $1.2293 this morning, the weakest since 3th April and down around half a cent.
Victoria Scholar, head of investment at interactive investor, says today’s BoE’s decision is “one of the most uncertain decisions in a while,” adding:
On the one hand, inflation is still at 6.7%, sharply above the Bank of England’s 2% target, wage growth remains extremely strong and oil prices have been surging, all supporting the case for further tightening. On top of that, the Federal Reserve (which is often a trendsetter in terms of monetary policy as the central bank to the world’s largest economy) suggested it is likely to raise rates again this year as part of its hawkish hold.
On the other hand, UK economic data has been softening with weak PMI readings, an uptick in the unemployment rate and a disappointing GDP reading for July, highlighting the fragility of the UK economy. Overtightening has the potential to push the UK into a recession, which supports the case for a hold today. This of course would be the preferred outcome for equities, with the FTSE 100, FTSE 250, and the UK housebuilders in particular rallying on Wednesday after the Swaps markets drastically wound back their probability of a hike.
The pound has hit the lowest level since April against the US dollar this morning while the FTSE 100 and FTSE 250 are also under pressure, reflecting the broader risk-off mood following the Fed’s decision last night.”
The Bank of England’s policymakers will have been “very pleased with yesterday’s inflation numbers” when they met to set interest rates, says Robert Dishner, senior portfolio manager at investment manager Neuberger Berman:
Levels came in well below their forecasts and market expectations. The declines were seen both in core goods and services. This should reduce but not eliminate the chance of a hike today and would expect the market to settle at about a 60% chance.
However, if the BoE does go, its likely to be a dovish hike and it’s not entirely certain they will hike. Expect for them to keep the “sufficiently restrictive for sufficient long” language even if they decide not to hike rates.
The Bank’s Monetary Policy Committee actually met yesterday to vote on interest rates, but we don’t get the decision until midday today.