Closing post
Time to recap.
Stocks continue to soar in London on hopes that UK interest rates have now peaked.
The FTSE 100 index is up 1.5%, while the smaller FTSE 250 has surged by 3%, despite the Bank of England insisting that monetary policy is likely to need to be restrictive for an extended period of time.
Government bonds have also rallied, a sign that investors don’t expect borrowing costs to rise higher.
The BoE’s warning came as it left UK interest rates on hold at their current level of 5.25%.
It warned that the economy will be on the brink of recession next year, with the economy expected to flatline for the next four quarters if interest rates follow the path expected by financial markets.
During a press conference, governor Andrew Bailey declined to say whether the pain being suffered by households was a price worth paying.
But he pledged to keep monetary policy restrictive for long enough to “squeeze inflation” out of the system, saying:
“Monetary policy is currently restrictive in the sense that if we maintain this stance for long enough, we will squeeze inflation out of the system and that’s what we will do.”
Bailey also predicted that inflation will fall below 5% in October, thanks to lower energy bills…
...while appearing unamused that his predecessor, Mark Carney, had endorsed Labour shadow chancellor Rache Reeves last month.
And here’s the rest of today’s news:
Updated
Here’s a video clip of Bank of England governor Andrew Bailey explaining today’s interest rate decision:
Governor Andrew Bailey explains today’s interest rate decision. pic.twitter.com/d86FXza0la
— Bank of England (@bankofengland) November 2, 2023
Markets rally on hopes interest rates have peaked
Britain’s FTSE 250 share index, which tracks medium-sized companies, is soaring higher.
The FTSE 250 has jumped by 3%, or 520 points, to 17,706 points, putting it on track for its third best day of the year.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says the City believes interest rates, at 5.25%, are at their current peak.
Streeter explains:
Although this wasn’t a unanimous vote, there is a growing strength of feeling that previous rate hikes need more time to feed through. There are deepening concerns about the faltering economy as the high borrowing costs batter financial resilience and policymakers paint a stark picture of a stagnation scenario lasting until 2025.
The minutes highlight that UK GDP is expected to have been flat in the third quarter, weaker than initial estimates. The economy only just eked out growth in August and there has been a surge in company insolvencies.
Although inflation was still more than three times the bank’s target, it’s expected to have taken another big step down in October, and private sector wage growth is also showing signs of easing. It’s far from surprising that the majority of policymakers want the economy to take a breather from this painful cycle of rate hikes.
Larry Elliott: the next move in interest rates will probably be down.
Despite the Bank of England’s hawkish tone, the next interest rate move is likely down, predicts our economics editor, Larry Elliott.
Having attended the briefing at the Bank today, he writes that policymakers risk leaving rates too high for too long, given weak economic outlook and shrinking inflation:
Rising unemployment. Cuts in business investment. Falling house prices. An economy that at best is going to move sideways and could easily dip into recession. The Bank of England’s latest quarterly update on the state of the UK economy makes grim reading, not least for Rishi Sunak.
The prime minister is leading a government well behind in the opinion polls and sorely in need of some good news before a general election that has to be held by January 2025 at the latest. According to Threadneedle Street, there is not going to be much between now and polling day to raise the spirits of voters.
The Bank’s best estimate – based on the City’s expectations of interest rates remaining unchanged at 5.25% until the third quarter of 2024 – is for the economy to show no growth at all in 2024. There is an even chance that it will be worse than that, with the economy slipping into recession. Unemployment is expected to rise steadily to just above 5% by the start of 2025. A 5% drop in house prices this year is expected to be repeated in 2024.
Charts: UK economy facing stagnation
The Bank of England’s monetary policy report contains this depressing graph, predicting stagnation for the UK economy for more than a year:
The outlook for the global economy is better, but not much.
The Bank says:
Global growth has remained subdued over the course of 2023. UK-weighted world GDP is expected to have grown by around 0.4% in 2023 Q3, similar to Q2 and broadly in line with the projection in the August Report.
Four-quarter growth in 2023 Q3 is expected to be around 1.5%, below its 2010–19 average of 2.4%.
The latest indicators, such as cross-country purchasing managers’ indices (PMIs), suggest that global GDP growth is likely to remain weak in Q4.
Traders in the City of London are shrugging off the Bank of England’s warning that interest rates will probably remain high for some time.
The FTSE 100 is now up 1.6% or 117 points at 7460 points, a two-week high.
Investors are hopeful that UK interest rates are now at their peak.
Nick Rees, FX Market Analyst at Monex Europe, says:
The MPC appeared to retain a modest tightening bias in its collective judgement, with Governor Bailey quoted as saying that the discussion of interest rate cuts is “too early”.
Furthermore, the Bank’s framing of how long rates will need to be kept restrictive has firmed somewhat too, shifting from “sufficiently long” to an “extended period”.
Nevertheless, today’s communications are hardly indicative of policymakers looking to conduct further rate hikes, evidenced not only by the fact that the core of the Committee voted for a hold but also by the minutes highlighting brewing concerns that the Bank has overtightened.
Cues from Global Markets 🌎 - 02 Nov 2023
— Xillion (@XillionApp) November 2, 2023
🇪🇺 $STOXX => 1.92% ↑
🇩🇪 $DAX => 1.55% ↑
🇬🇧 $FTSE => 1.25% ↑
🇯🇵 $NIKKEI => 1.1% ↑
🇮🇳 $NIFTY => 0.76% ↑
🇨🇳 $HSI => 0.75% ↑
Updated
The Bank of England’s press conference ended with a question about government policy:
Q: What impact would tax cuts, or other fiscal loosening, be on the economy?
Andrew Bailey replies that tax cuts are a matter for the government, not the Bank of England, and ducks giving an assessment.
The BoE’s forecasts are based on announced government policy, Bailey points out, adding:
Whatever were to be announced [in the autumn statement] would be factored into our forecasts.
Thames Water cutting 300 roles after 'dance with the devil'
Away from the Bank of England, under pressure Thames Water is cutting about 300 roles in what it has called a “difficult but necessary” decision.
The financial health of Britain’s biggest water supplier has been under scrutiny since it emerged contingency plans were being drawn up for an emergency nationalisation. The debt-ridden company has since secured £750m from existing shareholders but will need to land further funds in the future as it attempts to upgrade London’s creaking water infrastructure.
The move will see 89 employees in its retail arm and 39 in its digital division made redundant, while around a further 160 roles which are currently vacant will not now be filled.
Gary Carter, national officer at the GMB union, condemned how the company had been managed since its privatisation in 1989.
He said:
“Thames Water has danced with the devil and now workers are paying the price.”
A Thames spokesperson said:
“The last year has been an extremely challenging year for the business and we continue to take a rigorous approach to financial discipline throughout the company in order to operate within budget…
“We will seek to minimise compulsory redundancies wherever possible, through redeployment and voluntary redundancy.”
The Guardian has also learned that Norma Dove-Edwin, the company’s chief digital and information officer, recently left for personal reasons. The former National Grid executive only joined Thames last year. She will be replaced on a temporary basis by technology boss John Brocking.
Sir Adrian Montague, who became Thames chairman in the summer, is also on the hunt for a permanent chief executive.
Updated
Q: Are you prepared to tolerate a mild recession, to bring down inflation? Are we looking at a bumpy landing?
Deputy governor Ben Broadbent reiterates his earlier comment that there isn’t a threshold which growth must not fall below, when the Bank is setting policy to control inflation.
Bailey wasn't warned Mark Carney would endorse Rachel Reeves
Q: Was it appropriate for former governor Mark Carney to endorse Rachel Reeves? Would you ever do the same?
Andrew Bailey says sternly that the Bank of England is “independent, and apolitical”.
That is absolutely at the core of this institution, let me be clear about that.
But former governors can make their own decisions.
Bailey reveals that Carney did not tell him in advance that he would be endorsing shadow chancellor Reeves - a rabbit out of the hat at the Labour Party conference last month.
“He has no obligation to tell me that, so I did not know in advance.”
Bailey says he is not at the stage of contemplating “life thereafter”.
But he insists that the Bank, and he personally, are apolitical, and independent.
“That is absolutely central to us,” Bailey declares, before apologising for “the sermon”.
Updated
Q: The recent insolvency figures has shown that access to lending is one cause of more companies going bust, what impact will that have on unemployment?
Bailey says the insolvency data is another piece of evidence of the impact that monetary policy is having on the economy, although “none of us are seeking to have insolvencies,” he insists.
Q: What effect has the disaster at the Office for National Statistics over its data collection of labour market statistics had on your work?
[reminder: the ONS was forced to switch to an experimental assessment of employment, unemployment and inactivity last month, because of poor responses to its surveys].
Andrew Bailey says the Bank looks at a suite of data to assess the labour market, as it has seen that the response rates to the ONS’s household survey has come down.
So the Bank hasn’t been flying blind without the ONS’s latest data, he argues.
This morning the ONS revealed a “comprehensive plan” to address the problems with its Labour Force Survey, which it hopes to have back to normal by December, depending on the response to data collection and methodological improvements.
Q: How would you describe the UK growth outlook for the next few years?
Andrew Bailey says the growth projection is “certainly subdued”.
On the demand side of the economy, there are now signs that restrictive interest rates are having an effect.
On the supply side, the Bank has revised its assessment of labour supply, because earnings growth has been more resiliant then expected. Plus, the efficiency at which people are matched to jobs has fallen.
Q: You’re painted quite a grim picture of the UK economy. Given you think it takes up to 18 months for interest rate rises to have their full impact, isn’t there a danger of falling behind the curve?
Andrew Bailey says Bank staff have done a lot of work about the impact of rates.
That work suggests the Bank is approaching the halfway point of the transmission of its previous 14 interest rate rises.
That is all priced into the Bank’s forecasts, he insists.
Andrew Bailey then denies that the Bank is pushing back against market expectations of a cut in interest rates by next August.
But he says there has been no discusson about cutting rates, and that the Bank thinks rates will remain where they are “for an extended period of time” to bring inflation back to the 2% target.
Q: Mortgage holders will be concerned to hear that interest rates will remain restrictive for some time – where do you think rates will settle?
Andrew Bailey doesn’t give a prediction, but he points out that the rates on mortgages have been falling since the summer as market expectations for the path of rates have fallen.
Deputy governor Ben Broadbent says the Bank thinks current rates are above the neutral rate of interest (this is the level where borrowing costs are neither stimulatory or restrictive).
However, central bankers usually only discover after the event what neutral rate actually was, Broadbent says.
Bailey declines to say household pain is price worth paying to beat inflation
Q: Households are feeling a lot of pain – how much of that is down to Bank policy? And is that a price worth paying to bring inflation down?
Governor Andrew Bailey swerves this trap, pointing out that there’s “a long history to the ‘price worth paying’ comment”.
He won’t join that history, as it’s “not the right language to use”.
[former Conservative chancellor Norman Lamont told the House of Commons in 1991 that rising unemployment and the recession were a price “well worth paying” to bring down inflation].
Bailey returns to a point he has made many times before – it is vital to bring inflation down.
He says:
If we don’t get inflation down, then the pain is worse.
All inflation hurts the least-well off the hardest, and when it’s concentrated in energy and foods, the essentials of life, it’s even harder.
Deputy governor Ben Broadbent denies that the Bank is trying to send any particular message to the financial markets with its latest forecasts (which show inflation falling to target whether interest rates are cut, or remain at current levels).
Broadbent adds that he’s been checking his emails on an electronic device at his seat in the press conference, and ‘nothing much’ has happen to prices in financial markets since the forecasts were published.
Updated
Q: Is your message that you don’t see any reason to cut interest rates in 2024, given the path of inflation?
Bailey replies:
The message is we’re going to have to maintain policy in a restrictive stance, as it is, in order to get all the way back down to target.
Updated
Q: Your willingness to raise rates again, if needed, is quite jarring when set against the downbeat economic outlook. Is it not much more likely that the next move is down, not up? And what would you need to see to justify a cut?
Governor Andrew Bailey replies that the Bank thinks the risks to inflation remain to the upside – that shows the Bank’s view of the future path of rates.
The ‘tragic’ events in the Middle East crisis do create uncertainty, and the risk of higher energy prices – althugh it’s encouraging that this hasn’t happened yet, he says.
[Brent crude jumped from $84.50 per barrel before the Hamas attacks of 7 October to almost $94 two weeks later, but is now back to $85].
“We have got to see inflation coming down to target…. we’ve got to see it coming back down to 2%,” Bailey adds.
Onto questions…
Q: You’re predicting stagnation for a year, to a year and a half. If there was a recession, would that change your view that rates should stay roughly where they are for an extended time?
Andrew Bailey says the Bank’s objective is price stability, defined as the inflation target of 2%.
He says the growth outlook is subdued, and that this shows the impact of previous interest rate rises.
There is “a considerable way to go”, Bailey points out, as inflation was 6.7% in September.
Deputy governor Ben Broadbent weighs in, saying it‘s “a bit odd” to have a very rigid definition of what is, or isn’t, a recession.
Whether growth is 'fractionally negative, or fractionally positive’ won’t have an impact on monetary policy, Broadbent insists.
[the technical definition of a recession is two quarter in a row of negative growth].
Andrew Bailey says the Bank must be mindful of the ‘balance of risks’ between doing too little, and too much.
The MPC’s latest forecasts suggest interest rate levels will need to be restrictive for quite some time yet, he adds.
On the outlook for price rises, the Bank’s latest forecasts show that inflation is more likely to be below its 2% target than above it in a few years time.
But the risks are skewed towards higher inflation, rather than lower, Bailey adds.
If you balance for those risks, then the Bank sees inflation just above its 2% target in two years time, and just below it at the end of 2026.
Those forecasts are based on market expectations for interest rates, which show them falling towards the end of next year.
Another set of forecasts, based on interest rates staying at 5.25%, shows inflation right at the 2% target in two years, and then down to 1.6% at the end of 2026.
Most indicators of UK employment growth are softening, warns BoE governor Andrew Bailey.
The number of vacancies have fallen, while unemployment has ticked up, he adds.
This weakening in the labour market has been driven, in part, by lower supply of labour not just demand, Bailey says.
That explains the continued strength in pay growth, even as employment growth has eased.
Updated
Bailey adds that there are ‘upside risks’ to the inflation outlook from energy, following the ‘tragic events in the Middle East’.
That’s a reference to the increase in oil prices following Hamas’s attack on Israel last month, although they have dipped back since.
Updated
Bailey: Inflation probably just below 5% in October
Andrew Bailey then predicts there was a large fall in UK inflation last month.
Bailey tells the press conference that inflation is forecast to drop to just below 5% in October, down from 6.7% in September.
That’s fall will be driven by the drop in energy bills last month, due to the drop in Ofgem’s price cap at the start of October.
Inflation is expected to stay around that level for the rest of the year, Bailey predict.
(if so, that would mean Rishi Sunak could claim success in his target of halving inflation in 2023, as annual CPI inflation was 10.5% last December.)
Updated
Governor Andrew Bailey then says the Bank will be watching closely to see if further interest rate increases are needed.
But even if they are not needed, it is “much too early” to be thinking about rate cuts, he adds (a point we flagged earlier).
BoE press conference begins
The Bank of England is holding a press conference to explain today’s decision.
The #MonetaryPolicyReport press conference is about to start. Watch here: https://t.co/wrBVd7Nbr0
— Bank of England (@bankofengland) November 2, 2023
Governor Andrew Bailey begins by saying that inflation is falling, and the Bank expects it to keep falling this year and next.
Our increases in interest rates are working to bring inflation back to the 2% target.
So today we have voted to maintain Bank Rate at 5.25%.
Bailey says that monetary policy remains restrictive.
There is absolutely no room for complacency, he insists, adding:
Inflation is still too high. We will keep interest rates high enough for long enough to make sure we get inflation all the way back to the 2% target.
Bank holds interest rates: snap reaction
It’s another day, another pause and another fight at the Bank of England, says George Lagarias, chief economist at accountancy group Mazars.
Lagarias says:
As expected, the UK central bank retained its key interest rate for the second time in a row, mirroring the Fed’s decision yesterday.
It is clear that the Bank’s board members are looking outside the window at an economy that has barely grown in the past year. Unlike the US, the holder of the world’s reserve currency, the UK can’t fiscally support its economy without risking a backlash in the bond market, similar to last September’s.
Further hiking would risk tipping a barely growing economy into a recession. External members seem to disagree, possibly adhering to stricter economic dogma. However, the Bank’s intention is now clear, and the scale has been tipped for growth rather than for controlling inflation.”
The @bankofengland hikers decide to take an extended break up “Table Mountain” to assess the terrain before deciding their next move. This will come as relief to those “track”ing their every move pic.twitter.com/41K30K1bum
— Emma Fildes (@emmafildes) November 2, 2023
The nation will be breathing a sigh of relief that the Bank of England has followed expectations and held interest rates for the second month in a row, says Laura Suter, head of personal finance at AJ Bell.
Suter explains:
Maintaining rates at 5.25% will raise hopes that we have finally hit peak interest rates – and that the only route from here is down.
“But anyone hoping for a drop in rates as steep and swift as the climb up will be disappointed. Markets are pricing in no cuts until Autumn next year. It means that rather than a traditional ‘mountain’ shaped rise and fall in rates we’re expecting a table-top mountain, where rates tick along at the same level for almost a year before a slower drop back down. The Bank itself says the market expects rates to only hit 4.25% by the end of 2026 – showing how glacial the path down could be. With risks like the conflict in the Middle East and a potential spike in oil prices, not to mention the potential for a surprise in inflation numbers or another economic data point, we can’t entirely rule out any further rate hikes.
And the Bank has certainly not ruled it out, if it sees ‘more persistent inflationary pressures’. The fact that a third of the MPC voted for a rate hike today shows there is still appetite among the committee to tighten monetary policy further.
Neil Shah, executive director at Edison Group, says the Bank’s decision adds to evidence that the interest rate rise cycle is reaching its peak.
“The Bank of England doves will hope their decision to hold interest rates does not come home to roost, given the evident division among the MPC.
The global consensus in pausing interest rates, mirrored by the Fed and ECB over the last two weeks, is an encouraging sign for investors seeking stability in the market and all indications certainly point to the rate rise cycle reaching its peak, with current interest rate levels seen as proving effective in the recent fall in inflation.
Governor Bailey: Much too early to consider cutting rates
Andrew Bailey, the Bank of England’s governor, has declared that it is “much too early to be thinking about rate cuts”.
In a statement issued as the Bank left borrowing costs on hold, Bailey adds:
“Higher interest rates are working and inflation is falling. But we need to see inflation continuing to fall all the way to our 2% target.
We’ve held rates unchanged this month but we will be watching closely to see if further rate increases are needed.”
BREAKING: Bank of England v hawkish PAUSE in the face of v anaemic growth forecasts.6-3 split
— Joumanna Nasr Bercetche 🇱🇧 (@CNBCJou) November 2, 2023
New line: “MPC’s latest projections indicate that mon policy is likely to need to be restrictive for an extended period of time”
Bailey: “much too early to be thinking about rate cuts” pic.twitter.com/nx7HO9pCj6
BoE: 50-50 chance of recession by next summer
The Bank of England has warned the economy will be on the brink of recession in an election year.
The warning comes as the Bank signals interest rates will need to remain high for an extended period to tackle stubborn inflationary pressures, our economics correspondent Richard Partington reports from the Bank.
Issuing updated forecasts as Rishi Sunak’s government comes under growing pressure over his economic management in the run-up to an election expected next year, the central bank said it anticipated flatlining growth throughout 2024.
Giving a 50-50 chance of a recession by the middle of next year – beginning around the time a spring election could be held – it forecast four consecutive quarters of zero growth in gross domestic product, should interest rates follow the path expected by financial markets.
BoE: Higher interest rates are working
Having left rates on hold today, the Bank of England insists that higher interest rates are helping to bring inflation down.
It says:
This means the speed at which prices rise is slowing. We expect inflation to fall further this year.
The Monetary Policy Committee voted by a majority of 6-3 to hold #BankRate at 5.25%. Find out more in our #MonetaryPolicyReport: https://t.co/DlCn88I5ut pic.twitter.com/j5wFmmTtsb
— Bank of England (@bankofengland) November 2, 2023
We have raised our interest rate to 5.25% from 0.1% since December 2021. Whilst this means many people will be facing higher borrowing costs, it is necessary to prevent high inflation lasting a long time. https://t.co/DlCn88I5ut #MonetaryPolicyReport pic.twitter.com/ji25wzMcun
— Bank of England (@bankofengland) November 2, 2023
Higher interest rates are helping to bring inflation down. This means the speed at which prices rise is slowing. We expect inflation to fall further this year. https://t.co/DlCn88I5ut #inflation #MonetaryPolicyReport pic.twitter.com/7T0qQZyhSp
— Bank of England (@bankofengland) November 2, 2023
Bank gloomier over UK economy
The Bank of England is more pessimistic about the UK economy than three months ago.
It predicts the economy stagnated in the last quarter, and will only grow narrowly in the final three months of this year.
The minutes of today’s interest rate decision say:
UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the August Report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic.
GDP is expected to grow by 0.1% in Q4, also weaker than projected previously.
Bank split 6-3 on rate decision
The Bank of England’s policymakers were split 6-3 on today’s decision.
The majority, who wanted to leave interest rates unchanged, were governor Andrew Bailey, deputy governors Sarah Breeden, Ben Broadbent, and Dave Ramsden, chief economist Huw Pill and external committee member Swati Dhingra.
The hawkish trio who pushed for higher borrowing costs were all external members of the committee – Megan Greene, Jonathan Haskel and Catherine Mann. They voted for a rise to 5.5%.
BANK OF ENGLAND DECISION
Newsflash: the Bank of England has voted to leave UK interest rates on hold.
For the second meeting running, the Bank’s monetary policy committee has decided to leave interest rates unchanged at 5.25%, a 15-year high.
This follows the 14 increases in borrowing costs from December 2021 to August this year, as the Bank tried to tame infation.
The move suggests the MPC is sticking with the ‘Table Mountain’ approach to fighting inflation – leaving borrowing costs at their current high levels until it is confident that inflation will fall back on a sustainable basis to its 2% target.
More to follow….
Updated
Stand By Your Desks! Bank of England up next so lets have some markers...
— Shaun Richards (@notayesmansecon) November 2, 2023
£/$ 1.2195
ten-year yield 4.43%
FTSE 100 +90 at 7432
Less than 10 minutes to go until the Bank releases its decision on interest rates…
James Smith, developed markets economist at ING, argues it was unlikely that a majority of Bank of England policymakers will vote for a rise this month.
Smith pointed out that September’s decision to hold rates had been a 5-4 split, with four policymakers pushing for higher rates.
“It would only take one committee member to change their mind to tip the balance in favour of more tightening – but we’re doubtful,”
Smith said that there had been little new data since the last vote, so those who voted against hiking rates are unlikely to change their minds.
He added that one of those who voted to hike last time – Jon Cunliffe – has since left the MPC, replaced by new member Sarah Breeden.
Updated
The pound and the euro have both now gained ground against the US dollar during this session, with 30 minutes until the Bank of England’s interest rate decision being announced.
Traders are judging that America’s central bank may have reached its peak for interest rates, after the Fed left borrowing costs on hold last night.
So sterling has gained almost half a cent to $1.2196, with the euro up two-thirds of a cent at $1.0634.
Raffi Boyadjian, lead investment analyst at XM, says:
The Bank of England will be next to announce its policy decision later today (12:00 GMT) and is widely anticipated to keep rates unchanged at 5.25%.
For pound traders, the highlight will be the updated economic projections, particularly the inflation forecasts and how quickly it’s expected to fall to the 2% target.
Consumer confidence could be damaged, in the run-up to the festive spending season, if the Bank of England was to surprise us with an interest rate rise today.
Antony Antoniou, CEO of real estate firm Robert Irving Burns, says the Bank should be thinking about when starting to lower rates.
“Such high interests rates risk seriously tarnishing retail’s Golden Quarter. As the penultimate vote before Christmas, this decision will further impact consumer confidence in what should be the most profitable months of the year for the high street.
“Household wealth has already plummeted thanks to interest rates rising so quickly, which is causing the UK economy to buckle; with a cooling jobs market, reduction in consumer spending and drop in property transactions. The MPC needs to take into consideration the 1.6 million people due to remortgage in 2024 who are in for an enormous shock; we’ve already seen mortgage approvals sink in September to the lowest level since January 2023.
“How many profit warnings or administrations will it take before the Bank of England acts to protect and facilitate growth across our economy? Until rates start to come down, businesses will continue to take a more conservative approach, focusing on repaying debt rather than investing in growth. We simply can’t afford for the economy to remain stagnant; the Bank of England should be thinking about starting to lower rates, rather than walking straight into a recession.”
BoE rate decision approaches....
Anticipation is building ahead of the Bank of England’s big reveal in under an hour, at noon today.
As flagged in the introduction, the BoE is expected to keep interest rates on hold at 5.25%.
Stephen Innes, managing partner at SPI Asset Management, says:
The economic data has been inconclusive, with high inflation levels and an elevated risk of recession. The voting pattern within the Monetary Policy Committee (MPC) is unclear, as seen in the split vote in September.
The BoE will release new forecasts alongside its policy decision, providing potential insights into the situation.
A misty day in the City ahead of today’s rate decision. Markets were last night poised for a hold, with a more than 90% probability. pic.twitter.com/t7eYM20fZC
— Richard Partington (@RJPartington) November 2, 2023
The macroeconomic challenges in the UK, characterized by stagflation, have significant political implications for Rishi Sunak and the Conservative Party, Innes adds:
The most recent YouGov polling data reveals a significant skew in general election voting intentions, favouring the Labour Party by 24 percentage points.
It’s worth noting that before Liz Truss’s brief tenure as Prime Minister, the spread between the two major parties was only 8 percentage points. However, during the peak of the October 2022 gilt crisis, this margin expanded to 36 percentage points. Since then, it has never narrowed to less than 13 percentage points. These numbers highlight a significant shift in public sentiment and political dynamics during this period.
Updated
Kitchen supplier Howden Joinery has told shareholders its profits this year will be towards the lower end of forecasts, as macro-economic headwinds continue to hit the sector.
Howdens reports that its like-for-like revenues fell 3.3% year-on-year in the three months to the end of October (but were still 30% higher than in 2019).
UK government bond prices are rallying this morning, as investors anticipate interest rates will be cut in 2024.
Reuters has the details:
British two-year government bond yields fell more than 10 basis points on Thursday to their lowest since June, as investors upped bets on interest rate cuts next year ahead of a Bank of England rate announcement due later in the day.
Two-year gilt yields sank as low as 4.680%, down 11 bps on the day at 0914 GMT, according to LSEG data, while less interest rate sensitive 10-year gilt yields were more than 9 bps lower at 4.404%, their lowest since October 13.
Yields on US Treasuries were also down, though not so much, after the U.S. Federal Reserve kept interest rates on hold on Wednesday and Fed Chair Jerome Powell was equivocal about future rate rises.
Financial markets see only a 10% chance of a rate rise from the BoE on Thursday, and have 11 bps of rate cuts priced in for June 2024, rising to almost a full quarter-point cut by August 2024.
In the UK property market, the lowest available 85% LTV (loan to value) mortgage rate has dropped below 5% for the first time since June, online portal Rightmove reports.
The lowest available rate for an 85% LTV five-year fixed mortgage is now 4.99%, they report.
Rightmove also shows that some average mortgage rates are noticeable cheaper than a year ago, when the chaos after the mini-budget drove up borrrowing costs:
The average 5-year fixed mortgage rate is now 5.36%, down from 5.97% a year ago
The average 2-year fixed mortgage rate is now 5.81%, down from 6.22% a year ago
The average 85% LTV 5-year fixed mortgage rate is now 5.44%, down from 6.00% a year ago
The average 60% LTV 5-year fixed mortgage rate is now 4.94%, down from 5.71% a year ago
The average monthly mortgage payment on a typical first-time buyer type property when taking out an average five-year fixed, 85% LTV mortgage, is now £1,164 per month, down from £1,228 per month a year ago
The Bank of England should “follow the money” when setting interest rates, argues Costas Milas, professor of finance at the University of Liverpool.
He tells us:
The Bank of England is expected to leave the Bank’s base rate unchanged at 5.25%.
One has to “follow the money” to realise that inflation is on its way down and therefore no further monetary tightening is necessary.
From the Chart below, Divisia money growth, which is a powerful measure of the economy’s liquid conditions as I have shown in my recent paper for The European Journal of Finance, reached a high of 19% in the first quarter of 2021, prior to UK inflation peaking at 10.7% in late 2022.
This means that money growth affects inflation with long and variable lags. Everything else equal, my own estimates suggest that the big drop in money growth in the third quarter of 2023 will reduce inflation by as much as 0.5 percentage points in 2023 Q4.
My ongoing worry is that the Bank of England’s policymakers have largely ignored money movements when setting interest rates. Something the ongoing review of the Bank’s forecasting, led by Ben Bernanke, should look at!
The Bank of England will be aware that most of the impact of its previous interest rate rises have not, yet, been fully felt by the real economy.
Mike Riddell, a senior portfolio manager at Allianz Global Investors, said the long lags between changes in rates and their impact meant most of the BoE’s increases in borrowing costs between late 2021 and August this year was yet to be felt.
“The BoE will most likely therefore be keen to keep all options open, but seems set to wait and observe how much pain the previous hikes have caused before changing rates again in either direction,” Riddell said.
Bank of England set to keep rates at 15-year high despite slowdown signs https://t.co/fXAayhc4QY pic.twitter.com/30RbzbIscV
— Reuters UK (@ReutersUK) November 2, 2023
Eurozone factory decline continues
The slump in the eurozone’s manufacturing sector continued in October, new data shows, reinforcing concerns over the region’s economy.
The latest poll of purchasing managers at eurozone factories shows another “considerable” fall in factory production last month.
Firms reported “steep and accelerated” falls in new orders, purchasing activity and backlogs, and the fastest reduction in factory employment levels since August 2020.
This pulled the HCOB Eurozone Manufacturing PMI, compiled by S&P Global, down to a three-month low of 43.1 in October, down from 43.4 in September. Anything below 50 shows a fall.
That shows a further marked deterioration in the health of the euro area’s goods-producing sector, just days after we learned the eurozone shrank in July-September, putting it halfway into recession.
Manufacturing orders across the #eurozone dropped at one of the fastest rates on record in October, latest @HCOB_economics #PMI data shows, bringing the PMI down to a 3-month low of 43.1 (Sep: 43.4). #manufacturing #euro Read more: https://t.co/Arhd8xJ5sl pic.twitter.com/Ds9WGrCjL3
— S&P Global PMI™ (@SPGlobalPMI) November 2, 2023
Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, says:
“The Eurozone manufacturing sector’s trend over the last two years or so looks like a bumpy sleigh ride down into the valley. Given that the headline PMI did barely move over the last few months, including October, we may be about to reach the bottom of the valley.
Thus, the big question is when we will begin to make an ascent. The stagnating new orders index, which remains deep in negative territory, and the similar behaviour of the Quantity of Purchase Index does not suggest an immediate turnaround.
Having said this, history tells us that in many cases the levelling out of these indices is the precondition for a start of the recovery. We expect this to happen in the first half of next year.
Norges Bank leaves interest rates on hold
Norway’s central bank has just announced that it has left interest rates on hold.
Norges Bank’s Monetary Policy and Financial Stability Committee decided unanimously to keep its policy rate unchanged at 4.25%.
Announcing the move, the committee says that pressures in the Norwegian economy are easing, although the labour market is still tight.
And while underlying inflation is high, Norwegian policymaker are concerned that they should not over-tighten monetary policy.
They say:
Persistently high inflation imposes substantial costs on society. The longer inflation remains high, the more costly subsequent disinflation may prove to be. On the other hand, the Committee does not want to raise the policy rate more than is necessary to bring inflation back to target within a reasonable horizon.
Monetary policy is now having a tightening effect on the economy, and the full effects of the past rate hikes are yet to be seen. In the Committee’s assessment, the policy rate is likely close to the level needed to tackle inflation, which provides the Committee with a little more time to assess whether there is a need to raise the policy rate further.
There will likely be a need to maintain a tight monetary policy stance for some time ahead. Whether additional rate hikes will be needed depends on economic developments.
📷 Norges Bank Interest Rate Decision Actual: 4.25% Expected: 4.25% Previous: 4.25%
— CentFx (@cent_fx) November 2, 2023
These charts, from asset manager ICG, show the dilemma facing the Bank of England as it sets interest rates today.
Nick Brooks, head of economic and investment research at ICG, says":
The BoE is likely to keep its benchmark rate steady at 5.25% and emphasise that future policy remains data dependent.
The dilemma the BoE faces is that although economic growth is slowing, the UK’s inflation rate is running at the highest among major developed economies and is proving very hard to bring down.
Until there is a significant loosening of labour markets, the BoE will likely need to keep rates at current levels, with the risk that it is forced to tighten further in the coming months.
Canada Life Asset Management’s Liquidity Fund Manager, Steve Matthews, predicts UK interest rates will remain on hold today…. and for much of the next year.
Matthews says:
“The Bank of England (BoE) is wary of potential bumps in the road.
The key here is not only getting inflation down to 2%, but doing so in a stable and lasting way. With MPC member Mann saying she was still worried about persistent rises in the cost of living, and with CPI holding steady in the last print, there are no guarantees that the hiking is over.
“However, UK Manufacturing PMI and employment data indicate a generally weakening economy and, as such, we expect the BoE to judge this as a precursor to inflation falling as previous hikes take hold.Naturally, as we perceive rates to peak, the market looks to when the first cuts may take place. We feel it’s too early to say that the work to control inflation is done and see rates remaining at 5.25% for much of 2024.”
FT: Lloyds rebuffs Barclay family’s latest £1bn attempt to regain Telegraph
The Barclay family’s latest attempt to reclaim the Telegraph has reportedly been rebuffed.
The Financial Times reports that Lloyds Banking Group, which is handling the auction of the newsaper group, has rejected the £1bn approach from the Barclays.
The move is an attempt to reassure other bidders, who were concerned that the Barclays £1bn “back door” offer could have a “chilling effect” on the official auction.
The bank, which placed the Telegraph into receivership in June, rejected a £1bn offer initially made by the family and backed by Middle Eastern investors as recently as three weeks ago, according to two people familiar with the situation.
Lloyds told the Barclays to either repay the £1.1bn with a transparently funded offer, or bid in an ongoing auction, those people said. The bank has contacted bidders to reassure them of progress in the auction, which aims to be completed by early next year, they added.
Analysts do not expect the sale price for the Telegraph to exceed £600mn based on market comparisons.
Lloyds rebuffs Barclay family’s latest £1bn attempt to regain Telegraph https://t.co/I5KT86h605
— Finance News (@ftfinancenews) November 2, 2023
Lst week Axel Springer, the German-based media group, cast doubt over whether it will submit a bid for the Telegraph group.
Danish manufacturer Novo Nordisk has reported a surge in sales of obesity and diabetes drugs, thanks to the success of the weightloss drug Wegovy.
Novo Nordisk grew its operating profits by 37% in the first nine months of this year, with sales up by a third.
Lars Fruergaard Jørgensen, president and CEO, says:
“We are very satisfied with the sales growth in the first nine months of 2023, which is reflecting that more people than ever are benefiting from our innovative diabetes and obesity treatments.”
Novo Nordisk became Europe’s most valuable company in September.
Novo Nordisk 🚀 $NVO
— Disruptor ⚡️ (@DisruptorStocks) November 2, 2023
Earnings reported. $LLY also reports today. pic.twitter.com/1e5B0k8tXD
Chris Hayes, senior analyst at Common Wealth, isn’t impressed that Shell is pumping billions of dollars more to shareholders.
Hayes says:
The last two years have locked us into two mutually reinforcing distributive and ecological crises, with oil majors hoovering up cash from the rest of the economy and using to consolidate their position and hasten climate breakdown.
All net zero pathways demand fossil fuel majors wind down their existing dirty assets and scale up renewables. Yet as we see, as long as the stewards of these assets remain answerable to shareholders, the pace of both will remain glacial. Using cash windfalls to buy up existing low-
carbon companies should not be mistaken for additive investment in decarbonisation and should be recognised for what it is — consolidation of market power whose consequences are purely distributive.
Shell moves ahead with $3.5bn shareholder windfall despite profits fall
Shell will hand its shareholders $3.5bn in share buybacks even as profits for the last quarter tumbled in line with lower oil and gas market prices.
The oil and gas company said its adjusted profits for the quarter fell to $6.2bn from $9.5bn in the same months last year, broadly in line with the expectations of industry analysts.
Despite the weaker earnings Shell will continue to hand shareholders multibillion-dollar quarterly windfalls. The company will buy back a further $3.5bn worth of shares by the time of its fourth-quarter 2023 results announcement, after a $3bn buyback over the last quarter.
Shell’s chief executive officer, Wael Sawan, said the company would hand shareholders $6.5bn in share buybacks over the second half of the year, “well in excess of the $5bn announced at Capital Markets Day in June”.
In total, the company’s shareholder payouts for 2023 stand at $23bn, he said.
More here.
Updated
The London stock market has opened higher ahead of the Bank of England’s interest rate decision, while the pound is stable.
The blue-chip FTSE 100 index has gained 73 points, or 1%, to 7416 points, a one-week high.
Ocado (+6.8%) are the top riser, followed by BT Group (+5.6%) which posted second quarter earnings slightly ahead of forecasts this morning.
Sainsbury (+4%) are rising after forecasting full-year profits will hit the upper half of previous guidance, following “strong trading momentum” in recent weeks.
Julien Lafargue, chief market strategist at Barclays Private Bank, predicts the BoE will hint that further interest rate rises are possible in future months, if needed:
“The BoE is widely expected to follow the ECB and the Fed in keeping interest rates unchanged. Andrew Bailey himself expects to see a “noticeable drop” in the headline rate of inflation when October figures are released later this month. While, at the same time, the most recent job data suggests that the UK labour market is cooling off, albeit gradually.”
“Although the BoE is likely to revise its short-term growth and inflation forecasts lower, just like its peers, the MPC will want to prevent financial conditions from easing prematurely.
As such, we expect a hawkish narrative to remain in place, with the door still open for future hikes should they be required.”
The main focus from the Bank of England’s interest rate decision will on how the vote breaks down, and on the BoE’s new forecasts, predicts Jim Reid, strategist at Deutsche Bank.
RReid explains:
Our economist expects a 6-3 vote count to keep rates on hold, with the 3 voting in favour of another 25bp hike.
With regards to the forward guidance, he expects no changes, and sees the MPC reiterating its view that policy will remain sufficiently restrictive for sufficiently long to get CPI sustainable back to 2%.
Saxo: BoE ‘on verge of losing credibility’
Althea Spinozzi, senior fixed income strategist at investment platform Saxo, has warned that the Bank of England is on the ‘verge of losing credibility’.
Spinozzi says the Bank was too slow to react to rising inflation.
And she warns that the decline in popularity for Prime Minister Rishi Sunak is ‘adding to inflation upside risk’ (as it could prompt tax cuts in an attempt to win votes)
Which of the following do you think would make the best Prime Minister?
— YouGov (@YouGov) October 26, 2023
Keir Starmer: 32% (no change from 17-18 Oct)
Rishi Sunak: 22% (-1)
Not sure: 42% (+1)https://t.co/LjVf7PfDKT pic.twitter.com/pGItFZcBeY
Spinozzi says the BoE cannot afford to lean dovish, explaining:
UK inflation remains the highest among developed economies. At the same time, the labour market is tight, and the country depends on energy and goods imports.
With upcoming elections [due by January 2024], fiscal policies remain uncertain as Rishi Sunak is losing popularity, adding to inflation upside risk.
“Within this environment, the BoE is on the verge of losing its credibility. It tightened the economy too little, too slowly. There is no option for governor Andrew Bailey other than sticking to the higher-for-longer rhetoric, hoping to maintain a hawkish bias while it’s becoming more apparent that policymakers are afraid of breaking something. As high inflation becomes entrenched in the economy, sterling will come under pressure.
Updated
The money markets are indicating that there’s little suspense over the UK interest rate decision.
Currently, ‘no-change’ is an 89% chance, with just 11% likelihood that the Bank of England lifts base rate to 5.5%.
Those probabilities are based on the price of overnight index swaps.
They’re not infallible, though – they suggested the Bank would start raising interest rates in November 2021 (when it surprisingly held at the record low of 0.1%), and to hold in December 2021 (when it unexpectedly started raising Bank rate).
The Bank of England is expected to keep the interest rate steady in response to the ongoing challenge of rising inflation.
— Roensch Capital News (@RoenschNews) November 2, 2023
Looking further ahead, the market expects two rate cuts over the next 12 months, bringing bank rate down to 4.75% by November 2024.
Updated
Labour says 630,000 will be hit by surge in mortgage costs before 2024 elections
Labour has warned that more than half a million homeowners face a surge in mortgage costs before the local elections in England in May, as ministers battle to contain the damage from what is expected to be a long period of high interest rates.
With the Bank of England widely expected to hold its key base rate at 5.25% today, the party released analysis that showed 630,000 more homeowners would be hit by higher borrowing costs before local elections next year.
Based on figures from the Office for National Statistics, Labour’s analysis suggested that more than 3,400 households would re-mortgage every day in the six months between 2 November and 1 May 2024 in a financial timebomb ahead of the next local and general elections.
Speaking on a visit to a housebuilding site in Stevenage, Rachel Reeves, the shadow chancellor, said homeowners were being left worse off after 13 years of Tory economic failure.
“It was the Conservatives’ disastrous mini-budget last year that crashed the economy, sent mortgage rates soaring and made the dream of homeownership a nightmare for hard-pressed families.”
More here.
Introduction: Bank of England interest rate decision
Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.
The Bank of England is widely expected to leave UK interest rates on hold today, at its latest monetary policy committee (MPC) meeting. But should it actually be cutting rates, to help the weak economy?
Experts in the City are pretty confident the BoE will leave base rate at 5.25% at noon today, its highest level in 15 years, extending the pause which began in September.
But the vote may not be unanimous, with several of the nine MPC policymakers expected to vote to increase rates further. Those hawkish members of the committee are concerned that even higher borrowing costs are needed to cool inflationary pressures.
The majority, though, seem likely to stick to the view that the BoE should maintain borrowing costs at the current elevated level for long enough to push inflation down.
Matthew Ryan, head of market strategy at global financial services firm Ebury, predicts a 6-3 split in favour of leaving rates on hold.
“Since the last meeting in September, indicators of economic activity have remained less than impressive, wage growth has eased and hawk Jon Cunliffe has left the committee, with his replacement, Sarah Breeden, appearing likely to side with the doves.
“This would suggest no closer than a 6-3 vote in favour of no change. The BoE will probably strike a cautious tone on the growth outlook, and downward revisions to the GDP forecasts for 2023 and 2024 are on the cards.
Bank of England may leave rates at a 15-year high https://t.co/uzjuwg1teF via @tomelleryrees pic.twitter.com/jRH8vkqGvo
— Zoe Schneeweiss (@ZSchneeweiss) November 2, 2023
Other major central banks have already held borrowing costs in recent days – the ECB did so last week, and the Federal Reserve left policy unchanged last night.
The BoE’s problem is that inflation is running higher in the UK than other advanced economies, clocked at 6.7% in September. It should have fallen in October, but could still be higher than the eurozone, where it was just 2.9% in October.
But even so, some economists think the Bank should be cutting borrowing costs.
Right-wing think tank the Institute of Economic Affairs runs a Shadow Monetary Policy Committee, and it voted 7-2 to cut Bank Rate.
This SMPC fears the Bank of England is at risk of over-correcting and slowing economic activities.
Trevor Williams, Chair of the Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, said:
“There is mounting evidence that the UK’s monetary policy is too tight and could lead to price deflation in a few years and potential recession in the interim. The Bank of England should act now by lowering interest rates.
“The Bank’s overly tight monetary stance is pushing mortgage lending down, companies are struggling to repay debt, insolvencies are rising, and households are withdrawing money to meet higher repayments.
“By underestimating the importance of the money supply, the Bank risks repeating the mistake that caused high inflation. It is essential for the Bank to ‘look through’ the current level of inflation and focus on where it could be in two years.”
We’ll find out the Bank’s view, along with its latest economic forecasts, at noon.
The agenda
9am GMT: Eurozone manufacturing PMI for October
9am BST: Norges Bank interest rate decision
Noon GMT: Bank of England sets interest rates
12.30m GMT: Bank of England press conference
12.30pm GMT: US weekly jobless claims
Updated
