Closing post
Time to wrap up….
The Bank of England has kept interest rates unchanged at 5% as it put its efforts to ease the pressure on household budgets on hold.
The Bank’s monetary policy committee (MPC) voted by a majority of eight to one against launching a back-to-back reduction in borrowing costs amid concerns over lingering inflationary pressures.
The Bank last month cut interest rates for the first time since the Covid pandemic was declared four years ago, after a sharp fall in inflation from a peak of more than 11% in late 2022 – the highest level since the early 1980s.
Andrew Bailey, the Bank’s governor, said inflationary pressures had continued to ease, but cautioned against expectations for rapid interest rate cuts, saying:
“The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time. But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
Bailey later told broadcasters that he was “optimistic” that inflation pressures would ease enough to allow further cuts to interest rates.
He said:
We’re now on a gradual path down. That’s the good news.
I think interest rates are going to come down. I’m optimistic on that front, but we do need to see some more evidence.
And of course, we’ll be looking at this at every meeting.
City economists predicted the Bank would cut interest rates in November, and make perhaps four quarter-point cuts to rates in 2025.
Here’s the full story:
Updated
By leaving UK interest rates on hold today, the Bank of England has fallen behind several fellow major central banks.
At 5%, UK interest rates are just 25 basis points (a quarter of one percentage point) below their highest level reached in the tightening cycle which ran over the last few years.
In contrast, the US Federal Reserve has just cut its rates by 50 basis points.
The European Central Bank has made two quarter-point cuts this year, meaning its deposit rate is now 50 basis points off its recent peak.
The Swiss National Bank has also made two 25bp cuts in 2024.
Adrien Pichoud, chief economist at Bank Syz, says that difference has strengthened the pound:
Importantly, as the Fed embarks on a policy of monetary easing and the ECB also cuts its key rates, the spread between sterling and other major currencies supports sterling, which reached its highest level in two years against the dollar and the euro after today’s announcement.
The strength of the currency will help to bring down inflation by containing pressure on imported goods and services. Sterling’s strength is also a headwind for exporters, which will ultimately weigh on the outlook for economic growth.
The minutes of the Bank of England’s interest-rate-setting meeting this month cites three possible scenarios that could hit the economy.
The first – that global shocks unwind – could allow interest rates to be cut faster, whie the third – that wage and prices rises are stickier than expected – could mean higher borrowing costs for longer.
The Bank says:
In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation should continue to feed through to weaker pay and price-setting dynamics. The persistence of inflationary pressures would therefore dissipate with a less restrictive stance of monetary policy than in other cases.
In the second case, a period of economic slack, in which GDP falls below potential and the labour market eases further, may be required in order for pay and price-setting dynamics to normalise fully. Domestic inflationary persistence would then be expected to fade away, owing to the opening up of slack from a more restrictive stance of monetary policy relative to the first case.
In the third case, the economy may be subject to structural shifts such as changes in wage and price-setting following the major supply shocks experienced over recent years. The degree of restrictiveness of monetary policy may be less than embodied in the Committee’s latest assessment, meaning that monetary policy would have to remain tighter for longer.
Japanese bank MUFG tells clients the Bank of England might squeeze in two interest rate cuts later this year:
BoE leaves policy rate on hold following 25bp cut in August.
The 8-1 vote was not a surprise with Swati Dhingra the lone dissenter and Alan Taylor voting for the first time with the majority.
We see a cut in November and an increased chance of another in December.
The pound remains the top G10 currency performer year-to-date but we see scope for that outperformance to start to fade.
Looking ahead, Deutsche Bank predicts the Bank of England will make one more interest rate cut by the end of this year, lowering Bank Rate from 5% to 4.75%.
Thereafter, they predict four quarter-point rate cuts through 2025, followed by a further three more rate cuts in 2026, taking Bank Rate down to 3%.
Deutsche Bank: Three takeaways from the Bank decision.
The big news today is the more unified message from the Bank of England’s policymakers that “a slow and steady removal of policy restraint” is needed.
So explains Sanjay Raja, chief UK economist at Deutsche Bank.
In a research note titled The Importance of Being Idle, Raja points to three key points:
First, the decision to hold Bank Rate was not unanimous. While we expected a more divided MPC, today’s decision highlighted a less divided Committee, with the vote tally coming in at 8-1.
Second, the MPC struck a more cautious tone than we expected. But the door remains wide open for a Q4 rate cut. Indeed, for the majority of the MPC, “a gradual approach to removing policy restraint would be warranted”.
And third, the Bank left its quantitative tightening (QT) envelope fixed at £100bn. What does this signal? By maintaining a steady QT envelope, the MPC has implicitly signalled that the Bank puts more weight on the total stock of gilt reduction as opposed to the Bank’s active sales footprint. Total sales for the next 12 months now will total £13bn, lowering the impact on cash borrowing for the remainder of the current fiscal year and the next fiscal year (i.e. 2025/26).
Gabriella Dickens, G7 economist at AXA Investment Managers, predicts the Bank of England will cut rates at its next meeting, in November, to 4.75%.
And looking further ahead, Dickens predicts the Bank will make one quarterly rate cut per quarter in 2025, which would bring Bank Rate down to 3.75% by the end of next year.
She told clients:
We think a further 25 basis point (bp) cut in November is in keeping with the messaging that a “gradual pace” of tightening seems appropriate.
Further ahead, we think the risks are skewed to the downside. Yes, services Consumer Price Index (CPI) inflation and wage growth are higher in the UK than in its peers, but we look for a material slowdown over the next 12 months.
And tighter-than-expected fiscal policy following the October 30th Budget looks very possible given recent signals from the government.
For now, we maintain a quarterly pace of tightening this year and throughout 2025, leaving Bank Rate at 4.75% end-2024 and 3.75% end-2025. But the risks are to the downside, primarily associated with expected fiscal tightening.
S&P 500 hits record high after US rate cut
Stocks on Wall Street have hit a new record high, as investors welcome last night’s whopping cut in US interest rates.
The S&P 500 share index has jumped by 1.5%, gaining up to 88 points to 5705.96 points.
Fawad Razaqzada, market analyst at City Index and FOREX.com, says the half-point cut in US interest rates last night has cheered markets:
The move was seen as a bold but necessary step to ease economic concerns without sending panic signals reminiscent of the 2008 financial crisis. Fed Chair Jerome Powell emphasised that the cuts are not part of a long-term strategy but rather a proactive measure aimed at stabilising growth, now that inflation appears to be on the path of returning to its target.
The Dot Plot projection also boosted investor confidence, showing a possible 50 basis points of cuts this year and 100 next year, with the terminal rate expected to hit 3.0% by 2026.
Bailey 'optimistic' that rates will come down further
Bank of England governor Andrew Bailey has told broadcasters he is “optimistic” that inflation pressures would ease enough to allow further cuts to interest rates.
Speaking to the BBC after UK interest rates were left on hold at 5% today, Bailey says the Bank’s job is to make sure inflation is “sustainably” at the 2% target [it was 2.2% in August].
He says:
We’ve made a lot of progress, inflation’s come down a long way, and of course we were able to cut rates in August.
Bailey adds that there are still some inflationary pressures, pointing out that price rises in the services sector are still running at an “elevated” rate (services inflation jumped to 5.6% in August, from 5.2%)
But, Bailey says, interest rates are on a ‘gradual path’ downwards:
We’re now on a gradual path down. That’s the good news.
I think interest rates are going to come down. I’m optimistic on that front, but we do need to see some more evidence.
And of course, we’ll be looking at this at every meeting.
NEW: 🚨
— Faisal Islam (@faisalislam) September 19, 2024
BoE Governor Andrew Bailey to broadcasters:
“Interest rates are going come down, I’m optimistic on that front but we do need to see some more evidence…”
He says it’s “imperative to raise the potential growth rate” of the economy” … and re fiscal rule change…:
🚨 Asked if he would see anything wrong with HMT changing the fiscal rule target (to include BoE), Governor Bailey:
— Faisal Islam (@faisalislam) September 19, 2024
“doesn’t really affect at all what we do… And so it's an important decision for them… I’m very relaxed that Treasury will take right decision on that front”
⚠ BOE'S BAILEY:
— PiQ (@PiQSuite) September 19, 2024
**OPTIMISTIC UK INTEREST RATES WILL FALL FURTHER, NEED MORE EVIDENCE
**NEED TO SEE RESIDUAL INFLATION PRESSURES DISAPPEAR
**"IMPERATIVE" THAT UK IMPROVES ITS CURRENT POTENTIAL GROWTH OF 1.2%-1.3%
**"VERY RELAXED" THAT UK GOVERNMENT WILL TAKE RIGHT DECISION…
Updated
ING: UK interest rates will fall to 3.25% by next summer
Although the Bank was cautious today, it could speed up its interest rate cuts next year if it grows more confident that inflationary pressures are easing.
ING developed markets economist, James Smith, predict that this will allow the Bank to lower rates to 3.25% by next summer, from 5% today. That would be the lowest since November 2022.
Smith says:
“The Bank’s hawks worry that corporate price and wage-setting behaviour has permanently shifted in a way that’s going to make it perpetually harder to get inflation down on a sustained basis. We’re not convinced that’s the consensus view on the committee right now – August’s decision to cut rates certainly suggests it isn’t. But so long as wage growth and services inflation remain sticky, then the committee as a whole seems happy to tread carefully. We’re less convinced that the UK’s easing cycle will deviate that much from the Fed or others. As the Bank readily concedes, the recent stickiness in service sector inflation is mostly down to volatile categories that hold little relevance for monetary policy decisions. Strip that out, and the picture is slowly looking better.
“Meanwhile, the jobs data, though admittedly of dubious quality right now, points to an ongoing cooldown too. The number of payrolled employees appears to be falling now and that will inevitably feed through to wage growth. Companies are consistently lowering their estimates of expected and realised price/wage growth, according to a monthly BoE survey.
We therefore think that Bank of England rate cuts will accelerate after November. Beyond then, we think the Bank will grow more confident in the persistence of inflation and there will be sufficient consensus on the committee to switch to back-to-back rate cuts. Like investors, we expect a cut in November and December, with further cuts in 2025 taking us to 3.25% by the end of next summer.”
Analysis: Why did the Bank of England not cut interest rates?
At 5%, UK interest rates now ranks as the highest among major economies, my colleague Phillip Inman points out.
But the economy is far from overheating, he writes:
Economic growth remains stagnant and employment is well down from its pre-pandemic level. Businesses are not investing and consumer confidence, which rose earlier in the year, has stalled.
According to these measures, interest rates should be on the way down and at a much faster pace.
The MPC, or at least most of its nine members, says this analysis ignores important dynamics in the post-pandemic economy that are inflationary. It believes the jobs market remains stuck in a groove of ever higher wages that have yet to be choked off by high interest rates.
While the employment rate is down, this has not translated into unemployment going up by much. Instead, workers have bailed out of the labour market altogether. Some have joined the ranks of the long-term unemployed. These are working-age people who, in a previous era, were able to retrain and find a new job. Others have been signed off sick. Others have taken early retirement.
Without a thriving jobs market and a confident business sector keen to invest, the Bank judges growth will remain low and the economy unable to expand by much next year and the year after without being inflationary.
Updated
The odds of a cut to UK interest rates in November, at the Bank of England’s next meeting, have now risen to 80% according to the money markets.
That’s up from 60% shortly after the Bank’s announcement at noon today.
But, before today, a cut by November was fully priced in.
Updated
City firm Capital Economics predicts the Bank of England will get rates back down to 3% in the current easing cycle.
Their chief UK economist Paul Dales says:
We expect only one more 25 basis point cut this year, although the pace of cuts may quicken next year with rates eventually falling to 3.00% rather than to the 3.25-3.50% priced into markets.
Bank maintains QT at £100bn
As well as leaving interest rates on hold today, the Bank of England also decided to maintain the size of its bond-selling programme, called quantitative tightening (QT).
Under QT, the Bank is selling UK government debt bought after the financial crisis and the pandemic, to reduce the size of its balance sheet to more normal levels.
It has decided to maintain the pace of QT at £100bn over the next 12 months, despite speculation that it might either speed up, or slow down, the process.
Most of the £100bn – £87bn – will be covered by maturing bonds, so there will only be 13bn of ‘active sales’ over the next year.
Thomas Pugh, economist at audit, tax and consulting firm RSM UK, explains:
“The MPC decided to keep its quantitative tightening envelope at £100bn over the next year. That is important for the Chancellor and the Autumn Budget as it implies just £13bn of active sales against an OBR forecast of £48bn.
The difference will shave some £2bn from her already wafer-thin headroom against the current fiscal target and makes it even more likely that she will opt to change the definition of debt used in the fiscal rule. Using Public Sector Net Debt (PSND) instead of the current metric that excludes the BOE (PSNDex), could also free up around £16bn based on the March OBR numbers.
Updated
Neil Mehta, portfolio manager at RBC BlueBay asset management, argues that the Bank of England simply had less justification to cut interest rates than the US Federal Reserve:
Unlike the Fed, who can point towards a sudden lurch higher in the unemployment rate, the BoE doesn’t have much of a leg to stand on regarding reducing interest rates swiftly.
Services inflation is an unhealthy 5.6%, while the labour market remains tight and dogged by post-covid supply side issues. Moreover, recent above-inflation pay deals awarded to the public sector workers, coupled with a rise in energy bills will keep headline inflation well above 2% for the remainder of the year. In that context, the BoE will struggle to communicate, with any force, meaningful rate cuts in the coming months.
Moreover, it might appear that the economy is coping just fine with elevated interest rates - the economy is growing at a modest pace and housing market and construction activity is picking up. The budget in October remains the wildcard for now in terms of policy trajectory over the short to medium term.
Bank of England holds rates: What the experts say
Suren Thiru, economics director at Chartered Accountants’ group ICAEW, fears the Bank of England will be “painfully cautious” with rate cuts in coming months, having left interest rates on hold today.
“Keeping interest rates unchanged will be a notable setback to households contending with burdensome mortgage bills and businesses grappling with a variety of other cost pressures.
“While this decision doesn’t mean the end of the rate-cutting cycle, it does suggest that the pace of policy loosening is likely to be painfully cautious, with rate setters still concerned that underlying inflation remains too high.
“Although only one rate-setter voted to loosen policy, the relatively dovish tone of the minutes suggest that the Monetary Policy Committee is shifting towards cutting interest rates when it next meets in November.
“Continuing to keep interest rates elevated risks hampering the government’s ambition of significantly higher annual GDP growth by keeping borrowing costs too high for too long, limiting investment and growth opportunities for businesses.”
James Sproule, UK chief economist at Handelsbanken says yesterday’s inflation report was “undoubtedly key” to today’s decision.
While the August inflation rate overall held steady at 2.3%, services inflation rose from 5.7% to 5.9%, largely driven by earnings. Longer term the outlook is that the overall 2% inflation target can be sustainably maintained so long as goods inflation is around -1%, while services inflation sits at around 3%.
For the moment goods inflation is negative at -0.9%, although longer term as and when supply chains are rebalanced away from China, maintaining that negative price trend may prove a challenge. As to services inflation and earnings, there is an ongoing concern that above inflation (and well above productivity growth) pay rises being agreed by the new Government for a range of public sector workers could spill over into pay expectations in the private sector. Such an outcome would undoubtedly prompt the MPC to slow, or stop, its path of interest rate reductions.
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, says the Bank. has a “trickier” inflation challenge than its counterparts in the US and the eurozone:
After the Federal Reserve cut rates by 0.5% yesterday and the ECB cut rates a second time this month, the contrast is stark as the BoE holds. Arguably the UK sees a trickier inflation environment, as services inflation and wage growth remain above 5% YoY. Near-term economic momentum has improved in the UK, whereas in the US it has slowed.
Broadly speaking, as the factors driving inflation higher have been normalising, inflation is still expected to slow toward 2%. So, it is fair to expect that the BoE will be able to keep cutting rates over the course of the next 12-18 months, but at a gradual and modest pace. The next cut is largely expected to be November, needless to say, the BoE will remain data dependent.”
Alpesh Paleja, interim deputy chief economist at the CBI, says the Bank is walking a ‘fine line’:
“The Monetary Policy Committee was widely expected to hold fire this month, after the first rate cut in four years in August. There remain very varied views among the MPC around the degree of inflation persistence, and over what horizon this will dissipate.
Monetary policy will be walking a fine line for a little while yet: between balancing upside risks to inflation, but not being too tight, so as to choke off activity. Developments in fiscal policy in October’s Budget will also be a key consideration for growth prospects.
We still anticipate another rate cut in November, and a few more next year, in line with the MPC moving at a slow but steady pace. On their own, lower interest rates will be a welcome respite to households and businesses.”
The hospitality industry are disappointed that interest rates have been held at 5%.
Kate Nicholls, chief executive of UKHospitality, says:
“It’s disappointing that interest rates will remain unchanged, after another month of stabilised inflation.
This positive sign should have emboldened the Bank to take decisive action that would inject some confidence into businesses and, crucially for hospitality, begin to relieve the pressure of Covid loan repayments.
These repayments remain a significant burden for businesses, particularly with interest rates remaining high.
Without a rate cut today, the need for the Government to avoid a business rates cliff edge in April becomes more urgent. Venues face their bills quadrupling when relief ends, which is why we’re calling for action and for the Government to introduce a lower, permanent and universal multiplier for hospitality.”
Pain for borrowers, but relief for savers
The Bank of England’s reluctance to cut interest rates today is a blow to borrowers, such as mortgage-holders and credit card customers. Savers, though, will benefit.
Alice Haine, personal finance analyst at online investment platform Bestinvest by Evelyn Partners, says keeping interest rates on pause at 5% may be unsettling for households, particularly with a painful budget looming.
Haine writes:
“Many households, who have seen their finances battered by high living and borrowing costs over the past few years, are likely to have pinned their hopes on another rate cut, particularly those still contending with high mortgage and debt repayments. While the 25 basis-point cut on August 1 will have slightly eased the strain for borrowers – another cut would have cemented that sense of relief.
“The worst of the cost-of-living crisis may now be behind us, but the rapid price rises of the past few years are now baked in, so making ends meet remains a struggle for some. While food inflation is continuing to ease, rents, airfares and transport costs rose in August – indicating that the inflation pain of the past few years is not over just yet.
“With high living and borrowing costs over a sustained period leaving consumer finances under strain, some households have been forced to delay major purchases, such as a first or bigger home. Others have relied on credit to make ends meet, putting them at the mercy of the high interest charges on that debt.
But those with money in savings accounts will benefit, for the moment anyway, says Mark Hicks, head of active savings at Hargreaves Lansdown:
“The decision to hold interest rates steady at 5% is good news for savers. Banks and building societies had started to price in the possibility of a cut over the past few days, and if this had materialised, we would have seen others swiftly follow suit.
However, this good news is unlikely to last. Further cuts later this year are likely to hit the easy access market the most, because those rates remain the most sensitive to the base rate. Fixed rates are still the best option for anyone who doesn’t need the money close at hand. They offer similar rates to the easy access market, and mean savers can lock in these rates for the entire fixed period. As the downward trend in global interest rates is well under way, it will now become a question of how far rates will fall – and at the moment, the end isn’t in sight anytime soon.”
November rate cut now looks less likely
The odds of a cut to UK interest rates in November have fallen, following the cautious comments from BoE governor Andrew Bailey.
The money markets now indicates that a November rate cut is only a 60% chance.
Before noon, it was fully priced in, so that’s quite a change.
Why? Two factors, I think.
Firstly, the fact the MPC split 8-1 to leave interests rates on hold, while economists had expected a 7-2 split.
Second, Bailey’s comments about being careful “not to cut too fast or by too much”.
No change in September, next stop Nov…. pic.twitter.com/brOHqxNolP
— Emma Fildes (@emmafildes) September 19, 2024
Updated
Pound hits two and a half-year high
The pound has jumped to its highest level against the US dollar in two and a half years, following today’s interest rate decision.
Sterling jumped by almost a cent to $1.331, its highest level since March 2022.
The rally shows the divergence between monetary policy in the UK compared to the US, following last night’s rate cut.
Luke Bartholomew, deputy chief economist at abrdn, explains:
Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle, with a 50bps cut yesterday. This difference in policy partly reflects different mandates of the two central banks, but also the different growth and inflation outlook. Underlying inflation pressures in the UK remains elevated, while the labour market is sending quite mixed messages about the health of the economy. This divergence should help support the pound for now.
But attention in UK markets may increasingly shift away from monetary policy and towards fiscal policy as we approach the Budget at the end of October. Certainly, the Bank will need to incorporate any fiscal changes in its next forecasts, which could provide the foundation for more rapid cuts in due course.”
$GBPUSD Analysis:- The British pound soared to approach $1.33, its strongest level since February 2022, benefiting from a general dollar weakness, after the Federal Reserve lowered interest rates by a jumbo 50bps. The Fed also signaled an additional 50bps of reductions for this… pic.twitter.com/OqFiNDQA0j
— Mohammed Baseer (@MohdBaseerFX) September 19, 2024
Updated
Bailey: We must be careful not to cut too fast
Governor Andrew Bailey has said the Bank needs to “be careful” not to lower interest rates too quickly, or by too much.
A day after his US counterpart boldly announced a whopping half-point reduction in interest rates, Bailey sounds decidely more cautious.
In a statement, he says inflationary pressures were easing and that the economy was evolving “broadly as we expected”.
Bailey explains:
“If that continues, we should be able to reduce rates gradually over time.
“But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
Updated
Why the Bank left interest rates on hold today
The minutes of this week’s meeting show that members of the MPC took “different views on the probabilities and risks” facing the economy, which suggests it was a lively meeting.
The Bank explains:
Eight members preferred to maintain Bank Rate at 5% at this meeting. Wage and price-setting had continued to normalise and UK activity growth had been broadly in line with expectations, although there was some greater uncertainty around the near-term global outlook.
There was a range of views among these members on the degree to which the unwinding of past global shocks, the normalisation in inflation expectations and the current restrictive policy stance would lead underlying domestic inflationary pressures to continue to unwind, or whether these pressures could prove more entrenched, possibly as a result of more structural factors or greater momentum in demand.
Despite these differences of view, the current policy stance was judged to be appropriate. For most members, in the absence of material developments, a gradual approach to removing policy restraint would be warranted.
But Swati Dhingra argued that rates should be cut now, to allow a “smooth and gradual transition in the policy stance”.
The Bank of England has trimmed its forecast for inflation this year.
It says CPI inflation is expected to increase to around 2.5% towards the end of 2024, as “declines in energy prices last year fall out of the annual comparison.”
Back in August, it predicted inflation would hit 2.75% later this year.
The Bank of England predicts that UK economic growth will slow in the second half of this year.
The minutes of this week’s meeting say headline GDP growth is expected to return to its underlying pace of around 0.3% per quarter in the second half of the year.
That would be a slowdown on the first two quarters – which saw growth of 0.7% and 0.6%.
Bank split 8-1 on interest rate vote
The decision was not unanimous – the Bank’s policymakers was split 8–1 to maintain Bank Rate at 5%.
Swati Dhingra, the most dovish member of the committee, voted against the move and wanted to cut rates to 4.75%.
But, the other eight members – Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, Catherine L Mann, Huw Pill, Dave Ramsden and Alan Taylor – all voted to hold rates unchanged.
BANK OF ENGLAND DECISION
Newsflash: The Bank of England has left UK interest rates on hold.
At its latest meeting, the Bank’s Monetary Policy Committee voted to leave interest rates at 5%, resisting any temptation to cut rates for the second meeting running.
The vote means no fresh relief for borrowers (even as defaults on direct debits rise), a day after the US central bank cut its rates for the first time in four years.
The decision comes a day after UK inflation stuck at 2.2% in August, above the Bank’s 2% target, with a rise in both core inflation and services inflation.
More to follow…
Just five minutes to go until the Bank of England’s decision on interest rates is unveiled.
The City is still expecting rates to be held – ‘no change’ is an 82% chance, the latest money market data shows….
FTSE 100 hits two-week high
Stocks are pushing higher in London, as last night’s US interest rate cut continues to cheer investors.
The FTSE 100 is now up 109 points, or 1.3% to 8363 points, the highest in over two weeks.
Shares are rallying across Europe too – Germany’s DAX has just hit a new alltime high.
Markets are seeing yesterday’s half-point cut to US rates as a positive, says Russ Mould, investment director at AJ Bell:
“Central banks have a reputation of moving at a snail’s pace, spending too long analysing data and subsequently playing catch-up with their monetary policy decisions.
It feels as if the Federal Reserve has had enough of this criticism and wants to be seen in a different light. A half-percentage point interest rate cut is certainly not messing around and shows it is serious about getting ahead of events and not being behind the curve.”
“The tone of the Fed’s comments makes this cut feel like a calm and collected decision, not one of panic. That’s reassuring for the markets as there was a danger that such a big rate cut could send the wrong message. However, there is a lot to digest and it’s understandable the market reaction was initially mixed.
US indices went up on the news, then pulled back and stayed flat, and now futures prices imply another leg up when Wall Street opens on Thursday.
Analyst: Services inflation makes UK rate cut today unlikely
Tension is rising in the City, with just 30 minutes until the Bank of England announces its decision on interest rates.
Anything other than a ‘no change’ decision would be a surprise, of course.
Joshua Mahony, analyst at Scope Markets, says the BoE appears unlikely to ease for a second consecutive meeting:
Coming off the back of a 25-basis point move that took UK rates down to 5%, we instead have to look ahead to November for the next cut according to market expectations.
The inflation report released yesterday highlighted exactly why the bank will likely take a cautious approach to easing, with core CPI spiking up to a four-month high of 3.6%.
Services price pressures remain a bugbear of the BoE, and we are seeing precious few signs that we will see any tangible shift towards target for core inflation this year. Nonetheless, with headline CPI at 2.2%, the BoE doe have the basis for further easing, and there is a view that the bank will cut by 25-basis points from November onwards.
Although UK interest rates aren’t forecast to fall today, the City does expect cuts before Christmas.
The money markets are fully pricing in a cut by the Bank’s November meeting, and a second cut in December.
That would bring Bank rate down to 4.5% at the end of the year, from 5% today.
Hawks and doves resume battle at MPC
This week’s monetary policy committee meeting at the Bank of England will have seen the hawks and doves on the MPC resume battle.
Hawks worry that inflation will become embedded unless interest rates are kept high, while doves fear that leaving borrowing costs too high for too long will cause unnecessary economic pain.
Last month, the doves had the upper harm, with five policymakers voting to cut rates from 5.25% to 5%, and only four hawks voting for no change.
But in both May and June, the committee has been split 7-2 with just two policymakers – Swati Dhingra and Dave Ramsden – voting to cut rates.
Dhingra and Ramsden are seen as the most dovish committee members, with Catherine Mann, Megan Greene and chief economist Huw Pill on the hawkish end of the committee table.
BOE set to refrain from a 2nd straight rate cut https://t.co/5Akft8rd9h via @tomelleryrees pic.twitter.com/oMPJsdZLNV
— Zoe Schneeweiss (@ZSchneeweiss) September 19, 2024
One wrinkle: we’re not really sure where new MPC member Alan Taylor lies on the hawkish/dovish scale. Tayor only started on 2 September, so this is his first MPC meeting.
The Bank of England would be wise to take a “steady as she goes” approach and leave interest rates on hold today, argues Simon French, chief economist at investment bank Panmure Liberum.
Bank of England up at noon. A short thread on where the inflation picture is heading into the September meeting that is expected to leave Bank Rate on hold - albeit not assured given the Fed’s outsized cut overnight. A short 🧵… (1/n)
— Simon French (@Frencheconomics) September 19, 2024
The data since the last meeting - that cut Bank rate by 25bp on a 5/4 vote & guided to expect a modest pace of UK easing - has been mixed. For the doves lower inflation expectations, lower commodity prices, stronger sterling, & tepid demand moderates the inflation picture (2/n)
— Simon French (@Frencheconomics) September 19, 2024
But for the hawks yesterday's services inflation, recent public sector pay settlements, and ongoing tight labour supply reinforces the merit of a “steady as she goes” approach (3/n)
— Simon French (@Frencheconomics) September 19, 2024
But the real time data is probably not the most important factor for the MPC, the upcoming Budget on 30 October and a new set of forecasts/scenarios in the November MPR mean there is a premium to had by waiting another seven weeks for greater clarity (4/n)
— Simon French (@Frencheconomics) September 19, 2024
With a decision to accelerate the pace of Gilt sales likely to attract political interest - given the fiscal implications - then surprising the market on Bank Rate would be quite a bit for a non-press conferenced meeting. Not an impediment to change, just context (5/n)
— Simon French (@Frencheconomics) September 19, 2024
What would I do? I would vote to hold Bank Rate because you get a lot of important information in a short pace of time before the next meeting. Would I like to flesh out what “restrictive” looks like - as the elephant in the room for many CBs is this continues to be defined…
— Simon French (@Frencheconomics) September 19, 2024
An intellectually confident MPC member would wade into the debate mindful that they may be wrong (like sell side economists have to all the time!). But does it have some merit in framing long term investment decisions (allocators are looking for a steer on cost of capital)? Yes I…
— Simon French (@Frencheconomics) September 19, 2024
All in, the BoE (and BoJ) look set to sit tight in contrast to the ECB and Fed. That is generating some interesting FX behaviour and currency moves - impacting quite a number of UK earnings calls at present. GBPUSD continues to be one to watch. /END
— Simon French (@Frencheconomics) September 19, 2024
A cut in UK interest rates at noon today looks increasingly unlikely, according to the money markets.
Right now, a reduction in Bank Rate to 4.75% is only a 17% chance, down from 20% first thing this morning, and almost 40% earlier this week, futures pricing shows.
‘No Change’, leaving Bank rate at 5%, is an 83% likelihood.
The copper price has hit a two-month this morning, as yesterday’s US rate cut weakened the US dollar.
The three-month copper price rose 2% on the London Metal Exchange, to $9,583 per tonne.
Copper prices had rallied earlier this year to above $10,000/tonne, before dropping back on concerns that economic demand was weakening.
The Bank of England’s interest rate cut in early August has led to a drop in mortgage rates, data provider Moneyfacts reports.
The average standard variable rate (SVR) has fallen below 8% for the first time since August 2023. It is now 7.99%, down from 8.16% at the start of last month, before the BoE’s rate cut.
Many lenders have moved to pass on last month’s 0.25% base rate cut, Moneyfacts says.
The average two-year fixed rate mortgage deal dropped to 5.56% at the start of this month, they report, down from 5.77% last month, while five-year fixeds dropped to 5.2%, from 5.38% at the start of August.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, says:
“The mortgage market has seen a bustle of activity over the last month, with the Bank of England base rate cut, and a more favourable swap rate market, creating a positive influence on fixed rate pricing. There have also been several lenders passing on the 0.25% base rate cut to customers, leading to the Standard Variable Rate (SVR) falling below 8% for the first time since August 2023. The expectations for another base rate cut are mixed, but it looks more likely that the next drop could come in November, which is after the Budget.
“New or existing borrowers will ideally want to see mortgage rates fall further in the months to come, particularly if they are about to come off a cheap fixed deal. Any borrower looking at their options today for peace of mind could lock into a fixed mortgage early, but it would be understandable for some to adopt a ‘wait and see’ approach, hoping rates will come down by bigger margins. However, when falling off a cheap rate onto a revert rate, borrowers will typically see their monthly repayments rise, so seeking advice to weigh up all their options before their deal ends is essential. A typical mortgage being charged the current average SVR of 7.99% would be paying £383 more per month, compared to a typical two-year fixed rate*.
Direct debit failure rate jumps 12%
More consumers are defaulting on their direct debits, as high interest rates hurt borrowers.
The Office for National Statistics has reported that the direct debit failure rate has increased by 12% in the last year. On a monthly basis, it rose by 1% in August, to 2.23% of direct debits.
Year-on-year, the failure rate for “Electricity and Gas” increased by 43%, while “Loans”, “Mortgages”, and “Water” increased by 11%, 11%, and 20%.
Total Direct Debit failure rate (seasonally adjusted) in August 2024 increased by 1% (compared with July 2024).
— Office for National Statistics (ONS) (@ONS) September 19, 2024
The rate was 12% higher when compared with August 2023. Categories with the largest increases (compared with August 2023):
· Electricity & gas (43%)
· Water (20%) pic.twitter.com/Wg4b3xEyPP
Wall Street is on track to rally later today, as traders welcome yesterday’s cut in US interest rates.
⚠️ .S. S&P 500 E-MINI FUTURES UP 1.1%, NASDAQ FUTURES UP 1.7%, DOW FUTURES UP 0.6%
— PiQ (@PiQSuite) September 19, 2024
Europe carmakers call for urgent action over emission rules
The slump in electric vehicle sales across Europe in August (see 9.25am) has prompted the sector to call for “urgent action” ahead of 2025 emissions targets.
ACEA warns that concerns about meeting the 2025 CO2 emission reduction targets for cars and vans are rising. They are calling for “a package of short-term relief for the 2025 CO2 targets for cars and vans” and a review of the CO2 legislation.
ACEA’s board says:
We are missing crucial conditions to reach the necessary boost in production and adoption of zero-emission vehicles: charging and hydrogen refilling infrastructure, as well as a competitive manufacturing environment, affordable green energy, purchase and tax incentives, and a secure supply of raw materials, hydrogen and batteries.
Economic growth, consumer acceptance, and trust in infrastructure have not developed sufficiently either.
Carmakers now risk multi-billion-euro fines or unnecessary production cuts, ACEA warn.
Norway leaves rates on hold
Just in: Norway’s central bank has left interest rates on hold, and doesn’t expect to cut before 2025.
The Norges Bank’s Monetary Policy and Financial Stability Committee left its policy rate unchanged at 4.5% at its meeting this week.
That means rates have been on hold since last December, and Governor Ida Wolden Bache says:
“The policy rate will likely be kept at 4.5 percent to the end of the year.”
Explaining the decision, Norges Bank says that inflation has been lower than expected since June, and international policy rates appear to be coming down faster. On the other hand, the krone has depreciated (which is inflationary).
'Spectacular' drop in electric car sales in France and Germany
Over in the European Union, car sales took a tumble last month as take-up of electric cars slumped.
Industry body ACEA has reported that registrations of battery-electric (BEV) cars across the EU dropped by 43.9% to 92,627 units, down from 165,204 cars in August 2023.
This dragged the market share of BEVs down to 14.4% from 21% a year ago.
ACEA says this was due to a “spectacular drop” in the two biggest markets for BEV cars, with sales in Germany falling 68.8%, and France by 33.1%.
Sales of plug-in hybrid cars, which contain an electric battery charged from the mains and an internal combustion engine, fell by 22.3%.
Sales of hybrid-electric vehicles – which charge their battery through regenerative braking – rose 6.6% and were the only vehicle type that saw growth in August, up 6.6%.
Petrol car sales dropped by 17.1%, while diesel car market saw a decline of 26.4%.
Overall, new EU car registrations fell by 18.3% year-on-year in August, with double-digit losses in Germany (-27.8%), France (-24.3%), and Italy (-13.4%).
🚨 BREAKING 🚨
— ACEA (@ACEA_auto) September 19, 2024
📊 🚗 European car sales figures for August are fresh off the press!
Battery-electric vehicle (BEV) registrations decreased by 43.9% in August, with the market share falling by almost a third. Plug-in hybrid registrations also declined, dropping 22.3%.
New EU… pic.twitter.com/nxUV0mLoeg
Updated
Some of the reaction to the Federal Reserve’s large interest rate cut yesterday has been “completely hatstand”, says analyst Bill Blain of Wind Shift Capital.
Blain argues that anyone who thinks the 50bp cut was driven by ‘unseen data’ showing the economy in poor shape, worries about disappointing the markets, or political interference by the Democrats, are probably overthinking it.
Blain writes:
I will admit the Fed surprised me yesterday – I expected a light 25 bp touch on the accelerator. Instead, it was a 50 bp engine-revving pedal to the metal roar on the gas – which Powell immediately made clear was limited.
Think of it the kind of aggressively signalled overtake you might make from behind the guy oblivious to the fact he’s driving like a granny at 30-mph on a 60-mph road. The opportunity to pass him comes up, and you take it. One minute later, you won’t even remember what the colour the car in front had been.
The pound has been climbing against the US dollar this morning.
It’s currently up a third of a cent at $1.3245.
Last night, sterling jumped to almost $1.3297, a two and a half year high, shortly after the half-point cut to US interest rates was announced, before dropping back.
Updated
FTSE 100 jumps, lifted by Fed rate cut and Next
Shares have opened higher in London this morning, as investors welcome last night’s cut in US interest rates.
The blue-chip FTSE 100 share index has jumped by 71 points, or 0.85%, to 8,325 points, close to a two-week high.
Next’s shares have surged 5.5% to a new alltime high of £109.10, after it lifted its profit forecasts this morning. Other retailers are also rallying.
Mining stocks are also higher.
Online supermarket Ocado has also lifted its forecasts.
Ocado Retail lifted its revenue guidance for its 2023-2024 year after sales jumped 15.5% in its latest quarter, as a focus on value attracted more customers.
Ocado Retail, a joint venture between Ocado Group and Marks & Spencer, said it now expected annual revenue to rise by low double digits, up from previous guidance for mid-high single digits.
It said its core earnings margin would come in around 2.5%, unchanged from its previous view.
Next on track for £1bn profits after raising guidance again
UK retailer Next have hiked profit forecasts again, helped by strong overseas sales.
Next now expects to make £995m of profits this financial year, a £15m increase on its previous guidance.
It says:
We are upgrading the profit guidance we issued on 1 August by +£15m to £995m. This is as a result of the strength of our full price sales over the last six weeks. We now estimate that full price sales in the second half will be up +3.7% (against our previous estimate of +2.5%).
This represents an increase of £30m of full price sales which, after accounting for other anticipated changes in our cost base, is expected to deliver an additional £15m of profit.
Next says its overseas business did “exceptionally well” in the first half of the financial year, with sales growth up +23%.
The UK business, though, only grew by +1.0%, which Next blames on “tough comparisons with last year’s exceptionally warm Q2”.
The Next brand was down -0.9% in the UK, which it calls “potentially worrying and warrants further analysis”.
But, it’s probably due to the poor weather this summer – and Next point out that sales have recovered sharply in the last six weeks (when the weather have been better than a year ago).
The Bank of England will probably take a ‘slow and steady’ approach to easing monetary policy, predicts Michael Brown, senior research strategist at Pepperstone:
My base case is for an 8-1 MPC vote in favour of holding Bank Rate steady, with just external member Dhingra dissenting in favour of back-to-back cuts, though there is a chance that either, or both, Deputy Governor Ramsden, and new external member Taylor, join her in this dovish camp.
Either way, the policy statement should be a ‘copy and paste’ of that issued las time out, signalling a slow and steady approach to removing policy restriction.
Asia-Pacific markets rally after Fed rate cut
Wall Street closed slightly lower last night, after the Fed delivered its half-point cut to US interest rates.
The S&P 500 shares index dipped by 0.3% by the end of trading, down 16 points at 5,618 points.
Asia-Pacific markets, though, are rallying today. Japan’s Nikkei has gained 2.1%, Hong Kong’s Hang Seng index is 1.9% higher, and China’s CSI300 index is up 0.8%.
Stephen Innes, managing partner at SPI Asset Management, says investors are hopeful that other central banks might follow the Fed’s lead and cut interest rates:
Asia’s markets are riding high, as the ripple effect from the Fed’s jumbo rate cut suggests it’ll be much easier for central banks across the region to cut rates, potentially fueling growth and boosting equity market valuations.
With the Fed taking the plunge, these more cautious central banks may finally feel encouraged to join the rate-cut party.
Donald Trump says Fed’s half-point rate cut may be 'playing politics'
Last night, Fed chair Jerome Powell insisted that the Fed’s large rate cut had nothing to do with the US election.
As we blogged last night, he told reporters:
“This is my fourth presidential election at the Fed and it’s always the same. We’re going into this meeting in particular and asking what the right thing to do for the people we serve. And we do that and we make a decision as a group and then we announce it.
That’s always what it is, it is never about anything else.”
But one presidential candidate doesn’t sound convinced. Donald Trump argued that the scale of the cut – a full half percent – showed the US economy was either “very bad” or the central bank was “playing politics.”
He told reporters:
“To cut it by that much, assuming they’re not just playing politics, the economy would be very bad.”
Trump nominated Powell to be Fed chair in 2017, but then swiftly fell out with him, claiming the Fed was hiking interest rates to harm the economy during his term in office.
Introduction: Bank of England interest rate decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
After a hefty interest rate cut in the US last night, it’s the turn of the Bank of England to set monetary policy – but we’re not expecting as many fireworks.
The Bank of England is widely expected to leave UK interest rates on hold today, at 5%, having cut them from 5.25% back in August.
The betting in the City is that just two policymakers will vote for a cut, and be outvoted by the other seven members of the Bank’s Monetary Policy Committee.
According to the money markets this morning, there’s an 80% chance of ‘No Change’ at noon today from the Bank, and just a 20% prospect of a cut in rates to 4.75%.
Yesterday, the MPC learned that UK inflation remained over their 2% target, running at 2.2% in August, while both core inflation and services inflation accelerated. That’s probably going to encourage some caution at Threadneedle Street, even though the economy has stagnated for the last two months.
Professor Andrew Angus at Cranfield School of Management explains:
“With economic growth and inflation having hit a plateau, I’m expecting the Bank of England to play it safe and hold interest rates.
“The economy had a good start to the year but businesses are now waiting for clarity on the government’s plans in next month’s all-important budget. This has cooled the economy and, combined with falling wage growth and unemployment levels, signals that a hold will be seen as the prudent choice for now. But, come November, the heat will be back on to cut rates.”
The Federal Reserve didn’t show much caution last night, though. It slashed US interest rates by half a percentage point, in its first interest rate cut since 2020, and a bigger cut than some investors expected.
It lowered its benchmark federal funds rate to between 4.75% and 5% - a significant turning point in its battle against inflation.
Chair Jerome Powell insisted the Fed was ‘recalibrating’ its policy to be more neutral, rather than panicking that the US was being dragged into recession by high interest rates.
He told reporters:
“I don’t see anything in the economy right now that suggests that the likelihood of a recession -- sorry, of a downturn -- is elevated.
You see growth at a solid rate, you see inflation coming down, and you see a labor market that’s still at very solid levels, so I don’t really see that.”
Powell casts the Fed's 50-bps cut in non-scary terms: "We are committed to maintaining our economy’s strength."
— Nick Timiraos (@NickTimiraos) September 18, 2024
"This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained."
The Bank of England could also adjust the pace of its bond-selling programme, known as quantitative tightening (QT) – under which it is selling securities bought during its stimulus programmes.
Some economists reckon it will speed up the pace of its active bond sales, even though it crystallises losses sustained by the BoE, because more of its bonds will mature this year (meaning it would need fewer active bond sales to hits its sales target).
We should also get interest rate decisions in Norway and South Africa today.
The agenda
9am BST: Norway’s Norges Bank sets interest rates
Noon BST: Bank of England sets interest rates
1.30pm BST: US weekly jobless claims report
2pm BST: South Africa’s central bank sets interest rates
Updated
