Closing post
Time for a recap.
The Bank of England has dropped the broadest possible hint that the next move in interest rates will be downwards after forecasting inflation will fall below 2% within months, despite keeping borrowing costs unchanged for a fourth consecutive time.
Threadneedle Street stressed that more evidence was required that inflation would stick at the target set by the government before the Bank could deliver a first cut to borrowing costs since the start of the pandemic. It warned that risks from fast-rising prices remained amid the cost of living crisis.
In a widely expected decision, the Bank’s monetary policy committee (MPC) voted by a majority to keep interest rates at the current level of 5.25%, the highest level since the 2008 financial crisis.
However, one member of the panel – the independent economist Swati Dhingra – pushed for an immediate reduction in borrowing costs, in a powerful signal to financial markets that the central bank was edging closer to taking action.
Two more policymakers, Jonathan Haskel and Catherine Mann – pushed for a further quarter-point increase in the Bank rate.
BoE governor Andrew Bailey said the recent falls in UK inflation were good news, but cautioned that the Bank needed to have more confidence that price rises would keep slowing, and stay low.
Governor Andrew Bailey explains today’s decision to hold interest rates at 5.25%. pic.twitter.com/7DUyd2BumC
— Bank of England (@bankofengland) February 1, 2024
Bailey told reporters in London that inflation may rise a little in January, but is expected to then drop to the 2% target this spring, before rising again.
He said:
“We have had good news on inflation over the past few months. It has fallen a long way, from 10% a year ago to 4%. But we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.”
Bailey also warned that the Bank couldn’t simply cut rates once inflation hits 2%, but explained that the bank has dropped its previous guidance that the next move in rates was more likely to be higher than lower.
Chancellor Jeremy Hunt banged this message home too, saying it was good news that interest rates have peaked.
Here’s the rest of today’s news:
Updated
For those partial to a chart showing economic metrics over decades here's a look at the Bank of England base rate compared with inflation since 1975. The preferred measure of inflation changed in 1989. Pre 2008 it was the norm for base rates to be higher than inflation. pic.twitter.com/BHwRSQbbCu
— David Edwards (@ScattClouds) February 1, 2024
Over in the US, the number of Americans filing claims for unemployment support has risen to a two-month high.
The number of fresh ‘initial claims’ rose by 9,000 last week, to 224,000, new data shows,
Continuing claims, which tracks the number of people receiving unemployment benefits, rose to 1.9 million.
Bad news for the US economy: initial jobless claims rose to 224K, well above the forecast of 212K. This indicates a slowdown in the labor market recovery and a rise in unemployment. The Delta variant and supply chain disruptions are likely to blame. #joblessclaims #economy #USA
— Investor Notes (@investor_notes_) February 1, 2024
Weekly jobless claims and continuing claims move up. Looks like the recent drop was a seasonal adjustment problem. pic.twitter.com/J0bSCxMSY6
— Kathy Jones (@KathyJones) February 1, 2024
Markets see small chance of rate cut in March
The money markets are indicating that the Bank of England is very likely to leave rates on hold at its next meeting, in mid-March.
But, it suggests there is a 10%-ish chance of a cut – even though two policymakers vote for a rise at this week’s meeting, and only one for a cut.
Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited, says Jonathan Haskel and Catherine Mann’s votes for higher interest rates seem ‘rather incongrous’:
“As expected, there was no change in UK monetary policy at this meeting of the Bank of England. Given that the voting split and the tone of the minutes were slightly dovish, the two votes for a hike seemed rather incongruous.
We were focused on changes in forecasts, specifically to wages and CPI, both of which have come lower. The press conference had a relatively balanced tone, nevertheless, we noted Governor Bailey’s comments around keeping the March meeting live.
Currently, a rate cut in March is priced at 12%.”
Hunt: Positive news that rates seem to have peaked
Chancellor Jeremy Hunt has said it is “positive news” that interest rates appeared to have peaked.
Speaking to reporters after the Bank of England held base rate at 5.25% today, Hunt said:
“It’s obviously very positive news for families with mortgages that interest rates appear to have peaked, but we should remember that inflation never falls in a straight line.”
The MPC maintained Bank Rate at 5.25% this lunchtime, while making something of a dovish pivot, in noting that the next move will be a cut, with focus now shifting to the duration for which rates will remain at their present level
— Pepperstone (@PepperstoneFX) February 1, 2024
Read the full article: https://t.co/G4mbzi7HjO pic.twitter.com/I5whoqykni
Updated
Bank of England interest rate decision: What the experts say
The Bank of England has sent three clear signals to markets that policymakers are shifting from a hawkish stance to a neutral one, says Kallum Pickering of Berenberg.
Those signals are the shifting balance of votes (one policymaker wanting a cut, while the number of votes for a rise fell from three to two); the removal of the guidance that the next move would probably be higher, and new forecasts showing inflation hitting 2% this spring.
Pickering adds:
This opens the door for rate cuts soon as long as inflation heads lower at a pace roughly in line with the BoE’s updated forecast. On the news, money markets continued to expect five 25bp cuts in 2024 with a first cut in Q2 – market participants are split on whether the first cut will come in May or June.
Gurpreet Gill, macro strategist at global fixed income at Goldman Sachs Asset Management, says the Bank remains cautious:
“The Bank of England removed its hiking bias but remains cautious on pivoting towards rate cuts. We continue to think the downtrend in inflation and subdued activity will see the Bank descend from its “table mountain” posture this spring, with rate cuts at subsequent meetings throughout the year.”
“With market pricing for UK monetary easing now converging to our outlook and the potential for looser fiscal policy presenting upside risks to bond yields, we are cautious on UK gilts.”
Paul Dales of Capital Economics predicts that rate cuts could come sooner than the BoE implies, saying:
While leaving interest rates at 5.25% for the fourth meeting in a row today, the Bank of England sent a signal that the next move will be a cut, but it pushed back strongly against the idea that rates will be cut soon or far.
Our forecast that inflation will fall further and faster than the Bank expects suggests it will change its tune in the coming months. A rate cut in June is still possible and we think rates will end 2025 at 3.00%. That’s lower than current market pricing of 3.25-3.50%.
Carsten Jung, senior economist at IPPR, warns that the Bank may act too slowly:
The fight against inflation is not yet over, but the end is in sight. This is largely due to global supply chains recovering and energy costs falling and not due to rising unemployment, as the Bank and most economists initially expected.
“Errors were made, regarding how we’ve been tackling inflation. There was too little focus on - and understanding of - the ripple effects of global shocks and too much attention on people asking for a pay rise. This matters because, as a result, the BoE tightened the screws too much. This will hurt the recovery. Similar to the US central bank, the Bank should reverse course and cut rates sooner this year.
“But even though inflation is coming down people’s incomes have still not caught up with the increased prices of the last years, with hundreds of thousands having newly fallen into destitution. More support is needed to support them. And we need more creative policy action to bring prices down, including on food and energy.”
Analysis: UK interest rates have peaked, the next move is down … but not yet
Interest rates have peaked. The next move in borrowing costs will be down. But not yet. Those were the three key messages from the Bank of England in its latest assessment of the state of the economy, our economics editor Larry Elliott writes.
Those conclusions may not be immediately apparent from the minutes of the latest meeting on Threadneedle Street of the monetary policy committee (MPC) – the body tasked with setting interest rates to hit the government’s 2% inflation target – because the MPC had a three-way split.
Six members voted to keep interest rates unchanged at 5.25%, two voted for them to rise to 5.5% while one voted for a reduction to 5%.
Video: Bank says 'we're heading in the right direction' in battle against inflation
The Bank of England have released a video of governor Andrew Bailey explaining today’s decision to leave rates on hold.
In it, he makes some points we’ve already heard in today’s press conference:
We’ve held rates because, even though there has been good news on inflation, we need to be sure that it falls back to our 2% target and stays there sustainably.
That means we need to see more evidence that inflation will fall further, and stay low, before we are able to lower interest rates.
Bailey adds that we can’t yet declare victory in the battle against inflation, but insists “we’re heading in the right direction”.
Governor Andrew Bailey explains today’s decision to hold interest rates at 5.25%. pic.twitter.com/7DUyd2BumC
— Bank of England (@bankofengland) February 1, 2024
Q: Is there a greater risk to waiting too long to cut rates, or from cutting too early?
That’s a judgement we look at each meeting, Andrew Bailey says, a little cagely.
But there is an important point – policy could still be restrictive even if rates were cut.
Q: How much of the previous tightening from the Bank of England is still to come through to the real economy?
About 30%, Andrew Bailey estimates. That’s down from around 50% estimated in November – partly because market interest rates have dropped, and partly because more time has elapsed.
Andrew Bailey is then bowled a tricky delivery about crypto – an area he’s been critical of in the past.
Q: How do you feel when you see two former chancellor of the exchequer being paid by the crypto industry? Are you concerned there is a “backdoor channel” of influence into UK policymaking?
[Reminder: yesterday we learned that George Osborne has been hired by the American cryptocurrency exchange operator Coinbase, following Philip Hammond who already chairs crypto firm Copper].
Bailey doesn’t directly address these moves by ex-chancellors. But he says there’s a difference between unbacked crypto, such as bitcoin, and stable coins. He still believes unbacked crypto has no intrinsic value, and is not money in any sense.
Stablecoins, though, purport to be money, so should be held to a higher standard, Bailey says.
Q: Would the Bank of England feel comfortable holding interest rates on hold for longer, even if the US Federal Reserve and the European Central Bank both cut rates earlier?
Andrew Bailey smilingly replies that all central banks take decisions based on their domestic situation; that’s how they’ll justify whatever decisions they take.
Deputy governor Dave Ramsden weighs in too, pointing out that services inflation is lower in the US and eurozone.
Q: When inflation falls to 2% in the spring, as you expect, many people will declare victory in the battle against inflation. Would they be wrong?
Andrew Bailey says the Bank’s mandate is price stability – defined at 2% on a sustained basis.
So the Bank’s forecast that inflation falls to 2% in April-June, before bouncing up again, does not show sustained price stability.
But, it’s “good news” that inflation is coming down, he insists.
And he refuses to give any steer about what the Bank might do at its next meeting in seven week’s time; that meeting is ‘live’, and policymakers will look at all the data.
Bailey: Don't need inflation back at 2% to cut rates
We don’t need to say inflation back at the 2% target before cutting interest rates, governor Andrew Bailey insists – just more confidence that it is heading there sustainably.
Q: What would it take for the Bank of England to cut rates? Lowest service sector inflation, more slack in the labour market, or a further fall in pay settlements?
These are exactly the indicators that have guided us over the last year, says deputy governor Ben Broadbent. They’ll remain just as important.
He adds that the Bank needs to have more confidence that inflation will fall and stay low, rather than better-than-expected “downside surprises” in the data.
Q: Are you worried that the government will ‘throw the kitchen sink’ in March’s budget, and create more problems for the Bank of England?
Andrew Bailey swerves any temptation to comment on tax and spending decisions, saying the Bank simply takes the government’s fiscal policy into account when it sets monetary policy.
Q: History suggests that most pay deals are done by April…. do you want to see how this year’s negotiations play out before deciding whether to cut rates?
Governor Bailey says the average weekly earnings index has fallen recently.
He points out that wages are set in markets, but indicates that the fall in inflation could ease the pressure to raise wages.
Bailey says inflation has been falling rapidly, that should be passed through into inflation expectations, and those expectations are then reflected into labour costs and services inflation.
Bailey insists he’s not making a “preaching point, at all” (having been criticised a couple of years ago for warning that pay rises could embed inflation). This is simply the mechanism you’d expect to happen.
Q: Fed chair Jerome Powell said yesterday he didn’t believe that working from home doesn’t boost productivity – do you agree?
Andrew Bailey says he’s not qualified to answer this one, as someone who comes into the office every day.
Updated
Q: The public want as clear guidance as possible about what is likely to happen next to interest rates. Is the Bank signalling that interest rates have probably peaked, and the next move is probably down?
Andrew Bailey repeats his earlier comment about the “good news” that inflation has fallen to 4%, and that the Bank has removed its earlier guidance that the next move in interest rates would probably be up.
The question has changed, the governor says, from how restrictive should the Bank be to how long it should maintain its restrictive stance.
That is the core question in our framework now, he insists.
Q: Can you bring inflation down to 2% sustainably without pushing up unemployment?
Bailey says the Bank’s latest forecast for unemployment is lower than it was in November.
Bailey: Won't leave rates unchanged for longer than we have to
Q: Cash-strapped homeowners and renters will want to know why you’re not acting now, and cutting interest rates. Are you saying that things will get worse later in the year?
Andrew Bailey says he very much understands the situation faced by those people.
And he says the Bank has two messages:
1) It needs to get inflation down to target, and keep it there on a sustained basis. Although inflation is seen rising somewhat later this year, it’s not heading back to 10% (the 40-year peak in 2022).
2) The question it faces now is how long to maintain the current stance.
Bailey says:
We will not maintain it for any longer than we need to do to achieve the objective of inflation being at 2% at a sustained basis.
Keeping inflation at 2% is the best thing we can do for households, the governor adds.
Updated
Q: Given the stickiness of services inflation, will the ‘last mile’ of bringing inflation down be the hardest part of the battle?
Deputy governor Ben Broadbent explains that this ‘last mile’ of inflation is to do with tackling stickier domestic inflation, rather than the impact of imported energy prices.
Q: Yesterday, America’s top central banker, Jay Powell, indicated that the Federal Reserve is unlikely to be able to cut interest rates as soon as March – could the Bank of England come to a similar conclusion?
Andrew Bailey resists any temptation to copy the Fed, saying he will not speculate what the Bank might do at its next meeting.
He points out that two sets of inflation and labour market statistics will be released before the Bank’s next meeting in mid-March. They will inform the MPC’s decision.
Andrew Bailey says he will not speculate on how the Bank might change interest rates in the future.
Evidence will be assessed “exhaustively” at each BoE meeting, he adds.
Q: Is the Bank’s next move more likely to be a cut, or a hike, or are you competely neutral on that?
Andrew Bailey flashes a bit of ankle (figuratively speaking!), pointing out that the Bank has removed language that had an ‘upside bias’ on the interest rate outlook from its statement.
Updated
Q: Your forecasts suggest keeping rates on hold risks turning sluggish growth into a recession – how do you justify that?
This is a reference to a section of the Bank’s economic forecasts that show how the economy would fare with no changes to borrowing costs.
Andrew Bailey points out that the market had not expected a rate cut today, so the Bank’s decision is consistent with those expectations.
Onto questions…
Q: Given inflation is falling faster than expected, you’ve marginally increased the tightening in the economy by leaving rates on hold – how can you justify that when growth is so weak?
BoE governor Andrew Bailey says the Bank is looking at the level of ‘persistence’ of inflation, and repeats that inflation is expected to rise later this year after dropping to its 2% target this spring.
Bailey then bats the question to his deputy, Ben Broadbent….
Bailey bringing Broadbent in on the first Q is not usually a reassuring sign...
— Michael Brown (@MrMBrown) February 1, 2024
…. who denies that the BoE has effectively lifted ‘real rates’ by leaving Bank Rate on hold even though inflation has been dropping.
Broadbent argues that inflation expectations are more important than headline CPI, and that two-year interest rates are more important to the economy than overnight rates. Those two-year rates have dropped sharply in recent months, helping pull down mortgage rates.
Updated
Bailey - about 2/3 of impact of impact of prior hikes has now fed through to the economy
— Michael Brown (@MrMBrown) February 1, 2024
Touching on the 6-2-1 split at this week’s meeting, Andrew Bailey says the Bank of England will “keep under review” how long it should keep interest rates at their current level.
The Bank believes that if it keeps interest rates at 5.25% for the next three years, it’s likely that inflation would fall significantly below the 2% target, Andrew Bailey says.
However, if the Bank followed the market path for interest rates (showing four or five rate cuts this year), inflation would be above that target for most of the period, he says.
So how long will a restrictive stance be needed?
It all depends on the incoming data, Bailey explains, such as for wage growth and unemployment.
And he warns that geopolitical tensions have intensified – with shipping volumes down materially on Red Sea routes, and shipping costs up.
Updated
“We have to be more confident that inflation will fall all the way to 2% and stay there” Governor says in opening statement: pic.twitter.com/evztgq2LS3
— Faisal Islam (@faisalislam) February 1, 2024
Here is the chart signaling that the Bank will not cut simply because target is hit in Spring, as energy cap is lowered… ex energy inflation still too high… geopolitical risks… energy prices pick up a bit in summer.
— Faisal Islam (@faisalislam) February 1, 2024
This is going to be a tough sell to some consumers,… pic.twitter.com/ncOJaF9bJE
Any decision on changing interest rates will depend on how the evidence evolves, Andrew Bailey adds.
Price stability is the foundation of a healthy economy, and we must get inflation back to the 2% target sustainably, and we will do that.
The governor then outlines that inflation may tick up in January’s report, but by March inflation could have fallen to 3%, and then fall to around 2% in April, May and June.
But (as flagged earlier), inflation is expected to rise by the end of this year, as the negative impact from lower energy prices fades.
It’s not a simple as saying the job is done when inflation returns to target in the spring, Bailey insists.
Bank of England governor: Things are moving in the right direction
Over at Threadneedle Street, the Bank of England is holding a press conference to explain today’s decision.
Andrew Bailey, the Bank’s governor, starts by saying that we’ve had good news.
Inflation has fallen a long way, Bailey says, from 10% a year ago to 4% in December.
Things are moving in the right direction.
But, Bailey says, the Bank has to be more confident that inflation will fall to its 2% target, and stay there,
We are not yet at a point where we can lower interest rates.
As such, the level of Bank Rate “remains appropriate” at 5.25%, he insists
(although three of the MPC didn’t agree with him!)
The #MonetaryPolicyReport press conference is about to start. Watch here: https://t.co/7qxw6bbm5m
— Bank of England (@bankofengland) February 1, 2024
The Bank of England has also released its latest monetary policy report.
Here are the top lines:
Higher interest rates are working to reduce inflation
Inflation could fall to our 2% target within a few months, before rising slightly again
We will keep interest rates high for long enough, so inflation settles at 2%
The Monetary Policy Committee voted by a majority of 6–3 to maintain #BankRate at 5.25%. Find out more in our #MonetaryPolicyReport: https://t.co/6Ts0mjSn0w pic.twitter.com/wDEC7uRgYf
— Bank of England (@bankofengland) February 1, 2024
The @bankofengland themselves say; "they expect inflation to fall further by the end of this year to around 2¾%.
— Emma Fildes (@emmafildes) February 1, 2024
But there could be some BUMPS along the way."
Lower oil & gas prices could mean that inflation temporarily drops to 2% , only to rise later in the year" pic.twitter.com/YdL6BQbmyU
Updated
Worryingly for the government, the Bank of England reckons there’s a roughly 50% chance that the UK fell into a technical recession at the end of last year.
- @BankofEngland forecasts inflation will drop down to its inflation target of 2% in APRIL.
— Ed Conway (@EdConwaySky) February 1, 2024
- But Governor says “more evidence” needed of lower inflation before cutting rates.
- Bank upgrades economic forecasts, but warns of near 50-50 chance of a technical recession in late 2023
That would mean two quarters of negative growth in a row – we already know the economy shrank by 0.1% in July-September, so all eyes will be on the Q4 GDP report in two week’s time….
There’s a clear change of tone in the minutes of this week’s Bank of England meeting, showing that the central bank is turning its attention towards cutting rates (but not today).
The Bank says the MPC is prepared to adjust monetary policy to return inflation to the 2% target sustainably, and will keep ‘under review’ how long to keep rates at 5.25%.
It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.
NEW
— Ed Conway (@EdConwaySky) February 1, 2024
- @BankofEngland votes to leave interest rates on hold at 5.25%
- One MPC member (Swati Dhingra) voted to reduce borrowing costs to 5%.
- First three-way split on whether to cut, hold or raise since 2008.
How the Bank was split over rate vote
The minutes of the Bank of England’s meeting show that the two hawks, MPC members Jonathan Haskel and Catherine L Mann, pushed to raise interest rates to 5.5% to tackle the risks of “more deeply embedded inflation persistence”.
Mann and Haskel told colleagues that this would help to return inflation to target sustainably in the medium term.
But across the table, Swati Dhingra argued that the MPC should cut rates now – pointing out that monetary policy operates with a lag (so much of the previous increases since December 2021 haven’t fully fed through to the economy).
Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates would come with a risk of overtightening, Dhingra pointed out – and after all, UK inflation was already on a firm downward trajectory.
The remaining six members were happy, though, to sit on their hands – concluding that the risks to inflation were more balanced.
The minutes say:
Although services price inflation and wage growth had fallen by somewhat more than had been expected, key indicators of inflation persistence remained elevated.
There were questions, on which further evidence would be required, about how entrenched this persistence would be, and therefore about how long the current level of Bank Rate would need to be maintained.
Inflation to hit 2% target, but not for long....
The Bank of England says inflation will hit its target of 2% in the second quarter of this year – down from 4% in December.
However, it’s not celebrating – as inflation is expected to increase again in the second half of this year.
CPI inflation is expected to be around 2.75% at the end of 2024, based on market expectation for interest rates.
The Bank blames “the persistence of domestic inflationary pressures”, adding:
CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.
Updated
The Bank of England says that global GDP growth has remained subdued since its last meeting in December – although activity in the US is stronger.
Inflationary pressures are abating across the euro area and United States, the BoE says.
But it also points to the risks of geopolitical tensions pushing up costs, saying:
Wholesale energy prices have fallen significantly. Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea.
Following recent weakness, GDP growth is expected to pick up gradually during the forecast period, in large part reflecting a waning drag on the rate of growth from past increases in Bank Rate. Business surveys are consistent with an improving outlook for activity in the near term.
I think this is the first time that the Bank of England’s policymakers have been split between raising rates, leaving them on hold, and cutting them since the financial crisis in 2008.
ps. in April, July and August 2008, Tim Besley went for a 25bps hike and Danny Blanchflower for a 25bps cut, with the majority voting to keep rates on hold... pic.twitter.com/mxsp2ApTAD
— Julian Jessop (@julianHjessop) February 1, 2024
BANK OF ENGLAND HOLDS RATES IN THREE-WAY SPLIT
Newsflash: The Bank of England has left UK interest rates unchanged, in a rare three-way split!
Bank Rate will remain at 5.25%, a 16-year high.
That will disappoint borrowers, such as mortgage holders, hoping to see a drop in borrowing costs today.
But it’s bang in line with City forecasts.
But, the decision is not unanimous … two members of the Bank’s Monetary Policy Committee preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
The Bank says:
Six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition.
Three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member (Swati Dhingra) preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
Updated
It will be a shock if the Bank of England doesn’t leave interest rates on hold today, to be honest.
Money market pricing suggests ‘no change’ is a 96.5% chance, with a tiny 3.5% possibility of a hike….
All eyes are on the @bankofengland rate decision and #inflation forecast. Underlying producer prices are one key predictor of inflation 3 months out. For goods, 12-mth input producer price inflation is in negative territory; for services still high close to +4%. #dataisbeautiful pic.twitter.com/z4Jn2rnvcs
— Tera Allas (@TeraPauliina) February 1, 2024
Deutsche Bank’s basecase scenario is that all nine Bank of England policymakers vote to leave interest rates on hold.
But it’s not guaranteed – some may vote for a rise.
Sanjay Raja, their chief UK economist, writes:
Our basecase is for a 9-0 vote, but there are risks on either side. Should one – or even two — members of the hawkish MPC contingent (Greene, Haskel, Mann) opt for a further Bank Rate hike, we’d see that as relatively hawkish.
Bank of England announcement will be made at noon today. Markets are expecting No Change to interest rates.
— Jumana Saleheen (@JumanaSaleheen) February 1, 2024
First rate cut is priced in for June.
Markets are expecting policy to ease by just over 100bps by end year. pic.twitter.com/smBWThFPRq
Allan Monks, a UK economist for JP Morgan, said it is widely expected that rates will be kept the same on Thursday, but that the Bank will “almost certainly make a dovish pivot that puts future easing higher up on the agenda than before”.
Monks adds:
“The Bank of England’s updated narrative is likely to be that clear progress is being made on inflation, but that it is too early to declare victory and therefore caution must be exercised when thinking about when and how quickly policy can be normalised.
Bank of England interest rate decision nears
Excitement is building in the City as the clock ticks towards noon, when the Bank of England will set UK interest rates.
As flagged in the introduction, the Bank is expected to leave UK interest rates unchanged at 5.25% today, their highest level since 2008.
But there’s a lot of interest in how soon the BoE will start cutting rates, given the falls in inflation in the last year and concerns that UK could drop into recession.
Mike Riddell, Head of Macro Unconstrained at Allianz Global Investors, predicts that the Bank will start to cut interest rates by the summer. But, he warns, “the water is getting muddier”.
Riddell says:
Only a month ago, markets were convinced that the Bank of England would begin a rate cutting cycle in March, as the UK economy had stagnated and inflation was rapidly dropping.
The next move in UK interest rates will almost certainly be down, but the timing has become more uncertain. The UK economy, and indeed much of the rest of Europe, has been showing some signs of life again. Businesses and consumers are saying they’re more confident about the outlook. The UK housing market is also picking up, perhaps buoyed by a fall in mortgage rates. It seems likely that the Bank of England will revise its growth forecast for this year higher as a result.
Inflation optimism has faded a little too. The BoE will be relieved to see that the UK labour market has cooled further, but the reality is that wage growth remains elevated and at a level that is inflationary. Inflation itself is still running way too hot, and on some measures, surprisingly ticked higher in January. The recent escalation in the Middle East puts further upside risk to inflation.
Price rises have helped communications group BT to grow its revenues and profits.
BT has reported that revenues grew 3% in the last nine months, due to price increases and the rollout of faster, “fibre to the premises” broadband.
Average revenue per user at its Openreach division grew by 10% year-on-year, “due to price rises and increased volumes of FTTP’.
BT’s pretax profits jumped 15% to almost £1.5bn.
Last summer, the Guardian reported that the UK’s largest mobile and broadband companies were pushing through the biggest round of price hikes for more than 30 years, sparking accusations of “greedflation”.
Rachel Reeves then told UK business chiefs that Labour’s pledge to cap corporation tax at 25% will give them confidence to invest.
She says":
“That means businesses can plan investment projects today, with the confidence of knowing how their returns will be taxed for the rest of this decade.
“To those you in this room who might be wondering – do we really mean what we say? Has Labour really changed? Will warm words today be matched by action in government?
“Be in no doubt. We will campaign as a pro-business party – and we will govern as a pro-business party.”
Labour pledges to cap corporation tax at 25%
Newsflash: shadow chancellor Rachel Reeves has pledged that Labour will not raise corporation tax if it wins the next election.
Speaking at Labour’s Annual Business Conference this morning, Reeves says that the next Labour government will cap the headlin rate of corporation tax at 25% for the duration of the next parliament.
And, if competiveness comes under threat, Labour “will act”, she says – an indication that it could be cut.
Reeves says:
“We reject the calls from those on the right wing of the Conservative Party to cut corporation tax. Our current rate is the lowest in the G7.
“We believe that 25 per cent rate strikes the correct balance between the needs of our public finances, and the demands of a competitive global economy.
“The next Labour government will make the pro-business choice and the pro-growth choice: We will cap the headline rate of corporation tax at its current rate of 25 per cent for the next parliament. And should our competitiveness come under threat, if necessary we will act.
Our Politics Live blog has more details:
Corporation tax was raised from 19% to 25% last April, after chancellor Jeremy Hunt reversed a plan by his predecessor, Kwasi Kwarteng, to keep it at 19%.
New: Labour promising to keep corporation tax at 25pc for next Parliament and may lower if uk competitiveness comes under threat - @RachelReevesMP at Labour business conference. @BloombergUK
— Katherine Griffiths (@GriffithsKath_) February 1, 2024
Updated
Euroclear earns €4.4bn interest from frozen Russian assets
Belgium-based financial services company Euroclear earned €4.4bn last year from Russian assets it is currrently holding which were frozen after the Ukraine war.
In its annual results this morning, Euroclear says it made €5.5bn of net interest earnings in 2023, of which €4.4bn relate to interests linked to Russian sanctions.
Subject to Belgian corporate tax, these earnings will generate over €1bn for the Belgian State in 2023.
Western sanctions means Euroclear is unable to pass on coupon payments and redemptions to sanctioned entities, so cash is stacking up on its balance sheet – which had swelled by €38bn by the end of 2023 to €162bn.
Euroclear says it incurred €62m of direct costs related to Russian assets, on top of €24m of lost business from sanctioned clients.
Across the world, there are over $300bn of frozen Russian assets. In December, the US proposed that working groups from the G7 explore ways to seize this money, and use it to fund the reconstruction of Ukraine.
UK foreign secretary David Cameroon ramped up the pressure at Davos last month, saying there was a “moral, political, legal, and economic case for using the money to repair Ukraine’s war damage.
Euroclear says it will retain profits on Russian assets until it is provided with further guidance on the distribution or management of such profits.
It says:
2023 also saw various parties contest the consequences of the application of sanctions, with a significant number of legal proceedings ongoing, almost exclusively in Russian courts. Claimants have initiated legal proceeding aiming mainly to access the assets blocked in Euroclear’s books. Despite all legal actions taken by Euroclear and the considerable resources mobilised, the probability of unfavourable rulings in Russian courts is high since Russia does not recognise the international sanctions. Euroclear will continue to defend itself against all legal claims.
In parallel, the Board notes that the European Commission is contemplating various options to use the profits generated by the reinvestment of sanctioned amounts held by financial institutions, including Euroclear, for the financing of Ukraine’s reconstruction.
Once-troubled lender TSB is proving to be a cash generator for its Spanish parent company, Sabadell.
The UK lender had at one point been put up for a potential sale after years of losses linked to a major IT meltdown in 2018, related to its separation from Lloyds Banking Group.
But TSB said on Thursday would be handing over a £120m dividend to Sabadell this spring, up from £50m in 2022, marking its second straight payout to the Spanish lender.
The payout follows its second straight year of annual profit, with pre-tax earnings rising nearly 30% to £237m.
However, the rise in profits was driven by high interest rates that allowed the lender to charge more for loans and mortgages, but which are expected to fall throughout 2024.
TSB is also expecting more customers to struggle to keep up on their repayments, resulting in a 24% jump in cash put aside for potential defaults, to £63m. The lender said it reflected “the uncertain economic outlook, the higher interest rate environment and increasing inflationary pressures on our customers.”
However, TSB’s CEO Robin Bulloch cheered the bank’s performance:
“We are reporting another year of sustained profitability, demonstrating the impact of both our continued focus on customers, delivering products and services that genuinely meet their needs, and the work to make TSB a simpler, more efficient, and resilient bank.”
Eurozone inflation drops to 2.8%
Newsflash: Inflation in the eurozone has fallen back, partly reversing December’s jump.
Statistics body Eurostat reports that euro area annual inflation is expected to be 2.8% in January 2024, down from 2.9% in December.
Food, alcohol & tobacco is expected to have the highest annual rate in January (5.7%, compared with 6.1% in December), followed by services (4.0%, stable compared with December), non-energy industrial goods (2.0%, compared with 2.5% in December) and energy (-6.3%, compared with -6.7% in December).
Euro area #inflation at 2.8% in January 2024, down from 2.9% in December 2023. Components: food, alcohol & tobacco +5.7%, services +4.0%, other goods +2.0%, energy -6.3% - flash estimate https://t.co/bVappgIxsF pic.twitter.com/wSmx5cEmQe
— EU_Eurostat (@EU_Eurostat) February 1, 2024
A Reuters poll found that economists predict the Bank of England will split 8-1, with one policymaker voting to raise interest rates, while the other eight plump for no change.
At the last meeting, in December, the Bank split 6-3, with policymakers Catherine Mann, Megan Greene and Jonathan Haskel all in the minority pushing for a hike.
But a vote for a cut can’t be ruled out with, as Bloomberg says:
Any vote for a cut at this meeting would strengthen betting on a reduction at future meetings. Swati Dhingra, who has consistently opposed increasing interest rates, is the most dovish of the bunch. Economists see a chance of a three-way split on the committee.
Bank of England may today signal when rates can be cut https://t.co/TxKC9erfiJ via @irinaanghel12 pic.twitter.com/OgMt0B29fs
— Zoe Schneeweiss (@ZSchneeweiss) February 1, 2024
Red Sea disruption hits UK manufacturing
UK manufacturing activity contracted last month, as the Red Sea crisis hits supply chains and contributes to rising costs, new data shows.
Data firm S&P Global Insight’s latest survey of purchasing managers shows that the downturn in the UK manufacturing sector continued in January.
UK firms reported that supply chain difficulties rose, as shipping firms rerouted vessels away from the Suez Canal following the attacks by Houthi rebels.
Some firms estimated that a minimum of 12-18 days could be added to vendor lead times for goods ordered from the Asia–Pacific region.
Rob Dobson, director at S&P Global Market Intelligence, said:
“Cost and stock management initiatives are being complicated by the Red Sea crisis. Diverting purchased inputs, especially those sourced from the APAC region, around the Cape of Good Hope is raising prices and extending supplier lead times.
Some of our panel members estimate that a minimum of 12-18 days could be added to some expected deliveries, disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas. One small ray of light from the January data is manufacturers expect some of these issues may be temporary, with an increasing number (over 50%) still forecasting output to be higher 12 months out.”
Manufacturers also reported that output and new orders fell again last month, leading to additional job losses and cutbacks in purchasing and stock holdings.
This left the UK’s manufacturing PMI still in contraction territory, at 47.0 in January, up from 46.2 in December but below the earlier flash estimate of 47.3.
Updated
Next up is the BoE with its rate decision and latest Monetary Policy Report at 12pm. The committee are expected to be leave rates on hold today, while delivering a reduced inflation forecast that may path the way for easier policy. Voting will be closely watched
— The Dude (@Redpanda73) February 1, 2024
The chancellor, Jeremy Hunt, has said there will be less room for tax cuts in the spring budget next month, just days after the International Monetary Fund warned that the UK needed to focus on repairing its public finances.
Hunt, who in November announced he was cutting the main rate of national insurance contributions paid by employees from 12% to 10%, was widely believed to be gearing up for another tax giveaway after dropping a series of hints about what could be the Conservatives’ last budget before a general election.
However, the chancellor said he needed to manage expectations.
Hunt told the BBC’s Political Thinking with Nick Robinson podcast:
“It doesn’t look to me like we will have the same scope for cutting taxes in the spring budget that we had in the autumn statement.”
Eurozone manufacturing downturn cools in January
The eurozone’s factory sector has shrunk again, but at a slower rate, as Red Sea disruption leads to supply delays.
Data provider S&P Global Insight reports that the slump in the eurozone’s manufacturing sector eased in January, with factory output and new orders declining at their softest rates since last April.
Its latest survey of purchasing managers shows that cutbacks to purchasing activity, stocks of inputs and employment also cooled, while business confidence rose to a nine-month high.
It adds:
Decreases in both input costs and output prices gathered momentum in January, despite suppliers’ delivery times lengthening for the first time in a year following disruption to ships passing through the Red Sea.
This lifted its HCOB Eurozone manufacturing PMI to a 10-month high of 46.6, up from 44.4 in December, but still below the 50-point mark separating expansion from contraction.
Manufacturing PMI In the Euro Area increased to 46.60 points in January from 44.40 points in December of 2023.https://t.co/a7iZn8THFh pic.twitter.com/6oeltdTsa1
— TRADING ECONOMICS (@tEconomics) February 1, 2024
Adidas CEO says Red Sea disruptions cause delays and higher costs
German athletic gear and footwear maker Adidas has warned that profit margins are being hit by shipping disrupion in the Red Sea.
Adidas CEO Bjorn Gulden told analysts that “exploding” freight rates are driving up costs, while shipping delays are causing some delivery issues.
Gulden said:
“Currently the spot rates are exploding again.
“We have contracts that go through the summer but if we need to ship more than what the contract says or we need to accelerate something, that now has a pretty high premium.”
Shipments are currently delayed by about three weeks, which Gulden said is causing some “delivery issues” especially to Europe.
Shell’s chunky profits of $28bn last year have prompted more calls for a stronger windfall tax on the sector.
Imogen Dow, warm homes campaigner at Friends of the Earth, said:
“2023 was one of Shell’s most profitable years ever as the oil and gas industry continues to rake in billions while billpayers face another winter of soaring energy prices.
“It’s been more than two years since energy prices first shot up and still the UK’s cold homes crisis remains unaddressed, at detriment to the millions struggling to stay warm and well this winter.
“By rolling out a street-by-street insulation programme, and rapidly expanding the UK’s homegrown renewable power production, the government can bring down bills quickly, keep millions warmer and slash carbon emissions. This can and should be funded in part through a windfall tax on the fossil fuel companies fuelling the climate crisis and driving up energy prices.”
The last two years’ energy price boom has seen oil giants like BP and Shell and their investors emerge as winners – at the expense of people and the planet, warns Sophie Flinders, data analyst at Common Wealth:
Shell has U-turned on climate targets and instead has committed to increasing their oil and gas production. In 2021 it seemed that fossil fuel companies and governments alike had committed, in principle, to working towards a fossil fuel free planet.
Today’s results remind us that for Big Oil, profits and payouts to shareholders are more important than preventing climate breakdown.
The for-profit energy giants cannot save us. pic.twitter.com/IagtFE9pyE
— Common Wealth (@Cmmonwealth) February 1, 2024
Shell’s $28bn profits for 2023 show that our energy system is broken, warns Simon Francis from the End Fuel Poverty Coalition.
Francis says:
Oil and gas companies continue to post obscene profits at the expense of the British public - millions of whom are spending this winter shivering in cold, damp and mouldy homes.
“Shell’s profits may be down from record numbers, but people’s energy bills continue at unaffordable levels, with more and more people being pushed into poverty.
“Households have £3bn of energy debt, pensioners are too afraid to put on their heating despite the cold, and businesses up and down the country are struggling to survive.
“The UK should be doing everything to keep our citizens warm this winter, but instead this government is choosing to side with the oil and gas industry and is wasting valuable time debating new oil and gas licences which ministers admit will do absolutely nothing to lower bills or increase UK energy security. “
Updated
In the banking sector, Deutsche Bank AG is planning to cut 3,500 jobs over the coming years, Bloomberg reports this morning.
The cuts are coming as CEO Christian Sewing tries to lift profitability and return more money to shareholders.
The reductions, most of them back-office roles, are part of cost savings that the Frankfurt-based bank had previously announced.
The lender detailed them as it raised its mid-term revenue target and said it will return €1.6bn to investors in the first half of this year, including through a €675m share buyback.
Deutsche Bank AG plans to cut 3,500 jobs over the coming years as Chief Executive Officer Christian Sewing seeks to make good on a pledge to lift profitability and return more money to shareholders.
— Global Markets Investor (@GlobalMktObserv) February 1, 2024
German lender announces new, €675 million share buybackhttps://t.co/OknrdsjETE
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The pound has lost ground against the US dollar ahead of the Bank of England’s interest rate decision, due at noon.
Sterling has slipped by almost half a cent, to $1.2645, as the dollar strengthens after Federal Reserve chair Jerome Powell said last night a rate cut in March was not the US central bank’s “base case.”
Updated
BoE Expected to Leave Rates Steady for 4th Time
— TRADING ECONOMICS (@tEconomics) February 1, 2024
The Bank of England is expected to keep the key base rate unchanged at a 16-year high of 5.25% for the fourth consecutive time during its first meeting of 2024....
More here: https://t.co/ftMqTaShI8 pic.twitter.com/n4nN0kTm89
Shares in Shell have hit their highest level in three weeks in early trading.
They rose by 2% at the start of trading in London to £24.97, the highest since 10 January.
Updated
Bank of England decision: What the analysts expect
BoE policymakers could be split three ways when they set interest rates today, predicts Michael Hewson of CMC Markets:
No changes are expected to monetary policy today with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. Of the 19 meetings Catherine Mann has voted in she has voted to increase the base rate at 17 of them so a hold will be a rare event for her.
There is also the possibility of a dovish outlier with the potential for Swathi Dhingra voting for a rate cut, prompting a split in the opposite direction to what we saw in December.
Since joining the MPC, Dhingra has only voted to raise rates twice in the 11 meetings she has voted in, so if anyone is going to break ranks and starting voting to cut rates it will be her.
Ben Laidler, global markets strategist at eToro, expects the Bank of England to start opening the door to interest rate cuts later this year.
The Bank of England (BoE) has been the most hawkish of major central banks and this has made Sterling one of the best recent currency performers. With UK inflation still double its 2% target, economic growth has been better-than-feared, and the government set for more tax cuts at its March budget.
But enough inflation-fighting progress has been made for the BoE to begin opening the door to lower interest rates starting this summer, with four cuts likely in the second half. This would lag behind the US Fed and Europe’s ECB but be welcome, and borrowers have already started to benefit from the fall in bond yields.
However, Tomasz Wieladek, chief European economist at T. Rowe Price, predicts the Bank will sound hawkish today, and signal that the markets are expecting too many rate cuts:
In December, UK inflation turned out to be stickier than expected, while survey data suggested a rebound in output and employment in the services sector. Mortgage approvals have begun to rise and mortgage rates are now falling, which will allow the mortgage and housing market to recover further over the next 6-12 months.
Economic activity will continue to rebound over the next couple of months as a result of the 2% National Insurance cut, which became effective at the beginning of the year. This will raise demand in the economy, while any additional tax cuts may increase demand further.
Updated
Shell chief executive Wael Sawan says the group “delivered another quarter of strong performance”.
“As we enter 2024 we are continuing to simplify our organisation with a focus on delivering more value with less emissions.”
Greenpeace protests outside Shell's GQ
Greenpeace activists dressed as Shell board members have held a demonstration outside the energy giant’s headquarter this morning.
They conducted a mock Shell profits party behind a burning sign reading “Your Future”, to highlight the climate damage caused by fossil fuels.
Maja Darlington, Campaigner at Greenpeace UK, said:
“Fires are raging across Colombia, Britain has been wracked by floods, 2023 smashed global temperature records, but Shell is posting yet more obscene profits from climate-wrecking fossil fuels. While customers struggle with the cost-of-living crisis, Shell shovels over $20bn to shareholders and drills for yet more oil and gas, climate disasters are multiplying and hitting hardest those who have done the least to cause the crisis.
“It’s time to end the fossil fuel party. It would take the average British worker over 640,000 years to earn as much as Shell did last year. Our government must make oil companies like Shell stop drilling and start using their immense wealth to pay for the damage they are causing, before all our futures go up in flames.”
Updated
Shell has beaten City profit expectations, by posting earnings of $28.25bn for last year.
Analysts had expected Shell’s full-year 2023 net profit to come in at around $27.5bn, reports CNBC.
Shell profits drop, but shareholders still benefit
Profits at oil giant Shell have dropped by almost a third, but that hasn’t stopped it announcing another share buyback scheme and lifting its dividend.
Shell has reported annual adjusted profits for 2023 of $28bn, 29% down from its record earnings of almost $40bn in 2022.
The drop in profits is due to lower oil and gas prices, lower volumes, and lower refining margins, Shell says.
In the last quarter of 2023, Shell made $7.3bn, up from $6.2bn in the third quarter of last year, but lower than the $9.8bn made in Q4 2022.
The oil giant has also announced a new share buyback programme of $3.5bn, and is also lifting its dividend by 4%.
Introduction: Bank of England rate decision
Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.
These are tricky times for central bankers. Growth is being held back by high interest rates, while inflation is still over target despite falling back from the peaks of the last two years.
So the Bank of England has plenty to ponder, as it prepares to set interest rates at noon today.
The City is confident that the Bank will leave interest rates on hold at their current 16-year high of 5.25%. With inflation at 4% – twice the BoE’s 2% target – policymakers probably won’t feel confident easing policy.
The money markets reckon there’s a 99% chance that the Bank holds rates unchanged today, with a 1% possibility of a shock rise to 5.5%.
The Bank may also cut its forecast for inflation this year, while investors also expect the BoE to signal when rate cuts are likely to start this year.
The Bank of England is likely on Thursday to deliver a brighter outlook for the UK economy, reducing its forecast for inflation this year and potentially opening the way to interest-rate reductions that could boost growth https://t.co/bmoBKJQBuZ
— Bloomberg Markets (@markets) February 1, 2024
Rates have been held at 5.25% since last August. But the nine members of the Bank’s monetary policy have been split at recent interest votes – with some hawkish members pushing for higher borrowing costs.
April LaRusse, head of investment specialists at Insight Investment, says:
“We don’t expect any change in UK rates tomorrow, but the vote is going to be fascinating. At the last meeting of the Monetary Policy Committee in December three members of the committee voted to increase interest rates to 5.5%.
A lot has changed since then; the US Federal Reserve have pivoted to a more dovish outlook and markets are now pricing in a series of UK interest rate cuts starting in May. With inflation now considerably below the Banks own forecasts we expect a shift in tone – but the Bank is going to face a tricky job to keep market perceptions on a realistic path.”
Last night, America’s Federal Reserve left interest rate on hold, while Fed chair Jerome Powell tried to cool expectations that the Federal Reserve would begin cutting interest rates as soon as March.
Powell insisted a March cut was not the Fed’s “base case”, seen as an indication that the Fed could delay easing monetary policy until May.
That, and jitters about the health of US regional bank New York Community Bancorp, knocked stocks in New York last night. It cut its dividend and posted a surprise loss, renewing fears over the health of similar lenders.
The S&P 500 index of US shares lost 1.6%, while the tech-focused Nasdaq Composite lost 2.2%. Google’s parent company, Alphabet, lost 7% after missing advertising revenue targets in its latest results.
The S&P 500 extended its losses and fell 1.6% today after #Fed Chair Jerome Powell ruled out rate cuts starting as soon as March – a hawkish stance relative to market expectations, in my view. I don’t think this Fed-induced equity pullback will last. More on my take 👇
— Jean Boivin (@Jean_Boivin) February 1, 2024
Also coming up today
The UK Labour party will be wooing business chiefs, and vice versa, today as it holds its largest ever business conference.
About 400 senior business leaders will gather in London for speeches, panels and roundtables, at an event where tickets sold out in just a few hours.
With a general election due within a year, Labour is expecting business leaders from companies such as Google, Shell, AstraZenaca, Airbus, and Goldman Sachs.
They hope the conference will demonstrate the party’s “commitment to work hand in glove with the business community” and will use it as an opportunity to reveal its business policy plans after two major industry reviews.
The agenda
8.30am GMT: Sweden’s central bank, the Riksbank, sets interest rates.
9am GMT: Eurozone manufacturing PMI report for January
9.30am GMT: UK manufacturing PMI report for January
10am GMT: Eurozone flash inflation reading for January
Noon: Bank of England interest rate decision
12.30pm GMT: Bank of England press conference
1.30pm GMT: US weekly jobless data
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