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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Cost of living: families face biggest fall in disposable income for three decades, Bank of England warns – as it happened

United Kingdom Bank Bank of England Andrew Bailey
The Bank of England (BoE) building in London, Britain.
The Bank of England (BoE) building in London, Britain. Photograph: Toby Melville/Reuters

Closing summary: Cost of living squeeze to worsen

Time to wrap up...

UK households are facing their most painful squeeze in decades, after a day in which the cost of living crisis escalated.

The Bank of England warned that disposable incomes will fall in 2022 and 2023, as rising inflation and tax increases hit families.

In its latest forecasts, the BoE predicted that real post-tax labour income will shrink by 2% this year, and another 0.5% in 2023 - the worst squeeze in at least 30 years.

The Bank raised UK interest rates from 0.25% to 0.5%, the first back-to-back rate rise since 2004, as it tried to rein in the cost of living. Four of its nine policymakers pushed for a larger increase, to 0.75%, in an effort to dampen inflationary pressures.

The Bank now expects inflation will hit 7.25% in April - even higher than previously thought, and more than three times its target of 2%.

Governor Andrew Bailey defended the move, saying that “If we don’t take this action, it will be even worse.”

Bailey also warned that any military conflict over Ukraine would drive energy prices higher. And tonight, he’s told the BBC that some “moderation of wage rises” is needed to prevent prices rising out of control:

Energy bills are set to surge by almost £700 in April, after energy regulator Ofgem lifted the cap on bills by 54%.

The record increase is even more than analysts had feared, taking average bills to around £2,000 per year, and plunging many more families into fuel poverty.

The move prompted the government to step in with a package of measures to try to cushion the immediate blow.

Households will see £200 knocked off their bills in October, however this loan will be repaid with a £40 added to bills over the following five years.

Chancellor Rishu Sunak also announced a £150 discount to council tax for those in the A-D bands (the less-expensive properties).

Despite these measures, the Resolution Foundation thinktank said cases of fuel stress – where energy bills in a household exceed 10% of disposable income – would double to 5 million in April.

Sunak’s support package will not come close to providing enough help for struggling families, our columnist Polly Toynbee writes:

Everything about this energy policy is wrongheaded.

The Social Market Foundation and the Joseph Rowntree Foundation want any subsidy delivered as cash directly into people’s pockets – £500 to all on low incomes on universal credit, which was an efficient way during the pandemic of paying out that £20 uplift (and then snatching it back).

It’s greener and more dignified to give people money to spend as they choose, not forcing it on to their energy bills: with out-of-work benefits their lowest for 30 years, hard-pressed families may need to choose to spend less on energy and more on other necessities.

Energy producers faced fresh calls for a windfall tax, after Shell reported that its profits had quadrupled in the last year to $19.3bn.

In other news today:

Shares in Meta, the parent company of Facebook, have plunged by 25% today after it reported Facebook’s first-ever drop in daily users.

The slump has wiped around $220bn off Meta’s value, putting the social network giant on track for the worst slump in stock-market history.

Lorry drivers struck in long queues at Dover have warned that Brexit customs checks are causing delays.

Battery technology startup Britishvolt and its backer, the FTSE 100 metals and mining firm Glencore, have announced plans to build a plant capable of recycling lithium-ion batteries used in cars and electronic devices.

Future, the UK’s biggest magazine publisher that is home to titles from Country Life to Metal Hammer, has been forced into an embarrassing sit-down with investors after a bruising shareholder revolt. Some 60% failed to support its annual pay report – including a controversial bonus scheme in which its chief executive could be awarded £40m.

BT has entered exclusive talks with the US pay-TV firm Discovery to create a joint venture business that will include BT Sport, which has rights to sports including the Premier League and Champions League.

A cyber-attack targeting KP Snacks could lead to a shortage of some of Britain’s most popular snacks including Hula Hoops, McCoy’s and Tyrrells crisps, Butterkist, Skips, Nik Naks and KP Nuts.

Waitrose is ditching free newspapers for loyalty card-holders from 22 February in the latest example of supermarkets cutting costs amid surging inflation.

Goodnight. GW

Rupert Harrison of BlackRock, who was George Osborne’s chief of staff during the 2010-2015 coalition, warns that central bankers are making a collective mistake by tightening monetary policy just as economies slow:

BBC: Don't ask for a big pay rise, warns Bank of England boss

Workers must not ask for big pay rises to try and stop prices rising out of control, the Bank of England governor has told the BBC.

Andrew Bailey said the Bank raised rates to 0.5% from 0.25% to prevent rising prices becoming “ingrained”.

Asked if the Bank was also implicitly asking workers not to demand big pay rises, he said: “Broadly, yes”, the BBC reports.

Mr Bailey said that while it would be “painful” for workers to accept that prices would rise faster than their wages, he added that some “moderation of wage rises” was needed to prevent inflation becoming entrenched.

“In the sense of saying, we do need to see a moderation of wage rises, now that’s painful. I don’t want to in any sense sugar that, it is painful. But we need to see that in order to get through this problem more quickly.”

Here’s the full story.

But...workers facing record energy bills, and rising prices in the shops, are understandably going to want their pay packets to reflect the cost of living squeeze.

The Unite union, for example, warned last month that significant wage rises are needed to combat the ‘cost of living catastrophe’, pointing out that the RPI inflation measure of retail price increases has hit 7.5%.

Here’s a chart showing how the energy price cap is calculated, as many households prepare for bills to surge in April:

And here’s a full explanation:

Rishi Sunak is outlining the government’s plan to help with the cost of living crisis, at a press conference, my colleague Tom Ambrose reports.

The chancellor has been asked if high energy prices are here to stay and whether he would rule out having to help out with rebate schemes again further down the line.

He says:

“The factors that are driving gas prices higher are global in their nature ... I don’t have a crystal ball as to what the future holds but I want to be honest with people.

“Higher energy prices are something we will have to adjust to, in common with other countries around the world and it would be wrong to pretend otherwise but what we can do is slow that adjustment to make it more manageable for people’s household budgets.”

He admits energy bills could rise again in October [when the price cap is next adjusted] but says the rebate announced today will kick in then and help with that.

Our Politics Live blog has all the details:

Back in the City, the blue-chip FTSE 100 index has closed 54 points lower, down 0.7% at 7529 points.

Gambling firm Flutter (-5.3%) led the fallers, followed by BT Group (-4.8%) after it warned of a drop in full-year revenues due to a delayed Covid-19 recovery and ongoing supply chain issues.

Bank shares rose, while Shell jumped 1.4% after lifting its dividend and share buybacks following a jump in profits (prompting new calls for a windfall tax on North Sea producers).

But Meta’s slump hit Europe’s technology stocks, with the sector sliding by 3.5% today.

ECB's Lagarde: Brexit has added to Britain's inflation problem

The head of the European Central Bank has said that Britain’s inflation problem is partly due to the departure of EU workers after Brexit.

Christine Lagarde told a press conference, after the ECB left interest rates on hold, that the shortage of workers in the UK is pushing up pay.

“The UK has a history of much higher inflation than we have in the euro area.

“The critical difference now has to do with the labour market, where clearly there is a lot of pressure on wages where there is scarcity of workers for jobs that are available.

“I don’t want to take a political stand but there was a lot of non-UK labour force that eventually had to leave the UK (after Brexit) that has not been totally replaced and the shortage of workers is actually having a bearing on ... the labour market in the UK.

“So that’s really what is causing the significant difference between the two.”

[thanks to Reuters for the quotes]

Eurozone inflation hit 5.1% in January, not far behind the UK’s 5.4% recorded in December, so there’s not very much difference in the headline inflation rates.

Plus, UK earnings growth has dropped back in recent months, after the pandemic and furlough scheme distorted the data.

But vacancies did hit record levels towards the end of 2021, indicating the labour market is tight, and some industry bosses warned that last year’s supply chain crisis was in part due to the loss of EU workers:

UK households should brace for interest rates to continue rising this year.

Dean Turner, Chief Eurozone and UK Economist at UBS Global Wealth Management’s Chief Investment Office, predicts the Bank will raise interest rates twice more this year, doubling them to 1%.

“In our view, it is reasonable to assume that UK rates will continue to rise, with the next hike possibly coming as early as March.

But we think that the peak will be around 1% this year (i.e. two more hikes), after which we expect a pause. Any moves beyond this will be ‘data dependent’ to use central bank jargon.”

Ed Smith, co-chief investment Officer at Rathbone Investment Management, points out that interest rate derivates market shows traders are betting on UK interest rates rising to 1.5% by the end of 2022.

“The 0.25% rise was fully anticipated, but the four dissenting voices voting for a 0.5% increase at today’s meeting has caught investors off-guard.

This extra hawkishness has seen forward rates price for 1.5% Bank Rate by December, and 10-year gilt yields rise 10bps.

Smith adds that interest rates could well rise less sharply, given wage growth is slowing, supply chain problems are easing, and the UK faces an “unprecedented fiscal tightening this year”:

But we will need to wait until the third quarter before we observe the pace at which inflation is likely to fall back, by which point Bank Rate is already likely to have hit 1% given what has been set out today.”

Scotland’s energy secretary, Michael Matheson, has denounced the chancellor’s measures on electricity costs as inadequate, and called on the Treasury to waive VAT on domestic energy bills and produce additional targeted measures for low income households, my colleague Severin Carrell reports.

The UK’s three devolved governments in Edinburgh, Cardiff and Belfast are getting a share of £565m from the Treasury to cut council tax bills and are mulling over how to apply the money. The Northern Irish government, which also oversees energy pricing, will receive £150m to cut power bills.

The Scottish government said the £290m it is expected to receive was too little to cope with energy poverty in Scotland, but Scottish Labour said ministers in Edinburgh had so far failed to use their existing powers and resources to reduce poverty.

Matheson said:

“I am concerned that the majority of these measures are not sufficiently targeted to provide support to those who need it most, and that the proposed £200 rebate is too little too late, applying 6 months after the coming price rise in April. This serves only to delay, rather than solve, the very real and growing cost of living crisis.”

Anas Sarwar, the Scottish Labour leader, accused the Scottish National party government of siding with the Tories. He said:

“The SNP have refused to use the powers of [the Holyrood] parliament to top up winter fuel payments. They have refused to back Labour’s windfall tax on energy companies. And they have refused to stop rises to rail fares and water charges.”

The number of families in England living in ‘fuel stress’ is going to double, despite the assistance announced by Rishi Sunak this morning, the Resolution Foundation says.

The Foundation’s analysis shows that – in the absence of Government action – the 54% price cap rise on 1 April would have trebled the number of families in England living in ‘fuel stress’ (spending at least 10% cent of their family budget on energy bills) to over six million families in total.

However, the Energy Rebate Plan – which includes a £200 rebate on energy bills this year across Britain, a £150 Council Tax rebate for those living in A-D band properties across England (with funding for Wales, Scotland and Northern Ireland), and extending the Warm Homes Discount (WHD) to an additional 780,000 families across England and Wales – is set to reduce the coming rise in fuel stress.

But, it is still set to rise by 2.5 million to five million families in total.

Adam Corlett, Principal Economist at the Resolution Foundation, also warns that the Chancellor’s strategy of funding a reduction in energy bills this year through higher bills over the following five years is risky - especially if the cost of gas doesn’t fall soon and sharply.

High energy bills could be a feature of the 2020s – emphasising the need to wean Britain off fossil fuels.”

Resolution have also calculated that households are facing the worst incomes squeeze in decades:

World stock markets are in the red this afternoon, after Facebook owner Meta spooked investors with unimpressive results last night.

Meta’s shares have slumped by 24%, wiping more than $200bn off its value.

Shareholders are alarmed by Facebook’s first-ever drop in daily users. The company also predicted slowing revenue growth in the coming quarter, as users spent more time on rivals like TikTok and privacy changes made by Apple hit its advertising business.

Rachel Jones, associate analyst in the Thematic Team at GlobalData, warns that Meta is sacrificing its core business model for its fascination with the metaverse.

Betting big on the metaverse isn’t a bad thing—the technology is set to be huge and provide a multitude of opportunities—but it will take at least another decade to really get going. Tech companies will need to tackle this new horizon from a position of strength.

“Meta’s Q4 earning results show the cost of its obsession to investors, who will be increasingly concerned. Its hope that the re-focus would save the company’s reputation has not paid off, its metaverse development research division Reality Labs has seen disappointing results so far, growth has plunged—even Meta’s typically strong advertising business has taken a hit as the company failed to navigate Apple’s privacy changes.

Other tech stocks are also weaker, with Twitter falling 5%, Etsy losing 5.8% and Amazon down almost 6% ahead of its results tonight.

The tech-focused Nasdaq Composite index is down 1.7%, wiping out some of its recent recovery after a bad start to the year, while the broad S&P 500 index is down 1.2%.

In the City, the FTSE 100 index has slipped by 0.4%, while the pan-European Stoxx 600 index has dropped 1.3%.

Today’s interest rate rise has sharpened fears that the spring of 2022 will represent a “perfect storm” for the cost of living, our economics editor Larry Elliott writes:

It wasn’t simply that Threadneedle Street’s monetary policy committee voted to raise borrowing costs, it was that four of the nine members considered a quarter-point rise to 0.5% insufficient to head off inflationary pressures and wanted a half-point increase instead.

Chancellor Rishi Sunak began his statement to MPs by boasting about how well the economy was doing, citing falling unemployment and the reduction in government borrowing. An altogether gloomier picture was painted by the Bank, which expects the annual inflation rate to peak at more than 7% in April, and for the bounce-back from the plan-B Covid restrictions to be followed by a marked slowdown in the economy.

The UK faces a triple whammy over the coming months: businesses and mortgage payers paying higher interest rates; prices rising faster than wages; and more expensive energy costs. Sunak’s package will ease the squeeze – but not by much.

Here’s Larry’s full analysis:

The BoE isn’t the only central bank facing sharply rising prices.

Although the European Central Bank left interest rates on hold at record lows today, president Christine Lagarde has acknowledged that euro zone inflation was running hotter than expected.

Lagarde added that inflationary risks are tilted to the upside, after eurozone inflation hit a record high of 5.1% in January.

Lagarde told a news conference that policymakers would not rush into new moves, but also chose not to repeat her past comment that a rate hike this year was very unlikely.

“Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year...

Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term.”

“The situation has indeed changed.”

UK living standard squeeze: what the media say

The Financial Times says the Bank of England has intensified the squeeze on household finances with its first back-to-back interest rate rise since 2004:

The four votes for a half-point rate rise were “a hawkish turn markets did not expect”, said Anna Stupnytska, an economist at Fidelity International.

The rise in official interest rates, alongside the highest rate of inflation for more than 30 years, would squeeze disposable household incomes by 2 per cent this year, with a further 0.5 per cent hit in 2023. That would be the biggest annual reduction in spending power since at least 1990, said BoE officials.

This would depress spending and reduce the UK growth rate to a crawl of about 1 per cent a year. However, the pain for households would help bring inflation down towards the bank’s 2 per cent target within two years, the MPC said.

Sky’s Ed Conway outlines that households face higher borrowing costs, and higher taxes, energy, goods and services prices, with the Bank now seeing inflation surging over 7% this spring:

The Telegraph warns the UK is facing a “generational cost of living crisis”:

Families face the biggest squeeze since the Bank’s records began in 1990 as prices outstrip wage rises and April’s National Insurance raid saps pay packets, sending real incomes after tax tumbling by 2pc this year and 0.5pc in 2023.

It means this year will be more severe for earnings than the financial crisis, when real post-tax wages fell by 1.4pc in 2008 and 1.3pc in 2011. Officials warned it will undermine the economic recovery and push up unemployment.

Better-off households will be able to prop up spending by using lockdown savings, but those without surplus cash are left more vulnerable to price increases.

ITV’s Joel Hills points out that pay rises are being completely outpaced by price rises.

Real post-tax labour income is forecast to fall by an extraordinary 2% this year.

If true, this would prove to be the biggest hit to household spending power since records began in 1990 and a bigger hit than the 1.3% fall experienced in the aftermath of the financial crisis in 2011.

It’s worth noting that the Bank’s forecast does not incorporate the action the government has announced on Thursday morning, which is designed to cushion the impact of a surge in energy bills - which are set to increase by £693 a year from April.

The rebates households receive should leave them with more money to spend than they would have otherwise had but is therefore also slightly inflationary, which in turn implies higher interest rates.

The Treasury’s actions will change the calculation but not the outlook, which for many households is really grim.

Updated

Boris Glass, senior UK Economist at S&P Global Ratings, warns that today’s interest rate hike will dampen the UK recovery, as the Bank tries urgently to curb inflation expectations:

  • Today’s hike demonstrates the Bank of England’s urgency to further curb inflation expectations, so soon after the December hike. That some members of the committee wanted to go even higher than the 0.25% hike we saw shows the unity in that assessment.

  • The move comes as the economy is naturally slowing down, after the biggest chunk of Covid-related recovery growth is already behind us. It will likely dampen the remaining recovery momentum and growth overall.

  • The tight labour market was a key element in the Bank’s assessment. Current wage negotiation rounds are likely to yield better than usual results for workers across many sectors and regions. If this trend continues and much higher wages become widely embedded in contracts, employers may have to raise prices further, translating into ongoing higher inflation.

  • It’s that risk of unhealthy wage-price-inflation dynamics in the future that the Bank is worried about. There is not much a central bank can do about the large portion of inflation that is still being driven by higher imported costs and one-off effects, such as from the reopening of the economy after lockdown.

  • Higher rates will translate into higher costs for borrowers, but if the Bank is right - and the “if” is important - the hike should be beneficial in the medium term and pre-empt a squeeze of household incomes from the portion of inflation it can control. But this trade-off will be far from painless.

  • The Bank’s action can do little to prevent what some have called the cost-of-living crisis, because most of it remains driven by higher cost of goods and energy imports. What the Bank is trying to do is to prevent things getting even worse by allowing higher domestic inflation on top what’s already there.

Jeremy Batstone-Carr, of the European strategy team at investment bank Raymond James, warns that the Bank of England risks hurting the UK’s recovery:

“The Bank of England’s Monetary Policy Committee (MPC) has sent a strong signal that it is serious about getting on top of prevailing inflationary pressures by voting to raise the UK’s base lending rate by 0.25% to 0.50%, the second rate hike in less than three months and the first back-to-back rate hike since 2004.

Four members of the 9-person Committee voted to raise the base rate by an even greater 0.50% to 0.75%, which would have been the single biggest increase since The Bank achieved its independence in 1997, while all members agreed that a further tightening of the monetary policy spigot would likely be necessary in coming months.

The risk of this hawkish action, as the Bank’s own forecasts demonstrate, is that it could halt the UK’s economic recovery in its tracks. Utilising monetary policy to address what is fundamentally a supply-side problem could crush demand, while the elevated energy prices and proposed tax increases scheduled to start in April will only exacerbate already tough conditions for hard-pressed households.

The Bank’s Monetary Policy Report warns that household incomes will be squeezed by energy bills and tax increases this year, as inflation hits living standards:

A sharp slowdown in real income growth, driven by the rise in global energy and tradable goods prices, is weighing on consumer spending, and this effect is expected to intensify. The sharp rise in global energy and tradable goods prices, the latter in part reflecting global bottlenecks, has squeezed household real incomes and is weighing on consumer spending. Four-quarter real income growth turned negative in Q3 last year and is projected to contract even more sharply in the middle of 2022.

Another rise in retail energy prices in April is expected to increase inflation further. Incomes will also be affected by the planned increase in National Insurance contributions in April.

Bank of England forecasts of household real labour income growth
Bank of England forecasts of household real labour income growth Photograph: Bank of England

Q: Did the Bank of England miss an opportunity in the second half of last year by not starting to raise interest rates, and preventing inflation surging over 7% in the coming months?

Andrew Bailey defends the Bank’s decision to leave rates on hold for most of 2021 (before lifting them to 0.25% in December).

He argues that the Bank had to wait and see the impact of ending the furlough scheme last autumn. That’s why the MPC didn’t raise interest rates in November.

With the benefit of hindsight, you can barely see the impact of ending furlough in the labour market data, he adds.

Q: Are households prepared for the impact of the squeeze in real incomes, and high inflation?

Governor Bailey says it’s a good question, and difficult to answer. But he suggests today’s news of surging energy bills, and the Bank’s interest rate increase, would lead households to adapt their expectations.

Q: Why do you need to raise interest rates, given the squeeze on real incomes? And why won’t people seek higher wage increases to compensate for higher borrowing costs?

BoE governor Andrew Bailey replies that the Bank’s forecasts show that inflation will not come back to the 2% target without raising interest rates.

Deputy governor Ben Broadbent says economic evidence is that raising interest rates will lead to lower inflation.

Q: Is the Bank of England behind the curve, given four of the nine MPC members wanted a 50-basis point hike?

Bailey denies being behind the curve, saying that today’s vote was a close call - but that’s not surprising given the situation we are in.

Bailey: Ukraine military action would push energy prices up

Q: How serious is the cocktail of effects hitting the UK? With omicron hitting growth, energy bills and taxes rising, and interest rates now going up -- is this a Black Thursday moment?

Bailey says there is some good news: Omicron has caused less severe disruption to the economy than first feared.

But... the surge in the prices of goods has persisted longer than the Bank expected [because supply chain disruption has continued]. There are signs that supply chain disruption is easing, but the Bank needs to see a lot more.

On energy prices - there are risks both ways, Bailey continued.

They could come down over time, but there is a risk they won’t -- and he singles out the rising tensions between Russia and the West over Ukraine:

If there is any form of military action around Ukraine, there would be a risk of prices rising, Bailey points out.

Explanation: Russia typically supplies about a third of Europe’s gas via a complex network of pipelines that run through Ukraine, Belarus and Poland to Germany.

And if the European market is disrupted, UK prices would inevitably rise too, as this article outlines:

Q: What impact will today’s interest rate rise have on the economy?

Deputy governor Sir Dave Ramsden says the Bank’s data shows wage settlements running at 4.8% this year.

So, the Bank tightened policy to manage upside risks around inflation, adds Ramsden (reminder: he was one of four policymakers who wanted a steeper hike, to 0.75%).

Governor Andrew Bailey warns that the UK’s households face a lot of pressure, including those who are less able to afford rising costs.

“Unfortunately, we’ve got a squeeze from energy prices, and you see the Ofgem announcement this morning, and in order to counter the threat, and the risk that we see of further pressure coming from the labour market, I’m afraid we do have to raise bank rates.

“This is a lot of pressure on households, and we have to be very clear, a lot of pressure on those households who are less able to afford it.”

Q: By raising interest rates, isn’t the Bank making the cost of living squeeze worse for real people?

The reason we have to do this, is that if we don’t take this action, it would be even worse, Bailey replies. He knows it’s a hard message, though.

Deputy governor Ben Broadbent adds that monetary policy cannot undue the impact of the shocks hitting real incomes. Its best contribution is to bring inflation down to target.

People should not assume that UK interest rates are inevitably on a ‘long march upwards’, Andrew Bailey explained, saying:

“The MPC judges that if the economy develops broadly in line with the February report’s central protection, some further modest tightening of monetary policy is likely to be appropriate in the coming months.

“But it would be a mistake to extrapolate simplistically from what we have done today and assume that rates are now on an inevitable long march upwards

The Bank’s goal is to stabilise inflation, and bring it back to target, Andrew Bailey continues.

But there is an “awful lot of uncertainty” at the moment, the BoE governor adds, pointing to the energy market.

Bailey: We are facing a real income squeeze

Governor Andrew Bailey is taking questions.

Q: Can you see the beginnings of a wage-price spiral? And how can you explain to households that their mortgage bills might go up, because their energy bills are going up?

Bailey says we are not in the territory of a wage-price spiral, but the Bank is seeing upward movements in firms’ expected wage settlements.

Underlying wage growth is higher than the Bank would expect at this stage in the economic cycle.

It’s a difficult situation, Bailey says. Hopefully we are emerging from the pandemic, with the economy back at its pre-covid levels in November.

But the “hard message” is that “we are facing a squeeze on real incomes”. (see earlier post)

So the Bank believes it’s necessary to raise interest rates, otherwise the effects will be worse, with more domestic price pressures.

Bank of England governor Andrew Bailey is explaining today’s interest rate increase.

Bailey tells reporters that that the Bank has raised borrowing costs because inflation is unlikely to return to the UK’s 2% target without it.

We have not raised interest rates because the economy is roaring away, Bailey says.

Instead, there is a risk that inflation will become engrained, leading to a longer period of higher inflation.

Bank warns of record squeeze on earnings

The Bank of England fears that UK families are about to suffer the biggest fall in living standards since comparable records began three decades ago.

Its new forecasts now show that disposable incomes (post-tax labour income, after inflation) will shrink by 2% this year, and by another 0.5% in 2023.

That would be the biggest annual reduction in spending power since at least 1990.

Sky News’s Ed Conway explains:

The fall - largely a consequence of higher energy bills but also the rising tax burden and comparatively weak earnings - is considerably bigger than 1.3% fall in 2011, up until now the biggest squeeze since the statistical series begin.

BoE: unemployment to rise, growth subdued

The Bank of England warns that the Omicron variant has hit economic activity in December and January, but UK GDP is expected to recover in February and March.

However, beyond the near term, UK economic growth is “expected to slow to subdued rates”, the BoE warns.

That’s because rising inflation will hit household incomes and spending, and push up unemployment, it says:

The main reason for that is the adverse impact of higher global energy and tradable goods prices on UK real aggregate income and spending.

As a result, the unemployment rate is expected to rise to 5% and excess supply builds to around 1% by the end of the forecast period.

Unemployment fell to 4.1% in the three months to November - the Bank forecasts it will fall further in the near term, then rise again, hitting 5% by the start of 2025.

The Bank of England’s monetary policy committee has also voted to start the process of unwinding its £895bn stimulus package introduced when the pandemic hit the UK economy.

The Committee voted unanimously for the Bank of England to begin to reduce its £875bn stock of UK government bonds, by not buying new gilts when they mature.

The Committee also voted unanimously to reduce its £20bn stock of corporate bonds on its balance sheet, by not reinvesting maturing assets and by selling bonds.

Today’s 5-4 interest rate vote was extremely close.

Governor Andrew Bailey, deputy governors Ben Broadbent and Jon Cunliffe, chief economists Huw Pill and external member Silvana Tenreyro voted to raise Bank Rate from 0.25% to 0.5%.

But concerns over inflation prompted deputy governor Dave Ramsden, and external members Catherine Mann, Jonathan Haskel and Michael Saunders to all vote for a steeper increase, to 0.75%.

Those four members argued that monetary policy should tighten faster, to “reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded”, to help bring inflation down to target.

BoE: Inflation to hit 7.25% in April.

The Bank of England has lifted its inflation forecast - and now estimates inflation will peak at around 7.25% in April.

That’s up from 5.4% in December, and over three times higher than its 2% target, and shows just how painful the cost of living squeeze is going to be.

Announcing today’s interest rate rise, the Bank says that energy bills will surge in April due to today’s price cap increase. Goods prices will continue to rise too:

Inflation is expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7¼% in April.

This projected peak is around 2 percentage points higher than expected in the November Report. The projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices.

The further rise in energy futures prices meant that Ofgem’s utility price caps were expected to be substantially higher at the reset in April 2022. Core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices

UK interest rates raised to 0.5%

Newsflash: The Bank of England has voted to raise UK interest rates to 0.5%, as it responds to inflation hitting its highest level in almost 30 years.

The Monetary Policy Committee voted by a majority of 5-4 to increase Bank Rate to 0.5%, with four members voting to raise rates to 0.75%.

Sunak outlines energy bill support

Chancellor Rishi Sunak is announcing the government’s response to the spike in energy bills.

He says all domestic electricity customers will receive a £200 discount on their bills, in October, which will be repaid at £40 per year over the next five years.

That will reduce the £693 increase in bills announced by Ofgem this morning, spreading some of the impact over a longer period

There is also a £150 council tax rebate in April, for households in bands A-D, which won’t need to be repaid.

Sunak also explains that eligibility for the warm homes discount will be expanded.

And a £150m “discretionary fund” for local authorities will help lower income households.

Sunak also told MPs that 80% of the increase in the price cap has been driven by the rise in wholesale energy prices.

Gas prices are going up for global reasons, he says. Cold weather has depleted stocks, and disruption to energy sources like nuclear and wind has led to a surge in demand.

And he argues:

For me to stand here and pretend we don’t have to adjust to paying higher prices would be wrong and dishonest.

But what we can do is take the sting out of a significant price shock for millions of families by making sure that increase in prices is smaller initially and spread over a longer period.

Our Politics Live blog has more details:

These chart from Ofgem show how wholesale energy prices have risen, forcing it to lift the price cap from April.

Wholesale gas prices
Wholesale electricity costs

The 54% increase in the energy cap is even larger than analysts had expected, and a severe blow to struggling households across Great Britain.

Even with government action to cushion the blow, it will drive the cost of living painfully higher this spring, as Samuel Tombs, chief UK economist at Pantheon Macroeconomic, shows here:

Here’s our news story on the record increase in UK energy bills just announced by Ofgem:

Unions: workers face cost of living catastrophe

The energy cap rise is a cost-of-living ‘catastrophe’ for ordinary workers, warns the Unite union.

General secretary Sharon Graham says:

“The energy price cap rise will turn the cost-of-living crisis into a catastrophe for millions of people. This will plunge at least one in four families in Britain into fuel poverty.

“The policy announced today to provide loans to energy companies to reduce bills, in the short term, is yet another knee-jerk reaction. It fails to address the calamitous increases coming in customer bills and ultimately means ordinary families will foot the bill for an energy crisis not of their making.

Unite also wants energy companies who benefit from the government’s support package to guarantee not to cut jobs:

“Given that taxpayers’ money is paying for the bail-out, these loans must come with substantial strings attached, including guarantees that jobs will not be lost. Otherwise, they will just vanish into big corporate energy balance sheets.

This 54% hike in the price cap will make energy unaffordable to millions of households, warns Dale Vince of green energy supplier Ecotricity.

He argues for a windfall tax on the North Sea energy firms whose profits have surged in the last year (as Shell’s results highlighted this morning)

(Ecotricity is exempt from the price cap, as it supplies renewable energy, so has able to adjust bills as wholesale costs rose)

Jonathan Brearley, chief executive of Ofgem, says:

“We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.

“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”

Energy price cap to rise 54% to £1,971

Newsflash: The energy price cap will increase by £693 from April, meaning households are facing a record increase in bills of over 50%.

Energy regulator Ofgem has announced that the energy price cap, which restricts how much suppliers can charge in Great Britain, will increase from 1 April for approximately 22 million customers.

Those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year, on average. Prepayment customers will see an increase of £708 from £1,309 to £2,017.

This is the second major increase in energy bills in six months, and the largest on record, and will intensify the UK’s cost of living crisis, pushing millions more households into fuel poverty for the first time.

Ofgem says the record increase in global gas prices means the energy price cap will rise by 54%.

This will affect default tariff customers who haven’t switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market.

The price cap increase was calculated by Ofgem based on the costs faced by suppliers, who have seen surging wholesale costs in recent months, and levies for maintaining energy network infrastructure and renewable energy projects.

We now wait to see what action Rishi Sunak will take to cushion this blow.

Updated

Steven Swinford, The Times political editor, reports that chancellor Rishi Sunak will announce a £9bn package of loans & council tax rebates today, to address the surge in energy bills

Sunak is due to make a statement on his response to rising energy bills around 11.30am.

Andrew Sparrow’s Politics Live blog is tracking the political developments here:

Shell’s CEO has pushed back against calls for a windfall tax, arguing it won’t fix the crisis in the energy market.

Reuters has the details:

A windfall tax on North Sea oil and gas producers will do little to alleviate a recent surge in energy prices in Britain, Shell chief executive Ben van Beurden said on Thursday.

“I’m not convinced that windfall taxes, popular though as they seem, will help us with supply, nor is it going to help us with demand,” van Beurden told reporters after the company announced its highest quarterly profits in eight years on the back of surging oil and gas prices.

Shell was in dialogue with the British government to find ways to alleviate the energy crisis, van Beurden said.

Van Beurden also pledged that Shell will step in to help supply Europe with natural gas in case of disruptions due to tensions between Russia and the West over Ukraine.

He said:

“If indeed there would be disruptions, possibly due to sanctions or otherwise, of course we will step in and do whatever we can to give Europe supply.”

Dale Vince, founder of green energy company Ecotricity, is highly critical of the government’s approach to the crisis.

He told Sky News that the idea of underwriting loans to energy companies, so they can lower bills by £200 this year, was a ‘joke’:

“It’s been a challenging five or six months really. The energy crisis began in August and, so far, the Government have done nothing except hold to the retail price cap while letting wholesale prices go through the roof and then bankrupted 50% of the suppliers in the market.

“What we’ll see today is far too little and far too late and for not long enough.

“This crisis will continue for three years. £200 is one third of the price rise that will be announced today, for one third of the time that the problem will endure, it’s one tenth of the problem.

“It’s a sticking plaster, and to lend the money to energy companies, to lend the money to customers, honestly, it’s a joke”.

[thanks to PA Media for the quotes]

Vince also told Radio 5’s Wake Up To Money programme that the loans plan was an ‘abdication of responsibility’. If the government thinks energy bills are too high, they should take action to lower then by cutting energy taxes, he argued.

Vince also fears the government would be taking on a massive credit risk, given the number of suppliers who have failed in the energy crisis.

Updated

Services firms hike prices at record pace

UK services companies are hiked their prices at the fastest rate in at least 25 years, as the cost of living squeeze bites.

A survey of service sector firms from IHS Markit and CIPS, just released, has found that cost pressures intensified at the start of this year.

With energy bills, transport costs and staff salaries rising, companies passed on costs to their consumers by raising prices in January at the fastest rate since the survey began in July 1996.

Tim Moore, economics director at IHS Markit, explains:

Record price increases in the service economy are set to add to the cost of living crisis for UK households. Input cost inflation accelerated again in January and service providers responded by increasing their prices charged at the fastest rate since the index began in July 1996.

Nearly one-in-three survey respondents reported higher average prices charged than in December, with rising salary payments, energy bills and logistics costs the most commonly cited reasons.”

In better news, activity picked up in January, after growth hit a 10-month low in December. Services companies predicted only a temporary slowdown from cancelled bookings and staff absences at the turn of the year.

But in the eurozone, growth slowed last month:

As well as higher energy costs, the UK economy is also facing trade frictions at Dover.

My colleague Joanna Partridge has visited the long queues of lorries building up at the port, and reports:

His lorry loaded with British Airways aircraft parts, Ivo Hradilik was expecting to drive onto a ferry headed to Calais, before delivering his cargo to the outskirts of Paris.

But there’s a problem with the customs paperwork, and the 26-year-old HGV driver from the Czech Republic will have to park up near the Port of Dover while the haulage company sorts everything out.

“From the new year it has got worse with the paperwork,” Hradilik said, clutching a handful of documents. He usually visits Dover five times a month bringing goods between Britain and the EU.

Hradilik expects to wait for hours before setting sail. On Wednesday, long queues of lorries built up once again on the approach roads to Dover, with as many as 100 vehicles waiting on the A20.

The sheer volume of HGVs meant the town’s emergency traffic management system was activated twice on Wednesday, once at 5am and again at midday. Known as TAP – Operation Travel Access Protocol – it can be triggered by a request from the port authority or the police to the National Highways agency.

The Port of Dover says the main cause is a spike in freight traffic, rather than Brexit. The drivers see things differently:

Many blame the introduction on 1 January of the first controls on imports from the EU, and a new UK government IT system for goods entering and leaving the country.

“Since 1 January, I have queued every time in Dover,” Hradilik said. “From Calais it is better – there is only about two hours waiting.”

Here’s the full story:

Shell’s surge in earnings last year shows the need for a windfall tax on energy producers, the Labour party says.

Shadow Treasury chief secretary Pat McFadden told Sky News that Shell’s bumper profits showed why a windfall tax was the best way to fund a support package.

“They are planning share buybacks and increased dividends but they are not being asked to pay a penny towards the package”

McFadden also criticised Chancellor Rishi Sunak’s approach to the crisis:

“He is not asking the oil and gas companies - who are making the most out of this - to pay a single penny towards this.

“Instead he is doing it on a buy now, pay later way.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, says Shell’s oil and gas fields have been “churning out cash” as prices of the commodities rise amid higher demand and shorter supply.

The big upswing in full year profit and the lifting of the dividend to 4% has been greeted with some cheer by shareholders [shares are up 2%].

However, there will be plenty of stony faces around, given the results come just hours before families find out just how much their energy bills will rise by. This is likely to add to the clamour for a temporary windfall levy on North Sea producers with the region considered to be one of the most profitable areas in the world for extraction after the government cut taxes to encourage production. The fiscal changes brought in were designed to boost production in the UK continental shelf but with such a rapid recovery, and a surge in revenues expected, the tax break looks increasingly outdated.

The energy giants argue that the higher earnings will be ploughed back into investment into greener, cleaner forms of energy. But that argument is harder to wash given this announcement of higher dividends and the $8.5 billion share buyback scheme, which will take place in the first half of 2022.’’

Here’s more reaction, from tax expert Richard Murphy, visiting professor of accounting at the Sheffield University management school.

Ed Miliband, Labour’s shadow Secretary of State for Climate Change, also argues for a windfall tax on North Sea profits:

Shell profits surge in 'momentous' year

The Shell logo
The Shell logo Photograph: Anna Gowthorpe/PA

Oil giant Shell has reported a surge in earnings, underlining just how profitable the energy crunch has been for producers.

Shell made annual profits of $17bn (£12.5bn) in 2021, up from a loss of almost $20bn in 2020 when energy prices slumped in the pandemic.

On an adjusted basis, profits quadrupled last year - hitting $19.3bn, up from $4.8bn a year, as it profited from the surge in oil and gas prices

In the last quarter of the year alone, Shell made adjusted earnings of $6.4bn, compared with just $393m in Q4 2020, and up from $4.13bn in July-September.

Brent crude oil hit $86 per barrel last autumn, for the first time in three years, driving petrol prices to record highs.

Shell plc Chief Executive Officer, Ben van Beurden, says:

“2021 was a momentous year for Shell. We launched our Powering Progress strategy and simplified our share structure and organisation. Progress made in 2021 will enable us to be bolder and move faster.

We have a compelling strategy, with customers at its core. We have ambitious plans to generate shareholder value, to decarbonise our products and to provide energy to our customers while respecting nature.

Shareholders will benefit, with Shell raising its dividend by 4% this quarter, just as millions of households brace for their bills to surge.

Van Beurden said the company is ‘stepping up’ its distributions to investors -- with an $8.5bn (£6.2bn) share buyback programme (which includes $5.5bn from the sale of its Permian reserves to ConocoPhillips last year).

Updated

Energy UK CEO Emma Pinchbeck also told BBC Breakfast that the government needs to help the industry through a “once-in-a-generation international gas price crisis”.

Pinchbeck said the industry has been trying to get the government to take steps, as other governments across Europe have done to support customers and businesses.

“Of course it’s right that the industry looks after its customers, it’s a really shocking price rise for many people.

Our point is, I don’t think that the industry can do this alone and particularly not with the state of our retail sector in the UK”.

The current energy price cap has protected customers from the jump in wholesale energy costs, which led to 27 suppliers collapsing since the start of last year.

Emma Pinchbeck, the boss of trade body Energy UK, said the retail sector is on average seeing negative margins as it subsidises customers amid soaring wholesale gas prices.

She told BBC Breakfast:

“At the moment, because of the gas price, most energy suppliers are losing 300 to 400 per customer.

“So at the moment, the energy companies are subsidising energy for our customers and that’s one of the reasons that we think it’s important, just as other governments have done, to act now so that we can make sure that we have a stable industry, but also that customers get the kind of help that they need”.

As this chart shows, gas prices soared during 2021, so companies who weren’t hedged against the increase found that supplying energy was unprofitable.

The UK day-ahead gas price over the last two years
The UK day-ahead gas price over the last two years Photograph: Refinitiv

The new price cap, announced at 11am, will reflect the increase in wholesale costs, which is why analysts forecast an increase of around 50%.

Pinchbeck explains:

“The overall profit margin for the energy retail sector over the last two years has been -1%.

“On average most companies are losing money and that’s a really bad thing, we’ve seen the retail market failures, we’ve had, to date, 20-odd suppliers exiting the market.

“There are then costs to that for customers that are also rolled into your bills.”

Our energy correspondent Jillian Ambrose has looked at the options available to the government to lower the rise in energy bills.

Options includes underwriting loans to energy suppliers to reduce energy bills this year (at the cost of higher bills in future), doubling the payments offered by the warm home discount, a temporary VAT holiday (not favoured by Boris Johnson), cutting green levies, or a windfall tax on energy producers (as the Labour party have proposed).

Here’s a flavour:

A government-backed £200 off bills

Industry sources believe the Treasury may be poised to help cut £200 from energy bills by offering suppliers government-backed loans that could be repaid over several years.

The £5.4bn plan would protect household budgets from a breakneck increase in their average energy bill from 1 April when the new price cap takes effect. But it could mean energy bills remain higher for longer as suppliers charge more to pay back their loans in the years ahead.

The plan, first reported in the Times, was described as “entirely plausible” by one industry source, who asked not to be named, and is seen as one of the most likely measures.

More support for vulnerable households

In addition to the Treasury’s broad-brush plans it is likely to also take a targeted approach to helping the most vulnerable households by doubling the payments offered by the warm home discount.

The scheme provides a one-off annual payment of £140 towards electricity bills for households on low income or receive certain pension benefits between October and March.

Currently 2.2 million households qualify for the support, but the government is expected to extend the scheme by making more households eligible and doubling the payment to help cover surging energy costs.

It is usually paid for via a levy on standard energy bills, but industry bosses have warned the government against using better-off households to fund the expanded scheme. The top-up should instead come from the government’s coffers, they say.

And here’s the full piece:

Introduction: Cost of living crunch day

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The UK’s cost of living crisis is centre stage today as the Bank of England sets interest rates, energy regulator Ofgem reveals probably the biggest ever rise in energy bills in Great Britain, and the government announces support to cushion the blow.

With UK inflation at a 30-year high of 5.4%, the BoE is expected to lift interest rates to 0.5% at noon, following December’s rise to 0.25%.

By hiking rates again, the central bank hopes to cool price rises, at a time when energy, food and goods prices have all risen, eating into family budgets.

A rate rise would push up the cost of credit, hitting borrowers and pushing up the cost of tracker mortgages, for example.

The Bank is also expected to revise its inflation forecasts higher, recognising that the cost of living squeeze is more intense. It could also signal how it will unwind its pandemic stimulus, including a gradual reversal of its huge bond-buying plan.

The Bank faces a balancing act, with inflation overtaking wage growth in November, and tax rises coming in April.

As analysts at Nomura explains:

The combination of rising inflation, more limited increases in wages, higher taxes and expectations of rising interest rates are creating a perfect storm for UK households, who are experiencing what’s been widely termed a “cost of living crisis”.

The bad news is that real pay could fall by around 2% this year (and real disposable incomes, taking into consideration the aforementioned costs, by more – possibly around the -3% mark), a similar decline to the worst annual falls we saw in the aftermath of the global financial crisis.

The cost of living crisis will intensify in April, when the cap on energy bills on millions of homes in Great Britian increases to reflect the surge in wholesale gas and electricity costs.

Ofgem has brought forward its announcement on the cap to 11am this morning, to coordinate with the government as it scrambles to put together a package of support.

Analysts expecting the average bill will surge by as much as 50% -- to nearly £2,000 a year, up from an average of £1,277 this winter.

That will put a painful squeeze on struggling households, pushing more into energy poverty.

The number of households suffering from “fuel stress” – those spending at least 10% of their family budgets on energy bills – will rise to 6.3m overnight once the cap rises, the Resolution Foundation warned last month.

The Treasury will try to soften the blow; The Guardian understands it is considering “broad-brush financial support” as well as extra payments for vulnerable customers who will be hit hardest by the price cap increase.

That could include multi-billion loans to energy companies, which they could then use to cut energy bills by around £200 per year.

However, that would only take the edge off the likely surge in energy bills. And it would mean bills were higher in future years, as the money would need to be paid back.

According to the Times, chancellor Rishi Sunak will commit to giving households in council tax bands A to C rebates funded by Government grants under targeted measures for poorer households.

Sunak is due to outline the Treasury’s plans at a press conference this afternoon.

The stakes are very high; Citizens Advice warned yesterday that the number of people seeking one-to-one crisis support, such as referral to food banks and advice on emergency one-off grants, reached its highest level on record last month.

Meanwhile in the financial markets, tech stocks will be under pressure after Facebook’s earnings disappointed investors last night.

Shares in Meta slumped by over 20% after it reported higher costs and slowing growth, with users spending more time on rivals such as TikTok instead:

The agenda

  • 9am GMT: Eurozone services PMI for January
  • 9.30am GMT: UK services PMI for January
  • 11am GMT: Ofgem announces changes to energy price cap
  • Noon GMT: Bank of England sets interest rates
  • 12.45pm GMT: European Central Bank sets interest rates

Updated

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