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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England says inflation will hit 11% after raising interest rates to 13-year high – as it happened

Bank of England Simon French Inflation United States MPC US Federal Reserve United Kingdom Andrew Bailey Conall MacCoille Economy
The Bank of England, as seen from The Royal Exchange in London.
The Bank of England, as seen from The Royal Exchange in London. Photograph: Thomas Krych/SOPA Images/REX/Shutterstock

Closing summary

The Bank of England has been accused of acting like a timid cat after raising interest rates by a quarter of a point, despite the UK’s intensifying cost of living crisis.

The UK’s central bank lifted its benchmark rate to 1.25% today, from 1%, the fifth rise in as many meetings. Three policymakers wanted a bigger rise, to 1.5%, but were outvoted.

The Bank also predicted that inflation will soar to 11% this autumn when the cap on energy bills is next lifted, and that UK GDP will shrink by 0.3% this quarter.

It pledged to take further action if needed:

“The committee would be particularly alert to indications of more persistent inflationary pressures, and would, if necessary, act forcefully in response.”

Some economists predicted the Bank might lift interest rates more aggressively at its next meeting in August, to 1.75%.

And with the US Federal Reserve going big with a 75bp hike last night, and the Swiss central bank shocking markets with an unexpected rise, central bankers are intensifying their battle against inflation.

Andy Burgess, Fixed Income Investment Specialist at Insight Investment, explains:

More important than the 25bp rate hike was the BOE finally admitting that they may have to take more “forceful” measures and raise rates faster if they see inflation as more persistent.

They are trying to balance the significant near-term inflationary pressures against signs that the economy is slowing which should reduce inflationary pressure in the medium-term; all set against a backdrop of more aggressive responses by their peers such as the US Federal Reserve.

Here’s the story, and analysis:

Today’s rise, the fifth in a row, will push up the cost of getting a new mortgage, and also hit borrowers with variable rate loans.

Stock markets have slumped again, with Britain’s FTSE 100 tumbling 3% to a three-month low.

It’s down 217 points in late trading at 7055 points, with retailers, tech stocks, hospitality firms, traverl companies and miners among the top fallers in London.

The pound had a volatile day, but is currently up almost a cent against the US dollar at $1.227.

Elsewhere today.....

Families have been warned that food price inflation could hit 15% this summer – the highest level in more than 20 years.

With pressures mounting, the UK’s financial watchdog has warned UK lenders to do more to support struggling borrowers hit by the cost of living crisis.

That could include offering payment holidays and waiving interest for some of the most at-risk customers.

The British Gas owner, Centrica, has signed a major supply deal with the Norwegian state oil company, Equinor, as ministers scramble to secure domestic energy supplies.

Online fashion retailer Asos has issued a profits warning, after a surge in cash-strapped customers returninge items to the online fashion retailer.

But the Queen’s property company is insulated from the squeeze, with the value of its rights to exploit the seabed around Britain’s coastline swelling to £5bn after a record-breaking auction of plots for offshore windfarms.

The West End landlords Shaftesbury and Capital & Counties have agreed to merge, creating a property company with a combined portfolio value of £5bn in the heart of London.

And transport secretary Grant Shapps has told rail staff not to “risk striking yourself out of a job”, before industrial action that will close much of the railway next week.

Nils Pratley: Bank’s rate rise is a couple of sparklers compared with Fed’s fireworks

Five interest rate rises in a row from the Bank of England would once have been regarded as strong and determined action to tame inflation, our financial editor Nils Pratley writes:

The problem for Threadneedle Street is that the US Federal Reserve rather redefined the definition of decisive measures on Wednesday when it hiked by 0.75 percentage points in one go.

Versus that full-on display of fireworks, the Bank’s quarter-point move to 1.25% felt like a case of turning up with a couple of sparklers. It was a bare-minimum move when official forecasts now see inflation at 11% in October when consumers’ energy bills go up again. The inflation forecasts get bigger every time the Bank opens its mouth these days. As recently as February – just before Russia’s invasion of Ukraine – the peak was projected to be 7.25%.

The bind, of course, is the weakness of the economy. The minutes of the monetary policy committee’s meeting showed that a fall in GDP in the second-quarter of this year is now almost nailed-on – the new forecast is for a fall of 0.3%. The US, by contrast, is still looking at growth.

So there is still a plausible argument that slowing demand in the UK will open up a margin of “slack” in the economy, which would do some of the inflation-fighting work. That, at least, is the case for sticking to baby steps on interest rate increases....

Here’s the full analysis:

The Dow Jones industrial average and the S&P 500 index have both hit their lowest levels since January 2021.

Updated

Central bankers’ determination to hike interest rates to quell inflation is hitting markets, says Jo Rands, portfolio manager at Martin Currie UK Equity team

“The Fed move last night, the steepest since the 1990s, dented investor sentiment this morning and triggered a sea of red across UK equities.

Post the MPC announcement, markets continued to see downward pressure across virtually all stocks – even the banks – as recessionary fears rise.”

Updated

London’s stock market has lurched lower too, amid anxiety over the prospects for growth at home and abroad.

The FTSE 100 index is now 223 points lower, down 3% today, on track for its worst session since early March (when the Ukraine war rocked markets).

The pan-European Stoxx 600 index is down 2%, as a wave of selling hits shares again.

Back in the financial markets, shares have tumbled at the start of trading in New York.

Traders are fretting that the US economy could be dragged into recession by higher interest rates, after the Federal Reserve’s whopping 75-basis-point rise in interest rates last night.

The Bank of England has repeatedly underestimated UK inflation since early last year, as this chart from Sky News’s Ed Conway shows:

(in the Bank’s defence, it didn’t know about the war in Ukraine - which drove up energy prices drastically - when it made its 2021 forecasts)

The latest Bank of England base rate rise will place a further squeeze on mortgage borrowers, as Grianne Gilmore, Head of Research at Zoopla, explains:

”This rise in rates will translate into higher mortgage costs for those looking to buy a home. For buyers with a 30% deposit buying an average priced home (£250k) in the UK, a quarter point rise in mortgage rates this will add hundreds (£264) to their annual mortgage bill.

Most homeowners will be protected from the current raft of interest rate rises as three quarters of those with outstanding mortgages are on fixed-rate deals.

Rate hike is "latest signal that UK house prices will cool"

Rising UK interest rates will dampen the housing market, making it more expensive to repay a mortgage.

Tom Bill, head of UK residential research at estate agents Knight Frank, says today’s rate hike is the is latest signal that UK house prices will cool:

“The latest interest rate rise will accelerate the process of normalisation taking place in the UK housing market.

“Unlike other parts of the economy, we don’t expect decades-old records to be broken in the property market and prices will continue to drift back down to earth after the distortions of the pandemic.”

A graph of UK mortgage rates and house price growth
A graph of UK mortgage rates and house price growth Photograph: Knight Frank

Knight Frank says there was an increase in house sellers in May, with some people keen to get their house on the market before the market peaked.

The Bank of England has highlighted the weakness of sterling -- pointing out it has fallen 2.5% since its last meeting in early May.

The minutes of its meeting explain:

Sterling had been particularly weak against the US dollar.

According to market participants, the recent movements had in part reflected the rising yield differential between shorter-term government bond yields in the United States compared to those in the United Kingdom, and perceptions of the UK growth outlook.

A weaker currency pushes up cost of imports, such as fuel, as Simon Nixon of The Times highlights:

Rupert Harrison, an economist and portfolio manager at financial services company BlackRock, has warned the UK may already be in recession and the situation “may get worse” in the autumn.

He spoke with the BBC’s World At One programme following news that the Bank of England had raised interest rates to 1.25% from 1%, the highest since January 2009.

Mr Harrison, who was also an adviser to George Osborne during his time as Chancellor, said (via PA Media):

“I think that for the Bank of England, I have a lot of sympathy for them, they face a very acute and difficult trade-off.

“We may already be in recession in the UK. It’s very very likely now that the second quarter is going to see negative growth [as the Bank predicts].

“We may get some mechanical bounce back in the third quarter, partly for complicated reasons due to the Jubilee holiday.

“But effectively growth is around zero and may get worse as we head into the autumn, particularly with energy prices going back up.”

Hetal Mehta, senior European economist at Legal & General Investment Management (LGIM), also thinks UK interest rates could leap to 1.75% in August.

By the August meeting, the Bank of England will have new economic forecasts for growth and inflation, plus a scheduled press conference to outline its thinking.

Mehta writes:

“The Bank of England finds itself between a rock and a hard place. The rock comes in the form of other central banks accelerating their plans in the face of high inflation, while the hard place is the deteriorating growth backdrop, with UK GDP growth at or below zero over the last 3 months.

“With this context in mind, it is our view that the Bank will hike rates by 50 basis points at its next meeting, when the change in gear can be communicated via updated forecasts and the press conference.

Full story: Bank of England raises interest rates to 1.25%

The Bank of England has raised interest rates for a fifth time in succession to tackle an inflation rate that is heading towards 11% amid soaring household energy bills, our economics correspondent Richard Partington writes.

In a move widely expected by City economists, the Bank’s monetary policy committee (MPC) voted by a majority to increase its key base rate by 0.25 percentage points to 1.25% in response to living costs rising at the fastest annual rate for four decades.

It also said it was ready to “act forcefully” if required, signalling further rate rises in the coming months.

In a downbeat assessment as the central bank attempts to navigate a narrow path between flatlining economic growth and surging inflation, Threadneedle Street now expects the economy to shrink in the second quarter while a further rise in household energy bills is expected to push inflation above 11% in October.

In a split decision, a minority of three members of the nine-strong MPC pushed for a larger, 0.5-point rise, amid growing unease over persistently high inflation as central banks around the world launch aggressive rate hikes to combat the rising cost of living.

The US Federal Reserve announced a 0.75-point rate rise on Wednesday – the largest single rise since 1994.

Reflecting fears about the rising cost of living as the Covid pandemic and Russia’s war in Ukraine drive up global energy prices, the MPC said it was ready to launch a tougher response to inflation remaining above its target rate of 2%.

The committee would be particularly alert to indications of more persistent inflationary pressures, and would, if necessary, act forcefully in response.

Here’s the full story:

Updated

ING: Bank could raise by 50 basis points in August

ING Developed Markets Economist James Smith predicts that the Bank of England could raise interest rates sharply in August.

He says it’s ‘entirely possible’ that the MPC lifts rates by 50 basis points, to 1.75%, at its next scheduled meeting.

That would be twice the typical rate rise of 25 basis points, and the biggest increase since 1995.

ING’s Smith writes that while the hawks at the Bank were outvoted 6-3, they have secured a noticeably more hawkish policy statement, including the pledge to act forcefully if cost pressures become more persistent.

“It’s pretty clear that the hawks are nervous about the 8% fall in the pound versus the dollar we’ve seen so far this quarter. Big picture, this is unlikely to change the inflation story dramatically, but the hawks know this is one of the few things the Bank can influence in an environment of rising dollar input prices.

“That means a 50bp move is still entirely possible in August. That’s what markets are pricing, and by then we’re likely to have had another 75bp hike from the Fed, both of which might just be enough to tip the balance narrowly in favour of the hawks.

Here’s some analysis of today’s interest rate decision, from James Smith of Resolution Foundation:

The Bank of England has estimated that Rishi Sunak’s £15bn cost of living support package could boost GDP by around 0.3% and raise CPI inflation by 0.1 percentage points in the first year.

But there are ‘upside risks’ around these estimates given the targeted and front-loaded nature of some of the measures.

Updated

The Bank of England has an increasingly difficult balancing act, as it tried to get a grip on inflation without causing more damage to the economy.

Oliver Blackbourn, portfolio manager, Janus Henderson says:

While central banks are clearly struggling to deal with inflation surges around the world, the Bank of England looks in a particularly tricky situation. Just as [Fed chair] Jay Powell has all but admitted that the Fed will likely cause a recession, the BoE has been much more open about this in its economic forecasts.

The UK looks more “stagflatory” than other major regions, with higher current inflation, expectations for a more prolonged surge in prices, and weaker forecasts for economic growth over 2023. There has been a collective global policy mistake from central banks but, despite reacting sooner than most, the UK looks to be in one of the worst positions.

Markets continue to expect a series of larger moves over the next few meetings. However, with one of the committee’s biggest hawks, Michael Saunders, leaving in August, predictions over voting will likely become more muddied after the next meeting unless others become more vocal in their opinions.

Updated

Charles Hepworth, investment director at GAM Investments, says the Bank’s commitment to act “forcefully if necessary” is “a little laughable”.

The necessity is already here, with inflation expected to peak at 11%, but the Bank knows that growth is slowing, so they cannot act as forcefully as they may proclaim.

Updated

IG: Bank looks like timid cat compared with the Fed

The Bank of England looks cautious and timid compared to its counterparts at the Federal Reserve, which unleashed a 75-basis point hike in rates last night.

So says Chris Beauchamp, chief market analyst at IG Group, who isn’t convinced that the Bank’s pledge to “act forcefully” will convince the markets.

Once again the BoE looks like the timid cat next to the Fed’s roar against inflation, with just a 25bps hike.

Accompanying comments about being prepared to act ‘forcefully’ on inflation will do little when the actual evidence shows the committee remains broadly cautious. A 6-3 vote on 25bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more.

Updated

What it means for borrowers and savers

Borrowers now face the highest interest rates since 2009, just after the financial crisis.

Bank rate has now increased from 0.1% in November, to 1.25% today, which will push up the cost of credit.

Sarah Pennells, consumer finance specialist at Royal London, says:

Mortgage borrowers on a variable or tracker rate will be hit the hardest as their monthly costs will rise, and this could be a significant increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month.

While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.

Rising interest rates should be a a win for savers, but many people are struggling to anything aside in the face of rising inflation.

Royal London’s research shows that almost a third of people plan to reduce the amount they were saving, while a fifth would stop altogether, because of the cost-of-living crisis.

Inflation is also eroding the value of savings, Pennells points out:

For those who can save, the gap between interest rates and inflation, now at 9%, means savers are continuing to lose value on cash they have in the bank.

Updated

Bank: economy to contract by 0.3% in Q2

The Bank raised interest rates despite predicting that the economy will shrink this quarter.

It says that “UK GDP was weaker than expected in April” (the economy shrank 0.3%) partly due to the winding back of Covid-19 Test and Trace activity.

Bank staff now expect GDP to fall by 0.3% in the second quarter, weaker than expected a month ago, in May’s Monetary Policy Report.

Consumer confidence has fallen further, but other indicators of household spending appear to have held up, the Bank adds

Bank: We'll act forcefully on inflation if needed

The Bank has also signalled that it will “act forcefully” if it sees signs that inflationary pressures are becoming persistent.

It says:

The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.

Updated

Bank: Inflation will hit 11% in October

The Bank of England has raised its inflation forecast again, and now predicts it will hit 11% this autumn, when energy bills rise.

It had previously estimated that consumer price inflation would hit 10% – far over its 2% target. This new forecast shows that households face even more pain, with real wages already lagging inflation.

Announcing today’s interest rate rise to 1.25%, the Bank says:

CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October.

The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.

The Bank explains the surge in inflation is partly due to rising global energy – greatly exacerbated by the war in Ukraine – and other tradable goods prices.

But there are also domestic factors, including “the tight labour market and the pricing strategies of firms”.

Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months.

In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.

Updated

Bank split over how high to raise rates

Today’s decision is not unanimous, though.

Three members of the monetary policy committee – Jonathan Haskel, Catherine Mann and Michael Saunders – voted to raise interest rates to 1.5%, which would have been the biggest rise since 1995.

They argued that:

Faster policy tightening now would help to bring inflation back to the target sustainably in the medium term, and reduce the risks of a more extended and costly tightening cycle later.

But six members – Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, Dave Ramsden and Silvana Tenreyro – voted in favour of a smaller, quarter-point rise to 1.25%.

Updated

Bank of England raises interest rates to 1.25%

Newsflash: The Bank of England has raised UK interest rates to 1.25%, from 1%, as it continues its battle to fight inflation.

The Bank’s monetary policy committee voted to raise UK interest rates to a fresh 13-year high at its meeting this week, the fifth rate rise in a row, despite concerns that the economy is weakening.

The move comes after UK inflation hit a 40-year high of 9% in April.

Updated

The clock is ticking towards noon, and the Bank of England’s interest rate decision.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says the City broadly expects a quarter-point rate rise, to 1.25%.

The focus now is sharply trained on the Bank of England’s decision later.

Worries have been rising that inflation could become too hot to handle for the Bank of England, given that the UK economy is already shrinking and is sorely lacking the insulation needed to protect itself from the impact of rate rises. There overall expectation is that it’ll keep the rate rise to 0.25% but given the harder line stance taken by the Federal Reserve, some policymakers may decide to swallow the bitter pill sooner rather than later and vote for a steeper hike of 0.5%.

Although there are still high hopes that supply snarl ups around the world will start to ease, energy prices are staying stubbornly elevated, with Brent Crude hovering around $120. The price has crept up again after the International Energy Agency warned that supply will outstrip demand next year, as Russia feels the weight of embargos and demand is forecast to resurge in China.

Updated

Why are central banks pushing to raise interest rates?

My colleague Richard Partington has written an explanation of why central bankers are raising interest rates, and the impact it will have.

It’s online here, and here’s a flavour:

How does it affect you?

When the central bank raises interest rates, high street lenders pass them on to consumer and commercial borrowers and savers. While they’re typically slower to raise the interest paid on deposits, mortgage costs can rise quite quickly.

Those on standard variable rates – which track the Bank’s base rate – are the first to see the difference. However, most homeowners have fixed-rate mortgages. This means you won’t see higher costs until you come to the end of your term. This is one of the reasons central banks say it can take time for higher rates to counter inflation.

Renters are also likely to come under pressure, as buy-to-let landlords pass on higher borrowing costs to their tenants.

When the Bank raised interest rates in May by 0.25 percentage points to 1%, analysts at Hargreaves Lansdown estimated it would push mortgage payments up by over £40 per month.

Against a backdrop of rising interest rates, the Office for Budget Responsibility estimates household debt servicing costs to rise from £55bn to £83bn over the next two years.

The pound has recovered from its earlier fall against the US dollar, in jittery trading, as the City braces for the UK interest rate decision under 30 minutes.

The pound vs the US dollar today
The pound vs the US dollar today Photograph: Refinitiv

UK companies have cut back on job adverts in recent weeks, in a sign that the labour market may be cooling.

The Office for National Statistics reports that the total volume of online job adverts fell by 9% in the three weeks to 10 June, according to data from recruitment website Adzuna.

Adverts dropped across the UK, with the largest fall (-14%) in East Midlands.

Most sectors of the economy also saw a drop in adverts, with the largest decrease was in “manufacturing” (22%), followed by “facilities and maintenance” (17%). The largest increase compared with three weeks ago was in “wholesale and retail” at 6%.

There were still 29% more job adverts than in February 2020, before the pandemic, down from 41% more in late May.

The ONS also found that 15% of firms said they were experiencing a shortage of workers in early June, up from 13% reported in early May.

Rising costs are the top worry, with 26% of firms saying input price inflation was their main concern.

Eurozone government bonds are coming under pressure again. with Italian, Spanish, Greek and Portuguese government bond yields all jumping.

This pushed Italy’s 10-year bond yields back to nearly 4% (they hit an eight-year high fo 4.19% earlier this week), up 15 basis points today.

But even safe-haven German debt is under pressure. The yield (or interest rate) on 10-year bunds has jumped 18bp, to an eight-year high.

Yesterday, the ECB pledged to support Southern European governments, by reinvesting cash from maturing bonds held on its pandemic support package to combat widening bond spreads.

The ECB also said it would work on a new instrument to prevent an excessive divergence in borrowing costs.

European markets fall further

European markets have dropped deeper into the red, after Switzerland’s central bank surprised investors by raising interest rates this morning.

The FTSE 100 index of blue-chip shares has now slumped by over 2%, down 154 points at 7131, a one-month low.

France’s CAC has also lost over 2%, and is on track to close in bear market territory - more than 20% off its peak in January.

Germany’s DAX has tumbled 2.7%, as fears of rising interest rates sweep markets again.

Marios Hadjikyriacos, senior investment analyst at XM, says:

The Swiss National Bank took markets by storm today after it raised interest rates by 50bps, overcoming even the most aggressive forecasts.

Wall Street is set for losses, as yesterday’s rally evaporates.

Here’s more reaction to the rise in Swiss interest rates from -0.75% to -0.25%, from Simon Harvey, head of FX analysis at Monex Europe:

While the consensus was for the Swiss National Bank to use today’s meeting to signal a policy change in September, last week’s hawkish ECB meeting coupled with a more hawkish Federal Reserve last night likely forced the SNB into earlier action.

With much of Switzerland’s current inflation coming through the trade channel, the Swiss National Bank is unofficially targeting a stronger inflation-adjusted CHF rate (real exchange rate) in order to reduce the level of imported inflation.

Widening monetary policy differentials threatens this objective, hence warranting an earlier than expected rate hike.

Here’s Frederik Ducrozet of Pictet Wealth Management:

Updated

Swiss central bank unexpectedly raises interest rates

Swiss National Bank (SNB) logo is pictured on its building in BernThe Swiss National Bank (SNB) logo is pictured on its building in Bern, Switzerland June 16, 2022. REUTERS/Arnd Wiegmann
The Swiss National Bank building in Bern, Switzerland. Photograph: Arnd Wiegmann/Reuters

Drama in Zurich, where Switzerland’s central bank has surprisingly raised interest rates from record lows.

The Swiss National Bank raised its policy interest rate for the first time in 15 years, up from -0.75% to -0.25%.

This 50-basis-point rise makes the SNB the latest central bank to lift interest rates to fight inflation.

This is the first interest rate rise by the SNB since Septenber 2007; it had kept borrowing costs at -0.75% since 2015.

Thomas Jordan, chair of the SNB’s governing council, said the bank decided to tighten monetary policy to counter increased inflationary pressure.

Swiss National Bank’s semi-annual conference today, with vice-chairman Fritz Zurbruegg, chairman Thomas Jordan, and board member Andrea Maechler
Swiss National Bank’s semi-annual conference today, with vice-chairman Fritz Zurbruegg, chairman Thomas Jordan, and board member Andrea Maechler Photograph: Anthony Anex/EPA

Jordan also indicated that further interest rate rises could follow, saying:

The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland.

It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term.

To ensure appropriate monetary conditions, we are also willing to be active in the foreign exchange market as necessary.

The Swiss franc has soared in response, up over 1.8% against the euro. The SNB has previously tried to prevent the franc rising too much, as investors seek a safe-haven asset.

Updated

In a busy morning for retail news, online retail and software group THG (formerly The Hut Group) says it has rebuffed all its recent takeover approaches.

There was a flurry of drama last month when TGH attracted some interest from property mogul Nick Candy, and also rejected an approach at 170p per share from Belerion Capital and King Street Capital Management, worth £2.1bn.

THG said it had received indicative proposals from numerous parties in recent months, but they had all “significantly undervalued” the e-commerce group -- and it hadn’t provided due diligence access to any of these parties.

The City has reacted by sending THG’s shares tumbling 15% to 89p, the lowest since April.

The boss of Halfords has accused the Government of taking a “backwards step” by stopping last remaining subsidies for electric cars.

Graham Stapleton, Halfords CEO, said the closure of the £300m plug-in car grant scheme for new orders earlier this week would hurt mass take-up of electric cars.

Until now, we have been greatly encouraged by the Government’s commitment to making the transition to electric cars.

However, the sudden and complete removal of the plug-in subsidy is a backward step.

It will delay mass adoption at a time when we need to be doing everything we can to help people to choose greener transport options.

We are writing to the secretary of state for transport to ask him to reconsider.

Halfords also reported a near 50% increase in pre-tax profits to £96.6m, helped by growth in its motoring and autocentres businesses.

But it warned it faces some macroeconomic headwinds, with Stapleton saying:

While rising inflation and declining consumer confidence will naturally present short-term challenges for any customer-facing business like ours, we remain confident in Halfords’ long-term growth prospects due to our service-led strategy and the enduring strength of our brand, people, products and services.

Halfords’ shares are being hit, down 20%.

Updated

Online fashion retailer Boohoo has also reported an increase in customers returning items, like its rival ASOS this morning.

Boohoo reported an 8% drop in revenues for the last quarter, due to tough comparisons compared to a year ago (when the pandemic was boosting online shopping), as well as higher product returns

It said UK sales fell 1%, but returned to growth in May. Sales in the US tumbled 26%.

European markets retreat

European stock markets have dropped into the red this morning, as recession worries hit shares again.

The UK’s FTSE 100 has tumbled by 105 points, or almost 1.5%, to 7166, wiping our yesterday’s gains. The blue-chip index has now lost almost 6% so far this month.

Retailers are among the fallers, following ASOS’s profits warning, such as JD Sports (-6.5%), Next (-5.3%) and Kingfisher (-4.1%).

There are similar losses across Europe too.

European stock markets, June 16 2022
European stock markets this morning Photograph: Refinitiv

Chris Beauchamp, chief market analyst at IG Group, says growth worries are pushing markets down.

It hasn’t taken long for the post-Fed bounce in stocks to fade, and given the gloomier outlook for growth that is hardly surprising. Stocks might have weathered the biggest single rise in almost 30 years quite well, but we are still living in the same world we were 24 hours ago, one where growth is slowing, earnings are still falling and prices keep on rising.

This is not a great environment for stocks, and it looks like we have a way to go before global equities look to be really good value.

Robin Brooks, chief economist at the Institute of International Finance, says a global recession is coming, as central bankers raise interest rates.

The pound has dropped in early trading, back towards its lows earlier this week.

Sterling has lost one cent against the dollar to $1.2070, losing much of Wednesday’s rally.

Against the euro, the pound is down half a eurocent at €1.16.

This weakness may suggest traders don’t expect the Bank of England to announce a half-point interest rate rise at noon, and to stick to a typical quarter-point rise.

Jeffrey Halley, analyst at OANDA, explains:

Soaring energy prices, robust labour demand, cost of living increases, and a central bank that raised the white flag on imported inflation some time ago, have torpedoed the British Pound.

The BOE has quietly gone about its business with a series of 0.25% hikes these past months and I don’t expect that to change today.

ASOS issues profit warning as returns rates surge

A keyboard and a shopping cart are seen in front of a displayed ASOS logo.

Online fashion retailer ASOS has issued a profits warning after being hit by an increase in customers returning items, which it blames on ‘inflationary pressures’.

Net sales over the last three months were affected by a “significant increase in returns rates” in the UK and Europe towards the end of the period, ASOS reports this morning.

As well as hitting sales, those returns also push up ASOS’s delivery costs and lead to more discounting to clear stock, undermining the benefits from a rise in gross lending.

The company now expects pre-tax profits of £20m to £60m this year, down from analyst forecasts of around £82m (according to Refinitiv), due to “uncertain consumer purchasing behaviour”.

Back in January, before the Ukraine war, ASOS was forecasting earnings of £110m-£140m, but rising cost pressures are now hitting its customers. In April, it said suspending operations in Russia would lower adjusted pre-tax profits by £14m.

Mat Dunn, ASOS’s chief operating officer, says global supply chain challenges are creating inflationary pressures.

What is now clear, based on the significant increase in returns rates that we have seen, is that this inflationary pressure is increasingly impacting our customers shopping behaviour.

Shares in ASOS have tumbled 14% in early trading.

The UK group has also promoted José Antonio Ramos Calamonte, currently chief commercial officer, to become chief executive, succeeding Nick Beighton who stepped down last autumn after an earlier profits warning.

Updated

FCA tells lenders to support consumers struggling with the cost of living

The UK’s financial watchdog has warned UK lenders to provide more support for customers who are struggling with soaring living costs.

The Financial Conduct Authority has written to banks and lenders, urging them to act now to offer help to borrowers who are struggling with payments and customers in vulnerable circumstances.

The FCA is concerned that some customers in vulnerable circumstances are not getting the support they need.

Last month, British Gas said it was taking on more staff to handle a rise in customers struggling to cope with soaring energy bills, while water regulator Oftwat has warned some people need support with utility bills.

The FCA is asking lenders to:

  • make sure that their approach to taking on new borrowers takes account of the financial pressure they may face and the impact on their expenditure.
  • consider and, if necessary, improve how they treat consumers in vulnerable circumstances.
  • effectively direct customers who need it to money guidance or free debt advice.

Full story: UK food price rises could hit 15% over summer

Food price rises in the UK could hit 15% this summer – the highest level in more than 20 years – with inflation lasting into the middle of next year, according to a report.

Meat, cereals, dairy, fruit and vegetables are likely to be the worst affected as the war in Ukraine combines with production lockdowns in China and export bans on key food stuffs such as palm oil from Indonesia and wheat from India, the grocery trade body IGD warns.

Products that rely on wheat, such as chicken, pork and bakery items, are likely to face the most rapid price rises as problems with exports and production from Ukraine, a big producer of grain, combine with sanctions on Russia, another key producer.

The report suggests inflation will last at least until next summer but could persist beyond that as a result of a range of factors such as additional key agricultural countries introducing export bans, trade disruption connected to Brexit, unfavourable weather in the northern hemisphere or further weakening of sterling.

The report says Britain’s food and consumer goods industry is “uniquely exposed to current pressures due to a reliance on food imports and the impacts of EU exit”.

It says the new regime has added to costs through additional administration at the EU border and other legislation changes – as well as labour shortages prompting higher wages for farmers and food producers.

James Walton, the chief economist at IGD, said:

“From our research, we are unlikely to see the cost of living pressures easing soon.

This will undoubtedly leave many households – and the businesses serving them – looking to the future with considerable anxiety. If average food bills go up 10.9% in a year, a family of four would need to find approximately £516 extra a year. We are already seeing households skipping meals – a clear indictor of food stress.

With growth slowing, this is the wrong moment to raise interest rates, argues Miatta Fahnbulleh, chief economist at the New Economics Foundation.

She explains that higher borrowing costs would “choke our struggling economy”, and increase the risk of recession.

The priority for the Bank of England’s communications over the next 24 hours is to express confidence in the economy and the path of monetary policy, argues Simon French, chief economist at Panmure Gordon.

That would provide reassurance to companies and households, and help ward off a recession:

Introduction: Bank of England interest rate decision looms

Governor of the Bank of England Andrew Bailey last month.
Governor of the Bank of England Andrew Bailey last month. Photograph: Reuters

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

Over to you, governor. After America’s central bank announced its largest interest rate rise since 1994, the Bank of England must now decide whether, and how fast, to lift UK borrowing costs.

Governor Andrew Bailey and colleagues on the Bank’s Monetary Policy Committee faced a difficult decision at this week’s meeting, with the economy slowing sharply and inflation heading towards double-digit levels.

The MPC are very likely to lift Bank Rate, currently 1%, at noon today - and some economists believe we could get the first 50 basis point increase since 1995, which would take rates to 1.5%.

Conall MacCoille, chief economist at wealth managers Davy, believes there are compelling reasons for the BoE to raise interest rates by as much as 50bps.

“CPI inflation at 9% and a tight labour market are creating a risk that employee price expectations could become entrenched.”

Furthermore, MacCoille points out that some Bank policymakers wanted a larger rise last month.

“The MPC’s vote was split 6-3 in May, with the minority favouring a 50bps rise in interest rates”.

James Lynch, fixed income manager at Aegon Asset Management, reckons the committee could split into three camps, making a smaller 25bp rise more likely.

The dovish view can be emboldened by the slowdown in GDP growth, the hawkish camp encouraged by the labour market strength/higher wages and ever rising inflation and finally, the more neutral members who are finding it all a bit confusing.

Therefore, there is a strong possibility of a split vote this week - some members vote for no rise, some for 25bps and some for 50bps.

The Bank has already raised interest rates at four meetings in a row. This month, it could also be concerned about the weak pound, which has hit its lowest level against the US dollar since early in the pandemic.

Surging inflation means UK real wages shrank at the fastest rate in at least 20 years in April, squeezing households.

And there is more pain ahead, with a grocery industry research group warning that food price inflation in Britain is likely to peak at up to 15% this summer and will remain high until 2023.

Red-hot inflation is forcing central bankers to become more hawkish, with the US Federal Reserve hiking its key rate by 75 basis points last night.

It blamed higher energy prices following the Ukraine war, supply chain disruption from the pandemic, and ‘broader price pressures’, as last week’s unexpected surge in US inflation forced the Fed to move more aggressively.

It said:

The invasion of Ukraine by Russia is causing tremendous human and economic hardship.

The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

Fed chair Jerome Powell signalled that a similar hefty rise was possible in July unless inflationary pressures soften, telling reporters:

“We at the Fed understand the hardship inflation is causing.

Inflation can’t go down until it flattens out. That’s what we’re looking to see.”

The Bank of England would love to see that too.

The agenda

  • 7am BST: European new car registrations
  • 8.30am BST: Swiss National Bank’s interest rate decision
  • 9.30am BST: Latest economic and business activity data from the Office for National Statistics
  • 12pm BST: Bank of England interest rate decision
  • 1.30pm BST: US weekly jobless figures
  • 1.30pm BST: US building permits and housing starts
  • 5pm BST: Russia’s Q1 GDP report
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