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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England’s Bailey sees ‘first glimmer’ of inflation easing, after lifting interest rates to 3.5% – business live

United States Inflation United Kingdom Bank of England ECB European Central Bank Interest Rates Norges Bank
The Bank of England, at the financial district in London.
The Bank of England, at the financial district in London. Photograph: Kin Cheung/AP

Closing summary

Time for a recap.

The governor of the Bank of England has said there are signs inflation was now beginning to come down from its 41-year high, shortly after raising UK interest rates to their highest level in 14 years.

Andrew Bailey said this week’s inflation data, which showed prices rose at a slower annual rate of 10.7% last month, was a ‘glimmer’ that inflation was coming down, and lower than the BoE had expected.

Bailey said the Bank expects inflation to start falling more rapidly from late next spring, but insisted that it had to raise rates today to offset pressures from a tight labour market.

He told broadcasters:

We expect inflation to start falling more rapidly, probably from the late spring onwards.

But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight

And that’s why, really, we had to raise interest rates today, because we see that risk as really quite pronounced.

Bailey was speaking after the Bank of England voted to raise UK interest rates for the ninth time in a row, to 3.5% from 3%.

But the decision was not unanimous, with two policymakers voting for no change and one arguing for a larger, 75 basis point, hike to 3.75%.

A majority of the Bank’s Monetary Policy Committee expect to keep raising interest rates at future meetings. The Bank also pointed out that the UK housing market appears to be weakening.

Economists predicted that UK interest rates could peak at 4.5% next year.

Today’s rate hike was criticised by the Unite union, while the Institute of Directors warned that the Bank risked prolonging the pain of the recession by tightening policy too much.

Here’s our news story on the Bank’s move:

The jump in borrowing costs means UK borrowers are facing a serious reality check, our economics editor Larry Elliott explains:

Here’s an explanation of what today’s rate hike will mean for mortgage-payes, other borrowers, and savers:

Here are today’s main other business stories, first on the UK’s industrial action:

Plus, the cost of living crisis:

And also:

High street shopper numbers plunge amid rail strikes and cold weather

High streets across the UK saw shopper numbers slump sharply early this week due to rail strikes and cold winter weather.

New figures from Springboard show UK retail destinations saw footfall decline by 8.6% from Monday to Wednesday compared to the same days last week.

The decline was particularly noticeable in high streets, where footfall dropped 15.1%.

On Tuesday and Wednesday, when thousands of rail workers took part in strike action in a long-running row over pay and conditions, high streets saw falls of 17.2% and 16.4% respectively.

Meanwhile, UK retail parks saw higher shopper numbers on these days as people opted to travel to out-of-town locations instead.

Central London was particularly dampened by a reduction of people travelling into the city, as footfall fell by 26.5% for the first three days of week, with 30.2% and 31.7% drops for Tuesday and Wednesday specifically.

Heathrow ground handlers suspend strike after improved pay deal, say Unite

I flagged earlier that ground handling staff at Heathrow were set to strike tomorrow… but there’s been a significant development – an improved pay offer – since.

Strikes planned by hundreds of workers at Heathrow for Friday have been suspended, union leaders said, while it puts a revised pay offer to its members, as our transport correspondent Gwyn Topham reports.

However, further dates announced for action over the Christmas and new year period will stay in place pending the ballot.

Unite said the action was being suspended after last-ditch talks as a “gesture of goodwill”. Earlier, it announced that ground handlers at Britain’s biggest airport had rejected the latest “miserable” pay offer from their employer, Menzies, and called new strike dates.

A 72-hour strike beginning at 4am on Friday is now off. A further 72-hour strike is planned unless the deal is accepted, beginning on Thursday 29 December and ending at 3.59am on Sunday 1 January.

Here’s the full story:

Updated

IPPR: Interest rate rise risks "longer and deeper" recession

Interest rate rises risk creating a “longer and deeper” recession, the IPPR thinktank fears.

Carsten Jung, senior economist at IPPR (and former Bank of England economist), has warned that the BoE risks “overtightening” monetary policy, and argues that policymakers should slow down:

“Interest rates had already increased significantly, and due to the time it takes for rises to be effective, most of the impact of these is yet to come. With the economy projected to slow significantly, there is a risk of overtightening, causing a “hard landing” for the economy in form of a longer and deeper recession.

We have previously argued that interest rates between 3 and 4 per cent would likely be sufficient to bring inflation back down; with rates now at 3.5 per cent the Bank should slow down rises to give time for the economics of this to play out.”

Bailey: Possibly seen first glimmer of inflation easing

Andrew Bailey has told broadcasters that inflation is likely to start falling ‘more rapidly’ from the late spring next year.

Bailey pointed to the November’s drop in annual Consumer Prices Index, to 10.7% from 11.1% in October, as a ‘glimmer’ that inflation is easing.

He says, in an interview shown on Sky News, that:

We think we’ve possibly seen the first glimmer, with the [inflation] figures released this week, that it’s not only beginning to come down but it was a little bit below where we thought it would be.

That’s obviously very good news, but there’s a long way to go.

Bailey then explains that inflation is likely to fall more sharply next year. But he cautions that this isn’t guaranteed, which is why the Bank hiked borrowing costs today.

We expect inflation to start falling more rapidly, probably from the late spring onwards.

But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight.

And that’s why, really, we had to raise interest rates today, because we see that risk as really quite pronounced.

Updated

Key event

Bank of England governor Andrew Bailey has suggested that UK inflation has peaked.

In a letter to chancellor Jeremy Hunt, Bailey predicts that inflation will fall next year.

He says:

The MPC’s latest projections suggest that twelve-month CPI inflation has reached its peak.

Household energy prices have been significantly reduced by the Government’s Energy Price Guarantee, which has limited the increase in CPI inflation. But inflation is expected to remain very high in the next few months as global and domestic factors continue to push up on consumer price inflation. CPI inflation is then expected to fall gradually into the spring of next year.

A significant part of this expected fall reflects so-called base effects as previous increases in energy prices start to drop out of the calculations of the twelve-month rate.

Under the terms of Bank of England independence, the governor must write to the chancellor everytime inflation is more than one percentage point above the 2% target.

In today’s letter, Bailey says there are signs that bottlenecks in global supply chains are starting to ease, while some nonenergy commodity prices have fallen back from recent peaks.

Survey indicators of costs and prices, such as the composite input and output price PMIs, have tended to moderate in recent months. While the labour market remains historically tight, there are also tentative signs that conditions may be softening.

Dr Tony Syme, macroeconomic expert at University of Salford Business School, fears that the Bank of England is hurting the UK economy:

He writes:

Another Monetary Policy Committee meeting, another rise in interest rates. But this time there is a particular significance. It comes on the same day as the biggest strike in NHS history. In less than four weeks’ time, junior doctors will be balloted on strike action.

At least everyone agrees on the main cause of the current strife. Inflation. It has significantly reduced peoples’ standards of living and they are rightly angry about it. It is an economic illness that the Bank of England has a responsibility to cure.

Initially, Andrew Bailey had asked people to cure themselves, that they should “think and reflect” before asking for pay rises. Unsurprisingly, people couldn’t relate to someone on £575,000 per year giving them advice on a cost-of-living crisis. So, the Bank of England has turned increasingly to sizeable increases in interest rates.

But this is a medicine that takes a long time to take effect. Three-quarters of mortgage customers were not directly affected by these interest rate rises as they held a fixed rate mortgage. For four million households, their fixed rate will end next year and, according to the Bank’s Financial Stability Report, their annual mortgage costs will rise by £3,000 per year.

One thing is clear. The Bank of England’s remedy for inflation is making the patient seriously unwell. They are focusing on the symptoms, not the causes. It’s time for a different remedy.

The pound is losing more ground in the financial markets against major currencies.

Sterling has lost almost one and a half eurocents against the euro, dipping below €1.15, after the European Central Bank hiked its interest rates by half a percentage point today.

ECB president Christine Lagarde has signalled that more aggressive rate hikes are coming in the eurozone, which has pushed up the euro and weakened share prices.

Millions of working people face paying “a Tory mortgage penalty for years to come” following today’s interest rate rise, says Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer.

“After 12 years of Tory failure and wasted opportunities, only Labour offers the leadership and plans to stabilise our economy and to get it growing, so we aren’t just surviving, but thriving again.

“Labour’s Green Prosperity Plan, our modern Industrial Strategy and our active partnership with business will get our economy firing on all cylinders.”

Video: Andrew Bailey explains today's rate rise

Bank of England governor Andrew Bailey has filmed a video clip in which he explains why the UK central bank has increased the cost of borrowing today.

Bailey says the Bank raised interest rates “because inflation is too high” (it was 10.7% in November, and hit a 41-year high the previous month).

He says:

We think it [inflation] will fall back quite sharply from the middle of next year.

And raising interest rates is the best way we have of making sure that that happens.

Bailay adds that “low and stable inflation is vital for a healthy economy” – one where people can plan for the future with confidence and where “hard-earned money keeps its value”.

He acknowledges that higher interest rates have a real impact on peope’s lives, but insists that raising interest rates, “we can bring inflation down sooner”.

Updated

Explainer: What Bank of England interest rate rise means for you

Today’s move is yet more bad news for the approximately 2.2 million people on a variable rate mortgage, who are already having to contend with a raft of rising costs.

Many now face paying hundreds of pounds extra a year, as my colleague Rupert Jones explains.

About half of those 2.2 million are either on a base rate tracker or discounted-rate deal. The other half are paying their lender’s standard variable rate (SVR).

A tracker directly follows the base rate, so your payments will almost certainly soon reflect the full rise. On a tracker now at 4.25%, the interest rate would rise to 4.75%, adding £40 a month to a £150,000 repayment mortgage with 20 years remaining.

This person’s monthly payment would rise from £929 to £969. As recently as June this year, this same individual would have been paying £776 a month – so their home loan bill has now jumped by 25% in just six months (assuming they have had their deal for a while).

Of course, for those with bigger mortgages, the numbers will be bigger. Up that mortgage to £500,000 and the payment will rise by £135 (from £3,095 to £3,230).

Raj Badiani, principal economist at S&P Global Market Intelligence, predicts the Bank of England will end its interest rate rising cycle early next year:

“We think the pace of the tightening cycle is set to slow and end in early 2023 to provide the economy some breathing space after several quarters of contraction alongside the fear of excessively tight monetary policy conditions triggering a major housing market correction.

The prospect of inflation being in the free-fall from late-2023 will allow the central bank to start lowering its policy rate from early 2024 to 2.5% by November that year.”

Higher interest rates will drag on UK economic growth, points out Tommaso Aquilante, associate director of economic research at analytics firm Dun & Bradstreet:

“The Bank of England’s decision to raise the UK base rate to its highest level since October 2008 will have significant implications for businesses of all sizes across the country. By making borrowing more expensive, the increase, together with other factors, will drag on economic growth.

“Amid the choppy economic climate, companies need to keep their heads above water and ensure they have a big picture view of the health and longevity of their supply chain, fiscal pipeline, who their partners are and what the end-user is looking for. As readiness in these areas will ultimately help them weather the storm.”

Chancellor Jeremy Hunt says it is important to get inflation down to the Bank of England’s target of 2%.

Responding to today’s interest rate rise, Hunt says:

“High inflation, exacerbated by Putin’s war in Ukraine, continues to plague countries across the world, eating into people’s pay cheques and driving up food and energy prices.

“I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target.

“The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.”

BoE: Labour market still tight

The Bank of England’s policymakers remain concened that inflationary pressures are building in the economy – citing recent price and wage increases.

The MPC says:

The labour market remained tight and there had been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justified a further forceful monetary policy response.

This week’s unemployment report showed that regular pay rose by a stronger-than-expected 6.1% in the August-to-October period, the biggest gain since records began in 2001.

The Bank of England is walking a narrow path, as it tries to limit inflation without causing an even deeper recession, says Josie Dent, Managing Economist at the CEBR think tank.

In particular, by raising rates, the Bank is increasing costs for the millions of households that will face higher mortgage costs from next year onwards. This will mean many of these households will have to cut back spending in other areas, leading to weaker economic activity.

However, concern was also expressed today that a tight labour market could lead to more persistent inflation, justifying further interest rate rises.”

The pound has extended its losses against the US dollar, after the Bank of England’s interest rate decision.

Sterling has now lost 1.2 cents, dropping to $1.23 – the lowest level since Tuesday, and further away from yesterday’s six-month highs.

The fact that two MPC members voted to leave interest rates unchanged, while only one wanted a larger rate hike, is weighing on the pound.

European Central Bank also raises rates by 50bp

Over in Frankfurt, the European Central Bank has followed the Bank of England – and the US Federal Reserve – by lifting its interest rates by half a percent.

It says:

The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further.

In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.

That takes the interest rate on the ECB’s main refinancing operations to 2.5%.

Updated

How high will UK interest rates go?

Economists agree that UK interest rates will probably rise further in the months to come, but disagree about where they will peak.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK predicts that rates will hit 4.5% in 2023.

The smaller 50bps hike, which takes interest rates to 3.5%, the highest level in 14 years, suggests the end is in sight for the BoE’s tightening cycle.

However, the minutes of the meeting made it clear that although the end is in sight, there are still more hikes to come. We expect rates to rise to 4.5% early next year and that they won’t start to be cut again until early 2024.

Paul Dales of Capital Economics also predicts the Bank will lift rates to 4.50% early next year before cutting them back to 3.00% in 2024.

There were three ways in which this felt a bit like another “dovish hike” from the Bank. First, in November seven MPC members supported the 75bps hike. Today only six members voted for the 50bps hike. Catherine Mann did vote 75bps. But Swati Dhingra and Silvana Tenreyro both voted for no change. They said “the current setting of Bank Rate was more than sufficient”.

Second, the passage in the statement in November on risks to inflation being skewed to the “upside” was dropped.

Third, the Bank dropped the section that pushed back strongly against market pricing that rates would rise to a peak of 5.25%, but that may just be because market rate expectations have since fallen back to 4.50%.

But analysts at ING predict rates will peak lower, at 4%.

In a note to clients, ING’s developed markets economist James Smith says:

For now, our best guess is the Committee implements another 50bp hike in February before calling it a day. The hawks can continue to point to 6% wage growth and the fact that core services inflation is running higher than expected in November.

But today’s meeting is a further demonstration of the delicate balancing act facing the BoE, between mitigating the risks of a tight jobs market on the one hand against mounting concerns about the housing market and the health of corporate borrowers on the other.

We expect Bank Rate to peak at 4% in the new year, although we aren’t yet convinced a rate cut will be as quick to follow as in the US (where we expect cuts shortly after the summer).

The Unite union has criticised today’s interest rate rise, saying it will hurt workers.

Unite general secretary Sharon Graham says:

“The Bank of England’s leadership continues to make the wrong choices. First, they call on workers not to ask for pay rises. Now, they inflict yet more pain during this cost-of-living crisis while the profiteers, who are the real drivers of inflationary price rises, are let off the hook yet again.

“Millions are already struggling and by raising interest rates further the Bank of England is adding even more to that pain. For many this rise could be the straw that ‘breaks the camel’s back’.

The Bank of England doesn’t have to do it and its leadership should be held responsible for the consequences.”

The Bank, though, would argue that it is trying to bring down inflation – which has been driving down real incomes this year.

IoD: Bank must not prolong the pain

The Institute of Directors has warned the Bank of England not to tighten monetary policy too tightly, as it tries to pull down inflation.

Kitty Ussher, IoD chief economist, says:

“From a business point of view, if higher interest rates are required now to stabilise prices in future, then the resulting ‘necessary recession’ should be as short and shallow as possible.

“With the labour market starting to turn, the economy already contracting and base effects from last year’s price rises expected to bring next year’s headline inflation rate down automatically, it is important that the Bank does not tighten too far and risk prolonging the pain. Not only would that be bad news for households and businesses, but it would also risk the Bank undershooting its own inflation target in the future.

“On balance, while today’s rise may be justified, given the long lead time between interest rate rises and the impact on demand, we may soon be getting to the point where enough has been done.”

Here’s some early reaction to the Bank of England’s interest rate rise, from Resolution Foundation’s James Smith:

Faisal Islam of the BBC:

And the New Economic Foundation, which warns the rate rise is a mistake:

Analysis: Speed of UK interest rate rises will dent an already weak economy

An entire generation of borrowers weaned on ultra-cheap rates is facing a serious reality check, warns our economics editor Larry Elliott.

The speed at which rates have risen and the dawning realisation among borrowers that there will be no return to the emergency levels reached during the Covid-19 pandemic is bound to have an impact on an already weak economy. Interest rates were at rockbottom levels for well over a decade following the financial crisis of 2007-08 and an entire generation has grown up believing that ultra-cheap borrowing is the norm. What’s more, many people have bought houses at high loan-to-income ratios in the belief that mortgage rates will be permanently low.

Those people have now seen interest rates rise by more in the last 12 months than in any year since 1989, and are now facing a serious reality check. While fixed-rate home loans will shield for a while, they will eventually have to remortgage at significantly higher rates.

As the minutes of the latest monetary policy committee (MPC) meeting show, the boom in the housing market is over. Buyer demand is weakening and both the Nationwide and Halifax have reported sharp monthly falls in property prices.

The good news for over-extended borrowers was that two of the nine MPC members – Swati Dhingra and Silvana Tenreyo – voted to keep interest rates at 3%. The bad news is that most of the committee thinks further increases in rates “might be required” for a sustainable return of inflation to its 2% target. One member, Catherine Mann, backed a 0.75 point increase (as flagged here).

Here’s Larry’s full anaysis:

Today’s rate rise means the Bank of England has raised borrowing costs at nine meetings in a row, dating back to December 2021.

A year ago, the BoE raised Bank Rate from 0.1% to 0.25%, and it has subsequently lifted borrowing costs at each of its eight meetings in 2022.

Bank of England interest rates
Bank of England interest rates Photograph: Bank of England

Bank: UK housing market indicators have weakened

Most indicators tracking the UK housing market have continued to weaken in recent months, the Bank of England points out.

The minutes explaining today’s interest rate decision point to the latest data from lenders showing that house prices have fallen this autumn, after rising sharply during the pandemic.

They say:

Although the official UK House Price Index had increased strongly in October, house prices had fallen quite sharply in the Nationwide and Halifax indices in October and November.

The November RICS survey had shown further declines in price balances and continuing weakness in indicators of housing market activity.

According to higher-frequency Zoopla data, the volume of offers made on properties by potential buyers had declined to below their normal seasonal levels.

Updated

Bank: More rate rises may be needed

A majority of the Bank of England’s nine monetary policymakers believe further interest rate rises may be needed at future meetings, to bring inflation down towards its 2% target.

The minutes of the MPC meeting say:

The committee has voted to increase Bank Rate by 0.5 percentage points, to 3.5%, at this meeting. The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.

The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.

There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.

The MPC hold their next interest rate-setting meeting on 2 February 2023.

Updated

Bank expects UK economy will shrink by 0.1% in Q4

The Bank of England’s economists expect the UK to fall into recession this quarter, although they now expect a smaller contraction.

The minute of the monetary policy committee meeting say:

Bank staff now expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report.

Household consumption remains weak and most housing market indicators have continued to soften.

Surveys of investment intentions have also weakened further.”

That would put the UK into a technical recession, as the economy shrank by 0.2% in Q3.

Last month, the Bank forecast that the UK could be entering its longest recession in a century.

Updated

Bank of England split over rate rise

The decision to lift UK interest rates to 3.5% is NOT unanimous – with Bank of England policymakers split over the correct level of borrowing costs.

Six members of the monetary policy committee – governor Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, chief economist Huw Pill and Dave Ramsden, voted in favour of a half-point rate hike.

But three members voted against.

Two members – Swati Dhingra and Silvana Tenreyro – preferred to maintain Bank Rate at 3%. Catherine L Mann preferred to increase Bank Rate by 0.75 percentage points, to 3.75%.

Bank of England interest rate decision

Newsflash: The Bank of England has raised UK interest rates to 3.5%, the highest since October 2008.

The Bank’s monetary policy committee decided to lift borrowing costs by half a percentage point from 3%, as economists had predicted, as it continues to battle inflation.

Updated

The Bank of England interest rate decision is just three minutes away…

Most Britons have a negative economic outlook for the country amid the rising cost of living, a new poll released by YouGov shows.

The survey of 1,670 adults in Great Britain, conducted on 8 and 9 December last week, suggests that the Prime Minister and Chancellor “still have a lot of work to do to convince the public that they have a grip on the economy and the rising cost of living”, YouGov says.

Here’s the details:

  • Over eight in 10 (85%) Britons described the economy as being in a bad state currently

  • Eight in ten (78%) say the government is doing a poor job of managing the cost of living

  • Seven in ten (68%) expect the economy to get worse over the next 12 months

  • Three quarters (73%) are worried that in the next two to three years people will suffer directly from cuts in public services spending

YouGov poll of public attitudes to the cost of living crisis

Updated

A bird flies past The Bank of England in the City of London
A bird flies past The Bank of England in the City of London Photograph: Clodagh Kilcoyne/Reuters

Today’s interest rate decision will have followed a battle between the hawkish and dovish members of the Bank of England’s monetary policy committee.

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, predicts a split vote:

“We are pencilling in another 50bp hike, although we suspect that the decision on the magnitude of the rate increase will be far from unanimous.

Assuming we see no surprise on rates, the reaction in sterling will, therefore, likely be determined by both the voting pattern among committee members and the bank’s communications in its statement and meeting minutes.

At the November meeting, the BoE pushed back against market pricing for interest rate hikes, noting that the peak in rates would be ‘lower than priced into financial markets’. We suspect that it may do so once again this week, which could present some downside to GBP [the pound].

In the event of a 50bp rate hike, and an increasingly divided committee, we think that sterling could sell-off, particularly should the statement or meeting minutes once again push back against current market pricing for UK interest rates.

That said, another 75bp hike cannot be ruled out entirely. This would be bullish for GBP, given current market pricing.”

Updated

Tensions is mounting in the City, as the time ticks towards the Bank of England’s interest rate decision at noon.

With 30 minutes to go, economists generally expect that UK interest rates will be lifted to 3.5% from 3%.

Barret Kupelian, senior economist at PwC, predicts the UK’s high inflation rate will prompt the Bank to tighten policy again:

At today’s meeting, we expect the Monetary Policy Committee to increase the base interest rate by 50 basis points, consistent with consensus.

Inflation remains about five times higher than the Bank’s medium-term target of 2% which means that the Committee members remain under considerable pressure to meet their medium-term mandate.

But for the first time in a long-time, a few data-points are indicating that we are in peak inflation territory and inflation should soon consistently be on a downward path, bar any additional surprises.

Yesterday’s CPI data release showed that the UK inflation subsided, mainly on the back of a strong US dollar. What was more encouraging was that core inflation, which excludes volatile items like food and energy, also stabilised.

Second, on the labour market, there are also signs of cooling. Vacancies remain extremely high but appear to be on a consistently downward trend since the summer, and we are also seeing a trickling back to the workforce of some of the people who became economically inactive at the beginning of the pandemic.

Finally, news from across the pond in the US is also encouraging, with the latest inflation reading pointing out that inflationary pressures are also subsiding in the US, which has been reflected in more recent comments by the Federal Reserve.”

Updated

Currys warns on profits as cost of living crisis hits demand

A Currys store in Edinburgh.
A Currys store in Edinburgh. Photograph: Currys/PA

Electricals retailer Currys cut its annual profit outlook today, as Europe’s cost of living crisis hit its sales.

Currys’ like-for-like sales in the six months to 29 October were down 8% against the high level of sales seen over the last two years, although they were 7% higher than before the pandemic.

Currys now expects to make profits of between £100m and £125m this financial year, down from its previous forecast of £130m-£150m.

It made an adjusted pre-tax loss of £17m in the first half of the financial year, down from £45m a year earlier.

Currys chief executive officer Alex Baldock warned that the ‘tough environment’ is likely to continue.

Of course, our customers are feeling real cost of living pressure and our job is to help them get hold of the technology that’s more essential to their lives than ever.

We’re doing that, through our price promise, giving customers access to responsible credit, and offering more products that save them money through lower energy costs.

Our Go Greener range is flying off the shelves.”

Lara Martinez, consumer electronics sector analyst at Third Bridge, says demand for consumer goods products has weakened:

Our experts expect UK consumer electronics growth to be flat or no higher than 1-1.5% over the next two years. Sales of TVs, smart technology, radios, and other discretionary items will be heavily affected by the recession. The white goods category will remain flat.

Customers don’t automatically trade down to the cheapest option when selecting consumer electronics. Instead, they typically wait and search for better-value products. Currys must focus on offering competitive finance packages if it is to excite customers into making impulse purchases.”

Updated

Bloomberg: Hunt considers extending energy support for all UK companies

Chancellor of the Exchequer Jeremy Hunt is considering continuing to help all UK businesses pay their energy bills when the current government support package expires at the end of March, Bloomberg reports.

More blanket support could be provided, according to a person “familiar” with Hunt’s thinking, rather than simply targeting it at the most needy firms.

Bloomberg says:

Hunt had previously said he would reduce the scope of the energy support for businesses from spring 2023 by focusing it on more vulnerable industries in order to save costs.

The existing six-month package is estimated to be costing the Treasury £29 billion ($36 billion).

Last week, the CBI urged the Treasury to decide which industries will receive energy support from next spring. Hundreds of companies were bracing for their bills to more than double, once the current support package expires at the end of March.

Updated

Markets down after hawkish Fed

The London stock market has lost ground this morning too, as the prospect of further increases in US interest rates hit shares.

The blue-chip FTSE 100 index is down 48 points or 0.65% at 7447 points, away from the six-month highs set at the start of December.

The smaller FTSE 250 index of medium-sized companies is down 0.6%.

European market are also in the red, with the pan-European Stoxx 600 down 1.2% after Wall Street closed lower.

The New York Stock Exchange last night

Investors have been disappointed by the hawkish words from America’s top central banker, Jerome Powell, last night.

Powell said the Federal Reserve policy isn’t “sufficiently restrictive” yet, despite lifting rates by another 50 basis points.

Menzies: We're well prepared for Heathrow strike

Menzies say they are ‘extremely disappointed’ that ground handling staff at Heathrow will strike this weekend (as Unite announced this morning).

Miguel Gomez Sjunnesson, EVP Europe, Menzies Aviation says:

We are extremely disappointed that Unite has rejected the pay increase despite GMB accepting the offer.

Our offer of a 10.5% salary increase is extremely competitive and reflects feedback from our employees. It is a great shame that as a result of Unite rejecting the offer, strike action will now fall on one of the busiest weekends of the year as people travel to meet family and friends for Christmas.

We are well prepared for industrial action and have been working closely with key partners to put in place robust contingency plans. We remain committed to ensuring that our employees receive their increase as soon as possible and hope to be able to resolve this matter soon.”

Updated

Adults shiver as winter pressures rise

A quarter of adults in Great Britain weren’t able to consistently keep warm in their own living room over the last two weeks.

A new survey of the impact of winter pressures, from the Office for National Statistics, also found that over half of households cut back on energy use, such as heating.

The survey also found that 82% of people have been putting on more clothing or blankets to keep warm, while 31% have used hot water bottles or microwave warmers, while 27% have gone to bed earlier.

Here’s the details:

  • Around a quarter of adults (23%) were occasionally, hardly ever, or never able to keep comfortably warm in their living room in the past two weeks.

  • Over six in 10 (63%) adults reported using less gas and electricity because of increases in the cost of living, with more than nine in 10 (96%) of these adults using the heating less.

  • Around one in three 3 (34%) of all adults reported that cutting back on heating their home has negatively affected their health or well-being.

  • Around one in six (16%) adults were somewhat, or very, worried their food would run out before they had money to buy more, and 6% said their household had run out of food and could not afford to buy more.

  • Around one in five (19%) adults reported eating smaller portions because of the rising cost of living, while 17% said they were eating food past its use by date.

  • One in five (20%) reported they were waiting for a hospital appointment, test, or to start receiving medical treatment through the NHS; of those who said waiting for NHS treatment has negatively affected their life, around six in 10 (59%) reported that the wait has affected their well-being, while around one in three (36%) said it has made their condition worse.

  • Barriers to getting a GP appointment in the past month included: being offered only a telephone consultation when they wanted a face-to-face appointment (41%), waiting too long for a GP appointment (36%), and not being able to get a GP appointment (22%).

Updated

UK companies are anticipating a slowdown at the start of next year.

More than a quarter (29%) of businesses surveyed by the Office for National Statistics this month expect their turnover to decrease in January 2023, while 10% expect their turnover to increase.

Two-thirds of accommodation and food service activities industry expected turnover to decrease (which seems plausible, as business tails off after the Christmas rush).

42% of businesses were hit by a rise in the cost of the goods or services they bought in November, while 30% expect to raise their own prices in January.

The monthly number of people that Citizens Advice helped with energy-related problems and issues rose to a record high in November, underlining the scale of the struggle with soaring costs of gas and electricity.

The charity said it was continuing to exceed its forecasts for the numbers of cash-strapped households turning to it for help because they cannot afford to top up their energy prepayment meter and therefore cannot perform basic tasks such as heating food.

It said that in 2022 so far it had seen more people unable to afford to top up their prepayment meter than in the previous six years combined.

Heathrow ground handlers strike goes ahead after staff reject latest pay offer

Passengers queue for airport check-in ahead at Heathrow Airport.
Passengers queue for airport check-in ahead at Heathrow Airport. Photograph: Hannah McKay/Reuters

Just in: Ground handlers at Heathrow are to strike tomorrow, and over the weekend, after rejecting a pay offer from their employer, Menzies.

The Unite union has announced that a 72-hour strike planned to start at 4am on Friday 16 December will go ahead, after workers rejected the latest ‘miserable’ pay offer.

The dispute involves over 400 workers employed by Menzies as ground handlers operating from Heathrow terminals 2, 3 and 4.

This will then be followed by a further 72-hour strike beginning on Thursday 29 December and ending at 03:59 on Sunday 1 January, Unite says.

The workers are seeking an increase of 13% for 2022 alone, and have rejected Menzies’ latest pay offer of a 4% increase backdated to May and then a further 6.5% pay increase from 1 January 2023.

Unite general secretary Sharon Graham argues that Menzies can afford to pay staff more:

This is a classic case of an employer that can fully afford to pay workers a fair pay increase but has chosen not to.

Menzies needs to stop making excuses and make a pay offer that meets our members’ expectations.”

The strike could cause disruption at Heathrow, says Unite regional officer Kevin Hall:

Heathrow passengers need to brace themselves for fresh disruption at the airport purely because of Menzies intransigence.

Strike action is being taken as a last resort because Menzies has only been prepared to offer our members a miserable pay increase that in no way reflects the cost of living.”

Heathrow has told passengers it is working with airlines on their plans to minimise disruption.

Updated

UBS expects BoE to slow pace of rate hikes today

The Bank of England will slow its hiking cycle today, by raising interest rates by half a point, predicts Anna Titareva, economist at UBS.

She told clients there are three reasons why November’s three quarter-point hike won’t be repeated.

First, while there appears to be consensus in the MPC that the labour market remains tight, several members have noted signs of an easing in labour demand, also reflected in the December labour market report.

Second, medium-term inflation expectations, while remaining overall high, have eased in recent months.

Third, given the lags in monetary policy transmission, most of the impact of the hikes already delivered is still to come, with the magnitude subject to significant uncertainty.

Against this backdrop, we expect the majority of the MPC to vote in favour of a smaller rate increase.

Titareva also predicts that the monetary policy commiteee will be split over the size of the rate hike, with the more dovish members (Silvana Tenreyro and Swati Dhingra) likely preferring a smaller increase (or even a pause), while the more hawkish ones (Catherine Mann and possibly Jonathan Haskel) are likely to support another 75bp hike.

Updated

Elon Musk has sold around $3.6bn of stock in Tesla, according to an SEC filing.

Tesla’s chief executive officer sold more than 20m shares in the electric-carmaker this week, the filing shows, a move which may disconcert other shareholders.

Musk also sold $3.95bn worth of Tesla shares in early November, despite saying in April that no more sales were planned.

Tesla’s share price has dropped by 60% so far this year, which cost Musk his crown as the world’s richest person this week.

Neil Wilson of Markets.com says:

Meanwhile. Tesla declined again as it emerged that Elon Musk had sold a further $3.6bn in the stock this week, further reducing his stake to 13.4%.

It’s the third share sale since declaring he wouldn’t sell any more. When do the bulls realise that the game is up?

This sale may alarm Tesla investors who fear Musk is distracted by his takeover of Twitter.

Reuters reports:

“It doesn’t put a lot of confidence in the business, or speak volumes for where his attention is at,” said Tony Sycamore, an analyst at brokerage IG Markets, where Tesla is a popular stock among small-time investors.

“It’s not a good situation. I’ve spoken to a lot of investors who have Tesla shares and they’re absolutely furious at Elon.”

Updated

Norway’s central bank has lifted its benchmark interest rate by a quarter-point, to 2.75%

The Norges Bank also signalled that it expects to tighten policy again in early 2023 to dampen inflation, saying:

Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in the first quarter of next year.

Pound drops back ahead of BoE decision

Sterling has dropped by almost a cent against the US dollar this session, after the Federal Reserve lifted US interest rates by 50 basis yesterday.

The Fed’s hawkish warning that officials anticipate that “ongoing increases” in the Fed Funds rate will be “appropriate” has dashed hopes that the interest rate hiking cycle could end soon.

That’s strengthened the dollar, pushing the pound down to $1.233. Earlier this week it hit the highest level since June.

Switzerland’s Swiss National Bank has voted to lift its benchmark rate by half a percentage point, to 1%.

Announcing the decision, the SNB warns that future rises may be needed, saying:

It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.

The SNB adds that “inflation has declined somewhat in recent months”, and stood at 3.0% in November – much lower than in the UK (10.7%) or the eurozone (10.0%).

There could be a three, or even four-way split at the Bank of England today on the interest rate decision (due at noon).

Last month, the monetary policy committee voted by a majority of 7-2 to increase the bank rate by 0.75 percentage points, to 3%. The two dissenters, Silvana Tenreyro and Swati Dhingra, argued for small increases in base rate.

Michael Hewson of CMC Markets says the MPC could be split again today:

The weak economic outlook will play a part in today’s decision with the real possibility of a three-way split on policy, which will make the prospect of a clear message much more difficult.

We could see some policymakers argue for a 25bps hike as opposed to a 50bps move, while we could also see some push for a move of 75bps in order to front load the hiking process.

Bloomberg reports that Rob Wood, UK economist at Bank of America, said this time policymakers could split four ways.

In that scenario, one member would vote for no change, one for a quarter point, five for a half point and two for a three-quarter point increase. That would mark the deepest division on the MPC since Bank independence in 1997.

Updated

Introduction: BoE and ECB expected to hike rates today

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

Central banks are in the spotlight today as the Bank of England and the European Central Bank both set interest rates.

Both banks are trying to fight double-digit inflation (sharply over their targets of 2%) and both are expected to raise borrowing costs by half a percentage point.

That would take UK interest rates up to 3.5%, the highest level since October 2008, up from 3% at present, despite fears the UK is falling into recession.

A 50 basis-point hike is punchy by historic standards, but would actually be a slowdown after the Bank of England lifted borrowing costs by three quarters of a percent last month to 3%, its biggest rise in three decades.

After November’s meeting, the Bank hinted that interest rates wouldn’t rise as high as the markets had been pricing in.

Today’s BoE decision comes at noon, and may not be unanimous. There are nine members of the Bank’s monetary policy committee (MPC), and they have a range of views about the risks facing the UK economy.

Victoria Scholar, head of investment at interactive investor explains:

“The Bank of England is expected to vote in favour of a more moderate 0.5 percentage point interest rate increase to 3.5% at its meeting today. This will immediately impact those on variable rate mortgages while those with fixed rate mortgages set to expire soon will have to refinance at higher rates.

When the monetary policy committee last met in early November, it carried out the biggest hike in over 30 years, raising rates by 0.75 percentage points to 3% in attempt to tame the UK’s sky-high inflation and price instability.

At today’s meeting, there are likely to be a range of opinions on policy from members of the MPC. Some hawkish members could vote for a more aggressive 75 basis point hike to help drive inflation and inflation expectations lower while some dovish members could vote for no change at all, fearing the negative impact of too much tightening at a time when the UK is heading towards a recession.

Yesterday, we saw that UK inflation has eased off slightly, with prices rising by 10.7% over the last year, down from 11.1% in October. That will be welcomed by the Bank, but the City doesn’t expect it will be enough to stop another rate hike today.

The BoE has already raised rates at every meeting this year, in a tightening cycle that began last December.

Last night the US Federal Reserve slowed its interest rate hiking cycle, by lifting its target rate by 0.5 percentage points.

But, Fed chair Jerome Powell struck a hawkish tone too, telling reporters that the central bank wants to see “substantially more evidence” that inflation is abating. Fed officials voted to hike rates despite new forecasts showing that the US economy will barely grow next year, while unemployment increases.

Norway’s Norges Bank, and Switzerland’s SNB, are also setting interest rates this morning.

The agenda

  • 8.30am GMT: Swiss National Bank interest rate decision

  • 9am GMT: Norges Bank interest rate decision

  • 9.30am GMT: Latest weekly ‘business insights’ from the UK’s ONS

  • 12pm GMT: Bank of England interest rate decision

  • 1.15pm GMT: European Central Bank interest rate decision

  • 1.30pm GMT: US retail sales for November

  • 1.30pm GMT: US weekly jobless figures

  • 1.45pm GMT: ECB press conference

Updated

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