Get all your news in one place.
100’s of premium titles.
One app.
Start reading
The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England says UK in recession as it raises interest rates to 14-year high of 2.25% – business live

Bank of England United States United Kingdom Jerome Powell Liz Truss Swiss National Bank US Federal Reserve
The Bank of England in the City of London,.
The Bank of England in the City of London,. Photograph: Alastair Grant/AP

Closing post

That’s all for today.

Here are our main stories, starting with the Bank of England’s latest interest rate rise, and warning that the UK’s economy has probably shrunk over the last six months:

Britain’s industrial unrest:

And in other news..

Andrew Sparrow’s Politics Live blog has all the build-up to tomorrow’s mini-budget:

What the Bank’s interest rate hike means for you

The half-point increase in UK interest rates will push up the cost of variable-rate mortgages, credit cards and loans.

And while it will lift savings rates, it won’t make up for the impact of inflation.

My colleague Rupert Jones has all the details:

Financial markets have headed lower this afternoon, amid anxiety that rising interest rates will push major economies into recession.

Europe’s Stoxx 600 index dropped below 400 points, for the first time since February 2021, down 1.8% today.

The FTSE 100 index has lost 1.1%, or 78 points, as Wall Street adds to yesterday’s losses after last night’s US rate hike.

The pound has now lost its earlier gains, and dropped back below $1.13 – its weakest point in 37 years.

Fiona Cincotta of City Index says.

With [Bank of England governor] Andrew Bailey abandoning the race to the top, the outlook for sterling is bleak.

Updated

Larry Elliott: Interest rate hike points to the Bank keeping its foot firmly on the brake

In the past, a slowing economy – let alone one already going backwards – would be the signal for lower borrowing costs, our economics editor Larry Elliott points out:

Yet the Bank is stepping up its action. The MPC has now tightened policy at seven meetings in a row, and having been content with quarter-point increases earlier this year has now plumped for back-to-back half-point jumps.

It is also clear the committee thinks rates will need to go still higher in the coming months. The Bank is assuming the chancellor Kwasi Kwarteng’s mini-budget on Friday will add to inflationary pressure and will make a “full assessment” of its implications before the next meeting of the MPC in November.

There was nothing in the minutes to suggest the MPC was ready to pause its tightening cycle. “The labour market is tight and domestic cost and price pressures remain elevated,” it said.

So with the economy struggling to grow this year, and heading into recession, the Bank could soon be accused of overkill, Larry warns.

Here’s his analysis:

UK interest rate rise: business reaction

Here’s a round-up of expert reaction to the half-point rise in UK interest rates today, to a 14-year high of 2.25%.

Kitty Ussher, Chief Economist of the Institute of Directors, warns that expectations of future inflation are still not where the Bank of England would like them to be.

Many of our members think that the peak will come next year, and so may price accordingly, running the risk that inflationary expectations become self-fulfilling.

“Combined with imminent announcements of a government stimulus package, plus some remaining – albeit smaller – upward pressure on CPI from household energy prices next month, the Bank of England has made the judgement that interest rates need to continue rising.

Sanjay Raja, chief UK economist at Deutsche Bank, predicts the BoE could raise rates by 75 basis points in November:

  1. Despite the three-way split in voting, we see today’s decision as slightly hawkish, with three members (Deputy Governor Ramsden, Catherine Mann, and Jonathan Haskel) pushing for an even more forceful response to recent economic news.

  2. The Bank has opened the door for a bigger rate hike in November. The MPC made clear today that should the risk of persistence in inflationary pressures increase, after taking into account any fiscal announcements, the MPC will act to offset it.

  3. The MPC acknowledged that despite slowing underlying growth momentum, domestic cost pressures have strengthened, with the labour market tightening further. Moreover, the scale of fiscal loosening expected over the coming months/quarters should raise medium-term inflation, all else equal.

Modupe Adegbembo, G7 Economist at AXA Investment Managers, says the Bank doesn’t seem to be concerned about the pound’s weakness.

Notably, the MPC made little reference to the impact of sterling on their rate decision.

With the pound trading around 40-year lows against the dollar, we had expected the BoE to consider the impact of a weak pound on inflation, but at present this appears not to be a prominent part of the MPC’s current considerations.

Tim Drayson, Head of Economics at Legal & General Investment Management (LGIM), says the Bank missed market expectations by only hiking rates by 50bp

The cost of this delay was to put upward pressure on long-term interest rates as markets believe the MPC will now have to keep rates higher for longer to maintain its inflation fighting credentials.

“However, the MPC hinted at a faster pace of tightening in November when it will have had time to fully assess the impact of the Government’s fiscal announcements which are expected to add to inflationary pressure in the medium term.”

Over in the eurozone, consumer confidence has plunged to a record low as the energy crisis pushed Europe towards recession.

The UK government is taking an ‘economic gamble’ by reversing its national insurance rate rise, warns Shaun Moore, tax and financial planning expert at Quilter.

Axing the additional 1.25 percentage points of NI contributions will boost consumers, but leave a “gaping hole” in Treasury funding plans for social care, Moore explains:

[Chancellor Kwasi] Kwarteng says overall funding for health and social care services will be maintained at the same level as if the Levy were in place and come from general taxation.

This sounds like wishful thinking and is effectively taking a gamble with social care funding in the hope the tax takes increases due to greater economic activity. Let’s hope tomorrow’s ‘mini budget’ reveals more about how the Chancellor plans to raise the much-needed funds for social care.

Updated

The UK government has pointed out that it’s not the only country facing slow growth.

A government spokesman has responded to the Bank of England’s forecast that GDP will fall 0.1% this quarter (meaning a technical recession) saying:

“The UK is not alone in facing slow growth, with Putin’s illegal invasion of Ukraine and weaponisation of energy presenting a global challenge for economies across the world.

“While several one-off factors have also impacted on the domestic outlook, we have recognised the need to take action.

“We will support households and businesses with high energy bills and have committed to an unashamedly pro-growth agenda, which the Chancellor will detail in the Growth Plan tomorrow.”

The US economy has already racked up two quarters of negative growth, while Germany’s economy is expected to fall into recession due to soaring energy prices.

Mortgage lenders put up interest payments before Bank’s base rate hike

Banks and building societies had already begun putting up mortgage interest payments before the Bank of England announced its latest base rate hike to 2.25%, piling more pressure on homebuyers and owners.

For some, the increased charges could add thousands of pounds to their total home loan costs over the next couple of years.

Santander, NatWest and HSBC are among the lenders that have this week increased their mortgage rates for new borrowers – in some cases by as much as 0.8 percentage points.

Other banks and building societies are expected to quickly follow suit and reprice their deals upwards now that the Bank has raised interest rates by 0.5 percentage points – the seventh increase since December.

National Insurance rise to be reversed from 6 November

The 1.25 percentage point rise in National Insurance will be reversed from 6 November, the Chancellor Kwasi Kwarteng has announced, ahead of tomorrow’s mini-budget.

The Treasury says that the reversal will deliver on prime minister Liz Truss’s pledge to slash taxes to drive growth.

Scrapping the rise, which began in April, will reduce tax for 920,000 businesses by nearly £10,000 on average next year, the government says, as they will no longer pay a higher level of employer National Insurance.

It also means almost 28 million people will keep an extra £330 of their money on average next year, they say.

The NI increase was brought in to fund extra spending on health and social care.

But the Health and Social Care Levy, expected to raise around £13bn per year, is instead being cancelled, the government says, through a Bill being introduced today.

Instead, chancellor Kwasi Kwarteng says funding for health and social care services will be maintained at the same level as if the Levy was in place – implying extra government borrowing?

Kwarteng said:

“Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy.

“Cutting tax is crucial to this – and whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the Levy will help them grow, whilst also allowing the British public to keep more of what they earn.”

Politics Live has more details and reaction:

Full story: UK in recession, says Bank of England as it raises interest rates to 2.25%

Britain’s economy is now in recession, the Bank of England has said, as it raised interest rates to tackle the worst bout of inflation for 40 years.

A majority of the Bank’s nine-member monetary policy committee (MPC) voted to increase the key base rate by 0.5 percentage points to 2.25% – its highest level since 2008 – judging that the risks of inflationary pressures becoming entrenched outweighed the short-term dangers to the economy.

With soaring energy bills and the rising cost of a weekly shop forcing households to rein in their spending, Threadneedle Street said the economy was heading for a second consecutive quarter of falling output.

After a 0.1% drop in gross domestic product in the three months to June as the economy slumped into reverse, the Bank said a further 0.1% decline could now be expected in the third quarter amid a slump in consumer spending and weaker activity for manufacturing and construction.

It said the fall also reflected a smaller-than-expected bounce back from the additional bank holiday for the Queen’s platinum jubilee, as well as the impact from businesses closing their doors in a mark of respect for the state funeral this week.

Three members of the MPC voted for an increase of 0.75 percentage points, five backed a half-point rise and one pushed for a more limited quarter-point move.

More here:

Newsnight’s Ben Chu shows how high interest rates are expected to rise by next summer:

Resolution Foundation’s Torsten Bell argues that we shouldn’t go overboard with the recession forecast:

The two-day Bank holiday for the Jubilee helped to knock GDP down by 0.6% in June, leading to a small (-0.1%) contraction in Q2 overall.

The disappointment is that July didn’t see much recovery – with GDP only rising 0.2%.

Kwarteng: Bank has my full support to fight inflation

Chancellor Kwasi Kwarteng has told Bank of England governor Andrew Bailey that the government remains fully committed to the central bank’s independence.

Bailey has written to Kwarteng explaining why inflation was (far) over the Bank’s 2% target in August (at 9.9%), as he must do under the remit of the MPC.

He pinned the blame primarily on large increases in global energy prices and other tradable goods prices, along with price rises by companies and the UK’s tight jobs market.

In reply, Kwarteng told Bailey that he is backing the Bank:

As we discussed during our meeting on my first day as Chancellor, you have my full support in your critical mission to get inflation under control.

The government’s commitment to the 2% CPI inflation target, and the independence of the Bank remains absolute.

It is essential to businesses and households across the country that inflation is brought back to target, and I know and expect that the MPC will continue to take the forceful action necessary to achieve this and to ensure inflation expectations remain firmly anchored.

Kwarteng added that he is “focused unashamedly on growing the economy, which will build stronger capacity to alleviate inflationary pressure”.

Updated

Sterling hasn’t received much of a boost from today’s interest rate rise.

It’s currently trading just above $1.132, around half a cent higher than the 37-year low hit last night.

Rates expected to double by next summer

The money markets are anticipating that UK Bank Rate will rise to nearly 5% by next summer, as the Bank of England continues to fight inflation.

Such further, rapid tightening would hit economy activity, as Ian Stewart, chief economist at Deloitte, explains:

“Hiking rates when the economy is heading into recession and inflation close to a peak testifies to the Bank’s concern that inflation has become embedded in the system.

“The Bank is unlikely to stop raising rates until price pressures and labour shortages have eased significantly.

“We expect rates to double by the middle of next year, causing a significant tightening of credit conditions, and adding to the downward momentum in the economy.”

Today’s half-point hike means the Bank of England has now increased UK interest rates by 200 basis points so far this year.

Bank Rate began 2022 at 0.25%, but soaring inflation has prompted the Bank to raise rates at every meeting this year.

The Bank of England’s job was made even harder by tomorrow’s’ mini-budget, which is likely to include various tax cuts as the government tries to stimulate growth.

David Goebel, associate director of investment strategy at wealth manager Evelyn Partners, says this has created additional uncertainty for the MPC, as it waits for clarity over Kwasi Kwarteng’s plans.

‘As well as inflation at its highest for a generation and faltering expectations for economic growth, the Bank has a new political administration to consider. Liz Truss’ government is set to be very expansionary in fiscal terms, in an attempt to boost growth, with a few specifics of its economic policy revealed at Chancellor Kwasi Kwarteng’s “fiscal event” tomorrow.

While the Bank’s primary mandate is to maintain price stability – i.e. control inflation - without a full view of policy direction it makes decision making difficult given the potential impact on consumer finances and spending.

Updated

The rate rise will increase the pressure on families, points out TUC head of economics Kate Bell:

The government must respond in the mini budget with action to get pay rising faster and to protect jobs from a recession that we may already be in.

“The Chancellor can’t do that with bungs to bankers and big business. He must get pay growing by increasing the minimum wage and giving public service staff a proper pay rise that keeps up with prices. And ministers should give all working people the rights they need to bargain for higher pay across the economy.”

Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer, has said today’s interest rate rise shows the government has “lost control of the economy”.

Updated

The Bank has pledged to act ‘forcefully’ to tame inflation – a signal that further interest rate increases are coming, even though it believes the UK is in recession.

The Monetary Policy Committee insists that “Policy is not on a pre-set path”, as it tries to get inflation down to its 2% target, from 9.9% at present.

Even though a narrow majority of the committee resisted hiking rates by three-quarters of a percent, the MPC says it will be forceful:

The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting.

The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.

Updated

The Bank of England will assess the impact of tomorrow’s mini-budget in time for its next interest rate decision in November (when it will publish new forecasts).

The MPC says:

All members also agreed that the forthcoming Growth Plan would provide further fiscal support and was likely to contain news that was material for the economic outlook.

In the November MPC round, the Committee would make a full assessment of the impact on demand and inflation from all these announcements, along with other news, and determine further implications for monetary policy.

Energy bill freeze will 'add to inflationary pressures'

The Bank of England has also warned that the government’s energy price freeze will push up inflation in the medium-term.

With energy bills rising less sharply, households will have more money to spend on other goods and services (although some people are already having to skip meals due to rising bills)

The Monetary Policy Committee says:

While the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period.

All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.

That’s a signal that monetary policy may need to be tightened more aggressively in future – meaning higher interest rates for longer.

Bank of England: UK already in recession

The UK is already in recession, the Bank of England fears, partly due to the bank holiday to mark the Queen’s funeral.

Bank staff have downgraded their growth forecasts, and now predict GDP will shrink by 0.1% in the third quarter of the year.

That would follow the 0.1% drop recorded in April-June – making it the second quarterly contraction in a row.

A month ago, the Bank had predicted the economy would grow by 0.4% in July-September.

But weaker-than-expected growth of just 0.2% in July, and Monday’s bank holiday for the state funeral, have led it to slash its forecasts.

The minutes of this week’s meeting say:

Bank staff now expected GDP to fall by 0.1% in Q3, below the August Report projection of 0.4% growth, and a second successive quarterly decline.

That fall would also, in part, reflect the smaller-than-expected bounce back in growth following the bank holiday in Q2 and the expected impact from the additional bank holiday in September for the Queen’s state funeral.

Updated

Bank sees inflation peaking lower thanks to energy bill freeze

The Bank has lowered its forecast for inflation, due to the energy price freeze.

They now predict that CPI inflation is likely to peak in October at just under 11% – lower than the peak of 13% forecast last month, before the two-year cap on bills was announced.

The minutes of the meeting warn, though,t hat we could suffer double-digit inflation for months:

Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back.

The Bank has also decided to start unwinding its stock of UK government bonds, built up through its quantitative easing programme following the financial crisis, and then the pandemic.

It will reduce the stock of purchased UK government bonds by £80bn over the next twelve months, to a total of £758bn.

This is “in line with the strategy set out in the minutes of the August MPC meeting”, it says.

It means the Bank will be reducing its holdings, just as the UK government looks to borrow more, to fund energy price caps and likely tax cuts.

Bank of England split 5-3-1 over rate rise

The Bank of England’s monetary policy committee was split, badly, over today’s interest rate decsion.

Five members – governor Andrew Bailey, deputy governors Ben Broadbent and Jon Cunliffe, chief economist Huw Pill, and external member Silvana Tenreyro – voted to lift rates by half a percent, to 2.25%

Three – external members Jonathan Haskel and Catherine Mann, plus deputy governor Dave Ramsden – pushed for a larger, 75 basis point hike (which would have been the biggest since 1989).

And the MPC’s newest member, Swati Dhingra, voted to only raise rates by 0.25%.

This lack of unanimity is not a good look for the Bank.

Updated

Bank of England raises UK interest rates... to 14-year high of 2.25%

Newsflash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.

That’s the seventh consecutive increase in Bank Rate in a row, but a smaller rise than many City investors had expected.

Today’s rate rise -- the second 50bp increase in a row - shows that the Bank is trying to prevent inflation becoming persistently embedded, despite concerns over the economy.

The decision by the Bank’s monetary policy committee takes rates to the highest level since 2008.

Updated

The UK government’s energy bill freeze might encourage the Bank of England to resist raising rates by as much as three-quarters of a percent.

The average domestic energy bill is being frozen at £2,500 a year until 2024, superseding Ofgem’s price cap that was supposed to rise to £3,549 on 1 October, and then again in January.

That means CPI inflation should peak lower and sooner than previously expected (but still leaves households paying much more for energy than a year ago).

RBC Capital Markets explains:

That should, in turn, weaken the argument that the MPC to act to quicken the pace of tightening in coming months to control inflation expectations in the face of high and rising spot inflation while also affording the Committee a degree of space attach more weight to the outlook for activity in their decision making.

We’ll find out in 15 minutes….

Ricardo Evangelista, senior analyst, ActivTrades, says it is “widely assumed” that the Bank of England will announce a rate hike of 75 basis points.

The BoE’s own predictions point to an incoming recession, while the government is having to borrow enormous amounts in order to mitigate the effects of a devastating rise in the country’s cost of living.

Looking ahead, despite the shift to a more hawkish stance by the central bank, the pound is likely to remain under pressure because of the country’s downgraded economic prospects.

Last month, the Bank raised interest rates by 50bp:

City braces for Bank of England rate decision

Tension is mounting in the City, as investors brace for the Bank of England’s interest rate announcement at noon.

We’re expecting a hefty increase in borrowing costs – at least another half-point, as the central bank tries to cool inflation despite fears the UK is heading towards recession.

Many traders predict the BoE could hike rates by three-quarters of a percent. That would take Bank rate to 2.5%, from 1.75% today, the highest since the start of the financial crisis.

That would be the biggest rate rise since 1989 – and with inflation at 9.9% in August, the Monetary Policy Committee may choose to tighten policy aggressively. Especially as the Federal Reserve raised its key interest rate by another 75bp last night, hitting the pound to 37-year lows today.

The decision has been delayed by a week due to Queen Elizabeth II’s funeral.

Updated

UK companies continued to be hit by rising costs last month, with many hiking their own prices in response to soaring bills.

Around 44% of firms saw the price of goods and services rise in August, compared with July, only slightly lower than the 46% in June.

A fifth of firms said they increased their own prices during August – and many expected to lift prices again next month.

The ONS says:

Of trading businesses, more than a quarter (29%) expect the prices of the goods or services they sell to increase in October 2022, broadly stable with September 2022, with energy prices (46%) the most commonly reported reason for considering doing so.

The price cap on electricity and gas for non-domestic customers announced yesterday could ease these pressures.

Germany’s finance minister has warned that inflation is threatening stability.

Reuters has the story:

The German government’s top priority is combatting high inflation, the finance minister said on Thursday during a parliamentary debate on legislation to offset inflation and boost consumers’ purchasing power.

“Inflation is a threat for wealth, social security and the stability of our country,” Christian Lindner told the Bundestag parliament.

German consumer price inflation soared to 7.9% in August, while factories and other producers raised their prices by 45% in the last year.

Over in parliament, Labour have warned that the government’s ‘fantasy economics’ is ‘threat to British businesses’

Jonathan Reynolds, the shadow business secretary, has tabled an urgent question on the energy package for non-domestic users announced yesterday.

He said the government had failed to say how much the energy support package would cost, adding:

This government says it can cut taxes, increase spending, increase borrowing and magically pay for that through higher growth that after 12 years in office has completely eluded them.

This is fantasy economics and is a threat to British businesses and the financial stability of this country.

Business secretary Jacob Rees-Mogg also felt the disapproval of Sir Lindsay Hoyle, the speaker, for not announcing the package to parliament yesterday.

Rees-Mogg also said the government must work with energy intensive industries to help them become more efficient.

Andrew Sparrow’s Politics Live blog has all the details:

Railway cleaners are to go on strike in a dispute over pay, as the wave of industrial unrest sweeping the UK continues.

Members of the Rail, Maritime and Transport union (RMT) employed by contractors to clean Avanti West Coast trains will walk out for 24 hours on Friday.

Atalian Servest runs the contract, paying cleaners £9.90 an hour and no company sick pay, said the RMT.

RMT general secretary Mick Lynch said:

“Cleaners have rightly been hailed as heroes and key workers during the Covid pandemic.

“Yet our members are languishing on poverty wages while the company they work for rakes in the revenues for shareholders.

Royal Mail shares have hit a two-year low this morning after the company reported it still hadn’t reached an agreement with the CWU, and wants to take the dispute to ACAS

They’ve dropped 3% to 207p, the weakest since September 2020, extending their recent losses.

The shares are sharply down on their pandemic highs (they hit almost £6 in June 2021, during the boom in home deliveries).

Royal Mail’s share price since privatisation
Royal Mail’s share price since privatisation Photograph: Refinitiv

Victoria Scholar, head of investment at Interactive Investor, says Royal Mail’s stock is under pressure as the industrial action looks set to drag on.

That will creating disruption for the company, its employees, investors and customers, she points out:

Postal workers have been staging walkouts to demand greater pay increases from Royal Mail during a period when living standards are under pressure from the cost-of-living crisis.

After its latest financial results released in May, shares in Royal Mail sank after it reported a 8.8% slump in pre-tax profit to £662 million for the year ended 27th March while revenue recorded flat growth to £12.71 billion. The stock has had a torrid time this year, shedding more than 60% year-to-date.

CWU: This is an all-out attack

The Communications Workers Union have accused Royal Mail of an ‘all out attack’ on the union, after it proposed ending some agreements with workers:

The CWU also urges members to take part in upcoming strike action – which is scheduled for 30 September and 1 October.

An earlier strike scheduled for 9th September was cancelled following the death of Queen Elizabeth II.

Updated

Royal Mail wants to end historic agreements with staff, and head to ACAS

Royal Mail has announced it wants to tear up up some of its existing workplace agreements and policies, as the industrial dispute at the postal operator continues.

In a statement to the stock market, Royal Mail says it hasn’t reached agreement with the Communication Workers Union (CWU), after five months of talks over pay and conditions.

Royal Mail says it is now taking two steps to ‘break the impasse’, arguing that it needs to move fast to stem losses of £1m per day.

It has told CWU that it “wants to modernise the ways of working with them”, by reviewing or ending various agreements and policies.

It says:

As part of this, Royal Mail will review or serve notice on a number of historic agreements and policies which are currently being used by the CWU to frustrate transformation, and intends to move to a more modern industrial relations framework designed to make the business more agile, and able to compete more effectively.

The company says that ending these ‘historic agreements and policies’ will let it speed up decisions about overtime and leave, test technology more quickly, address ‘persistent short-term absense” and cut costs.

Royal Mail has also proposed that talks with the union should be taken to Acas (the Advisory, Conciliation and Arbitration Service), in the hope of ending the current industrial action.

When Royal Mail was privatised nine years ago, it agreed an “Agenda for Growth” which included key protections for staff.

That includes not taking on new staff on inferior terms to existing staff, no zero hours contracts, avoiding compulsary redundancies and temporary contracts, and not outsourcing parts of the business.

Last month, 115,000 Royal Mail workers went on strike in the year’s biggest industrial action so far.

Royal Mail workers have been offered a 2% pay rise, backdated to April, and further benefits equivalent to a 3.5% increase if they agree to changes in working practices to support the growth of its parcels business, according to the company.

Staff argue they should receive a pay increase in line with inflation with no strings attached.

Updated

Japan intervenes to prop up the yen

Japan intervened in the currency market on Thursday for the first time since 1998 to shore up the battered yen.

Tokyo acted after Japan’s central bank left interest rates at ultra-low levels (see earlier post).

Vice finance minister for international affairs Masato Kanda told reporters,

“We have taken decisive action (in the exchange market),”

This has revived the yen - it’s now nearly 2% higher against the dollar, after dropping 1% lower to a 24-year low.

Updated

The pound is clawing its way back from this morning’s 37-year low, now back above $1.13 (still a very weak level).

FT: Somerset Capital for sale in potential windfall for Jacob Rees-Mogg

Business Secretary Jacob Rees-Mogg at the funeral service of Queen Elizabeth II at Westminster Abbey on Monday.
Business Secretary Jacob Rees-Mogg at the funeral service of Queen Elizabeth II at Westminster Abbey on Monday. Photograph: Geoff Pugh/AP

Business secretary Jacob Rees-Mogg could be in line for a windfall as Somerset Capital, the boutique fund manager he co-founded, explores a possible sale.

According to the Financial Times, which got the story, Rees-Mogg’s stake in Somerset is in the low to mid teens – he resigned from an advisory role at Somerset in 2019 when he joined the cabinet.

The FT says:

Three people familiar with the situation said talks to sell the firm, which manages about $5bn, were being held as chief executive Dominic Johnson prepares to step down ahead of a potential move into politics.

Johnson, a former Conservative party vice-chair who co-founded Somerset with Rees-Mogg 15 years ago, will be replaced by current chief operating officer Robert Diggle, according to two people familiar with the matter.

Several options are on the table, including a management buyout or a merger with another asset manager, these people said.

It’s not clear how much Rees-Mogg’s stake would be worth today.

Back in 2019, Somerset was valued at up to £100m during negotiations to sell the company (meaning the now business secretary could have received £15m), but those talks collapsed.

The current deal is being negotiated at a fraction of the price Somerset was valued at three years ago, the FT says. More here.

Norway’s central bank has joined the rate-hikers.

The Norges Bank has lifted its benchmark interest rate by 50 basis points, to 2.25%, and signalled that the policy rate will probably be raised further in November.

The Norges Bank’s Monetary Policy and Financial Stability Committee said they were acting to bring down rapidly-rising inflation.

Many will be facing a squeeze on finances given the rapid rise in prices at the same time as the policy rate is being raised.

But a faster rate rise now reduces the risk of inflation becoming entrenched at a high level and thereby the need for a sharper tightening of monetary policy further out.

Global bond markets are flashing warning signs that a recession is looming.

Typically, investors would get a rather higher rate of return for holding longer-dated government bonds than shorter-dated debt, to reflect the extra risk they’re taking on (a country could default, say, or deliberately inflate away its debt).

But this year, the gap between the yields (or interest rates) on shorter and longer-dated debt has narrowed significantly.

Yesterday, for example, you got a higher rate for holding 5-year German debt than 30-year bunds.

That reflects concerns that central bankers will hurt long-term growth as they try to bring down inflation.

Alfonso Peccatiello, a former investment manager who now publishes The Macro Compass newsletter, shows here how yield curves have been squashed:

UK bond yields at new highs

Britain’s short-term borrowing costs have hit their highest level since autumn 2008.

The yield on two-year gilts has risen to 3.4%, amid a wider sell-off in government bonds as traders anticipate higher interest rates from hawkish central bankers.

[yields rise when prices fall, and show the rate of return for holding the debt].

The Bahnhofstrasse street in Zurich
The Bahnhofstrasse street in Zurich Photograph: Arnd Wiegmann/Reuters

Switzerland’s central bank has just ended its era of negative interest rates

The Swiss National Bank has lifted its key interest rate by 75 basis points, from -0.25% to 0.5%, bringing rates back into positive territory for the first time in eight years.

The SNB says is it tightening monetary policy to counter the renewed rise in inflationary pressure, and the spread of inflation to goods and services, adding that further increases can’t be ruled out.

Global growth has slowed considerably in recent months, it adds, notable in Europe:

In particular, the energy situation in Europe, the loss of purchasing power due to inflation, and tighter financing conditions are having a dampening effect. Inflation will remain elevated for the time being.

Updated

Key event

The foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea.
The foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea. Photograph: Ahn Young-joon/AP

Stock markets have opened sharply lower across Europe, following losses in Asia, after last night’s hawkish interest rate hike by the US Federal Reserve rattled Wall Street.

In London, the FTSE 100 index has dropped 1%, or 71 points, to a three-week low of 7168 points.

Almost every share on the blue-chip index is lower, with investment companies, property firms and hotel groups among the fallers.

Germany’s DAX and France’s CAC have both tumbled around 1.7%.

Fed chair Powell’s warning that there wasn’t a painless way to bring down inflation has heightened anxiety that the US will see weaker growth and higher unemployment, hurting the global economy too.

Carl Riccadonna, US Chief Economist at BNP Paribas Markets 360, says:

The Fed announced a unanimous 75bp hike, coupled with a more hawkish dot plot and Jackson Hole-like press conference in which Chair Powell reiterated the central bank’s commitment to restoring price stability.

Powell specifically stated: “Without price stability, the economy does not work for anyone.”

He concluded by adamantly assuring that regardless of the exact trajectory of interest rates, the Fed is determined to do “enough to restore price stability.”

South Korea’s KOSPI has dropped 1%, while Australia’s S&P/ASX 200 has lost 1.5%.

Fears of a European recession are hitting the euro again, as it weakens further against the Swiss franc:

The Bank of Japan has defied the push towards higher interest rates, though.

The BoJ kept rates at ultra-low levels today, and pledged to hold them there to support economic growth – hours after the Federal Reserve delivered its third straight 75bpp hike and signalled more were coming.

This rare dovishness sent the yen reeling to a fresh 24-year low – adding to the challenge of supporting Japan’s fragile economy without accelerating the decline in the yen which makes imports pricier.

Japan’s core consumer inflation rate rose to an eight-year high in August, but at 2.8% its still much lower than the US, UK or eurozone.

UK households face £3bn hit if Bank goes ahead with 0.75-points rate rise

The Bank of England would hit millions of households more than £3bn in extra mortgage costs if it raises interest rates by 75 basis points (three-quarters of a percent) today.

Analysts say the biggest rate hike for more than three decades – which could come at noon - would mean an extra £3.1bn of interest payments for borrowers on standard variable rate and tracker mortgages.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said:

“For anyone who is already struggling with runaway price rises, the extra cost of the mortgage could be the final straw.”

The investment firm said three-quarters of mortgage holders are on fixed rates, meaning they would not see an immediate impact, but that more than 2 million borrowers are on standard variable rates or trackers.

For the average UK property, with a 75% loan-to-value-mortgage, an increase of 0.75 percentage points would mean a £78 jump in monthly interest payments, according to estimates by TotallyMoney.

Fixed-rate deals are due to expire for as many as 3.2 million borrowers within the next two years.

Here’s the full story:

Mini-Budget risks setting UK on ‘unsustainable path’

Concerns that chancellor Kwasi Kwargeng could put the UK public finances on an “unsustainable path” in his mini-Budget on Friday won’t help the pound either.

Last night, the respected Institute for Fiscal Studies warned that the government’s planned sweeping tax cuts, at a time of weak economic growth, could leave a £60bn per year hole in the public finances.

The IFS, in a joint report with Citi, fears that Liz Truss’s government is “choosing to ramp up borrowing just as it becomes more expensive to do so, in a gamble on growth that may not pay off.”

My colleague Phillip Inman explains:

Fuelling concerns that the UK’s precarious financial position will spark a run on the pound, the chancellor, Kwasi Kwarteng, is expected to reverse an increase in national insurance payments and cut corporation tax at a cost to the Treasury of £30bn.

Kwarteng, who will announce a review of his fiscal rules to allow the government to borrow more, is also expected to give away billions of pounds by cutting stamp duty on house purchases and confirm a multibillion-pound rise in the defence budget to support the war in Ukraine and boost growth

These measures will be in addition to a freeze on energy prices for consumers and businesses that could cost more than £150bn over two years.

The IFS report said:

“Recent rapid increases in the cost of debt interest highlight the risks of substantially and permanently increasing borrowing and putting debt on an ever-increasing path.”

“There is no miracle cure, and setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best.”

Introduction: Pound at 37-year low against dollar as Bank of England decision looms

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

A plethora of problems have sent sterling sliding to a new 37-year low against the US dollar, ahead of a crunch Bank of England interest rate decision.

The pound has dropped to $1.123 this morning, the lowest since 1985, extending its recent slump – it’s now down almost 17% so far this year.

The pound vs the US dollar over the last 20 years
The pound vs the US dollar over the last 20 years Photograph: Refinitiv

It lost more ground against the rampant dollar after America’s Federal Reserve delivered its third hefty interest rate rise in a row last night, lifting rates by another 75 basis points (three-quarters of a percent).

Anxiety about Vladimir Putin’s threat of nuclear retaliation against the West are hitting the markets.

UK assets are also being weighed down by concerns over Liz Truss’s push for unfunded tax cuts and spending pledges such as yesterday’s energy price cap for non-domestic users, which will add to borrowing.

Yesterday’s August public finances, showing the UK borrowed almost twice as much as expected, has added to the pressure.

Fed chair Jerome Powell rattled investors last night by insisting, again, that his central bank would keep tightening rates to push down inflation, and wouldn’t rule out a recession.

Powell warned:

We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging.

And we don’t know. No one knows whether this process will lead to a recession or if so, how significant that recession would be.”

This drove investors into the dollar, which has hit two-decade highs against the euro and the yen this morning too.

But will the Bank of England deliver a hawkish rate hike too?

The money markets say there’s roughly an 90% chance that the BoE will raise Bank Rate by 75 basis points at noon today, to 2.5%, as it tried to tame inflation.

That would be its biggest raise increase since 1989, and take borrowing costs to their highest levels since late 2008.

But some economists think the Bank might ‘only’ raise rates by another half a percent, repeating last month’s move (which was the biggest rise since 1995).

Policymakers may want to see the impact of the government’s energy bill freeze, which is likely to prevent inflation soaring as much as feared in the short term – while also adding to price pressure further ahead.

The Bank could also announce the start of ‘quantitative tightening’, cutting back its holding of UK government debt bought during the financial crisis, and the pandemic.

Kallum Pickering, senior economist at Berenberg, suggests this might lead the Bank towards a half-point rate rise:

While 75bp is far from inconceivable, 50bp remains more likely, in our view. Remember, in addition to raising rates, the BoE looks set to announce the start of active selling gilts as part of its quantitative tightening policy.

As financial conditions are already tightening as benchmark rates edge ever higher, we believe the BoE will wait to see the impact of active QT before deciding on whether to steepen the trajectory of rate hikes.

A smaller hike could further weaken the pound. And either way, higher borrowing costs will add to the burden on consumers amid the cost of living squeeze.

It’s a busy day for monetary policy. Switzerland and Norway’s central banks are both setting interest rate today – with the Swiss National Bank expected to raise rates by 75bp, out of negative territory.

The agenda

  • 8.30am BST: Swiss National Bank interest rate decision

  • 9am BST: Norway’s Norges Bank interest rate decision

  • 9.30am BST: ONS’s economic activity and business insights data on UK economy

  • 12pm BST: Bank of England interest rate decision

  • 1.30pm BST: US weekly jobless claims

  • 2.15pm BST: Treasury Committee to scrutinise yesterday’s energy price cap announcement and look ahead to mini-budget

  • 3pm BST: Eurozone consumer confidence flash estimate for September

Updated

Sign up to read this article
Read news from 100’s of titles, curated specifically for you.
Already a member? Sign in here
Related Stories
Top stories on inkl right now
One subscription that gives you access to news from hundreds of sites
Already a member? Sign in here
Our Picks
Cher 'shocked' to find out real birth name
Cher was stunned when she obtained a copy of her birth certificate and realised her name had been incorrectly registered as Cheryl.
BANG Premier
BANG Premier
Kanye West sued for assault
Former 'America's Next Top Model' finalist Jenn An is suing Kanye West for allegedly assaulting her in 2010.
BANG Premier
BANG Premier
He'll be the last meatpacker in the Meatpacking District. Here's how NYC's gritty 'hood got chic
The last meatpackers in New York's Meatpacking District have agreed to end their leases early and make way for development on their city-owned lot
The Independent UK
The Independent UK
I tried the viral microwave makeup sponge cleaning hack and won't be doing it again – here's what works better instead
The method was inefficient, potentially dangerous, and my sponge looked the same as before
Homes & Gardens
Homes & Gardens
Rufus Wainwright: ‘I had a great party trick, but it once blew up in my face’
The singer-songwriter on his most memorable fan, his love of Chappell Roan, and his close friend and nemesis Jake Shears
The Guardian - AU
The Guardian - AU
Will there be an Arcane season 3? Here's what the creators have said about what's coming next
A look ahead to League of Legends' on-screen future
Total Film
Total Film
Fourteen days free
Download the app
One app. One membership.
100+ trusted global sources.
Download on the AppStore Get it on Google Play