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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Public sector pay rises unlikely to drive up inflation, says Bank of England after interest rate cut – as it happened

United States United Kingdom Bank of England Nationwide Jeremy Leaf Interest Rates Inflation Monetary Policy MPC The Bank of England
The Bank of England in London.
The Bank of England in London. Photograph: John Walton/PA

Shares in low-cost airline Wizz Air have slumped by 22% today, the biggest drop in the FTSE 250 today, after it reported sharply reduced profits for the last quarter.

The carrier has been one of the worst affected by the Pratt & Whitney engine issues in Airbus planes, which have forced it to ground more than a fifth of its fleet on average over the three months to June.

Operating profits were down to €44.6m, compared to €79.9m in the same period in 2023.

With lower growth and almost €40m in leasing costs to cover the grounding – albeit partly offset by compensation from the manufacturers – Wizz lowered its full year forecast profits by almost €200m, to €350-400m.

While the Budapest headquartered carrier has slightly stalled in its ambition to challenge Ryanair’s crown as Europe’s biggest budget airline, chief executive, József Váradi, said that performance had improved despite the problems, adding: “We remain on track to return to annual capacity growth [next year], underpinned by the pipeline of Airbus deliveries.”

Closing summary

Time for a recap….

The Bank of England has cut interest rates for the first time since the start of the Covid pandemic.

The Bank’s monetary policy committee (MPC) voted by a narrow majority to cut its base rate by a quarter of a percentage point to 5%, down from a 16-year high of 5.25%.

The MPC was split by five votes to four, with the governor, Andrew Bailey, casting the deciding vote for the first reduction in borrowing costs since March 2020.

With headline inflation holding at the Bank’s 2% target for a second consecutive month in June, financial markets had expected a cut in rates, although City economists had predicted it would be a close call amid fears over stubbornly high inflation becoming entrenched. The pound fell against the US dollar and euro.

The Bank also lifted its forecast for UK growth this year, saying the economy had been stronger than expected in 2024.

Bailey said inflationary pressures had “eased enough” to enable the first reduction in borrowing costs since the Bank stopped ramping up interest rates this time last year – the joint longest period that rates have been held after a hiking cycle since the turn of the millennium.

But he also insisted the Bank must be careful not to cut interest rates “too quickly or by too much.”

Bailey also told reporters that the government’s new public sector pay deal will have almost no impact on inflation.

Former prime minister Rishi Sunak, and ex-chancellor Jeremy Hunt, had both claimed that these pay deal would threaten future rate cuts.

City economists predict the Bank will cut rates by another quarter of one percent by the end of this year, with November seen as a likely date for the next cut.

Here’s the full story:

And here’s the rest of today’s business news:

What today's rate cut means for you

Today’s interest rate cut won’t have any immediate impact on mortgage-holders on a fixed rate deal – although those whose deals are coming up for renewal may benefit.

Otherwise, those on a tracker mortgage or a lender’s standard variable rate (SVRs) should see their interest rates fall.

Today’s reduction is likely to be passed on to many savers who have easy-access accounts and others who do not have guaranteed interest rates.

The Bank of England’s interest rate cut hasn’t brought much cheer to the City today.

The FTSE 100 index of blue-chip shares has sunk by 1% today, and just closed 85 points lower today at 8283 points.

Banks were among the big fallers, with NatWest tumbling 8%, HSBC down 6.5% and Lloyds losing 5.75%.

Here’s a video clip of BoE governor Andrew Bailey explaining today’s interest rate cut:

Here are BNP Paribas’s thoughts on today’s interest rate cut:

  • Thursday’s decision to cut Bank Rate by 25bp to 5.0% was followed by a relatively hawkish Bank of England press conference. This suggests to us that the MPC members for whom the decision was a close call may prefer a relatively gradual pace of monetary policy easing from here.

  • We are a little more optimistic than the BoE on services inflation over the coming months, and so we continue to hold our view that it will cut again in September. However, we see risks skewed towards a delay until November.

  • The BoE did not explicitly push back on market pricing, however, a medium-term inflation forecast that undershoots the 2.0% inflation target is to us an implicit sign that the BoE may see the neutral rate as a little lower than markets think.

S&P Global Market Intelligence fears that today’s rate cut could be a “risky decision”.

The danger is that the fundamentals of inflation and wages may not yet be in place to deliver medium-term price stability.

Raj Badiani, economics director for Europe at S&P Global Market Intelligence, explains:

The BoE could be open to some reputational damage if today’s decision was premature and results in a damaging start-stop monetary loosening cycle.

Nevertheless, today’s rate cut decision is good news for both the UK’s budding economic recovery and the new Labour government’s pledge to deliver stronger UK growth amid limited fiscal options.

The decision will be welcomed by millions of cash-strapped households who hope today’s rate cut is the start of the final chapter of the cost-of-living crisis.”

Peder Beck-Friis, economist at bond-trading giant PIMCO, predicts the Bank of England will proceed cautiously – and probably won’t cut interest rates at its meeting next month:

We think another cut in September is unlikely, unless incoming inflation and labour market prints surprise to the downside, and expect the next cut in November as a baseline.

Further out, however, we see room for the BOE to cut more than financial markets expect — as tight fiscal policy, a cooling labour market, and a likely low neutral rate should allow more rapid cuts next year and beyond.

Updated

UK mortgage-holders should benefit from today’s interest rate cut.

Homeowners on tracker mortgage rates will see their annual payments cut by more than £340 on average as a result of the base rate reduction from 5.25% to 5%, PA Media reports.

According to industry body UK Finance, based on outstanding mortgage balances, the average tracker mortgage borrower will see their monthly payments cut by £28.44.

Someone on a standard variable rate (SVR) mortgage meanwhile will see their monthly payments fall by £14.50, assuming their lender passes on the rate cut in full. SVRs are set by lenders individually.

Huw Pill reappointed to the Monetary Policy Committee

Huw Pill has some consolation after being outvoted at this month’s MPC meeting – he’s just been reappointed to the Monetary Policy Committee (MPC).

Pill’s initial three-year term was due to expire in September, and the BoE’s chief economist has now been given the green light to say on the MPC for another three years.

The decision was taken by governor Andrew Bailey, after consultation with the chancellor.

The Bank explains:

Reappointments are not automatic and each case is considered on its own merits.

Huw Pill was reappointed to the MPC following consideration by the Chancellor of a number of factors, including the diversity of the current committee and its balance of skills and experience.

Pill’s time on the MPC has not been without incident. He was criticised last April after saying that British households and businesses “need to accept” they are poorer and stop seeking pay increases and pushing prices higher.

It’s not unusual for the Bank’s chief economist to disagree with other officials, though. Pill’s predecessor, the ever-quotable Andy Haldane, was outvoted in 2021 when he tried to cut the Bank’s money-printing programme.

When will Bank cut again? November looks likely....

The financial markets have been digesting the Bank of England’s decision today, and are pricing in at least one more interest rate cut by the end of this year.

Tomasz Wieladek, chief European economist at T. Rowe Price, predicts the Bank will cut rates again in November, adding:

What happens after this will depend on the path of fiscal policy, but given the timing of the budget on 30 October, the fiscal policy path will only be updated in the February 2025 projection.

We flagged earlier that BoE Governor Andrew Bailey cautioned against cutting rates “too quickly or by too much”.

ING developed markets economist, James Smith, reckons the Bank will cut faster than the committee is currently prepared to admit.

“We suspect the data on services inflation and wage growth will improve as the year goes on, making the committee more comfortable with proceeding with at least one more cut this year.

We suspect that will most likely come in November, and we think that will most likely be followed by another in December. A September rate cut is entirely plausible though, if the services inflation data starts meaningfully surprising to the downside.

We think Bank Rate could reach the 3-3.5% area by next summer.”

Ruth Gregory, deputy chief UK economist at Capital Economics, says the Bank isn’t in a rush to cut again:

The Bank of England kick-started a loosening cycle today by cutting interest rates from 5.25% to 5.00%, but the accompanying guidance and forecasts suggest it will proceed cautiously.

Accordingly, we suspect the Bank will keep rates on hold in September before proceeding with the next 25 basis point (bp) cut in November. And the risks to our forecast are tilted towards cuts being a bit slower and smaller than we currently expect.

Updated

Here’s another chart showing the upward revision to the Bank’s growth forecasts:

Bank more than doubles 2024 growth forecast

As well as cutting UK interest rates today, the Bank of England has also upgraded its growth forecasts.

The Bank says UK GDP growth picked up quite sharply around the turn of the year and has been stronger than it expected back in May.

It points out that UK GDP increased by 0.7% in the first quarter of 2024 and is now expected to have risen by 0.7% in the second quarter of the year, up from forecasts of 0.4% (for Q1) and 0.2% (for Q2).

The BoE now thinks Britain’s economy will expand by around 1.25% this year, revised up from its previous forecast of 0.5%.

Updated

Bailey unconcerned by early fall in sterling

The Bank’s press conference ends with a zinger:

Q: Are you concerned by the move in sterling at 8am this morning?

As we flagged this morning, the pound weakened on the foreign exchanges even before the Bank’s decision was announced at noon.

Andrew Bailey says a lot has been happening in the financial markets – citing the latest interest rate decisions yesterday by the Federal Reserve and the Bank of Japan.

He points out that the odds of a rate cut had shifted from 50% last week to around 60% this morning.

The governor explains:

I don’t think there’s any particular story behind that.

Markets will form their own views, and as I say there’s a lot going on in the rest of the world, so I wouldn’t put anything more in it than that.

The Bank took its decision last night, remember, and the vote should have been kept secret until noon today.

This chart shows how the pound weakened this morning….

Updated

Q: Is the Bank of England shocked by the £20bn black hole in the public finances uncovered by its former employee, Rachel Reeves, and what are the ramification?

Governor Andrew Bailey tries to argue that the Bank leaves fiscal matters to the government.

He reiterates his earlier point that the Bank focuses more on private sector pay growth, not public sector wages – and that ‘back of the envelope’ calculations show little impact on inflation from public sector pay rises.

Asked about Middle East tensions, Andrew Bailey says the Bank of England must be “very vigilant” about whether they will lead to higher inflation pressures.

Q: You say you don’t want to cut interest rates too much or too quickly – can you define that, or is it just ‘vibes’?

Bailey won’t give a definitive answer – saying only that there are a number of potential paths for inflation; each MPC member will “recalibrate” their view, as evidence comes in.

Q: Are UK interest rates heading back to the near-0% level we saw before the recent surge in inflation?

Andrew Bailey says it’s “unlikely” that we’ll return to the situation we saw from 2009, when borrowing costs hit record lows.

That’s because those very low interest rates were due to major shocks – first the financial crisis, and later the Covid-19 pandemic.

Q: What measures should the government introduce in the budget to boost growth?

Andrew Bailey tries to swerve this curveball too, saying he agrees with both Rachel Reeves and her predecessor Jeremy Hunt that important things need to be done to improve the productivity of the UK economy.

Q: What impact would a Donald Trump presidency have on the UK economy?

Andrew Bailey says the Bank does not take a view on the US election.

We’ll see who wins and what their policies are.

Q: How much damage has been caused by the Bank’s refusal to cut interest rates sooner?

Deputy governor Dave Ramsden, who had voted for a rate cut in May and June, says all MPC members believe interest rates should remain at restrictive levels to keep squeezing the persistent portion of inflation.

Away from the Bank of England’s press conference, Rachel Reeves has pushed back against Conservative claims that she inherited a strong economy.

Asked whether the Tories’ decisions in office may have led to today’s rate cut, the Chancellor told broadcasters:

“Decisions around interest rates are of course decisions for the independent Bank of England, but I have been left with a £22 billion black hole in the public finances.

“I am determined to close that black hole so that we can fix the foundations of our economy.

“That will require tough decisions, but that is what we were elected to do.”

Q: What’s the Bank of England’s advice to people wondering whether to remortage now, or wait?

The Bank is “rather careful” not to give financial advice, governor Andrew Bailey replies.

He points out that mortgage rates are around 1 percentage point lower than this time last year, as the market has adjusted to forecasts of falling inflation.

Bailey says:

Inflation has come down more rapidly than all of us feared this time last year.

He points out that mortgage rates are priced off the ‘swaps curve’ – which reflects what financial markets think will happen to interest rates in future.

Q: What impact will April’s rise in the minimum wage have? Are businesses at the limit of what they can absorb?

Deputy governor Dave Ramsden says the Bank flagged this as a risk to inflation in its May report – when its economists estimated it would 0.3 percentage points to pay growth.

Ramsden says wage growth since has been in line with expectations.

Sunak: Labour's inflation-busting public sector pay rises could put further cuts at risk.

Rishi Sunak, leader of the opposition, has posted on X that he fears Labour’s “inflation-busting public sector pay rises” have put further interest rate cuts at risk [echoing Jeremy Hunt’s comment earlier].

Andrew Bailey is asked for an immediate response…. [reminder: he has already explained that these pay rises won’t have a big impact on inflation].

He tells reporters gathered at the Bank that the next step is the budget on 30 October, which will fully ‘fill in’ chancellor Rachel Reeves’s plans.

That will show how public sector pay rises will be funded, he explains.

[for example, increased borrowing would be stimulatory, while tax increases would not be].

Updated

Q: Are the markets getting ahead of themselves by predicting another rate cut by the end of this year?

Andrew Bailey refuses to comment on market expectations, which will disappoint borrowers hoping for further cuts in interest rates.

Q: When will UK interest rates stop being at painful levels?

Andrew Bailey doesn’t give a clear date.

He says the economy is coming out of last year’s shallow recession, but the current growth path appears to be below potential.

That means a small output gap is opening up, meaning monetary policy should remain at restrictive levels to suppress inflation.

Bailey says interest rates, at 5%, are still above the neutral rate (known as r* in economics) – this is the rate where borrowing costs are neither restrictive nor stimulative.

Bailey: Public sector pay rises will have little impact on inflation

Q: How do above-inflation public sector pay settlements adjust the balance [on future interest rates cuts?

[Reminder, former chancellor Jeremy Hunt claimed earlier that they will make further rate cuts harder]

Andrew Bailey says a Treasury representative attended this month’s monetary policy committee meeting where the interest rate cut was agreed; he has also spoken to the chancellor, Rachel Reeves, about it.

And he makes two points:

1) The Bank takes its lead on pay from the private sector, as that feeds directly into CPI inflation.

He says:

But public sector pay obviously has an effect on demand, and it can have a signalling effect.

On the whole, private sector pay tends to lead public sector pay, Bailey adds.

2) The Bank doesn’t have “the full story” yet, as we don’t know how the pay rises for NHS staff and teachers will be funded.

But, he suggests that a very simple, back-of-the-envelope calculation shows there won’t be a big impact on inflation.

He says:

The proverbial back-of-the-envelope suggests an increment in the inflation space that is very small. I mean, you’re in quite small second decimal place numbers.

Updated

Onto questions…..

Q: Is the door open for future rate cuts, or does today’s move mean the Bank of England is ‘one and done’?

Governor Andrew Bailey tells today’s press conference that the committee is “highly alert” to the risks of inflation persistence.

Bailey resists giving any firm guidance either way, saying:

We will go from meeting from meeting, as we always do. It’s this judgement about resilience.

He says the Bank has become more confident that inflation is falling sustainable to target, meaning it could cut rates.

He also points to the final paragraph from the minutes of this week’s meeting, which says:

Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further. The Committee continued to monitor closely the risks of inflation persistence and would decide the appropriate degree of monetary policy restrictiveness at each meeting.

The Bank’s latest economic forecasts suggest inflation will fall below its 2% target in the next two and three years, based on market expectations for interest rates.

On the market-implied path that rates fall to 3.5% over the next three years, the Bank expects CPI inflation to drop to 1.7% in two years, and 1.5% in three years.

Governor Andrew Bailey adds that there is still a question about whether the persistent component of inflation will drop to levels consistent with its 2% target.

He says the Bank will continue to pay close interest to services inflation (which was 5.7% in June).

But, he adds, the Bank shouldn’t change course in response to “every data surprise” that comes in…

Andrew Bailey adds that “we have truly come a long way” in returning inflation to target.

He shows a chart showing how inflation has fallen “significantly” from its peak over 11% in late 2022, to 2% in May and June.

Bailey cautiond that inflation is expected to rise later this year, perhaps to around 2.75%, before then reverting back to the 2% target again.

Bailey: Economy has been stronger in recent months

The Bank of England is holding a press conference now to explain today’s cut in interest rates.

Governor Andrew Bailey says it was a “finely balanced decision”, as inflation has been exactly on the Bank’s 2% target for two months in a row.

Inflation pressures in the economy have eased much as expected, Bailey adds.

“This is very welcome news,” he tells reporters in London (over the sound of one journalist’s mobile phone receiving a news alert).

Bailey adds that the UK economy has been stronger in recent months – that’s also very welcome, he explains, but also brings the risk of higher inflation if rates are cut too much or too quickly.

We need to make sure that inflation stays low.

We need to put the period of high inflation firmly behind us.

The UK’s Institute of Directors has welcomed today’s interest rate cut.

Anna Leach, chief economist of the IoD says it will provide relief to businesses – and households – hurt by the high cost of finance:

“Today’s 5-4 vote by the MPC for a rate cut will give some welcome relief to businesses and households squeezed by the high cost of finance.

Although key measures of domestic inflation persistence have not come down as much as the Bank would have liked, they are clearly content that sufficient progress has been made to warrant a slight reduction in rates.

“We’re not expecting much more by way of rate cuts this year. The IoD’s economic confidence measure has improved materially over the past 6 months and broader data on the economy points to momentum holding up despite the high level of interest rates. With wage growth and services inflation still high, and headline inflation expected to rise in the coming months, monetary policy is set to stay restrictive for a good while yet.”

Former chancellor Jeremy Hunt is keen to take some credit for today’s interest rate cut.

He has posted on X (formerly Twitter) that the previous government’s “difficult decisions” brought inflation down.

Hunt also claims that the recent “inflation-busting public sector pay rises” announced by the government will make it harder for the Bank to cut rates again in future.

However…. the drop in UK inflation is primarily driven by cheaper energy costs, and falling prices of imported goods.

And… many economists insist that public sector pay rises will not fuel inflation (after all, state schools and hospitals will not put their prices up….)

Bailey: We mustn't cut rates by too much

Bank governor Andrew Bailey – one of the five policymakers who voted to cut rates today – has said that inflationary pressures have “eased enough” to allow an easing of policy.

Bailey warns, though, that the Bank needs to make sure inflation stays low, and mustn’t cut rates too quickly or by too much.

Reeves: Mortgage rates still high

Chancellor of the Exchequer Rachel Reeves has welcomed the Bank’s decision to cut interest rate today.

But she also points out that mortgage rates are still much higher than two years ago, before the spike in borrowing costs after the previous government’s disastrous mini-budget.

Reeves says:

“While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget.

“That is why this Government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off.”

That fits with Labour’s strategy to remind voters about the economic legacy they have inherited, with tax rises expected in Reeves’ first budget this autumn.

Why some policymakers (including Bank's top economist) opposed rate cut

The four Bank of England policymakers who argued, in vain, not to cut interest rates today are worried that underlying domestic inflationary pressures appeared more entrenched.

That quarter includes the Bank’s chief economist, Huw Pill, along with three external members – Megan Greene, Jonathan Haskel and Catherine Mann.

The minutes of the meeting explain:

These members thought that there was a greater risk of more enduring structural shifts, such as a rise in the medium-term equilibrium rate of employment, a fall in potential growth and a rise in the long-run neutral interest rate, contributing to domestic inflationary persistence.

They preferred to maintain the current level of Bank Rate until there was stronger evidence that these upside pressures would not materialise.

Bank: Falling inflation should lead to lower pay rises

The Bank’s monetary policy committee took its eagerly-awaited decision to cut UK interest rates, after seeing inflation drop back to its 2% target in both May and June.

Today, it says it expects this fall in inflation to lead to lower pay rises, and to discourage firms from raising prices rapidly.

The minutes of this month’s meeting, say:

The Committee expects the fall in headline inflation, and normalisation in many indicators of inflation expectations, to continue to feed through to weaker pay and price-setting dynamics.

A margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further. Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy.

The MPC also points out that average wage growth fell to 5.6% in the three months to May, while services consumer price inflation declined to 5.7% in June.

BoE: policy must remain restrictive until inflation risks have dissipated

The Bank of England cautions that monetary policy will need to continue to “remain restrictive” for sufficiently long until the risks to inflation returning sustainably to its 2% target in the medium term have dissipated further.

In the minutes of this week’s meeting, it says:

The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.

Bank split 5-4 on rate cut

As suspected, today’s decision was a narrow one.

The Bank’s monetary policy committee has voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 5%.

The Bank says:

Five members (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli and Dave Ramsden) voted in favour of the proposition.

Four members (Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill) voted against the proposition, preferring to maintain Bank Rate at 5.25%.

BANK OF ENGLAND INTEREST RATE DECISION

Newsflash: The Bank of England has cut UK interest rates to 5%, from 5.25%, the first reduction in borrowing costs in over four years.

The BoE has decided to ease policy following the drop in inflation back to its 2% target in May and June this year.

This is the first time that the Bank has lowered interest rates since its emergency rate cut in March 2020.

It had raised rates from 0.1% in December 2021 to 5.25% in August 2023, where they had remained over the last year.

Today’s cut should ease some of the pressure on UK borrowers, if mortgage lenders pass this cut on.....

Details to follow...

Updated

Just time for one last look at the money markets – which suggest there’s a 63% chance of an interest rate cut in two minutes….

The MPC took its decision last night, but they’ll announce it on the dot of noon.

Although Goldman Sachs expects a UK interest rate cut at noon today, they also warn that the decision is a close call.

GS economist James Moberly predicted last week that BoE governor Andrew Bailey, deputy governors Sarah Breeden and Clare Lombardelli would join existing doves Swati Dhingra and Dave Ramsden, and vote for a cut today. That would give a 5-4 majority on the monetary policy committee.

Moberly wrote:

The totality of the data continues to show significant progress on curbing inflationary pressures, and we think that the updated projections will continue to show inflation slightly undershooting the target two to three years ahead even if the MPC lowers Bank Rate in line with the market-implied path.

We think that this will be enough for Bailey, Breeden, and Lombardelli to join Ramsden and Dhingra in voting for a cut, despite recent strength in services inflation.

That said, limited communication from these Committee members means that their votes are difficult to predict. Taken together with the cautious tone of Chief Economist Pill’s recent speech, which indicates that he is unlikely to support a cut, we therefore view the decision to lower Bank Rate as a close call and see a low bar for the MPC to delay the first cut until September.

Chief economist at PwC UK, Barret Kupelian, explains how an interest rate cut could help the UK economy:

“Economic theory states lower interest rates lead to cheaper borrowing costs, as a result helping propel spending across the economy. The prospect of lower interest rates in the UK in the backdrop of an extraordinary cost of living crisis and anaemic growth should therefore be welcome news.

How households will react, however, is not as clear as what really drives their behaviour is their perception, rather than the reality, of the economic outlook.

Updated

Back in the City, Smith & Nephew shares have jumped by nearly 11% to a one-year high this morning.

The company, which makes artificial hips and knees, wound dressings and other surgical materials, reported better than expected half-year profits on the back of higher demand for its orthopaedic products.

Andy Murray, who made it to the quarter finals in doubles in the Paris Olympics and is playing tonight, had the firm’s hip resurfacing device fitted in his right side in 2019.

Smith & Nephew’s share price hit £12.45 earlier and is now up by nearly 6% at £11.89.

The shares have risen by a fifth in the past month, after the activist investor Cevian disclosed that it had taken a 5.1% stake in Smith & Nephew, making it the firm’s second-biggest shareholder. Previously, they had lost mare than half their value since an all-time high hit in February 2020.

Profit rose by 12.8% to $471m in the half year to 29 June, ahead of analysts’ expectations of $462m. The company has struggled in recent years after the Covid-19 pandemic led to surgery delays and supply disruptions, and has also been hit by high raw material costs following Russia’s invasion of Ukraine.

Chief executive Deepak Nath said:

“There is still more work to be done and we expect to see further progress in the second-half of the year.”

Revenue from its orthopaedics division rose by 5.8% to $581m in the second quarter, lifted by strong growth in hip and knee implants outside the US, as well as from other reconstruction procedures.

Pound falls as interest rate decision approaches

Tension is mounting in the City of London as clocks tick towards noon, and the Bank of England’s interest rate decision.

Today’s decision is on a knife-edge; the money markets currently indicate there is a 59% chance of a cut in borrowing costs today, to 5%, and a 41% chance of no change today.

As covered in the introduction, interest rates have been set at a 16-year high of 5.25% since last August, since when the Bank has paused its rate-hiking cycle, as inflation fell back to its 2% target.

The pound is still in the red – currently down 0.6% or 0.8 of a cent at $1.2775, having hit a four-week low this morning.

Bas Kooijman, CEO and asset manager of DHF Capital, says:

The British Pound is facing pressure as investors await the Bank of England’s (BoE) decision on interest rates, later today.

Recently, the Pound has weakened, reaching a three-week low and falling against the euro and the dollar. This decline is partly due to expectations that the Bank of England may cut rates. Markets strongly expect the Bank of England to lower rates from 5.25%, which has also contributed to drops in British two-year and five-year bond yields.

As covered earlier, several banks expect the BoE’s monetary policy committee to split 5-4, with a small majority in favour of cutting rates today.

Hedge fund owner Paul Marshall is closing in on The Spectator magazine, reports Sky News’s Mark Kleinman.

Sources have said Marshall’s Old Queen Street Ventures vehicle could strike a deal to buy the Spectator as soon as this month.

Marshall, who holds a stake in GB News, had been expected to be a frontrunner in the race to buy the Telegraph – but Sky say there is “growing doubt” about whether he would participate in the newspaper auction.

Both the Telegraph titles, and the Spectator, are up for sale after the government blocked their sale to an Abu Dhabi-backed fund.

Marshall has described himself as “a committed Church of England Christian” – he worships at the evangelical Holy Trinity, Brompton – and has said he wants to make “free enterprise once again a pillar of human flourishing”.

There is cautious optimism in the UK factory sector, reports James Brougham, senior economist at Make UK.

Following today’s rise in the UK manufacturing PMI, Brougham says:

“As the first issue of this data since the new government came to power, all eyes have been on what this significant electoral majority may manifest for industrial confidence in the second half of the year. Cautious positivity is in the air as the sector has seen continued expansion for three consecutive months, the longest sustained positive run for two years.

Eased worries have translated into a slowdown in destocking, subsequently returning demand for the sector’s products to growth. However, just as this demand returns, so too does the ghost of the past that haunted the sector for so long. Manufacturer’s input price inflation has struck its highest point in one and a half years, reminding the sector that it is uniquely sensitive to demand-side pressures.

Given activity should continue to pick up towards the ends of the year, this input price pressure will likely continue, so the perfect intervention from Government of a long term and robust industrial strategy delivered at speed is more needed than ever to restore investment confidence across the sector.”

Updated

Eurozone unemployment rises to 6.5%

Back in the eurozone, unemployment has unexpectedly risen.

The jobless rate across the euro area rose to 6.5% in June, new data from eurostat shows, up from 6.4% in April and May.

The pound is continuing to lose ground on the foreign exchanges this morning.

Sterling has now lost almost a cent against the US dollar, to $1.2767, its lowest since early July.

The recovery in UK manufacturing last month is a sharp contrast with the eurozone, where the sector contracted again (see earlier post):

The increase in the UK’s manufacturing PMI in July is a “welcome boost” to the sector, says Dave Atkinson, UK Head of Manufacturing, SME & Mid-Corporates at Lloyds Bank:

“Today’s figures confirm three consecutive months of growth and will provide a welcome boost to the sector despite some of the uncertainties of late.

“July’s growth may give businesses the breathing space they need to reconsider stalled investment plans to support them to remain competitive and consider longer term growth strategies.

UK factory output strengthens after election

Britain’s factories have recorded their fastest monthly growth in two years, in a sign that the economy has picked up since last month’s general election.

Data provider S&P Global has reported that the UK manufacturing recovery strengthened in July, as output and new orders rose, leading to the first increase in workforce levels since September 2022.

Production volumes rose across the consumer, intermediate and investment goods industries, according to the latest survey of purchasing managers.

This lifted the S&P Global UK Manufacturing Purchasing Managers’ Index to a two-year high of 52.1 in July, up from 50.9 in June and the earlier flash estimate of 51.8. That shows the fastest growth rate since July 2022.

Business confidence also rose last month, with. positive sentiment rising to its second-highest level in almost two-and-a-half years.

Rob Dobson, director at S&P Global Market Intelligence, says the sector benefitted from falling political uncertainty:

“UK manufacturing has started the second half of 2024 on an encouragingly solid footing.

July saw growth of production and new orders strengthen and staffing levels rise for the first time since September 2022. Hopes for an economic revival and reduced political uncertainty took confidence to one of its highest levels for two-and-a-half years, with 60% of companies surveyed now forecasting output will rise over the coming 12 months.

There were also further signs that the trend in new export business is close to stabilising following a prolonged period of decline.

Updated

The eurozone’s factory sector continued to shrink last month, as manufacturers were hit by a drop in new orders, and rising costs.

Output and employment levels contracted at a faster rate last month, according to the latest PMI survey from S&P Global.

The report found that eurozone factory output contracted at its fastest rate of 2024 in July. It also highlights a “marked acceleration” in cost pressures, with input prices increasing at the fastest rate in a year-and-a-half.

Here’s the details:

  • HCOB Eurozone Manufacturing PMI at 45.8 (Jun: 45.8). Unchanged.

  • HCOB Eurozone Manufacturing PMI Output Index at 45.6 (Jun: 46.1). 7-month low

Eurozone manufacturers are suffering from weak demand, reports Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank:

“The widely held belief that the eurozone’s recovery would pick up speed in the second half of the year is taking a hit, thanks to the latest HCOB PMI index for the manufacturing sector.

Earlier this year, it looked like the sector might gradually climb out of the production slump it had been in for months, but the doubts that surfaced in June have been intensified by an accelerated decline in production in July.

Given this weak data, we’ll probably need to lower our GDP growth forecast for the year from 0.8%.”

Overnight, data has shown that China’s manufacturing activity in July shrank for the first time in nine months as new orders tumbled.

The Caixin/S&P Global manufacturing PMI fell to 49.8 in July from 51.8 the previous month, the lowest reading since October last year and missing analysts’ forecasts of 51.5.

UK government bond prices are strengthening this morning, pushing down borrowing costs (the yield on the debt).

That’s another sign that the City is anticipating a cut to UK interest rates today.

Reuters has the details:

British two-year government bond yields fell to their lowest since May 2023 and five-year yields hit a six-month low on Thursday ahead of a Bank of England decision which may well see the rates cut from their current 16-year high.

Two-year yields briefly dropped more than 4 basis points to 3.760% while five and 10-year yields fell as low as 3.718% and 3.925%, all down a similar amount.

Interest rate swaps price in a 62% chance of a BoE rate cut today and 56 bps of easing over the course of 2024.

There are nine members of the Bank of England’s monetary policy committee, and today’s vote is unlikely to be unanimous.

BNP Paribas, Deutsche Bank and Goldman Sachs all predict the MPC will split 5-4, narrowly in favour of cutting interest rates from 5.25% to 5%.

At the last meeting, in June, two policymakers – Swati Dhingra and Dave Ramsden – voted for a cut, but were outvoted by the other seven.

Sanjay Raja, Deutsche Bank’s chief UK economist, told clients:

To be sure, as most economists and market participants have noted, the August decision will likely be finely balanced. No, we don’t expect a unanimous vote for a rate cut. Our baseline expectations are for a very slim majority (5-4) voting in favour of dialing down restrictive policy.

Updated

James Smith, developed market economist for ING, says today’s Bank of England decision will be a “close call”.

He expects a majority of policymakers to vote for a rate cut, telling clients:

“Some of the recent economic recovery can also be traced back to expectations of imminent rate cuts. And decent growth for the rest of 2024 relies, in part, on those cuts being delivered, a fact that won’t have been lost on BoE officials. Remember that the passthrough of higher rates has been more rapid in the UK relative to some other parts of Europe or, indeed, the US.

The bottom line is that there is just about enough in the recent data to give the Bank confidence to begin lowering rates.

ING also suggests four scenarios for today’s decision – ranging from a cut today and hints of further easing, to a hold with no guidance as to when cuts may come.

Professor Costas Milas, of the Management School at University of Liverpool, points out that new economic research suggests the Bank of England should cut interest rates today:

The BoE’s MPC has a very narrow window of opportunity (today, that is) to cut interest rates before the recently announced public sector wage increases above inflation (and the wage increases for junior doctors) trigger a wage-price spiral.

More importantly, however, brand-new research (not mine), just published in the very prestigious Journal of Monetary Economics (the “Bible” for policymakers) finds that monetary tightening in the US takes about 43 months to lower “services inflation” significantly.

So, if these results also carry over to the UK (where, for instance, “services inflation” remains high at 5.7%), the natural implication is that the MPC should cut the Base Rate immediately and be patient, that is, not worry much about service-sector inflation.

The pound is weakening as traders anticipate the Bank of England’s interest rate decision at noon today.

Sterling has dropped by over half a cent against the US dollar to $1.2795, a three-week low.

It’s also lost half a eurocent, to €1.1834.

A weakening pound could show that traders are anticipating a UK interest rate cut.

Kyle Rodda, senior financial market analyst at capital.com, says:

For the markets, a cut from the Bank of England is a matter of when and not if; however, provided the Bank of England signals it’s the beginning of a cycle, a cut would likely boost the FTSE 100 and weaken the Pound.

Alternatively, the decision to hold rates would likely inspire the greatest volatility: rates markets imply a 57% chance the Bank of England cuts tonight, and the pricing out of that move would likely undermine equities and give a shot in the arm to the Pound.

Rolls-Royce to pay dividend for first time since pandemic

Engineering group Rolls-Royce has raised its profit forecast and announced plans to pay a dividend for the first time since 2020, when it was hit by the the pandemic.

Rolls-Royce now expects to make an underlying operating profit of between £2.1bn and £2.3bn, up from previous guidance of £1.7bn-£2.0bn, as the turnaround plan implemented by chief executive Tufan Erginbilgiç gathers pace.

Shares in Rolls-Royce have jumped almost 10% in early trading.

The company has reported an operating profit of £1.65bn for the first half of this year, up from £797m in H1 2023, with its operating margin rising to 18.6% from 10.6%.

It is also reinstating shareholder distributions for the first time in four years, having suspended its divident in early 2020 when the Covid-19 pandemic rocked the airline industry and hit demand for RR’s jet engines.

Erginbilgic says:

“Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity.

We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing. We are on track to deliver our mid-term targets.

Updated

Shares in Next have jumped 7.5% in early trading after it raised its profit forecasts again this morning (see earlier post).

They’ve touched £97.66, which looks to be an alltime high.

Updated

Profits have dipped at Shell, although the energy giant has still raked in over $14bn so far this year.

Shell has reported adjusted earnings of $6.3bn for the second quarter of this year, down from $7.7bn in the first quarter of the year.

It attributes the drop in earnings to weaker profit margins from oil refining, and weaker liquified national gas (LNG) trading.

Shell chief executive officer Wael Sawan says:

“Shell delivered another strong quarter of operational and financial results. We further strengthened our leading LNG portfolio, and made good progress across our Capital Markets Day 2023 financial targets, including $1.7 billion of structural cost reductions since 2022.

Today, we have also announced a further $3.5 billion buyback programme for the next three months. We continue to demonstrate that we are delivering more value with less emissions.”

Shelll has recently paused the construction of a large biofuel plant in Rotterdam, and has been criticised for watering down a key green energy target.

Philip Evans, campaigner at Greenpeace UK, says:.

“Wildfires raging across the Arctic Circle and temperature records being broken by the day should be a wake-up call.

But Shell continues to bank billions from digging up climate-wrecking fossil fuels. Shell’s reckless pursuit of profit is causing global climate chaos - and it is planning a new drilling frenzy that will only exacerbate the crisis.

“We cannot let countries and communities that have done the least to cause climate change pay the price for Shell’s greed. The new Labour government must prove it is different to its predecessor by reining in the fossil fuel giants and imposing bold new taxes on polluters to force them to pay their climate debts at home and abroad.”

Retailer Next upgrades profit forecasts again

Next has upgraded its annual profit hopes by £20m to £980m after a better than expected second quarter helped by strong sales overseas.

The clothing and homewares retailer said it made £42m more profit than anticipated in the three months to 1 August with full price sales up 3.2% against its forecast of a 0.3% fall.

The upgrade comes after at least four profit upgrades by Next last year as the retailer outperformed a tough clothing market where many brands have struggled as consumers have reined in spending on non-essentials amid high energy costs and interest rates.

Sales in the UK were only slightly ahead of expectations - up +0.4% - but overseas sales online were much better than expected, up +21.9%.

The group also enjoyed strong growth at its online brands division Label, where sales rose almost 8% while sales in stores, which are mostly in the UK, sank by almost 5%.

Simon Wolfson, the chief executive, said he now expects group sales, including discounted goods and subsidiaries such as FatFace and Joules, to rise 6% for the full year, 2.6% more than previously indicated after completing the acquisition of FatFace and increasing its stake in Reiss during the year.

Updated

Nationwide’s house price report also shows the general election had little impact on prices or activity, says Jeremy Leaf, north London estate agent.

Leaf adds:

Today’s knife-edge decision on interest rates is much more relevant to buyers and sellers in terms of confidence to move and direction of travel for future mortgage pricing.

“Nationwide has proved a reliable long-standing indicator of house-price movements, demonstrating market resilience once again, which indicates further inherent strength over the next few months at least.”

Analyst: Consumer confidence returns to the housing market

The rise in house prices last month shows confidence is returning to the market, argues Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners:

“UK house prices rose 0.3% in July, according to the latest Nationwide House Price Index, a slightly faster pace of growth compared to June’s 0.2% increase as consumer confidence returned to the housing market despite lingering affordability pressures for buyers.

Annual house price growth came in even stronger, accelerating by 2.1% in July compared to June’s 1.5% uplift - the fastest pace of growth since December 2022 - with the possibility of a rate cut today set to catalyse the market even further.

Fastest pace of growth in UK house prices since December 2022

Newsflash: UK house prices rose at the fastest annual rate since the end of 2022 last month.

Lender Nationwide has reported that annual house price inflation rose to 2.1% in July, up from 1.5% in June.

That’s the fastest pace of growth since December 2022, when the housing market was reeling from the aftermath of Liz Truss’s mini-budget which drove up borrowing costs.

On a monthly basis, rose by 0.3% in July alone, with the average price of a property sold rising to £266,334.

Nationwide’s figures are based on mortgage approvals, so won’t track cash buyers.

Robert Gardner, Nationwide’s chief economist, points out that prices are still around 2.8% below the all-time highs recorded in the summer of 2022.

“Housing market activity has been holding relatively steady in recent months with the number of mortgages approved for house purchase at around 60,000 per month.

While this is still c.10% below the level prevailing before the pandemic struck, it is still a respectable pace given the higher interest rate environment.

Preview: Knife-edge Bank of England decision

Today’s BoE interest rate decision is the first since the general election – the Bank went into purdah during the campaign, so we didn’t hear as much from its policymakers as usual.

Since the election, some members of the Bank’s nine-strong monetary policy committee have voiced concern over persistent inflationary pressures, including the Bank’s chief economist, Huw Pill.

“I think it’s still an open question on whether the timing for a rate cut is now,” he said earlier this month.

However, Swati Dhingra, consistently one of the most dovish members of the MPC, warned this month that it was time for the Bank to “stop squeezing living standards” and cut interest rates.

Here’s our preview of today’s decision:

Introduction: Bank of England sets interest rates today

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

UK borrowers may get some relief from high interest rates today, but it could be a close call.

The Bank of England is due to announce its latest monetary policy decision at noon today, and policymakers might vote to cut rates, economists suggest.

It’s a knife-edge decision, though, with the City split over whether we’ll see the first rate cut since 2020 today; the Bank could leave borrowing costs unchanged until its next meeting in mid-September.

Bank Rate is currently 5.25%, a 16-year high, where it has been pegged for the last year, to fight inflation.

Price rises have slowed to normal rates again, with CPI inflation running at the Bank’s 2% target in June, meaning a cut could be justified. The recent slowdown in wage rises could also tee up a rate cut.

However, the BoE may be concerned that service sector inflation, at 5.7%, remains too high to make a rate cut wise.

Last night, the US Federal Reserve left US interest rates on hold, but hinted that

The money markets this morning indicate there’s a 55% chance that the Bank of Engand cuts rates to 5% today, and a 45% chance that it leaves them on hold.

Overnight index swaps are pricing in a 64% probability of a cut.

Professor Andrew Angus at Cranfield School of Management says the Bank faces a dilemma::

“The current economic growth presents the Bank of England with an interest rate paradox. One reason for the economy’s stronger than expected performance is the expectation that rates will fall this Thursday, having been stubbornly sat at 5.25% for the last 12 months.

But persistent challenges, such as rising wages and strong service sector prices, could push the Monetary Policy Committee to be more cautious. It’s a Catch-22 situation: if the BoE doesn’t follow through, it could send shockwaves through the market.”

But…S&P Global Market Intelligence expects the BoE to maintain its Bank Rate at 5.25% at tomorrow’s meeting, with the first cut likely to occur in September.

They explain:

We acknowledge it is a close call after several Monetary Policy Committee (MPC) meeting who voted against a proposition for a 25-bp rate cut described their decision as “finely balanced” in the June meeting. This could be interpreted as a sign that they are closer to voting for a rate cut.

However, earnings and inflation developments since last month’s meeting suggest a vote for a rate cut tomorrow would be a risky decision with the fundamentals not yet in place to deliver medium-term price stability. The BoE needs to avoid any collateral damage to its inflation-bursting credentials by cutting rates too soon, resulting in a damaging start stop monetary loosening cycle.”

The agenda

  • 9am BST: Eurozone manufacturing PMI for July

  • 9.30am BST: UK manufacturing PMI for July

  • Noon BST: Bank of England interest rate decision

  • 12.30pm BST: Bank of England press conference

  • 1.30pm BST: US weekly jobless claims report

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