October 1, 2022
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Markets brace for Bank of England interest rate decision – business live | Business

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Introduction: Bank of England interest rate decision looms

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

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

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

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

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

BoE later…imo should do 50, but will probs do 25 judging by recent MPC comments/last vote…inflation & growth outlooks both worsening…cautious tone won’t help £ which will import more inflation…dug themselves into a v deep hole now & tough to see how they get out…

— Michael Brown (@MrMBrown) June 16, 2022

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

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

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

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

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

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

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

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

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

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

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

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

It said:

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

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

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

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

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

The Bank of England would love to see that too.

The agenda

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

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

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

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

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

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

“We are writing to the Secretary of State for Transport to ask him to reconsider.”

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

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

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

Halfords’ shares are being hit, down 20%.

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

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

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

European markets retreat

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

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

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

There are similar losses across Europe too.

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

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

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

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

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

Global recession is coming. The latest Fed forecasts project a huge drop in core inflation (lhs, green), but only a very small rise in the unemployment rate (rhs, green). Hard to see how inflation comes down so much without a much bigger jump in unemployment and recession… pic.twitter.com/wguDTJN7Or

— Robin Brooks (@RobinBrooksIIF) June 15, 2022

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

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

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

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

Jeffrey Halley, analyst at OANDA, explains:

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

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

ASOS issues profit warning as returns rates surge

A keyboard and a shopping cart are seen in front of a displayed ASOS logo.
Photograph: Dado Ruvić/Reuters

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

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

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

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

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

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

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

Shares in ASOS have tumbled 14% in early trading.

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

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

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

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

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

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

The FCA is asking lenders to:

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

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

Sarah Butler

Sarah Butler

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

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

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

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

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

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

James Walton, the chief economist at IGD, said:

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

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

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

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

The UK’s economic growth has just been forecast to be the slowest in the developed world.

At the same time, regular pay excluding bonuses is down by 2.2% – the fastest fall in a decade.

1/4

— Miatta Fahnbulleh (@Miatsf) June 16, 2022

In this context, an #InterestRate rise from the @bankofengland today would only serve to choke our struggling economy, and add more pressure to households on the brink.

2/4

— Miatta Fahnbulleh (@Miatsf) June 16, 2022

Why? #InterestRates can be increased to dampen inflation when inflation is caused by the economy overheating. But the #inflation we’re seeing now is caused by global disruption and supply issues. Rising interest rates won’t solve those issue.

3/4

— Miatta Fahnbulleh (@Miatsf) June 16, 2022

But what rising interest rates will do is make borrowing more expensive, dampen investment & increase the risk of recession when people are already struggling with rising prices. Stagflation is the worse possible outcome.

Let’s hope the @bankofengland makes the right call.

4/4

— Miatta Fahnbulleh (@Miatsf) June 16, 2022

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

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

Some thoughts on todays interest rate decision from the BoE. First up the policy decision. As with the Fed overnight it looks set to be a split decision. There is a caucus of the MPC who have publicly stated the merits of going faster, sooner, to avoid a higher terminal rate 🧵

— Simon French (@shjfrench) June 16, 2022

Recent events (fiscal boost, higher inflation, weakness in GBPUSD broadening to other pairs) have possibly given this group on MPC a majority & path to 50bp today. The actions of other major central banks going in >25bp increments will also weight on thinking given herd tendency

— Simon French (@shjfrench) June 16, 2022

Three thoughts if this is the outcome. Firstly, the transmission to household disposable income has weakened since last UK rate hiking cycle with lower mortgaged home ownership, and >80% of mortgages now on fixed rate. This might not be the worst thing given concerns over growth

— Simon French (@shjfrench) June 16, 2022

Secondly, plenty of speculation of a “Sterling Crisis” with traders potentially targeting GBP having gone for the Yen. Evidence (below) is thin so far with GBPUSD moving in line with divergent short rates. The Fed’s greater recent hawkishness the biggest driver of 1.20 FX rate pic.twitter.com/QFxFYMvmzn

— Simon French (@shjfrench) June 16, 2022

Thirdly, there are no easy decisions for MPC with CPI at 9% & growth flatlining in recent months. Similarly the inflation outcome (in my view) would have been only marginally different with different policy path in H2 21. A level-headed response is needed whatever the policy call

— Simon French (@shjfrench) June 16, 2022

Most important thing for the BoE’s comms over next 24h is expressing confidence in the economy & policy path. If U.K. to avoid recession needs hhlds/corporates to smooth consumption/investment through this period – not pursue precautionary saving. Narratives matter END/

— Simon French (@shjfrench) June 16, 2022

Introduction: Bank of England interest rate decision looms

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

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

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

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

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

BoE later…imo should do 50, but will probs do 25 judging by recent MPC comments/last vote…inflation & growth outlooks both worsening…cautious tone won’t help £ which will import more inflation…dug themselves into a v deep hole now & tough to see how they get out…

— Michael Brown (@MrMBrown) June 16, 2022

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

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

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

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

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

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

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

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

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

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

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

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

It said:

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

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

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

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

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

The Bank of England would love to see that too.

The agenda

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





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