Introduction: Bank of England on brink of biggest rate hike since 1995
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The Bank of England could make a little piece of history today, by raising UK borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago.
The Bank sets interest rates at noon, and many (but not all) City economists predict that its policymakers will plump for a 50 basis point rise. That would lift Bank Rate to 1.75%, up from 1.25%.
If so, it would be the first 50bp rise since 1995, 27 years ago, taking interest rates to their highest since December 2008.
Hiking borrowing costs sharply could push the UK closer to recession. However, the Bank’s Monetary Policy Committee could take the plunge in an attempt to squell inflation – now at a 40-year high of 9.4%, far far above its 2% target.
Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of increasing rates in quarter-point steps.
At a speech at Mansion House in London, Bailey declared:
“Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,”
The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today.
Katharine Neiss, chief European economist at PGIM Fixed Income, says the BoE may use today’s meeting to put through one more final, substantive rate hike before the economy starts to soften materially.
There are already signs the UK economy is starting to cool, says Neiss, adding:
There is still a lot of uncertainty around how the recent energy price and inflation shocks will impact economic activity, as well as the cumulative impact of rate rises by the BoE since last December, as these will take some time to feed through.
There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.
It’s already been a summer of hefty rate hikes, with the European Central Bank raising its benchmark rate by 50 basis points last month, and the US Federal Reserve hiking by 75 basis points in both June and July.
A winter of misery is approaching, with inflation heading into double-digits soon.
Yesterday, the Resolution Foundation thinktank predicted the UK’s annual inflation rate could hit 15% at the start of 2023, due to further sharp increases in energy prices.
That would intensify the squeeze on households, particularly poorer ones, who need more help from the government to get through the coming months.
Resolution’s Jack Leslie warned that the jump in gas prices since the Ukraine war began meane UK energy bills could hit £3,600 early in 2023.
Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation plausibly moving above 15 per cent next year (without Government measures to reduce prices).
Higher and more persistent inflation both mean that the Bank of England faces a protracted period of challenging policy making.
More importantly, low-to-middle income families are likely to face disproportionately higher living cost levels for the foreseeable future.
The Bank will release its own economic forecasts at noon, and are expected to show inflation heading higher than it expected three months ago.
The agenda
- 8.30am BST: Eurozone construction PMI for July
- 9am BST: UK car sales for July
- 9.30am BST: Eurozone construction PMI for July
- 12pm BST: Bank of England interest rate decision
- 12.30pm BST: Bank of England interest rate decision
Key events
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In the City, the financial markets are calm as traders await the Bank’s decision.
The FTSE 100 index of blue-chip shares is slightly higher, while the pound has risen almost half a cent against the US dollar to $1.219, near Monday’s five-week high.
Full story: Is Bank of England about to break precedent on interest rates?
There’s an hour to go until the Bank’s eagerly awaited interest rate announcement, which could bring the biggest increase in borrowing costs in 27 years:
After edging rates up by a quarter-point at a time, the financial markets are betting that Threadneedle Street’s monetary policy committee (MPC) will announce a 0.5 percentage-point jump at noon, something that has never happened since the Bank was granted independence in 1997.
The previous time interest rates were raised by such a margin, John Major was the prime minister, Ken Clarke was the chancellor and Eddie George was the Bank of England governor. That was back in 1995, when the Treasury still had the final say over interest rates.
If the Bank does break new post-independence ground, it will not just be because the annual inflation rate is at a 40-year high of 9.4% and expected to rise further over the months ahead.
Nor will it be simply a matter of playing catch-up after repeatedly underestimating price pressures, even though that is a factor. This time last year, the MPC was forecasting that inflation would peak in late 2021 at just 4%.
Rather, the jump will be because the Bank’s fear of inflation becoming embedded in the economy outweighs concerns that the economy is about to enter recession or, indeed, may already be in one. David Blanchflower, a former MPC member, has said he believes the UK is in the early stages of a recession that began some months ago.
What makes the committee’s job more difficult is that the economy is giving off mixed signals, as is often the case at a key turning point.
Unemployment is back to low levels last seen in the 1970s and there are record job vacancies….
More here:
Torsten Bell, chief executive of living standards at think tank the Resolution Foundation, says the Bank of England is “very worried” that a recession is looming.
The UK is being hit by several economic shocks, notably the surge in energy prices due to Russia’s invasion of Ukraine.
As Bell points out on the Today Programme, raising interest rates won’t bring down the price of gas.
“Some of those wider shocks are easing and that’s to do with global supply chains and due to the spikes in global commodity prices that I was just mentioning, but others are getting worse and that’s to do with the Russian war and what that’s done to energy prices.
“That isn’t going to go away and interest rate rises are only relevant to that insofar as they prevent that becoming embedded in our wage setting processes in the months and years ahead. They can’t do anything about that actual rise in energy prices.
So, while the Bank may raise interest rates by 50 basis points today, Bell would be surprised to see several such large hikes.
“I think there is pressure from the global situation for people to put up interest rates by large amounts. We may see one rise of half a percentage point today.
“I’ll be surprised if we see several months of that because actually, if you look at what the Bank of England have been saying to us, they’re also very worried about the state of the economy – that there may be a recession looming.
We may get a forecast of recession in the updated forecast from … the Bank of England later today.”
UK construction activity falls by most in over two years
In another worrying economic signal, output at UK construction firms has fallen for the first time since the pandemic lockdown of January 2021.
Civil engineering was the worst-performing segment in July, with business activity falling at the fastest rate since since October 2020. House building declined for the second month running.
S&P Global’s monthly survey of purchasing managers also found that rising inflation, fragile consumer confidence and higher interest rates were all hitting demand.
This pulled the UK construction PMI, which measures activity, down to 48.9 in July, down from 52.6 in June. Any reading below 50 shows the sector shrank, and this is the fastest decline since May 2020.
Tim Moore, Economics Director at S&P Global Market Intelligence, says:
“July data illustrated that cost of living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity.
Total industry output fell for the first time since the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.
But, UK builders weren’t alone. Eurozone construction activity fells at the sharpest rate since February 2021 last month, as new orders fell and costs rose.
UK car sales have continued to fall, as the cost of living squeeze hits demand and computer ship shortages constrain supply.
Nnew car registrations fell by 9% in July compared with a year ago, the Society of Motor Manufacturers and Traders (SMMT) reports. It’s the fifth monthly decline in a row
Battery electric vehicles (BEV) bucked the trend, with sales up nearly 10%, but the pace of growth here slowed too.
With manufacturers struggling to source semiconductors, the SMMT has also cut its forecast for new car sales this year, to 1.6m from a prior forecast of 1.72m. That would be a 2.8% drop on 2021.
Here’s another clip of Suella Braverman’s interview, where she explains that Liz Truss is very keen on radical reform at the Bank of England.
Braverman argues this doesn’t mean taking away the Bank of England’s independence, but other central banks have ‘different degrees’ of independence, citing the Bank of Japan as an example.
The Bank of Japan, like other major central banks such as the Federal Reserve, the European Central Bank, the Swiss National Bank, is independence, meaning they set interest rates freely without political interference, with mandates to achieve price stability (low inflation).
The Fed has a dual mandate, to also aim for full employment.
Central bank independence has reassured investors that monetary policy will be focused on economic issues, rather than being influenced by political concerns (the temptation to engineer a boom before an election).
The BoJ’s independence has come under some pressure. Shinzo Abe, the former prime minister who was shot dead last month, made hyper-loose monetary policy one of the ‘three arrows’ of his Abenomics economic policy. Negative short term interest rates made it cheaper for consumers and companies to borrow money and spend.
One former BoJ policymaker warned last year that the BoJ’s tools were moving towards the realm of fiscal policy, which could undermine its independence.
Attorney General Suella Braverman also told Sky News that Liz Truss wants to make the Bank of England ‘more responsive’ to challenges, such as the global fight against inflation.
She’s very interested in looking at how the Bank of England operates, maintaining its independence of course, but also ensuring that it’s much better placed and more responsive in the future to economic challenges like the type we’re seeing at the moment.
Ofgem has confirmed that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”.
The energy regulator said reviewing the price cap for household bills in Great Britian every three months would allow it to “adjust much more quickly” to volatility in the market. More here:
Truss would review Bank of England’s mandate
Attorney General Suella Braverman has confirmed that Liz Truss would review whether the Bank of England’s current arrangements are “fit for purpose” if she becomes prime minister.
Braverman, an ally of Liz Truss, told Sky News:
“Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”
She added that the review will examine whether the Bank’s ‘entire exclusionary independence’ over interest rates was appropriate.
“Liz Truss has made clear that she wants to review the mandate that the Bank of England has, so that’s going to be looking in detail at exactly what the Bank of England does and see whether it’s actually fit for purpose in terms of its entire exclusionary independence over interest rates.”
The Bank cut rates to record lows of 0.1% in March 2020, after the Covid-19 pandemic began.
It left them there until last December, concerned that unemployment would rise when the furlough job protection scheme ended.
Liz Truss, the frontrunner to become the next UK prime minister, wants to look to change the Bank of England’s mandate to ensure it controlled inflation.
Speaking at a hustings of Conservative party members in Cardiff on Wednesday, Truss said she wanted to review the BoE’s mandate, which has a target of 2% inflation, the Financial Times reports.
She told the event:
“The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation.”
Truss added:
“The last time the mandate was looked at was in 1997 under Gordon Brown. Things are very, very different now.”
Truss has previously cited the Bank of Japan as an example of success tackling inflation.
Core inflation in Japan is running at just 2.2%, but the BoJ’s main challenge has been fighting deflation despite introducing negative interest rates and running the biggest quantitative easing (government bond-buying) program of all major central banks.
Since last December, the Bank has already increased its key interest rate, Bank Rate, from 0.1% to 1.25%, in response to the rising cost of living.
But the Bank admits it will take time to work (monetary policy operates with a time lag) — and it certainly hasn’t cooled UK inflation yet:
Analysts at ING say a 50bp hike looks highly likely, especially after Governor Andrew Bailey specifically put a hike of this size on the table in his comments last month.
ING explain:
Admittedly, there’s a chance we simply get another 25bp move, given there’s not much in the recent economic data flow to suggest the BoE needs to move more aggressively than it did in June.
But concerns among hawkish committee members about job market tightness and a weaker pound point to a larger move this week – especially given that this is what markets are pricing.
Looking further ahead, ING have been pencilling in another 25bp hike in September, before a pause, but accept this may be a slight underestimate.
We highlighted last week that persistent worker shortages, as well as potential tax cuts depending on the result of the Conservative leadership contest, could ultimately see the Bank deliver another 25-50bp on top of what we’ve been forecasting.
UK interest rates are set by vote, by the nine members of the Bank’s monetary policy committee. Some are keener than others to raise rates sharply.
At the last meeting in June, three MPC members wanted a 50 basis-point rise, but were outvoted by the other six who favoured a smaller, quarter-point increase to 1.25%.
Those three hawks were Jonathan Haskel, Catherine Mann and Michael Saunders (whose MPC term ends this month).
Bloomberg reckons that deputy governor Dave Ramsden, chief economist Huw Pill, and governor Andrew Bailey are most likely to join the hawks, while deputy governor Jon Cunliffe and external member Silvana Tenreyro were the most dovish.
Introduction: Bank of England on brink of biggest rate hike since 1995
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The Bank of England could make a little piece of history today, by raising UK borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago.
The Bank sets interest rates at noon, and many (but not all) City economists predict that its policymakers will plump for a 50 basis point rise. That would lift Bank Rate to 1.75%, up from 1.25%.
If so, it would be the first 50bp rise since 1995, 27 years ago, taking interest rates to their highest since December 2008.
Hiking borrowing costs sharply could push the UK closer to recession. However, the Bank’s Monetary Policy Committee could take the plunge in an attempt to squell inflation – now at a 40-year high of 9.4%, far far above its 2% target.
Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of increasing rates in quarter-point steps.
At a speech at Mansion House in London, Bailey declared:
“Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,”
The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today.
Katharine Neiss, chief European economist at PGIM Fixed Income, says the BoE may use today’s meeting to put through one more final, substantive rate hike before the economy starts to soften materially.
There are already signs the UK economy is starting to cool, says Neiss, adding:
There is still a lot of uncertainty around how the recent energy price and inflation shocks will impact economic activity, as well as the cumulative impact of rate rises by the BoE since last December, as these will take some time to feed through.
There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.
It’s already been a summer of hefty rate hikes, with the European Central Bank raising its benchmark rate by 50 basis points last month, and the US Federal Reserve hiking by 75 basis points in both June and July.
A winter of misery is approaching, with inflation heading into double-digits soon.
Yesterday, the Resolution Foundation thinktank predicted the UK’s annual inflation rate could hit 15% at the start of 2023, due to further sharp increases in energy prices.
That would intensify the squeeze on households, particularly poorer ones, who need more help from the government to get through the coming months.
Resolution’s Jack Leslie warned that the jump in gas prices since the Ukraine war began meane UK energy bills could hit £3,600 early in 2023.
Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation plausibly moving above 15 per cent next year (without Government measures to reduce prices).
Higher and more persistent inflation both mean that the Bank of England faces a protracted period of challenging policy making.
More importantly, low-to-middle income families are likely to face disproportionately higher living cost levels for the foreseeable future.
The Bank will release its own economic forecasts at noon, and are expected to show inflation heading higher than it expected three months ago.
The agenda
- 8.30am BST: Eurozone construction PMI for July
- 9am BST: UK car sales for July
- 9.30am BST: Eurozone construction PMI for July
- 12pm BST: Bank of England interest rate decision
- 12.30pm BST: Bank of England interest rate decision