Bank: inflation likely to have peaked
The Bank of England believes inflation has probably peaked, in the UK and other advanced economies too.
In a summary of today’s decision, the Bank says:
Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom.
Wholesale gas prices have fallen recently and global supply chain disruption appears to have eased amid a slowing in global demand. Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.
Key events
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Bank of England governor Andrew Bailey then warns that the increase in people leaving the labour market is hurting the UK economy.
Since the start of the COVID pandemic, he tells reporters in London, there’s been a large increase in the number of people who do not take an active part in the labour market.
Some of this rise in economic inactivity is caused by the population ageing. But, there’s also been a marked increase in inactivity amongst 50 to 65 year olds – many choosing to retire early for lifestyle reasons.
But many other people report that they’re affected by long term illness. A number of these people say they are unlikely to come back into the labour markets.
Bailey warns:
This significance and lingering fall in the labour supply is weighing on the UK economy’s potential.
Bailey: Too early to declare victory on inflation
Bank of England governor Andrew Bailey is giving a press conference now, to explain today’s interest rate rise.
Bailey tells reporters that the Bank has seen “the first signs that inflation has turned the corner” since its last Monetary Policy Report in November.
He points out that UK consume price inflation fell to 10.5% in December, from 11.1% in October.
That’s got a lot to do with energy prices, says Bailey, pointing to sharp falls in gas spot prices.
But also, global price pressures are easing as supply chain disruptions lesson, he explains. That has pulled down core goods inflation – although services inflation hit a 30-year high in December.
And Bailey insists it is too early to declare victory on inflation – warning that current high inflation could lead to higher wage or price-setting than the Bank estimates.
We need to be absolutely sure that we really are turning the corner on inflation.
So that’s why the Bank has increased interest rates today.
Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management, predicts that UK interest rates are near their peak.
Turner says the Bank of England could potentially cut interest rates before the end of the year.
As expected, today’s 50 basis-point hike was a split decision. It looks as though the appetite for further outsized hikes is fading but given the BoE’s revised outlook for growth and inflation, this hiking cycle is unlikely to be over just yet.
We look for one further increase of 25 basis points in March which should mark the top of the cycle. Furthermore, we believe the door remains open for rate cuts before the year is out.
UK families are facing numerous challenges, and an interest rate hike is the last thing they need, says Tara Flynn, personal finance expert of Choosewisely.co.uk, a financial comparison site.
The Bank of England argues that increasing interest rates helps control inflation but appears indifferent to the impact this will have on millions of homeowners whose mortgages are due for renewal, credit card holders, and those seeking loans.
“It’s widely acknowledged that the cost of living crisis has led to a significant increase in credit card usage, as families have been compelled to use them to cover escalating expenses such as energy bills, fuel, and food. However, they are now being penalised for something they would prefer not to do; it’s absolutely heartbreaking”.
The Bank of England have tweeted the key points from their new Monetary Policy Report.
They explain that inflation is expected to fall quickly this year, and that higher interest rates make it more expensive for people to borrow money and encourage them to save.
If they spend less, the Bank says, prices will tend to rise more slowly, lowering the rate of inflation.
UK recession expected to be much shallower than feared
The Bank of England has lifted its UK growth forecasts, and now sees a shallower recession than previously feared.
Bank staff now expected GDP to have grown by 0.1% in the final quarter of 2022, stronger than predicted in November. That would keep the UK out of a technical recession, after the economy shank by 0.3% in the third quarter.
But, the Bank cautions that underlying output has remained weak, with the small rise in GDP in October-December partly due to the recovery in activity following the Queen’s state funeral.
The economy is expected to shrink a little in the current quarter, though, by 0.1%.
Growth is expected to be held back by falling real household incomes, and hence consumer spending, due to high global energy and tradeable goods prices.
And the broader picture, Reuters says, is that the Bank of England thinks Britain is still on course for a recession but it was likely to be “much shallower” than it feared in its last forecasts in November, thanks largely to a fall in energy prices as well as lower market rate expectations.
Gross domestic product was now seen contracting by 0.5% in 2023, compared with the 1.5% shrinkage forecast in November, and close to the IMF’s forecast of a 0.6% contraction earlier this week.
The Bank now thinks the recession would last five quarters, cutting output by less than 1%, rather than eight quarters.
Jeremy Hunt welcomes increase in interest rates
UK chancellor Jeremy Hunt says the government supports the Bank of England’s decision to lift UK interest rates by half a percentage point to 4% today.
Hunt says the rate rise will help bring inflation down:
Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year.
“We will play our part by making sure government decisions are in lockstep with the Bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
UK inflation was 10.5% in December, over five times above the BoE’s target of 2%.
Why did the Bank raise interest rates today?
The minutes of this week’s BoE meeting show that most policymakers on the MPC were concerned that wages and prices in the UK could keep climbing even as inflationary pressures ebbed.
They say:
Seven members judged that a 0.5 percentage point increase in Bank Rate, to 4%, was warranted at this meeting.
Economic activity had weakened, but there had been some signs of greater resilience in the most recent data. Headline CPI inflation had begun to edge back and was likely to fall sharply over the rest of the year, as a result of past developments in energy and other goods prices. However, the labour market had remained tight and domestic price and wage pressures had been stronger than expected, suggesting risks of greater persistence in underlying inflation.
Measures of inflation expectations were still at elevated levels. The risks to the inflation outlook in the medium term were both large and asymmetric, with a skew towards greater persistence. This warranted additional weight being put on recent strength in the labour market and inflation data, and relatively less on the medium-term projections. A 0.5 percentage point increase in Bank Rate at this meeting would address the risk that domestic wage and price pressures remained elevated even as external cost pressures waned.
But Swati Dhingra and Silvana Tenreyro argued, in vain, against a 10th consecutive increase in UK borrowing costs.
They pointed out that the real economy remained weak, as a result of falling real incomes and the tightening in financial conditions over the past year. They also pointed to forward-looking indicators suggesting that the downturn was affecting the labour market, the minutes say.
Bank: inflation likely to have peaked
The Bank of England believes inflation has probably peaked, in the UK and other advanced economies too.
In a summary of today’s decision, the Bank says:
Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom.
Wholesale gas prices have fallen recently and global supply chain disruption appears to have eased amid a slowing in global demand. Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.
Policymakers split 7-2 over rate rise
The Bank of England was split over today’s decision.
The Monetary Policy Committee voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 4%.
Two members, Swati Dhingra and Silvana Tenreyro, preferred to maintain Bank Rate at 3.5% [they had both voted for no change in December as well].
Bank of England Interest Rate Decision
Newsflash: the Bank of England has lifted UK interest rates to 4%, the highest level in over 14 years, as it continues to battle inflation.
The increase from 3.5%, which was broadly expected by economists, puts more pressures on mortgage payers and businesses struggling to pay off their loans.
This is the 10th meeting in a row at which the Bank’s Monetary Policy Committee has voted to raise UK borrowing costs.
UK rates are now at the highest level since October 2008, when the Bank had only just started cutting rates in response to the financial crisis.
Stand By Your Desks! The Bank of England is up next….
— Shaun Richards (@notayesmansecon) February 2, 2023
Tension is rising in the City, with less than 15 minutes until the Bank of England announces its decision on UK interest rates.
The money markets indicates that a hike of 50 basis points, or half a percent, to 4% is seen as most likely (around an 86% chance).
But the pound is still weaker today, down half a cent against the US dollar at $1.232.
Marios Hadjikyriacos, senior investment analyst at XM, says the Bank of England has a tricky task, as it tries to strike a balance between reining in double-digit inflation while business surveys point to a rapidly deteriorating economy.
Hadjikyriacos explains:
Markets have almost fully priced in a 50bps rate hike, but the decision might contain a dovish twist if the vote is heavily split or the updated forecasts continue to point to a recession this year.
The days of ultra-low interest rates are behind us, former Bank of England policy maker Michael Saunders says.
Speaking on Bloomberg TV this morning, Saunders said people shouldn’t expect rates to return to the “very low levels that we saw before the pandemic”, even if the BoE do start to cut rates next year.
UK interest rates were cut to 0.5% in 2009 after the financial crisis, then a record low, but were then lowered to 0.25% after the Brexit referendum in 2016. They then hit 0.1% in March 2020 once the pandemic hit, before the Bank began hiking in December 2021.
Saunders says that the UK won’t return to such low interest rates in the “foreseeable future”.
He says:
Those were exceptional conditions, very low, global, neutral interest rates, a long period of spare capacity, a long period of very low inflation.
And I think having been through the pandemic, and then the experience of last year of very high inflation rates, inflation expectations are likely to be persistently higher, requiring a slightly higher nominal interest rate.
Bloomberg also point out that (as flagged earlier) a half-point rate isn’t completely priced in – there’s a chance of a smaller, quarter-point rate rise.
Equity markets have made a strong start to trading this morning, after the US Federal Reserve slowed its interest rate hike cycle last night.
The UK’s FTSE 100 index has gained 48 points, or 0.6%, to 7,809, back towards the four-year highs set last month.
European markets are also higher, with Germany’s DAX gaining 1.5%.
Craig Erlam, senior market analyst at OANDA, says Fed chair Jerome Powell cheered investors last night by talking about progress being made bringing down inflation pressures, after the Fed lifted rates by just 25 basis points.
Erlam says:
While Powell was determined not to overplay the shift in the Fed’s views on inflation and interest rates, certain comments were well received by the markets.
The acceptance that the disinflation process has begun, being one obvious comment, but this was also paired with him stressing that they need substantially more evidence and to hike a couple more times before monetary policy is appropriately restrictive.
Borrowers will be hit hard if the Bank of England raises interest rates again at noon today, says William Marsters, senior UK sales trader at investment platform Saxo.
“Today the Bank of England looks set to raise interest rates for the 10th time in a row, expected to be up from 3.5% to 4%.
With inflation currently at 10.5% the Bank has been stuck between a rock and a hard place for a long time with little to no choice but to hike rates again with a target of reducing inflation to as low as 2%.
This rise in interest rates has hit borrowers hard and those with large mortgages or credit card loans in particular will continue to feel the squeeze with the cost of living already tightening any kind of consumer purchasing power. Some homeowners have even decided to roll the dice and apply floating rates to their mortgages, taking the pain now in the hope that inflation will soon reduce and rates turn lower again later in the year.
The UK is still likely to enter a recession in the coming months, something the BoE would have had to factor into their decision, and in the long term this should see consumer prices pressured, though many businesses will be negatively affected with costs already proving difficult to manage.”
Ofgem launches urgent investigation into British Gas over prepayment meters
UK energy regulator Ofgem has announced it will launch an investigation into British Gas after an investigation found its debt collectors broke into customers’ homes to force-fit pay-as-you-go meters, even when they are known to have extreme vulnerabilities.
An undercover reporter from The Times worked for Arvato, a company used by British Gas to pursue debts, and found they worked with a locksmith to break into the home of a single father of three young children and switched it to a prepayment meter.
According to job notes seen by The Times, other British Gas customers who have had prepayment meters fitted by force in recent weeks include a woman in her fifties described as “severe mental health bipolar”, a woman who “suffers with mobility problems and is partially sighted” and a mother whose “daughter is disabled and has a hoist and [an] electric wheelchair”.
AFS employees are incentivised with bonuses to fit prepayment meters. But if families with these gas meters cannot afford to top up, their heating is cut off.
An Ofgem spokesperson says:
“These are extremely serious allegations from The Times which we will investigate urgently with British Gas and we won’t hesitate to take firm enforcement action.
“It is unacceptable for any supplier to impose forced installations on vulnerable customers struggling to pay their bills before all other options have been exhausted and without carrying out thorough checks to ensure it is safe and practicable to do so.
“We recently announced a major market-wide review investigating the rapid growth in prepayment meter installations and potential breaches of licences driving it. We are clear that suppliers must work hard to look after their customers at this time, especially those who are vulnerable, and the energy crisis must not be an excuse for unacceptable behaviour towards any customer – particularly those in vulnerable circumstances.”
British Gas has suspended the use of court warrants to force the installation of prepayment meters, following The Times’ investigation.
Chris O’Shea, the chief executive of the owner of British Gas, Centrica, said the allegations around Arvato were unacceptable.
The pound is a little weaker this morning, as traders await the Bank of England’s interest rate decision at noon.
Sterling has lost 0.3%, or a third of a cent, against the US dollar to $1.234, and a similar amount against the euro to €1.122.
The euro is at a 10-month high against the dollar, at $1.099, with the markets expecting the European Central Bank to lift its interest rates by a half-point this afternoon, after the US Federal Reserve slowed the pace of its rises to 25 basis points (a quarter-point) last night.
Just in: Heathrow Airport is looking for a new CEO.
Heathrow has told the City that chief executive John Holland-Kaye has decided to step down sometime this year.
This follows nine years as the boss of Britain’s biggest hub, a time which included the disruption caused by the Covid-19 pandemic when passenger numbers hit a 50-year low, followed by chaotic scenes last year as passengers missed flights and lost their luggage.
There were also tensions with airlines over the charges which Heathrow is allowed to levy on them:
The board has started a process to select his successor, it says, with Holland-Kaye holding off his departure until the new CEO starts.
The Chair of Heathrow Airport, Lord Deighton said Holland-Kaye had been “an extraordinary leader of Heathrow”, adding:
During the past nine years, he has worked tirelessly and collaboratively with shareholders, Ministers, airlines and other stakeholders to ensure the country can be proud of its ‘front door’. The Board would like to put on record our gratitude to John for his dedication and commitment to Heathrow throughout his tenure as CEO.”
