Introduction: Bank of England decision in focusGood morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Before early yesterday morning, investors were pretty convinced that the Bank of England would raise interest rates today, for the 15th time in a row.
But Wednesday’s surprise fall in UK inflation, from 6.8% to 6.7%, has shaken the City, leaving traders – and businesses and households across the country – unsure what to expect from the BoE at noon today.
The money markets are currently indicating that the odds of a rate rise, or a hold, are roughly 50% each. That suggests the Bank’s monetary policy committee will have a fierce debate at this month’s meeting over whether to pause their hiking cycle today, or not.
Many analysts think we will get another rate hike today, taking borrowing costs to a 15-year of 5.5%.
Not all, though. Goldman Sachs yesterday predicted that the BoE will keep bank rate unchanged today, and that rates are already at their peak, after “the August inflation print surprised meaningfully to the downside.”
But other experts fear that leaving rates on hold today could be declaring victory too soon.
Kim Crawford, global rates portfolio manager at J.P. Morgan Asset Management, explains that a pause at this meeting “could backfire”, arguing:
‘The Bank of England’s decision is more finely balanced as activity data weakens more clearly, but a pause at this meeting could backfire.
‘Since the last meeting, services inflation has come in lower than the Bank of England’s forecasts, and there has been clearer demand-led loosening in the labour market, but wage growth has still continued to surprise to the upside.
Last night, the US Federal Reserve delivered a hawkish pause, by maintaining US interest rates on hold but keeping the door open for future hike.
That helped to push the US dollar to a five-month high against the pound overnight, at just over $1.23.
We actually hear from ten central banks today, including interest rate decisions in Turkey, Sweden, Switzerland and Norway, as well as the UK.
The agenda 7am BST: UK public finances for August
8.30am BST: Sweden’s Riksbank interest rate decision
8.30am BST: Swiss National Bank interest rate decision
9am BST: Bank of Norway interest rate decision
12pm BST: Bank of England interest rate decision
12pm BST: Bank of Turkey interest rate decision
1.30pm BST: US weekly jobless claims
Key events
Next predicts cost inflation will falllUK retailer Next has raised its profit guidance, again, this morning after sales were boosted by pay rises among its customers, and sunny weather this spring.
Next, which sells online, through its catalogue business, and on the high street, now expects pre-tax profits of £875m this year, £30m more than previously expected.
In its half-year trading update, CEO Simon Wolfson explains that Next had expected full price sales to fall by 3% in February-July, but they atually rose by 3.2%.
Wolfson explains:
In reality, we were overly cautious about the prospects for sales in the current year, we underestimated the support nominal wage increases, and a robust employment market, would give to our top line.
We also believe the exceptionally warm weather in late May and June served to significantly boost sales of our summer clothing at a critical time (a factor we need to bear in mind when it comes to our forecast for next year).
Next’s must-read annual report is out& it’s the most thorough analysis of the market going. It’s a best in class retailer but it shows extreme levels of self-awareness and details how weather and wage inflation play a role in its sales pic.twitter.com/uQdJUrRxdd
— Ashley Armstrong (@AArmstrong_says) September 21, 2023 The Bank of England could be concerned to hear that rising wages helped to bolster Next’s profits.
But Next has reassuring news for the BoE, and its own customers, too – it predicts that inflationary pressures on selling prices and operating costs will continue to ease.
Wolfson, whose notes to the City are always good value, explains:
It was inevitable that price inflation would ease. Even if consumers were to spend the same amount of money on clothing, higher prices would mean the number of garments sold would fall. That is what has happened.
And as a result, the demand for labour, commodities, production and freight has diminished throughout the entire supply chain – from fabric mills through to container ships.
In fact prices have fallen faster than we expected, and we have revised our estimate of Autumn Winter 2023 cost price inflation down from 3% to 2%.
For next spring and summer, Next predicts that prices could fall by up to 1%, having risen by 7% this Spring/Summer season.
Terrific illustration from Next plc on the slowdown in price inflation that has been “faster than we expected” & “throughout the entire supply chain”. Part of the body of data, alongside official statistics, for the MPC to consider today. Next plc RNS’ remain best in class. pic.twitter.com/w9RIL5EZJo
— Simon French (@shjfrench) September 21, 2023 Next – “The biggest risk is that, in making multiple investments, we build an unwieldy retail conglomerate that lacks the focus and agility we have worked so hard to maintain over the last thirty years”. Always an interesting company to read the thoughts from… pic.twitter.com/yVbNZKk4RV
— Chris Bailey (@Financial_Orbit) September 21, 2023 The City is swinging back towards predicting an increase in UK interest rates today.
The money markets now indicate that there is a 60% chance that the Bank of England raises interest rates by a quarter of one percent today, and only 40% chance of no-change, vs 50:50 last night.
Nationwide launches 8% account as battle for UK’s savings intensifies
Rupert Jones
Competition among financial firms for a slice of the nation’s savings is intensifying, with Nationwide launching an account paying a “market-leading” 8% interest.
A string of Bank of England interest rate rises have pushed up savings rates across the board, and many experts expect another one on Thursday.
With some easy-access savings accounts still offering only about 1% interest, the financial data provider Moneyfacts said it was essential for savers to “ditch and switch” if their loyalty was not being rewarded.
Nationwide’s new deal is a regular savings account, available exclusively to its current account customers.
The building society is also attempting to attract new current account customers by offering a £200 payment to anyone who moves to it using the switching service.
UK public borrowing rose in AugustNew official data shows that Britain’s budget deficit swelled last month, but not by as much as expected.
Britain borrowed £11.6bn to balance the books in August, which is £3.5bn more than in August 2022.
It’s the fourth highest August borrowing since monthly records began in 1993, but lower than the £13bn predicted by the UK’s fiscal watchdog, the Office for Budget Responsibility (OBR).
Total public sector spending was £7.2bn higher than a year ago, while public sector receipts only rose by £3.7bn.
Britain paid out £5.6bn in interest on its national debt last month. Almost £2bn was caused by the increase in inflation between May and June, which lifted the interest payments on index-linked gilts.
So far this financial year, the UK has incurred a deficit of almost £70bn – which is £19.3bn more than in April-August 2022.
However, it is £11.4bn less than the £81.0bn forecast by the OBR, which may give the Treasury some wiggle-room for tax cuts or spending increases.
Chancellor of the Exchequer Jeremy Hunt said:
“These numbers show why after helping families in the pandemic we now need to balance the books.
That becomes much easier when inflation is under control because higher inflation pushes up interest rates, so we need to stick to the plan to get it down.”
Pound lowest since AprilThe pound has dropped to a five-month low this morning, touching $1.2305 against the US dollar.
Sterling weakened due to expectations that UK interest rates will not rise as high as previously expected, ahead of the Bank of England announcement at noon.
Plus, the US dollar is being lifted from expectations that US interest rates have not yet peaked., following the Federal Reserve meeting last night.
The pound vs the US dollar Photograph: RefinitivIpek Ozkardeskaya, senior analyst at Swissquote Bank, argues that the BoE will raise interest rates at noon today:
Up until yesterday, the expectation was an almost certain 25bp hike from the BoE at today’s meeting, but yesterday’s shocker inflation data has shaken these expectations. In fact, no one, and even less the BoE Chief Bailey himself, was expecting to see softer inflation in Britain last month, when oil prices spiked and sterling fell. Therefore, the surprising nature of yesterday’s data release should prevent the BoE from announcing a surprise rate pause today.
Because:
Rising energy prices, and falling sterling hint at potentially higher inflation in the foreseeable future,
At 6.2%, core inflation is still more than three times the BoE’s 2% inflation target.
In summary, the BoE is not there yet, Ozkardeskaya adds:
And if sterling continues to fall – which is the most plausible outcome if the BoE softens its policy stance more than necessary today, inflation in Britain will become harder to contain. As a result, a – maybe – last 25bp rate hike is on today’s menu to limit losses in sterling so that energy costs wouldn’t spike as a result of a happy CPI report, that’s happiness would remain short-lived.
Introduction: Bank of England decision in focusGood morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Before early yesterday morning, investors were pretty convinced that the Bank of England would raise interest rates today, for the 15th time in a row.
But Wednesday’s surprise fall in UK inflation, from 6.8% to 6.7%, has shaken the City, leaving traders – and businesses and households across the country – unsure what to expect from the BoE at noon today.
The money markets are currently indicating that the odds of a rate rise, or a hold, are roughly 50% each. That suggests the Bank’s monetary policy committee will have a fierce debate at this month’s meeting over whether to pause their hiking cycle today, or not.
Many analysts think we will get another rate hike today, taking borrowing costs to a 15-year of 5.5%.
Not all, though. Goldman Sachs yesterday predicted that the BoE will keep bank rate unchanged today, and that rates are already at their peak, after “the August inflation print surprised meaningfully to the downside.”
But other experts fear that leaving rates on hold today could be declaring victory too soon.
Kim Crawford, global rates portfolio manager at J.P. Morgan Asset Management, explains that a pause at this meeting “could backfire”, arguing:
‘The Bank of England’s decision is more finely balanced as activity data weakens more clearly, but a pause at this meeting could backfire.
‘Since the last meeting, services inflation has come in lower than the Bank of England’s forecasts, and there has been clearer demand-led loosening in the labour market, but wage growth has still continued to surprise to the upside.
Last night, the US Federal Reserve delivered a hawkish pause, by maintaining US interest rates on hold but keeping the door open for future hike.
That helped to push the US dollar to a five-month high against the pound overnight, at just over $1.23.
We actually hear from ten central banks today, including interest rate decisions in Turkey, Sweden, Switzerland and Norway, as well as the UK.
The agenda 7am BST: UK public finances for August
8.30am BST: Sweden’s Riksbank interest rate decision
8.30am BST: Swiss National Bank interest rate decision
9am BST: Bank of Norway interest rate decision
12pm BST: Bank of England interest rate decision
12pm BST: Bank of Turkey interest rate decision
1.30pm BST: US weekly jobless claims