Introduction: Bank of England to set rates and bond-selling programme
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
It’s a crunch day for the Bank of England. The UK central bank will announce its latest interest rate decision at noon, and also reveal whether it has made any changes to its bond-selling programme.
The City are pretty confident that the Bank will leave rates on hold, at 3.75%, despite inflation rising further away from its 2% target yesterday.
But while perhaps three members of the monetary policy committee might vote for a hike, they’ll probably be outvoted by the other six…. (but you never know for sure!).
The problem facing the Bank of England is that it has a mandate to control inflation, but there are signs that consumers are struggling – and a rate hike would add to that pressure on households.
Kathleen Brooks, research director at XTB, explains:
BoE policymakers might also feel slightly uncomfortable that other central bankers have been raising rates – including the US Federal Reserve yesterday (to the annoyance of Donald Trump).
As Fed chair Kevin Warsh pointed out:
The Bank’s decision on quantitative tightening (QT) – the sale of bonds bought to stimulate the economy – is harder to call, and potentially more explosive.
Economists expect the Bank to slow the pace of QT – perhaps to an annual pace of £50bn, down from £70bn over the last year. It might even halt the sale of long-dated bonds, where it has faced criticism for helping to push borrowing costs to multi-year highs.
[This is because bond yields rise when prices fall, and prices are pushed down if one major bond-holder is determined to sell their gilts].
The Bank has already faced criticism from the Reform party for pressing on with QT, given the losses being incurred by taxpayers.
The Guardian wrote earlier this week that QT needs to be revised, explaining:
The agenda
10am BST: Eurozone inflation report for August
12pm BST: Bank of England decision on interest rates and QT
1.3pm BST: US initial jobless claims data
Long-dated UK government bond prices are flat this morning, ahead of the Bank of England’s decisions at noon.
This leaves the yield on 30-year UK gilts unchanged at 5.85%, and the 10-year yield marginally higher at 5.301%.
Both measures hit multi-year highs earlier this week.
London stocks rise after Fed rate hike
The London stock market has opened higher, as investors shrug off last night’s US interest rate rise.
The FTSE 100 share index has gained 82 points, or 0.8%, to 10,771 points.
Although the Dow Jones industrial average of US stocks fell by 1.2% yesterday, the wider market reaction is quite subdued.
Mark Haefele, chief investment officer at UBS Global Wealth Management, says:
Haefele also gives three reasons why markets might not be too rattled by the Fed:
Much of the tightening is already priced in.
Economic strength makes tightening more manageable.
Strong earnings can counter higher yield
There’s only a 20% chance that the Bank of England raises interest rates at noon today, according to the money markets.
A hold – maintaining Bank rate at 3.75% – is an 80% shot.
Next warns of UK slowdown despite lifting profit forecast
In the City, shares in retail chain Next have jumped after it lifted its profit forecast again.
Next cheered shareholders this morning by reporting it has increased its profit guidance for this financial year by £12m, to £1.255bn.
The increase is the result of a small upgrade in sales expectations and some additional cost savings, mainly in warehousing, it said.
This looks to be the fourth profit upgrade from Next this year.
However… the company has also lowered its forecast for sales growth in the UK this year, down from +2.8% to +2.0%.
Next predicts a slow, steady decline as the year progresses, and warns chancellor John Healey not to raise taxes in next month’s budget, saying:
Next’s shares are up 3.2% to £150, putting it at the top of the FTSE 100 risers.
Given high energy prices are driving up UK inflation, the Bank of England will not be pleased to hear the latest transit data from the Middle East.
Commodity vessel transits through the strait of Hormuz dwindled to just three ships on Wednesday, down from 12 a day earlier.
Although this exclude any vessels that might have passed through the waterway with their Automatic Identification System transponders turned off to avoid detection, it underlines that oil and gas flows from the Middle East are still badly affected by the Iran war.
Reuters has more details:
Today’s interest rate decision comes at an increasingly difficult point for UK policymakers, says Daniela Hathorn, senior market analyst at Capital.com:
QT explained
Why is the Bank of England in the business of selling bonds anyway?
In 2009 (after the financial crisis), the BoE began buying bonds with newly created money to push up their prices and bring down long-term interest rates. This process, called quantitative easing (QE) also aimed to support inflation and boost asset prices, and thus spur economic activity.
After another burst of QE after the Covid-19 pandemic, the Bank build up its stock of bonds to £895bn.
But it is now reversing that process, though QT.
Quantitative tightening can be done through two ways – either selling a bond, or simply holding onto it until it matures, and then not reinvesting the money.
Active bond sales have been criticised because the Bank is selling bonds for less than it paid for them.
So, given QT pushes up government borrowing costs, and creates a loss for taxpayers, why do it at all?
The Bank says:
There’s a full explanation here.
Although the Bank of England may not raise rates today, money market pricing suggests borrowing costs are going to increase over the next year or so.
As of last night, investors were pricing in four quarter-point increases by the end of 2027, which would lift Bank rate from 3.75% to 4.75%.
Introduction: Bank of England to set rates and bond-selling programme
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
It’s a crunch day for the Bank of England. The UK central bank will announce its latest interest rate decision at noon, and also reveal whether it has made any changes to its bond-selling programme.
The City are pretty confident that the Bank will leave rates on hold, at 3.75%, despite inflation rising further away from its 2% target yesterday.
But while perhaps three members of the monetary policy committee might vote for a hike, they’ll probably be outvoted by the other six…. (but you never know for sure!).
The problem facing the Bank of England is that it has a mandate to control inflation, but there are signs that consumers are struggling – and a rate hike would add to that pressure on households.
Kathleen Brooks, research director at XTB, explains:
BoE policymakers might also feel slightly uncomfortable that other central bankers have been raising rates – including the US Federal Reserve yesterday (to the annoyance of Donald Trump).
As Fed chair Kevin Warsh pointed out:
The Bank’s decision on quantitative tightening (QT) – the sale of bonds bought to stimulate the economy – is harder to call, and potentially more explosive.
Economists expect the Bank to slow the pace of QT – perhaps to an annual pace of £50bn, down from £70bn over the last year. It might even halt the sale of long-dated bonds, where it has faced criticism for helping to push borrowing costs to multi-year highs.
[This is because bond yields rise when prices fall, and prices are pushed down if one major bond-holder is determined to sell their gilts].
The Bank has already faced criticism from the Reform party for pressing on with QT, given the losses being incurred by taxpayers.
The Guardian wrote earlier this week that QT needs to be revised, explaining:
The agenda
10am BST: Eurozone inflation report for August
12pm BST: Bank of England decision on interest rates and QT
1.3pm BST: US initial jobless claims data
