[a
Table of Contents
Bank of England raises UK interest rates… to 2.25%
Newsflash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.
That’s the seventh consecutive increase in Bank Rate in a row, but a smaller rise than many City investors had expected.
Today’s rate rise — the second 50bp increase in a row – shows that the Bank is trying to prevent inflation becoming persistently embedded, despite concerns over the economy.
The decision by the Bank’s monetary policy committee takes rates to the highest level since 2008.
Key events
Filters BETA
The Bank has also decided to start unwinding its stock of UK government bonds, built up through its quantitative easing programme following the financial crisis, and then the pandemic.
It will reduce the stock of purchased UK government bonds by £80bn over the next twelve months, to a total of £758bn.
This is “in line with the strategy set out in the minutes of the August MPC meeting”, it says.
It means the Bank will be reducing its holdings, just as the UK government looks to borrow more, to fund energy price caps and likely tax cuts.
Bank of England split 5-3-1 over rate rise
The Bank of England’s monetary policy committee was split, badly, over today’s interest rate decsion.
Five members – governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro – voted to lift rates by half a percent, to 2.25%
Three – Jonathan Haskel, Catherine L Mann and Dave Ramsden – pushed for a larger, 75 basis point hike (which would have been the biggest since 1989).
And the MPC’s newest member, Swati Dhingra, voted to only raise rates by 0.25%.
This lack of unanimity is not a good look for the Bank.
Bank of England raises UK interest rates… to 2.25%
Newsflash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.
That’s the seventh consecutive increase in Bank Rate in a row, but a smaller rise than many City investors had expected.
Today’s rate rise — the second 50bp increase in a row – shows that the Bank is trying to prevent inflation becoming persistently embedded, despite concerns over the economy.
The decision by the Bank’s monetary policy committee takes rates to the highest level since 2008.
Okay ten-minute warning for the Bank of England.
They should ( think the £) increase interest-rates by 0.75%.
They might increase interest-rates by 0.5%— Shaun Richards (@notayesmansecon) September 22, 2022
The UK government’s energy bill freeze might encourage the Bank of England to resist raising rates by as much as three-quarters of a percent.
The average domestic energy bill is being frozen at £2,500 a year until 2024, superseding Ofgem’s price cap that was supposed to rise to £3,549 on 1 October, and then again in January.
That means CPI inflation should peak lower and sooner than previously expected (but still leaves households paying much more for energy than a year ago).
RBC Capital Markets explains:
That should, in turn, weaken the argument that the MPC to act to quicken the pace of tightening in coming months to control inflation expectations in the face of high and rising spot inflation while also affording the Committee a degree of space attach more weight to the outlook for activity in their decision making.
We’ll find out in 15 minutes….
Ricardo Evangelista, senior analyst, ActivTrades, says it is “widely assumed” that the Bank of England will announce a rate hike of 75 basis points.
The BoE’s own predictions point to an incoming recession, while the government is having to borrow enormous amounts in order to mitigate the effects of a devastating rise in the country’s cost of living.
Looking ahead, despite the shift to a more hawkish stance by the central bank, the pound is likely to remain under pressure because of the country’s downgraded economic prospects.
Last month, the Bank raised interest rates by 50bp:
City braces for Bank of England rate decision
Tension is mounting in the City, as investors brace for the Bank of England’s interest rate announcement at noon.
We’re expecting a hefty increase in borrowing costs – at least another half-point, as the central bank tries to cool inflation despite fears the UK is heading towards recession.
Many traders predict the BoE could hike rates by three-quarters of a percent. That would take Bank rate to 2.5%, from 1.75% today, the highest since the start of the financial crisis.
That would be the biggest rate rise since 1989 – and with inflation at 9.9% in August, the Monetary Policy Committee may choose to tighten policy aggressively. Especially as the Federal Reserve raised its key interest rate by another 75bp last night, hitting the pound to 37-year lows today.
The decision has been delayed by a week due to Queen Elizabeth II’s funeral.
UK companies continued to be hit by rising costs last month, with many hiking their own prices in response to soaring bills.
Around 44% of firms saw the price of goods and services rise in August, compared with July, only slightly lower than the 46% in June.
A fifth of firms said they increased their own prices during August – and many expected to lift prices again next month.
The ONS says:
Of trading businesses, more than a quarter (29%) expect the prices of the goods or services they sell to increase in October 2022, broadly stable with September 2022, with energy prices (46%) the most commonly reported reason for considering doing so.
Latest from the Business Insights and Conditions Survey (5 to 18 Sept 2022) https://t.co/STPWU1q46q
44% of trading businesses reported an increase in prices of goods or services bought in Aug 2022.
In contrast, 20% reported an increase in the prices of goods or services sold. pic.twitter.com/1rIXFBxncp
— Office for National Statistics (ONS) (@ONS) September 22, 2022
The price cap on electricity and gas for non-domestic customers announced yesterday could ease these pressures.
Germany’s finance minister has warned that inflation is threatening stability.
The German government’s top priority is combatting high inflation, the finance minister said on Thursday during a parliamentary debate on legislation to offset inflation and boost consumers’ purchasing power.
“Inflation is a threat for wealth, social security and the stability of our country,” Christian Lindner told the Bundestag parliament.
German consumer price inflation soared to 7.9% in August, while factories and other producers raised their prices by 45% in the last year.
Over in parliament, Labour have warned that the government’s ‘fantasy economics’ is ‘threat to British businesses’
Jonathan Reynolds, the shadow business secretary, has tabled an urgent question on the energy package for non-domestic users announced yesterday.
He said the government had failed to say how much the energy support package would cost, adding:
This government says it can cut taxes, increase spending, increase borrowing and magically pay for that through higher growth that after 12 years in office has completely eluded them.
This is fantasy economics and is a threat to British businesses and the financial stability of this country.
Business secretary Jacob Rees-Mogg also felt the disapproval of Sir Lindsay Hoyle, the speaker, for not announcing the package to parliament yesterday.
Hoyle channelling his inner headmaster.
“I am not angry, I am so disappointed.”(Points out Rees-Mogg frequently complained as backbencher when ministers made announcements on TV before coming to the Commons). pic.twitter.com/PBg2MTZALc
— Paul Waugh (@paulwaugh) September 22, 2022
Rees-Mogg also said the government must work with energy intensive industries to help them become more efficient.
Andrew Sparrow’s Politics Live blog has all the details:
Railway cleaners are to go on strike in a dispute over pay, as the wave of industrial unrest sweeping the UK continues.
Members of the Rail, Maritime and Transport union (RMT) employed by contractors to clean Avanti West Coast trains will walk out for 24 hours on Friday.
Atalian Servest runs the contract, paying cleaners £9.90 an hour and no company sick pay, said the RMT.
RMT general secretary Mick Lynch said:
“Cleaners have rightly been hailed as heroes and key workers during the Covid pandemic.
“Yet our members are languishing on poverty wages while the company they work for rakes in the revenues for shareholders.
Royal Mail shares have hit a two-year low this morning after the company reported it still hadn’t reached an agreement with the CWU, and wants to take the dispute to ACAS
They’ve dropped 3% to 207p, the weakest since September 2020, extending their recent losses.
The shares are sharply down on their pandemic highs (they hit almost £6 in June 2021, during the boom in home deliveries).
Victoria Scholar, head of investment at Interactive Investor, says Royal Mail’s stock is under pressure as the industrial action looks set to drag on.
That will creating disruption for the company, its employees, investors and customers, she points out:
Postal workers have been staging walkouts to demand greater pay increases from Royal Mail during a period when living standards are under pressure from the cost-of-living crisis.
After its latest financial results released in May, shares in Royal Mail sank after it reported a 8.8% slump in pre-tax profit to £662 million for the year ended 27th March while revenue recorded flat growth to £12.71 billion. The stock has had a torrid time this year, shedding more than 60% year-to-date.
CWU: This is an all-out attack
The Communications Workers Union have accused Royal Mail of an ‘all out attack’ on the union, after it proposed ending some agreements with workers:
The CWU also urges members to take part in upcoming strike action – which is scheduled for 30 September and 1 October.
An earlier strike scheduled for 9th September was cancelled following the death of Queen Elizabeth II.
Royal Mail wants to end historic agreements with staff, and head to ACAS
Royal Mail has announced it wants to tear up up some of its existing workplace agreements and policies, as the industrial dispute at the postal operator continues.
In a statement to the stock market, Royal Mail says it hasn’t reached agreement with the Communication Workers Union (CWU), after five months of talks over pay and conditions.
Royal Mail says it is now taking two steps to ‘break the impasse’, arguing that it needs to move fast to stem losses of £1m per day.
It has told CWU that it “wants to modernise the ways of working with them”, by reviewing or ending various agreements and policies.
It says:
As part of this, Royal Mail will review or serve notice on a number of historic agreements and policies which are currently being used by the CWU to frustrate transformation, and intends to move to a more modern industrial relations framework designed to make the business more agile, and able to compete more effectively.
The company says that ending these ‘historic agreements and policies’ will let it speed up decisions about overtime and leave, test technology more quickly, address ‘persistent short-term absense” and cut costs.
Royal Mail has also proposed that talks with the union should be taken to Acas (the Advisory, Conciliation and Arbitration Service), in the hope of ending the current industrial action.
When Royal Mail was privatised nine years ago, it agreed an “Agenda for Growth” which included key protections for staff.
That includes not taking on new staff on inferior terms to existing staff, no zero hours contracts, avoiding compulsary redundancies and temporary contracts, and not outsourcing parts of the business.
Last month, 115,000 Royal Mail workers went on strike in the year’s biggest industrial action so far.
Royal Mail workers have been offered a 2% pay rise, backdated to April, and further benefits equivalent to a 3.5% increase if they agree to changes in working practices to support the growth of its parcels business, according to the company.
Staff argue they should receive a pay increase in line with inflation with no strings attached.
Japan intervenes to prop up the yen
Japan intervened in the currency market on Thursday for the first time since 1998 to shore up the battered yen.
Tokyo acted after Japan’s central bank left interest rates at ultra-low levels (see earlier post).
Japan’s FX intervention is its first since 1998, and came after the yen weakened past 145 per dollar. Is that the new line in the sand?
— Lisa Abramowicz (@lisaabramowicz1) September 22, 2022
Vice finance minister for international affairs Masato Kanda told reporters,
“We have taken decisive action (in the exchange market),”
This has revived the yen – it’s now nearly 2% higher against the dollar, after dropping 1% lower to a 24-year low.
The pound is clawing its way back from this morning’s 37-year low, now back above $1.13 (still a very weak level).
FT: Somerset Capital for sale in potential windfall for Jacob Rees-Mogg
Business secretary Jacob Rees-Mogg could be in line for a windfall as Somerset Capital, the boutique fund manager he co-founded, explores a possible sale.
According to the Financial Times, which got the story, Rees-Mogg’s stake in Somerset is in the low to mid teens – he resigned from an advisory role at Somerset in 2019 when he joined the cabinet.
The FT says:
Three people familiar with the situation said talks to sell the firm, which manages about $5bn, were being held as chief executive Dominic Johnson prepares to step down ahead of a potential move into politics.
Johnson, a former Conservative party vice-chair who co-founded Somerset with Rees-Mogg 15 years ago, will be replaced by current chief operating officer Robert Diggle, according to two people familiar with the matter.
Several options are on the table, including a management buyout or a merger with another asset manager, these people said.
It’s not clear how much Rees-Mogg’s stake would be worth today.
Back in 2019, Somerset was valued at up to £100m during negotiations to sell the company (meaning the now business secretary could have received £15m), but those talks collapsed.
The current deal is being negotiated at a fraction of the price Somerset was valued at three years ago, the FT says. More here.