Time to recap…

Bank of England policymakers have told MPs that they will take a ‘gradual approach’ to cutting interest rates, as they assess the inflationary impact of last month’s budget.

BoE governor Andrew Bailey told MPs:

“A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook.”

MPC member Alan Taylor suggested the Bank could cut rates more rapidly than the market expect, if inflation remains lower than expected, while colleague Catherine Mann argued that rates should have remained on hold this month until there was proof that inflation was beaten.

Bailey offered support to UK retailers who fear that increases in national insurance contributions will cost jobs and push up costs.

Bailey also warned against “fragmenting” the world economy, given the threat that Donald Trump imposes steep trade tariffs on other countries.

Global stock markets have dropped, after Ukraine fired US-made long-range missiles into Russia for the first time since the Biden administration lifted restrictions on their use, drawing a warning from Moscow that it would respond “accordingly”.

Here’s the rest of today’s news stories:

Professor Costas Milas of the University of Liverpool’s management school argues that the ‘gradualist’ approach to rate cuts has its merits over the ‘activist’ approach advocated by Catherine Mann today.

He explains that it’s all a question of the merits of one large rate cut versus several small interest rate cuts, saying:

Catherine Mann is actually asking the well-known question: “Is it better to cut by (say) 75 basis points only once rather than making three successive interest rate cuts of 25 basis points each?”

The answer is far from clear: A large interest rate cut might actually spook markets as these will surely be thinking: Does the MPC know/worry about something we do not know ourselves and, therefore, have decided to take “radical” action?

More, fundamentally, however, BoE’s quantitative models do not currently allow for full assessment of the above question because this type of monetary policy asymmetry is not built in the modelling approach. In the absence of a robust answer to the above essential question, it makes sense to favour a gradualist approach to setting interest rates!

Here are the key points from today’s session with top Bank of England officials at the Treasury Committee today.

• The impact of the measures in last week’s budget will be crucial in determining how quickly UK interest rates fall, MPs have heard.
  
  BoE governor Andrew Bailey told the Treasury commmittee that the Bank doesn’t yet know how firms will handle the rise in their national insurance contributions – but it’s likely to involve higher prices, lower wages and some job cuts.
  
  Bailey explained that the rise in social security contributions that employers must pay “represents an increase in the cost of employment”, adding:

“A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook.”

• Bailey also said UK retailers were right to warn that the NICs increases will lead to job cuts, warning:

“I think there is a risk here that the reduction in employment could be more. Yes, I think that’s a risk.”

• He then explained that the budget could either be inflationary, if firms push up prices, or deflationary, if they make lower wage rises and increase job cuts.

• Bailey, deputy governor Clare Lombardelli and new MPC member Alan Taylor all said recent progress in disinflation had encouraged them to cut interest rates this month.

• But… fellow policymaker Catherine Mann disagreed; she favours holding rates until there are clear signs that inflationary pressures have been squeezed, followed by hefty rate cuts afterwards. Mann also said Rachel Reeves’s budget had deterred her from leaning towards a rate cut this month, due to its inflationary impact.

• MPs pressed the BoE about what its policy of ‘gradual’ rate cuts would mean in practice. Taylor said the markets are forecasting four quarter-point rate cuts in the next year, but that the Bank could cut faster than expected if developments on inflation remain positive.

• Bailey was also quizzed about the dangers of Donald Trump launching a new trade war. He said we need to see what the US actually does, adding:

Fragmenting the world economy is not a good thing, quite clearly.

• Bailey also said the UK should engage in “active dialogue” about trade with both the Trump administration and Brussels, adding:

I find it hard to understand people who seem to say we should implement Brexit in the most hostile fashion possible.

The world’s biggest pharmaceutical companies have failed to increase access to life-saving medicines in poorer countries, which can result in illness or death for billions of people that could be avoided, according to a new report.

Industry performance has fallen in the past two years, according to the latest ranking of the world’s top 20 pharmaceutical companies from the Netherlands-based, non-profit Access to Medicine foundation, which is funded by the UK and Dutch governments and the Bill & Melinda Gates Foundation.

Only 43% of clinical trials take place in the 113 low and middle income countries covered by the analysis, even though they are home to 80% of the global population; as companies typically prioritise access planning in countries where they conduct trials, this leaves much of the world behind. Just 3.5% of trials – where new medicines are tested on volunteers – are conducted in the poorest countries.

Examples include Californian firm Gilead’s clinical trials in Uganda for lenacapavir, a long-acting injectable for HIV prevention, and trials by Germany’s Merck and Switzerland’s Novartis in low-income countries for new antimalarials.

Jay Iyer, the foundation’s chief executive, said:

“Companies have very clearly said we will register and prioritise registration in countries where the trials are running, but if they don’t run the trials in more areas,… then you’re never going to solve this health equity problem for all the innovative new products.”

Only three new non-exclusive voluntary drug licences have been issued, compared with six in the 2022 report, signalling a missed opportunity to improve local availability of new medicines. Voluntary licenses enable generic drugmakers to make cheaper copies of patented medicines.

The new voluntary licences include GSK’s long-acting HIV treatment cabotegravir, along with a Novartis drug for chronic myeloid leukaemia, and Gilead’s agreements with six generic manufacturers to produce and sell lenacapavir, for HIV prevention. The Access to Medicine foundation hailed these licences as “promising milestones”.

British drugmaker GSK, which has been top of the Access to Medicine index since it was first compiled in 2008, has lost the top spot to Novartis, while AstraZeneca, Britain’s biggest pharmaceutical firm, slipped from third to fifth place. France’s Sanofi and New York-based Pfizer were in third and fourth place respectively.

GSK said it is committed to investing £1bn over next 10 years on global health research & development to tackle infectious diseases, such as tuberculosis and malaria, and that it is one of the largest suppliers of of vaccines of the vaccine alliance GAVI, with 1.2bn vaccines supplied since 2010.

Emma Walmsley, the GSK chief executive, said:

“As the report makes clear, partnership with governments, multilateral organisations and others is critical to making progress here. We are committed to achieving health impact at scale as a growing, successful business, positively impacting the health of 2.5 billion people by the end of the decade, including more than 1.3 billion people in lower-income countries.”

AstraZeneca’s drop in the ranking partly reflects its focus on getting its Covid vaccine to over 180 countries at no profit pricing, which impacted on other drug programmes. The research does not include rare diseases which is a large part of the firm’s portfolio.

The research will be launched by Goldman Sachs and the investment firm AllianceBernstein at investor events in London and New York today. David Reddy, director general of the International Federation of Pharmaceutical Manufacturers & Associations, said:

“The Access to Medicine Index highlights important industry progress, such as tiered pricing models, inclusive business strategies, and voluntary licensing agreements. These efforts demonstrate the value of partnerships with governments, healthcare systems, and local organizations to improve access.”

“Despite these strides, the report underscores the need for accelerated efforts to close persistent gaps in access, particularly in low-income countries. To achieve sustainable impact, stronger collaboration among companies, governments, and global health stakeholders remains essential.”

Hawkish policymaker Catherine Mann declares that she does not support the Bank of England’s policy of taking a ‘gradual’ approach to cutting interest rates.

Even though she was the only MPC member to vote to hold, rather than cut, rates this month, Mann insists she takes the view that “a more activist strategy is superior”.

Mann argues that monetary policy is currently less restritive than you might think, as the ‘neutral level’ of interest rates is probably much higher than is incorporated in the Bank’s models.

Mann insists that she isn’t going to vote to hold rates “forever”, pledging:

When I do cut, it will be more aggressive.

That point will be reached when Mann has seen signals in the data that a larger cut is needed, she says, as firms would react immediately to a large cut in rates.

[however, the MPC may have moved ahead of her, though its gradual approach….]

She also argues that a large cut sends a clearer signal to the economy, and “cuts through the noise” of financial market behaviour.

Q: What impact would new US tariffs would it have on the UK’s relationship with Europe – last week, you warned that Brexit had undermined our economy?

Bailey says the Bank will be very transparent in its analysis, and share it with the committee.

On Brexit, he says the UK should look to trade freely with all parts of the world, and in an “active dialogue” with both the US about its plans, and Europe.

Bailey says a lot of effort has gone into maintaining open relations with Europe, as they have to trust the UK with financial services.

Bailey adds that he doesn’t take a position on Brexit, but it’s his job to deal with it, adding:

I find it hard to understand people who seem to say we should implement Brexit in the most hostile fashion possible.

Q: But the new US president may see this as a binary choice – with the UK choosing between allying with Washington or Brussels.

When does that moment crystallise?

Bailey says that moment can only come once we know what Donald Trump’s trade policies are.

Conservative MP John Glen turns to events across the Atlantic.

Q: What impact will Donald Trump’s policy on tariffs have on the UK economy? Credible sources say it could knock 0.8% off UK GDP, and hurt exports from the UK into the US?

Andrew Bailey says the Bank wasn’t able to incorporate the impact of the US election into its forecasts, as the result came in on the day it was setting UK interest rates.

It’s very important to wait and see what the administration does, rather than simply says, Bailey explains, adding:

US elections don’t quite have the same tightness of tie to the manifesto than UK elections do.

We would need to know a lot of other things, not just what new tariffs the US deploys but what how other countries respond, and what the impact on exchange rates is.

Bailey says:

Fragmenting the world economy is not a good thing, quite clearly.

But the precise effect of particular tariffs, especially if there are different levels set for different countries, is hard to predict – also as the UK has a more services-dominated economy.

Incidentally, unions do not share the Bank of England governor’s support for UK retailers unhappy about paying a higher minimum wage and more national insurance contributions.

The GMB Union has described big retailers warning they will have to slash jobs if forced to pay a bit more tax as ‘utterly pathetic.’

Nadine Houghton, GMB National Officer, says:

“Multi billion pound businesses pleading poverty because they’re being made to pay more to support public services is utterly pathetic.

“Most of these companies’ fortunes are already subsidised by the tax payer - they pay very low wages which then have to be topped up by in work benefits.

“And some - for example Asda - have been systematically trousering fortunes made by underpaying women workers.

“It’s only right that they should now contribute a bit more to rebuilding our country.”

Q: Your latest forecasts show a 40% chance that inflation rises to 3% – would that be a failure?

Andrew Bailey points out that the Bank’s forecasts also show inflation at target at the end of its forecast horizon.

That’s why the Bank is taking a ‘gradual approach’ to lowering rates, the governor explains.

He tells the Treasury Committee at today’s hearing:

The evidence we’ve seen recently is that the outturns have been lower than we thought they would be, but we don’t know if that’s going to continue. We’ll see.

Q: Does your model show how many jobs will be lost due to the rise in employers’ national insurance rates?

Bailey says the Bank has not made a calculation.

He says the Office for Budget Responsibility’s forecast of 50,000 job cuts is based on ‘pretty similar assumptions’ to the Bank as to how the NICs changes will be passed through the various channels. (prices, wages, profit warnings or job cuts).

And he says UK retailers are right to warn that the NICs changes will lead to jobs cuts, as they did in a letter organised by the British Retail Consortium this morning (see opening post).

Bailey says:

I saw the BRC’s letter. I think they’re right to say…

I think there is a risk here that the reduction in employment could be more. I think that’s a risk.

Governor Andrew Bailey also explains that Budget measures such as the increase in employers’ national insurance contributions could actually be deflationary – allowing faster cuts to interest rates.

It all depends how firms handle the increase – do they raise prices, or cut wages?

As Bailey tells the Treasury committee:

You could get higher inflation, but you could get quite a weakening of the labour market, and downside pressure on pay.

Labour MP Lola McEvoy takes the Bank of England onto mortgages….

Q: We’ve seen mortgage rates go up, since you cut interest rates earlier this month. That’s a blow to hard-working households trying to get by – did you expect it, and why did it happen?

BoE governor Andrew Bailey points out that mortgages rates have fallen since August, when the Bank made its first cut to interest rates in this cycle.

He points out that most UK mortgages are fixed-rate, and priced off the ‘swap curve’ (which measures where the markets expect interest rates to be in future).

Bailey concedes that the curve has risen, due to ‘event risk’ – namely the reaction to the UK budget at the end of October, and the US presidential election this month.

He says it’s not unusual for the UK swap curve to be influenced by the US curve, and points out that they’re both down today*.

* – due to worries of escalating tensions in Russia-Ukraine, as covered earlier.

Q: What does the Bank mean when it talks about taking a ‘gradual’ approach to rates – how quickly might they fall?

Monetary policy committee member Alan Taylor says this is the question on everyone’s mind, and the word ‘gradual’ means different things to different people.

Taylor suggests that some in the markets believe ‘gradual’ means a cut at every other Bank of England meeting, while ‘aggressive’ would mean a cut at every meeting.

But, he points out, the Bank has eight meetings per year, and makes a decision each time.

His view is that the key is the labour market, warning:

We don’t necessarily have the best statistics there.

[the Office for National Statistics has been struggling for months to get accurate data on the jobs market]

Right now, the ‘gradual’ pledge is aligned closely with market expectations of about one percentage point of cuts this year, Taylor explains.

But that doesn’t mean that’s what will unfold.

Taylor says:

If conditions are weaker, and my own view is skewed to the downside risks now versus the upside risk of a year ago, then we could go faster.

BoE policymaker Catherine Mann adds that the measures in Rachel Reeves’s budget encouraged her to vote– alone - to hold interest rates at 5% this month.

Mann says she concluded that the budget was “front-loaded”, meaning it lifted demand in the near term, and also “geographically dispersed” across the country.

That could allow firms to push through the price rises they are planning, she says.

[Reminder: the MPC voted 8-1 to cut rates on 7 November]

Q: What impact did the increase in the national minimum wage, and employers’ national insurance contributions, in the budget have on your vote?

Mann says the firms were already struggling to incorporate previous increases in minimum wage rates, which have squeezed the differential in wages across their businesses.

A higher-than-inflation increase in the living wage next April will add to those pressures, she argues.

Mann adds that companies can pass the NIC increase on through higher prices, or lower wages, or by cutting their workforce, or invest in raising productivity.

These are upside risks to inflation, she argues, so the Bank should have waited to see what happens….

Labour MP Dame Meg Hillier, who chairs the Treasury committee, begins today’s session by asking the Bank of England about this month’s decision to cut interest rates, from 5% to 4.75%.

Q: What tipped the balance on your decision?

Governor Andrew Bailey says he voted to cut borrowing costs due to the “pace and progress on disinflation”, which has been faster than expected – with inflation dropping below target to 1.7% in September.

Bailey says the Bank also flagged that it emphasises the word ‘gradual’ when looking forwards, due to the various risks to inflation.

Deputy governor Clare Lombardelli says the dominating factor for her vote to cut rates was the drop in inflation, and the fall in services inflation, and in wage settlements.

Taken together, that suggests the drivers of inflation were less strong than in the past.

But, Lombardelli warns, there are “risks on both sides” on the inflation outlook.

Professor Alan Taylor says he’s “broadly in agreement” with Bailey and Lombardelli.

Taylor says that historical patterns show that energy shocks feed into some sectors quickly – such as goods and foods – but arrive later in other sectors. What’s happening in the UK isn’t abnormal, Taylor says, but there is still the possibility that inflation beomes embedded.

But as inflation has been lower than forecast, that gave “reassurance” that it was OK to make a second cut to interest rates.

Catherine Mann, who opposed the rate cut, says she looks at the data in a slightly different way. She points out that recent earnings growth was higher than the Bank had forecast back in August, and that wage settlements are running higher than is compatible with hitting the Bank’s 2% inflation target.

Forward-looking measures of future prices and wages have been over target for the last four months, and haven’t fallen, Mann adds – that’s a sign that inflationary expectations may be higher than the Bank would like.

Over in Westminster, top officials from the Bank of England are appearing before the Treasury Committee.

Governor Andrew Bailey is in the hot seat, flanked by the new boy on the Monetary Policy Committee, Alan Taylor, plus deputy governor Clare Lombardelli, and Catherine Mann.

Mann is the most hawkish member of the monetary policy committee – the only one to oppose this month’s cut in UK interest rates, to 4.75%.

The committee point out that this is their first session with the Bank since the July general election (s well as last month’s budget).

They say:

MPs are likely to ask witnesses about the current economic picture and how it affects the Bank’s interest rate decisions, particularly in relation to the measures announced in the Chancellor’s 2024 Autumn Budget.

MPs may also choose to probe the Bank’s plans for unwinding its QE portfolio and the most recent pay and jobs figures, including the continued issues with the reliability of official data.

A shiver of fear just rippled through the financial markets, after Vladimir Putin approved an updated Russian nuclear doctrine today.

Kremlin spokesperson Dmitry Peskov has said the use of western non-nuclear missiles by the Ukrainian armed forces against the Russian Federation under the new doctrine could lead to a nuclear response.

The warning came after US president Joe Biden gave approval for Ukraine to strike targets within Russia with US-supplied long-range missiles.

And there are reports that Ukrainian armed forces have carried out their first strike in a border region within Russian territory with a ATACMS missile, according to news agency RBC Ukraine.

This has triggered a flight to safety, with investors piling into the US dollar, the Swiss franc and the Japanese yen. The British pound is down half a cent against the dollar, at $1.262.

US and European bond prices are also jumping, pushing down government borrowing costs. But Ukraine’s bonds are falling, having rallied earlier this month on hopes that Donald Trump might end the war with Russia.

Equities are dropping, with the FTSE 100 share index down 40 points or 0.5% at 8067 points, with bank stocks among the fallers.

And the Euro stoxx volatility index – a measure of fear in the markets – is up 1.3 points to 19.1 points.

Rachel Reeves is feeling pressure from farmers, as well as retailers, over the tax changes in last month’s budget.

Thousands of farmers are descending on central London this morning, arguing that changes to inheritance tax rules will destroy family farms. The government, though, says it will make no difference to food security.

My colleague Joanna Partridge is attending an event organied by the National Farmers Union, where emotions are running high, and reports:

Our Politics Live blog is tracking all the developments:

Staff have resigned at Starling Bank after its new chief executive demanded thousands of workers attend its offices more regularly, despite lacking enough space to host them.

In his first major policy change since taking over from the UK digital bank’s founder, Anne Boden, in March, Raman Bhatia has ordered all hybrid staff – many of whom were in the office only one or two days a week, or on an ad-hoc basis – to travel to work for a minimum of 10 days each month.

But the bank, which operates online only, admitted that some of its offices would not be equipped to handle the influx.

An email sent by Starling’s human resources team and seen by the Guardian said:

“We are aware that in some office locations we may not be able to accommodate 10 office working days per month for everyone right now. We are considering ways in which we can create more space,”

Starling has 3,231 staff, the vast majority of whom are in the UK with some also in Dublin. However, the Guardian understands that the bank has only about 900 desks, including 260 at its Cardiff site, 320 in its London headquarters and 155 in Southampton.

More here:

Consumer goods giant Nestlé has announced plans for 2.5bn Swiss francs (£2.2bn) of cost cuts, to fund a new ‘action plan’ to drive sales and boost its share price.

Nestlé’s new CEO, Laurent Freixe, says he wants to “unlock the full potential” of the company’s portfolio – which includes chocolate bars such as KitKat and Aero, breakfast cereals, and coffee brands including Nespresso and Nescafe.

Freixe’s action plan includes “targeted” investments in Nestlé’s winning brands, addressing problems at its underperforming divisions, and more investment in advertising and marketing – funded by those cost cuts.

Nestlé’s also plans to spit off its water and premium beverages activities as a global standalone business.

Freixe says:

“Nestlé is a strong company with global reach, exceptional demand generation and in-market capabilities. We have a diverse and strategically well-positioned product portfolio. Our iconic brands and innovative products connect with people every day, at every stage of their lives.

These strengths give us a unique advantage and position us to win in the marketplace. We will now invest further in our brands and growth platforms to unlock the full potential of our products for our consumers and our customers.

A global trade war could also drive up inflation, and interest rates, if Donald Trump pushes on with his plans to impose new tariffs, and other countries retaliate.

The International Monetary Fund (IMF) has warned today that “tit-for-tat” tariffs could raise costs and disrupt supply chains.

Speaking at a forum in Cebu, in the Philippines, IMF Asia-Pacific Director Krishna Srinivasan warned it could also undermine Asia’s economic prospects.

Srinivasan said:

“The tit-for-tat retaliatory tariffs threaten to disrupt growth prospects across the region, leading to longer and less efficient supply chains.”

The recent rise in UK mortgage rates will probably also be raised by MPs when they grill the Bank of England this morning.

A string of high street lenders have pushed up mortgage rates modestly in recent days amid expectations of higher inflation – partly due to measures in the budget.

Sir Keir Starmer, though, has denied that the budget is to blame for a recent rise in mortgage rates.

Speaking to journalists as he travelled to the G20 summit in Rio, the PM said:

“What we have done with the budget is to stabilise the economy and that, in my view, was the essential first step.

“As a result of that, the forecasts are for interest rates to go down, inflation to go down – you saw the figures around the budget.”

Starmer added that mortgage rates were “individual decisions for the banks, but the interest rates will be coming down”.

Interest rate are indeed forecast to come down, but not quite as quickly as hoped earlier this autumn. Currently, the money markets expect rates – currently 4.75% – will drop to 4% by next December. Before the budget, they were forecast to drop to 3.75% by the end of 2025.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Some of Britain’s largest retailers are crying foul over the government’s plan to raise their national insurance contributions, warning that it will cost jobs and drive up prices.

More than 70 businesses have signed an open letter to Chancellor Rachel Reeves, saying the changes the employers’ NICs contributions – plus the higher minimum wage and a packaging levy – mean price hikes are a “certainty”, and will cost the retail sector more than £7bn each year.

They warn that retailers cannot absorb such significant cost increases quickly by making efficency savings or eating into profits. Instead, they’ll be forced to take dfficult decisions such as lifting prices, offering lower pay rises, cutting staff and closing stores.

The letter is signed by major retailers including Tesco, Asda, Sainsbury’s, Aldi, Amazon UK, Boots, Lidl, JD Sports, Primark, Morrisons and Greggs.

In it, they warn:

“We appreciate Government’s focus on improving the fiscal situation and investing in public services; we also recognise the role businesses have in supporting this.

But, the sheer scale of new costs and the speed with which they occur create a cumulative burden that will make job losses inevitable, and higher prices a certainty.”

In last month’s budget, Rachel Reeves increased the rate on employer’s NI contributions (NICs) from 13.98% to 15% from April 2025, and lowered the threshold at which they pay NICs on employees earnings to £5,000 from £9,100.

The plan is forecast by the government to raise £25bn per year.

Marks & Spencer warned that the measure in the budget could cost it more than £60m next year, while Asda expects a £100m cost.

Hospitality businesses have already warned that they will have to slash jobs and investment, or close, due to the increase in NICs.

The issue of higher national insurance contributions will be on the agenda at parliament later this morning, when the Treasury Committee will question the Bank of England Governor, Andrew Bailey.

MPs will also hear from three members of the BoE’s Monetary Policy Committee --- deputy governor Clare Lombardelli, professor Alan Taylor and Dr Catherine Mann.

The committee say they’re likely to ask about the current economic picture, and how the measures announced in the Chancellor’s 2024 Autumn Budget will affect monetary policy.

The Bank’s plans for unwinding its QE portfolio, the most recent pay and jobs figures, and the continued issues with the reliability of official data, may also come up…

The agenda

• 10am GMT: Eurozone inflation report for October (final reading)

• 10.15am GMT: Treasury committee hearing with the Bank of England

• 1.30pm GMT: US building permits and housing starts data