Graeme Wearden 

Bank of England governor denies being ‘unreliable boyfriend’ after leaving interest rates unchanged – as it happened

Rolling coverage of the latest economic and financial news
  
  

Governor of the Bank of England Andrew Bailey addressing the media today.
Governor of the Bank of England Andrew Bailey addressing the media today. Photograph: WPA/Getty Images

Closing summary

Time to wrap up, after a day in which the Bank of England startled the markets by not raising interest rates.

The move, following hawkish comments from some policymakers, send the pound sliding by almost two cents tonight below $1.35. It also triggered a rally in government bonds.

Stocks also jumped, on relief that higher borrowing costs wouldn’t hurt the recovery after just 2 of the 9 rate-setters voted to hike rates from 0.1% to 0.25%.

But the decision to back away from raising rates has also attracted a storm of criticism over the Bank’s communications - with governor Andrew Bailey denying acting like an ‘unreliable boyfriend’ after talking about the need to act to keep inflation expectations in hand.

The Bank also signalled that the cost of living squeeze will intensify, with inflation seen at 5% by next April. It said interest rate increases will probably be needed in the ‘coming months’ to bring inflation to target - but wouldn’t be more precise.

It also cut its growth forecasts for the UK. More encouragingly, it only expects a small rise in unemployment from the ending of the furlough scheme.

Nomura say:

The Bank of England used the opportunity of its Monetary Policy Report to push back on market pricing today in a number of ways: a) most simply by not hiking, b) by saying that inflation would be falling below target at the forecast horizon based on Bank Rate topping out at 1%, and c) by direct comments from Governor Bailey.

Here’s today’s stories:

Goodnight. GW

Investec: Bank decided to be patient

Investec economist Sandra Horsfield says the Bank of England erred on the side of patience today - deciding to resist raising interest rates given the weaker growth, and expectations that inflationary pressures will be temporary.

  • Underlying the MPC’s decision today was a new set of macroeconomic projections. In its central scenario, the new forecasts have become somewhat less optimistic as regards GDP. Indeed, despite the upward revision to quarterly national accounts data since the August Monetary Policy Report, the MPC now expects slightly weaker GDP growth for this year (7% rather than 7¼%) and next year (5% rather than 6%), as supply bottlenecks are expected to be more of a drag than previously thought. Indeed, the Bank now anticipates GDP to recover its pre-pandemic level only in Q1 2022 rather than already during the current quarter.

  • As regards inflation, the Bank acknowledged the sharp upward pressure the recent wholesale gas price surge is exerting on headline inflation.

    Indeed, the CPI inflation forecasts for 2021, 2022 and 2023 were all raised, to 4¼% (+¼%pt), 3 ½% (+1%pt) and 2¼% (+¼%pt), respectively, with the peak in the inflation rate now expected in April 2022, when it is forecast to be around 5%. That forecast, however, rests heavily on the assumptions for retail gas prices to rise by 35% in April and electricity prices to increase by around 20%, and for energy prices to remain flat after following the path envisaged by current futures pricing for the first six months. As Governor Bailey stressed in the press conference, were the Bank instead to assume that energy prices evolve in line with futures market throughout the forecast horizon – market expectations beyond the first six months are for sharp falls – the inflation profile would be markedly lower, by 0.5pp in two years’ time and by 0.2pp in three years’ time. Naturally, this uncertainty complicates the MPC’s decision-making.

  • However, more fundamentally, the Bank has not abandoned the idea that inflation pressures should prove transient and correct largely of their own accord as Covid-related global supply bottlenecks resolve themselves over time.

    Importantly, embedded in its central projections is the assumption of no ‘second-round effects’ in wages emerging – in other words, that the current inflation spike does not trigger higher wage settlements, which then add to costs for firms and perpetuate upward price pressure. Indeed, arguably its central forecast has doubled down on that notion, lowering expected average weekly earnings growth by ½%pt each for 2022 and 2023, to 1¼% and 2¼%, respectively. That said, the MPC judged in aggregate that the risks to this view are skewed to the upside. Still, this assumption goes a long way in explaining why, despite more concerns about supply bottlenecks persisting for longer, the MPC did not hike rates today.

Bailey: Not our job to steer markets

Bank of England Governor Andrew Bailey has now hit back against criticism that he misled investors and bungled communications ahead of today’s decision.

He’s told Bloomberg TV that it wasn’t his job to guide financial markets on interest rates, and repeated the argument that his remarks on the need to curb inflation before the meeting were “conditional.”

“I don’t think it’s our job to steer markets day by day and week by week,” he said.

The comments will do little to ease criticism that Bailey’s decision not to push back against aggressive bets of tightening would undermine the central bank’s credibility, Bloomberg points out:

Traders had expected the BOE to raise borrowing costs from 0.1% to 0.25% on Thursday. Some of the country’s commercial banks including Barclays Plc increased, NatWest Plc and Lloyds Banking Group Plc pulled their cheapest mortgage deals before the decision, hitting households directly.

Dario Perkins of City firm TS Lombard tweets:

That second tweet is a reference to ex-governor Mervyn King’s comparison of monetary policy to Diego Maradona’s 2nd goal against England in the 1986 World Cup, where Argentina’s genius ran in a straight line to score because the English defense shifted to anticipate his moves.

If market expectations move, central banks don’t have to actually change policy. But, like dribbling from the half-way line, it’s hard to pull off in practice.

The Bank made the right call today, argue Carsten Jung, senior economist at the IPPR think tank.

With inflation expected to ease back next year, and rising prices hitting families today, there’s no sense in harming the recovery and hitting household incomes, he explains.

Charles Hepworth, Investment Director, GAM Investments, fears trouble ahead....

Trick or treating might be over this year, but the Bank of England decided that not altering rates at its committee meeting was the better treat(ment) for markets at present. This is in contrast to market expectations that rates would rise, based on the telegraphing over recent weeks from Governor Bailey about the urgency of containing inflation.

Cutting its forecast for growth, which the BoE now sees at 5% in 2022 (from 5.3% previously), due to rising inflationary effects and continued supply issues was less welcome news for markets to deal with.

It’s a short term treat for markets that rates aren’t moving higher but the medium-term effects on a slower growing economy facing an inflationary battering might be the trick that they missed at this meeting. Sterling is fading on the news (adding additional inflationary import costs).

Like a Halloween hangover, this BoE is damned if they do and damned if they don’t and may be walking blindly into the arena of policy errors.

Stocks jump

Shares got a boost from the Bank of England’s surprise decision not to raise interest rates today - although banks were hit.

The FTSE 100 index of blue-chip shares ended 31 points higher at 7279 points, up 0.4%.

Technology, real estate firms and industrial groups were the best-performing sectors.

But Finance stocks fell - as higher interest rates are generally good for bank profit margins.

NatWest (-5.6%), Lloyds Banking Group (-4.5%) and Barclays (-4%) were all in the top fallers.

The smaller FTSE 250 index of medium-sized companies, more focused on the UK, surged by 1.5% today - on relief that higher borrowing costs wouldn’t hit growth.

European stock markets rose to fresh record highs, with investors anticipating that central banks will be cautious about withdrawing monetary stimulus.

Danni Hewson, AJ Bell financial analyst, says:

“Rather like the boy who cried wolf, the Bank of England’s failure to raise interest rates today after giving what many believed was a clear indication that it would, could lead many investors to simply ignore future guidance.

Today’s hike had been priced in, it’s failure to launch has driven London markets up this afternoon, with the more domestically focussed FTSE 250 in particular enjoying what in this case feels like a rather unhealthy jump. Generally real estate exhaled and financials winced.

Whether you agree that this was ultimately the best move to keep a fragile economy moving forward or a lost chance to grip inflation doesn’t really matter. It’s the way it wasn’t done that will ultimately do the most damage and there are plenty of pundits accusing Andrew Bailey of becoming the country’s latest ‘unreliable boyfriend’.

The reverberations from the Bank’s decision not to raise interest rates were even felt in the massive market for US government debt.

The yield (interest rate) on short-term US government bonds was heading for their biggest daily declines this year, Bloomberg reports.

That shows that traders are reassessed the US monetary policy outlook - a day after the US Federal Reserve started to wind back its stimulus programme, in response to rising inflation and employment.

“Rates are a global market,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

“Global central banks seem to pushing back on market expectations for aggressive policy action.”

UK government short-term borrowing costs have fallen dramatically today, as bond traders react to the Bank’s decision.

The yield, or interest rate, on two-year gilts has fallen to 0.489% today, from 0.699% last night, after interest rates weren’t raised today.

That, Reuters’ David Milliken flags, is the biggest fall since the UK voted to leave the EU.

And the pound is now down almost two cents today - extending earlier losses.

Updated

The Opec+ group have firmly rejected pressure to accelerate oil production to ease the energy crisis which has been pushing up inflation.

At a meeting today, Opec and its allies decided to stick to their plan of adding 400,000 barrels per day each month, ignoring demands for a larger increase from - among others - the White House.

Bloomberg explains:

“Oil is not the problem,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after a meeting on Thursday, when the cartel emphatically rejected President Joe Biden’s request to quicken the pace of its supply hikes.

“The problem is the energy complex is going through havoc and hell.”

Opec+ slashed production early in the pandemic when demand, and prices, slumped, and has been slowly unwinding those cuts.

Prince Abdulaziz bin Salman argued that oil stocks will see “tremendous” builds at the end of 2021 and early 2022 because of slowing consumption.

Meanwhile in America, the number of people filing jobless claims has hit a new pandemic low.

There were just 269,000 fresh ‘initial claims’ for unemployment support last week, the lowest since the first lockdowns in March 2020.

That’s an encouraging sign that the US labor market is healing, with jobless claims closer to their pre-pandemic levels:

Less encouragingly, though, separate data today has shown

  • Productivity plunged 5% in the third quarter, the biggest slump since 1981.
  • The US trade deficit expanded to $80.9 billion, a fresh record amid growing gaps with China and Mexico.

Video: Andrew Bailey denies being 'unreliable boyfriend' after not raising rates

Here’s a clip of Bank of England governor Andrew Bailey at today’s press conference, where he denied acting like a Carney-esque ‘unreliable boyfriend’ over interest rates, answering our economics editor Larry Elliott:

Updated

Former MPC member Danny Blanchflower says the Bank has seen sense by not raising rates today:

Silvia Dall’Angelo, Senior Economist at the International business of Federated Hermes, isn’t convinced that today’s decision was as close as Andrew Bailey claimed:

The Bank of England surprised the market and kept rates unchanged following today meeting. Today meeting’s tone was more dovish than expected, with the surprise on hold decision prompting parallels with past flip-flopping moves by former Governor Mark Carney, the so-called ‘unreliable boyfriend’.

Markets had been pricing a 15bp rate hike today and roughly 100bps of tightening to the end of 2022, following several hawkish speeches and comments by Governor Bailey and some of his MPC colleagues.

Today the Governor stressed that the decision on the policy rate was close, although the vote would suggest otherwise (7-2, with only MPC members Saunders and Ramsden voting for a hike today).

Dall’Angelo adds that the Bank’s credibility could be tarnished by the episode.

Inflation was obviously the focus of the discussion during the meeting. The MPC continued to subscribe to the view that inflation drivers are transient in nature as they largely relate to global and external factors such as energy prices and pandemic-related supply issues, which the Bank has no way to control. However, they are concerned that as inflation remains high for long, it might become persistent. For this reason, they are vigilant with respect to developments in inflation expectations and the labour market (with a focus on the impact from the end of the furlough scheme).

A possible interpretation of what happened is that the Bank has used its recent communication to carve out plenty of optionality, in a context of high uncertainty surrounding the inflation outlook and the labour market.

In recent weeks the Bank has managed to affect financial conditions without moving its policy tools. That gives the Bank some extra flexibility, although the risk is that its credibility gets somewhat tarnished.

Bank blasted for communications failure

Criticism of the Bank of England continues to roll in.

Michael Hewson of CMC Markets says today’s 7-2 MPC vote to leave rates on hold was unexpected, driving the pound down.

This was surprising given that Governor Andrew Bailey had briefed on more than one occasion in recent weeks that a hike was coming due to rising inflation expectations. This view was reinforced by new chief economist Huw Pill although he did soften those comments a touch, but certainly not by enough to rein in market expectations that the Bank might disappoint either today, or next month. Even more puzzling was that neither Bailey nor Pill voted for a hike, although Bailey did admit it was a close call, which is also a bit of a distortion of the truth. 7-2 is not a close call. If my team lose 7-2 in a football game, that’s not a close call. 5-4 is a close call. Again, words matter, and it seems Andrew Bailey appears to have a real problem with this part of his new role.

In short what we’ve seen today is a failure to communicate by the Bank of England. That isn’t a good thing for price stability, and to see Bailey’s rather jolly demeanour at today’s press conference suggests he doesn’t understand the importance of central bank communications.

He, and the Bank of England in general needs to take some lessons from the Federal Reserve, and how markets reacted to last night’s decision in Washington. There are certainly plenty of reasons to criticise the US central bank, but on communications they do tend to be much better.

Economics writer Duncan Weldon says the Bank led people ‘down the garden path’ with comments about the need to act to contain inflation expectations.

Steven Bell, chief economist, BMO GAM, says the Bank had signalled it would raise rates today, only to do the opposite.

After heavy press briefings that base rates would rise today, the Bank of England Monetary Policy Committee decided by a majority of 7:2 to keep rates on hold. They also made no new announcements on the bond buying programme, which will probably end as planned next month. Some commentators expected that it would be suspended with immediate effect.

The market reacted by shifting down expectations for future base rates, gilts rallied except at the longest maturities. Equities rallied but banks suffered.

Despite all this, the BoE gave a clear signal that base rates are headed higher. Their forecasts were predicted on market pricing for interest rates, before the announcement of course, which implied that base rates would exceed 1% by the end of next year. The profile of their forecast for inflation implied that some, but not all of these increases would be justified.

The BoE sparked a major reassessment of monetary policy in the markets when it began its program of briefing for a rate increase in September, with the central banks of Canada and Australia making similar moves. Yet yesterday, the US Federal Reserve pushed back on market pricing for an early rise in Federal Funds Rates. The BoE’s decision reverberated around global markets, on expectations that other central banks would be dovish too.

Oliver Blackbourn, Portfolio Manager at Janus Henderson, said today’s decision could have surprised many in the markets - and could see Andrew Bailey saddled with that ‘unreliable boyfriend’ label he was trying to avoid earlier.

It had seemed in recent weeks that the Governor and Chief Economist were going out of their way to make sure that there was to be no surprise if interest rates rose.

Former governor, Mark Carney, was labelled the ‘unreliable boyfriend’ over his confusing communication, and there is a risk that the new governor inherits this moniker following his public statements ahead of today’s announcement. After taking time to seemingly warn markets about potential lift off, it may be particularly perplexing for many that the Bank then chose to push against markets that had priced in a steeper path for interest rates.

However, the Bank pointed to its estimates that such a path would take inflation back below target by the end of the forecast period, something that markets seem less convinced of given the inflation outlook being expressed by 10-year breakeven rates.

Pound continues to slide

Back in the markets, the pound is continuing to slide after the Bank of England left rates on hold.

It’s now down 1.8 cents, or 1.3%, to just $1.35 against the US dollar. That’s a one-month low.

It puts sterling on track for its worst day against the dollar in over a year.

Andrew Bailey also refused to say whether the current market expectations for rate rises are now more appropriate, following today’s news.

None of us are going to endorse the market curve at any point in time, he insists, causing a stir (the Bank uses it to calculate their inflation forecasts).

Q: Given the strong market reaction today (the pound falling 1%, government bond yields down significantly), did you really communicate as clearly as possible, or did the markets misinterpret you?

Bailey repeats that his comments last month (about having to act if there was a risk to medium term inflation) was a very clear “conditional” warning.

I want to be clear, Bailey adds. None of us ever said ‘rates will go up in November’.

Simon French of Panmure Gordon says some investors did get this wrong:

The Bank’s new economist, Huw Pill, told the FT last month that the November meeting was “live”, with the decision on rates ‘finely balanced’.

Q: What would unanchored inflation expectations look like?

Governor Bailey says it’s a really good question that doesn’t have a straightforward answer. There’s not a single factor - and anyway, the Bank doesn’t want to wait until it happens, so it looks at a range of indicators.

Deputy governor Dave Ramsden cites earnings data, for signs that inflation is driving up wage bargaining.

Andrew Bailey denies that the Bank of England is powerless against rising inflation, despite leaving interest rates on hold and forecasting CPI will hit 5% by next April before falling back.

He explains that some of the causes of inflation won’t be addressed by higher interest rates, which would also slow the economy.

Monetary policy can’t increase the supply of gas, or semiconductor chips, and it couldn’t increase the wind speed a few weeks ago (when UK wind turbines were hit by low breezes), Bailey says.

If the only thing facing the Bank were temporary inflationary shocks, then to cool down the economy, hitting household income and probably causing unemployment to rise, would be “the wrong thing to do”.

It wouldn’t just be impotent, it would be the wrong thing to do.

BoE governor rejects 'unreliable boyfriend' tag after holding rates

Governor Andrew Bailey has denied acting as an ‘unreliable boyfriend’ by not raising interest rates today.

My colleague Larry Elliott challenges Andrew Bailey about the market expectations that the Bank would raise rates at this month’s meeting.

Q: The markets were clearly expecting you to raise rates at this meeting, and you didn’t. Is it a failure of communications on your part, and is there a risk that you become Unreliable Boyfriend Number 2?

[This label was first applied to Mark Carney, and some City analysts have already raised it again today]

It’s not compulsory for the governor of the Bank of England to be an unreliable boyfriend, Bailey smiles.

Bailey says he made a ‘conditional statement’ last month, that if the Bank saw inflation pressures which translated into medium-term inflation expectations, then “of course we would have to act”.

But he insists that no committee member, he included, had made any pledges ahead of this week’s meeting.

Today’s decision was “a very close call”, he adds, as the MPC deliberated for many hours how to set monetary policy.

We are in a situation where the calls are close, they’re quite hard.

And he rejects the tag:

It’s not ‘unreliable boyfriend’. We didn’t say we were going to act at any particular meeting.

The framework I deliberately laid out remains true today, and will go on, he adds.

Q: You say you want more time to assess the UK labour market - how much do you need, and what are you looking for?

Andrew Bailey points out that the Bank hasn’t yet had any official labour market data covering the period since the furlough scheme finished (on 30th September).

But there are two labour market data releases between now and the December interest rate decision, which will shed light on the situation.

Bailey insists that’s not a hint to expect a rate rise at the next meeting, on 16th December.

Let me caution that by (saying) please do not therefore assume that I’m giving you a strong clue about anything, other than observing that there are two official labour market data releases between now and our next meeting in about six weeks’ time.”

Q: Is the Bank of England limbering up to raise interest rates faster than the US Federal Reserve and the European Central Bank because the UK economy faces two shocks - Brexit and Covid?

Bailey says other factors are also causing global shocks, including to energy prices.

He argues that the BoE has taken a different approach than the Fed, which only just voted to slow its bond-buying programme.

The Bank’s QE scheme ends next month (when it will have bought all the bonds under its £895bn target), so ‘sequencing’ means rate rises are closer.

He adds that the UK is a much more open economy than the US, and has kept inflation closer to target in the last decade.

Onto questions:

Q: You say an interest rate rise may be needed in the “coming months” - when might that be?

Andrew Bailey won’t speculate, saying the Bank has monetary policy meetings at six-week intervals.

Q: Do you think inflation is still transitory?

Bailey says there’s no fixed time that defines inflationary pressure as transitory.

He argues it’s a behavioural question - the longer that prices rise, the greater the risk that it translates into inflation expectations, and pressure for higher wages.

Updated

Andrew Bailey adds that the UK’s period of higher inflation is likely to be temporary. Monetary policy cannot tackle the causes of supply problems.

It is likely that Bank Rate will need to rise to bring inflation sustainably back to target.

But the governor also pushes back against market expectations, saying he would caution against views that Bank Rate would rise to levels that would push inflation below the 2% target.

Bailey: Only expect small rise in unemployment after furlough

Governor Andrew Bailey is holding a press conference now.

He says the UK and the wider global economy faces challenges as we recover from the pandemic.

Growth has been slower in the last quarter than expected, amid ongoing supply chain disruption. There are also signs of weaker UK consumer spending, Bailey adds.

But there are few signs of increases in redundancies, with vacancies still high and ongoing reports of recruitment problems.

Unemployment is only expected to rise by a small amount in the last quarter of 2021, Bailey says, as most furloughed employees are seen returning to work [as today’s date from the ONS suggests too].

And he confirms that CPI inflation is seen peaking at 5% next April, citing the surge in wholesale energy costs - not something which can be affected by interest rates.

Andrew Sentance, a former MPC member, says the whole episode is a ‘shambles’

Andrew Bailey cast in Carney's ‘unreliable boyfriend’ role

Bank of England governor Andrew Bailey is facing criticism, after expectations of a rate rise today were dashed.

Chris Beauchamp, Chief Market Analyst at IG Group, says:

“The doves have won again at Threadneedle Street, and Andrew Bailey finds himself being cast in the Mark Carney ‘unreliable boyfriend’ role, as the Bank of England avoids raising rates this time.

“The statement does its best to swerve the view that the bank has been caught saying one thing and doing another, arguing that rates will have to rise in coming months, but the 7-2 vote suggests it might take a while to shift the balance of opinion on the MPC. This will be welcome news for homeowners, but markets will wonder if the Bank of England has the necessary steel in the months to come to contemplate the needed rise in interest rates.”

Carney was famously labelled an ‘unreliable boyfriend’ in 2014 by Labour MP Pat McFadden, for hinting at interest rate rises which never came.

Last month, Bailey said the Bank “will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” -- which was seen as a clear hint that rates were going up.

Yet today, he was one of seven MPC members who voted to leaves Bank Rate on hold.

Neil Wilson of Markets.com says the governor’s credibility is at stake. He compares Bailey to the grand old Duke of York, happily marching markets up the hill to expect a rate hike today only to need to march them back down again.

The Bank of England delivered a surprise by not raising rates, sending gilts and sterling into a bit of a spin. It’s really one of those moments where you have to question the communication strategy of the BoE.

It had multiple occasions on which it could have gently nudged against the growing market anticipation around the November meeting being live but chose not to, and appeared to actively encourage tightening bets.

Credibility is at stake, Mr Bailey. I’d said a hike was no slam dunk due to the way certain MPC members were leaning, but Bailey has been cheerleading tighter policy and didn’t vote for it himself – which suggests either he’s bad at communicating his views or there were simply not enough votes for him so he refrained from being a minority voter.

Why did the Bank of England not raise interest rates, after a series of hints from some policymakers - including the governor Andrew Bailey - that a hike was coming?

The minutes of today’s meeting say that most policymakers wanted to wait for more employment data, to see the impact of ending the furlough scheme just over a month ago, before deciding to tighten monetary policy

Plus, the Bank has cut its growth forecasts (see last post), and flags that rising prices will hit household incomes:

In addition, at least part of the downgrade in near-term UK GDP prospects since the August Report was likely to have reflected a moderation in demand, and downside risks to demand could be accentuated by the impact of higher prices on households’ real incomes.

But, it does add that rates could rise in the ‘coming months’, if the employment market develops as it expects:

The Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.

Bank cuts growth forecasts

The Bank of England’s new forecasts showed a weaker picture for Britain’s economic growth as the bottlenecks that have weighed on global supply chains continued in the near term, Reuters explains:

The world’s fifth-biggest economy was seen regaining its pre-pandemic size in the first quarter of 2022, later than the BoE’s projection made in August of the last three months of this year.

Britain’s expected economic growth rate in 2021 was trimmed slightly to 7% and the forecast for 2022 was cut to 5% from a previous projection of 6%.

Growth is expected to slow sharply to 1.5% in 2023 and 1% in 2024.

Updated

Bank sees inflation hitting 5% next April

The Bank of England has lifted its inflation forecast, and now sees consumer price inflation peaking around 5% next April, before dropping back.

That’s more than double its 2% target, and up from 3.1% in September, and would mean a more painful cost of living squeeze for households.

The Bank warns that prices will continue to rise in the coming months, partly due to the surge in energy prices, plus rising prices for ‘core goods’ and food.

Bank staff expect inflation to rise to just under 4% in October, accounted for predominantly by the impact on utility bills of past strength in wholesale gas prices. CPI inflation is then expected to rise to 4½% in November and remain around that level through the winter, accounted for by further increases in core goods and food price inflation. Wholesale gas prices have risen sharply since August.

CPI inflation is now expected to peak at around 5% in April 2022, materially higher than expected in the August Report.

But, the Bank also predicts the upward pressure will dissipate as supply disruption eases, global demand rebalances, and energy prices stop rising.

So, it see CPI inflation falling back materially from the second half of next year.

Conditioned on the market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to be a little above the 2% target in two years’ time and just below the target at the end of the forecast period.

Updated

Pound falls

Sterling has fallen after the Bank of England left interest rates on hold.

The pound has dropped to $1.356 against the US dollar, a four-week low, down 1.3 cents today (it was down half a cent before the announcement).

The Bank has also left its quantitative easing programme unchanged.

But that was a 6-3 split -- on the committee, with Catherine Mann, Dave Ramsden and Michael Saunders all pushing to reduce the size of the bond-buying programme (from £875bn of government debt to £855bn).

Updated

Just two Bank of England policymakers voted to raise interest rates to 0.25% -- deputy governor Sir Dave Ramsden, and external member Michael Saunders.

The remaining seven members of the MPC voted to maintain Bank Rate at 0.1%.

Bank of England leaves interest rates on hold

Newsflash: The Bank of England has left UK interest rates unchanged.

The Monetary Policy Committee has voted to leave Bank Rate at its current record low of 0.1%. More to follow...

With just minutes to go until the Bank of England decision is announced at noon, Raffi Boyadjian of brokers XM says “it’s a close call” as to whether policymakers will vote to hike rates to 0.25%, from 0.1%.

Although the UK economy appears to be recovering strongly, investors see too many headwinds and a premature policy tightening would only add to the list. Hence why the pound hasn’t fully benefited from the BoE’s hawkish signals.

If there is no rate hike today, sterling is in for a bumpy ride, though the BoE’s forecasts will be just as important.

Here’s Bloomberg’s Philip Aldrick on today’s data showing that most furloughed staff returned to their jobs when the scheme ended (see earlier post).

Tension is building in the City ahead of the Bank of England’s interest rate decision at noon.

Jeremy Thomson-Cook, chief economist at international business payments firm Equals Money, says there’s uncertainty over whether the BoE will lift borrowing costs from their current record low of 0.1% today, or not.

I can’t remember a Bank of England meeting that was so eagerly anticipated since the ones in the immediate aftermath of the Brexit vote.

While market pricing is definitive in its view that the Bank of England will raise interest rates by 15bps this lunchtime, people in my profession are more split on the possibility.

Those looking for a hike cite the increase in inflation and the possible damage to the Bank’s credibility should they hold off having talked up the chances of an increase in borrowing costs for weeks.

Those looking for no change are focused on the lack of clear data on how the jobs market has handled the end of furlough and the decreasing support from government spending as we head into the new year.

I wouldn’t be surprised if they hike rates but have started to lean more to no change in policy in recent days, especially following the Federal Reserve meeting last night.

UK bank Metro says it has received an approach from funds affiliated with The Carlyle Group regarding a possible takeover offer.

In a statement to the City, Metro Bank says:

Metro Bank has engaged with Carlyle in relation to its Possible Offer and a further announcement will be made as and when appropriate. In the meantime, shareholders are advised to take no action.

Metro made the announcement after Bloomberg reported Carlyle’s interest this morning.

Bloomberg said:

The buyout firm has been studying a potential acquisition of Metro Bank, the people said, asking not to be identified because the discussions are private. Shares of Metro Bank have fallen 25% in London trading this year, giving it a market value of about 180 million pounds ($245 million).

Metro Bank was the first new retail bank to open its doors in the U.K. in more than a century in 2010 and has become known for its branch network, including in expensive locations like the King’s Road in Chelsea.

It emerged to challenge incumbents such as Barclays Plc and Lloyds Banking Group Plc, whose reputations in the country had been tarnished by the 2008 global financial crisis.

But Metro Bank’s image took a hit of its own in 2019, when U.K. regulators the Financial Conduct Authority and Prudential Regulation Authority began an ongoing investigation into how it misclassified certain assets

Metro shares, which had slid this year, are currently up 20% this morning.

Many workers who were still on the British government’s COVID-19 furlough programme when it closed at the end of September returned to their employers on the same hours, data from the Office for National Statistics suggests.

The ONS surveyed UK businesses who still had staff on furlough when it ended.

They reported that two-thirds returned to work on the same hours, while 16% went back with reduced hours and 6% went back with hours increased.

Here’s the details:

  • been made permanently redundant - 3%
  • returned to work on increased hours - 6%
  • returned to work on the same number of hours - 65%
  • returned to work on reduced hours - 16%
  • voluntarily left their role - 3%
  • other - 8%

However, as Reuters’ Andy Bruce points out, this estimate isn’t the last word on the fate of furlough workers - we’ll have to wait for the official labour market data to see if redundancies or unemployment has risen.

Firms also reported problems hiring workers:

Nearly two fifths of UK companies have found that the prices of materials, goods or services bought in the last month had increased by more than normal.

That’s according to the Office for National Statistics latest ‘Business insights and impact on the UK economy’ survey.

It also found that 7% of businesses couldn’t get the materials, goods or services needed in the last month, including 19% of firms in ‘accommodation and food service activities industry’ .

Another 11% had to switch suppliers or find ‘alternative solutions’ to supply problems.

And off the businesses who had experienced challenges with UK supply chains over the last month, 63% say it cause “major or moderate disruption”.

In the eurozone, prices charged by producers rose at a record pace in September.

They jumped 2.7% in the month, and were 16% higher year-on-year, as inflationary pressures rise.

This was driven by skyrocketing energy costs, which have rocketed by over 40% in the last year, statistics body Eurostat reports.

UK construction sector picks up despite shortages

The UK construction sector picked up last month, although shortages of supplies are still a problem.

Data firm IHS Markit’s latest survey of building firms found that:

  • Construction recovery accelerates from September’s eight-month low
  • House building regains its place as bestperforming category
  • Severe shortages of staff and materials continue in October

Construction companies continued to report widespread supply constraints and rising prices for materials, although these trends were the least severe since April, Markit says.

Its UK Construction PMI rose to 54.6 in October, up from 52.6 in September, which indicates faster growth. However, new orders remained unchanged from September’s eight-month low.

Tim Moore, director at IHS Markit, says UK construction companies posted faster growth despite headwinds from severe supply constraints and escalating costs.

There were widespread reports that shortages of materials and staff had disrupted work on site, while rising fuel and energy prices added to pressure on costs.

Nonetheless, the worst phase of the supply crunch may have passed, as the number of construction firms citing supplier delays fell to 54% in October, down from 63% in September. Similarly, reports of rising purchasing costs continued to recede from the record highs seen this summer.

Updated

More retail news: JD Sports has been ordered to sell Footasylum, the trainer retailing rival it bought in 2019, after the competition regulator once more found that the takeover had reduced competition for high street shoppers.

JD Sports has blasted the decision, saying it is “inexplicable” and “defies logic”, and is considering its options.

More here:

Weakest October UK car sales since 1991

UK car sales hit a 30-year low last month, as the global supply chain crisis continues to hit the auto sector.

Registrations of new vehicles fell by almost a quarter last month, compared to the previous October, as carmakers struggle to obtain the semiconductors needed to build cars.

Just 106,265 new cars were registered in October, a -24.6% fall on last year and the weakest October since 1991.

Industry body the SMMT blamed chip shortages, but also weaker consumer confidence as inflation picks up and taxes rises.

It has slashed its forecast for car sales this year by 8.8% to 1.66 million units, in light of the “on-going supply issues and deteriorating economic outlook”.

The SMMT predicts sales for 2021 will only reach 1.66m units, which is 30,000 (+1.9%) more than in 2020, when Covid disrupted the economy.

But it’s around 650,000 units down on 2019’s pre-pandemic sales of 2.3m.

The SMMT also reports that plug-in vehicles now account for 16.6% of all new car registrations in 2021, with hybrid vehicles (which have an electric battery and a fossil fuel-powered engine) making up another 9.1%.

Mike Hawes, SMMT Chief Executive, said:

“The current performance reflects the challenging supply constraints, with the industry battling against semiconductor shortages and increasingly strong economic headwinds as inflation rises, taxes increase and consumer confidence has weakened.

Electrified vehicles, however, continue to buck the trend, with almost one in six new cars registered this year capable of zero-emission motoring, growth that is fundamental to the UK’s ability to hit its net zero targets.

Updated

Sainsbury's warns of consumer electronics shortages this Christmas

British consumers could see a shortage of consumer electronics products in stores this Christmas, Sainsbury’s suggested after reporting its latest results (see here).

Chief executive Simon Roberts cited the global delays of semi-conductor chips, and said there are delays shipping goods around the world as global supply chains struggle.

Reuters has the details:

British consumers should expect a shortage of consumer electronics products in Sainsbury’s stores this Christmas due to the global delays of semi-conductor chips, the boss of the supermarket group said on Thursday.

“I think in that category particularly there will be less stock available than would normally be the case,” CEO Simon Roberts told reporters after Sainsbury’s published first-half results.

“That’s well understood, I think customers are hearing that and are planning early and shopping early.”

Roberts said shipping delays had also caused Sainsbury’s to push back its traditional toys promotion. The group also owns retailer Argos.

“That’s going to happen next week, a couple of weeks later than normal,” he said.

Roberts said in a normal year it took about 24 days to ship containers from Asia. However, this year it had been above 40 days.

Updated

Sainsbury’s confident of keeping stores stocked despite supply chain issues

Sainsbury’s has shrugged off supply chain problems with a return to profit and rise in sales as families bought more petrol and clothing and continued to cook more meals at home.

Total sales, including fuel, rose 6% in the six months to 18 September, including a 0.8% rise in groceries despite issues with importing foods caused by a mix of the Covid-19 pandemic and Brexit. Clothing sales rose by one-third and fuel sales were up almost 63% as families returned to school and workplaces after last year’s lockdowns.

The group returned to profit, making £541m before tax, after a £137m loss a year before, saying it had cut costs at the Argos chain and improved grocery sales.

Sales at Argos fell by just over 7% after a busy 2020 when families were stocking up with kit to entertain children during lockdowns or technology and desks for work from home.

Simon Roberts, the chief executive, said:

“Our industry faces labour and supply chain challenges.

However our scale, advanced cost saving programme, logistics operations and strong supplier relationships put us in a good position as we head into Christmas.”

Sky News adds:

Mr Roberts later added that while prices pressures, as a result of the headwinds, had been flat during the first six months of its financial year he now expected them to build over the winter months - potentially threatening customers with additional bills.

Mr Roberts also admitted that recruitment was “challenging” and it needed more drivers.

Shares in Sainsbury’s are down 4% this morning, the biggest FTSE 100 faller.

Shares in BT have jumped over 5%, after the UK telco dropped plans to bring in an outside investor to boost its superfast broadband upgrade.

BT has decided not to bring in a partner to help fund the rollout of fibre to an extra 5m homes. It says a reduction in build costs and strong demand means it can invest all the money itself.

Chief executive Philip Jansen told reporters this morning that:

“The great news is we can afford to do it ourselves,”

“With FTTP (fibre to the premises) build costs coming down and take-up ahead of expectations, we think the best decision for shareholders is to retain 100% of the project and its returns.”

BT, which might soon face a possible takeover bid by the French billionaire Patrick Drahi, also reinstated its dividend, and confirmed its outlook for this year and next after reporting a 3% decline in first-half revenue.

Online estate agency Purplebricks warns on profit amid shortage of houses to sell

Online estate agent Purplebricks has issued a profits warning, saying that it is running short of houses to sell.

Shares in Purplebricks have tumbled almost a third this morning, after it warned that it is struggling to keep pace with strong demand.

It told the City that new instructions have slowed significantly in recent months, warning that adjusted profits are likely to be below its previous guidance.

After an exceptionally strong period for the UK housing market in FY2021, buoyed by the stamp duty holiday, the six-month period to 31 October 2021 has been more challenging.

New instructions have slowed significantly in recent months, given continued strong demand across the housing market is not being met by sufficient supply of instructions.

PurpleBricks now expects to report around 22,000 property sale instructions in the six months to October 31, down from 35,387 a year before.

Shares have slumped by 31% to 36p, the lowest since May 2020.

Purplebricks is also facing legal action from over 100 estate agents who argue they are entitled to holiday pay and pension contributions because they effectively worked for the company despite being classed as self-employed.

Today, the company says it is pleased with the progress made transitioning its sales team to a fully employed model, which will offer agents “greater security and benefits” and help it scale up when market conditions improve.

Updated

Over in Germany, manufacturing factory orders have returned to growth, in a sign that economic demand may have picked up.

German factory orders rebounded by 1.3% in September after an 8.8% plunge in August, although not as fast as the 2% rise economists expected.

Firms reported greater demand for investment goods outside the euro area.

In September, demand for investment goods rose nearly 4%. Car and machinery makers reported steep order gains, which may show that production will strengthen as supply bottlenecks clear.

Here’s Sky News on the impact that a rate rise would have on mortgage holders:

A 0.15 percentage point increase for a borrower with a typical £250,000 mortgage would add £228 a year to repayments, according to figures from investment platform AJ Bell.

The 74% of home loans where rates have been fixed for a set period - which include 96% of those taken out since 2019 - will not be affected immediately.

However, analysis by financial information website Defaqto shows that, in anticipation of a rate hike, ultra-low rate fixed deals have been disappearing from the market in recent months.

It found that on 25 October there were 82 fixed-rate mortgages available at 0.84% to 0.99% but that by Tuesday this week this had fallen to 22.

The Bank is in a sticky position today, having created uncertainty in the City (and beyond) over whether it will raise rates today.

A Guardian editorial this week argued:

Did the governor of the Bank of England, Andrew Bailey, err in exaggerating the prospects of an interest rate rise? It seems so. Mr Bailey’s intervention, along with his chief economist’s, suggested the base rate might rise this week. City traders are now betting that it will do so – with the Bank’s rate-setting monetary policy committee (MPC) due to pronounce on Thursday.

The governor is now damned if rates rise – giving the impression that the central bank can be talked into a hike. And he is damned if they do not – because he signalled rises that did not arrive.

And on balance, it says leaving rates unchanged is the least bad option, if inflation pressures prove to be temporary.

The economists David Blanchflower and Alex Bryson point out that, in the last MPC meeting in September, there was a 9-0 vote to keep rates at their current level of 0.1% as the “elevated global cost pressures will prove transitory”. Nothing has changed, say the academics, about that prudent judgment. One reason to raise rates would be to bring inflation to heel, but the economists say this is unnecessary. They compare Covid to a hurricane hitting an island. Once the storm recedes, everyone wants plumbers, roofers and electricians “whose wages rise dramatically for a while and inflation goes up temporarily. But eventually, after a few months, things get back to normal”.

Here’s a Q&A on why the Bank might raise interest rates today...

Introduction: Will Bank of England raise interest rates today?

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

Will the Bank of England raise interest rates today for the first time since the pandemic? And should they?

This month’s monetary policy decision is on a knife-edge, as policymakers weigh up whether to hike borrowing costs now in an attempt to slow inflation.

With inflation expected to soon rise over 4% (twice the Bank’s target), many City economists predict the Monetary Policy Committee will hike Bank Rate today to 0.25%, up from the current record low of 0.1%.

But others argue that the MPC will hold off until December’s meeting. By then, they’ll have data showing if ending the furlough job protection scheme this autumn has started pushing up unemployment.

A rate hike could dampen inflationary pressures, by pushing up the cost of borrowing on credit, and also lift mortgage costs for those not in fixed rate deals -- at a time when rising energy costs are already squeezing households.

It could also weaken the economic recovery, at a time when supply chain problems are already weighing on growth.

As Laith Khalaf, head of investment analysis at AJ Bell, put it:

The Bank may well decide that pouring more cold water on the situation at this juncture could lead to an economic freeze.

We know that MPC members are split over the issue. The hawkish Michal Saunders last month warned households to get ready for “significantly earlier” interest rate rises.

Governor Andrew Bailey reignited speculation of an interest rate hike in October, by saying the Bank of England ‘will have to act’ if it sees a risk to medium-term inflation and to medium-term inflation expectations.

But Silvana Tenreyro recently argued that the Bank should hold off, as some of the factors pushing up inflation such as raw material shortages and surging gas prices are temporary - so a rate hike could be “self-defeating”. Catherine Mann, who recently joined the committee, also argues that the Bank could wait.

An estimate from Refinitiv based on interest rate futures suggests a rate hike today is roughly 63%, so it could be an edgy morning in the City.

Matthew Ryan, senior market analyst at Ebury, predicts borrowing costs will rise.

“We still think that the hawks will win the day, and force through a 15 basis point increase in rates to 0.25% this week, albeit we have slightly less conviction in this view than we did a week or so ago.

We would then expect an additional 25 basis point move to follow in February, dependent on the tone of the bank’s communications on Thursday afternoon.”

But Thomas Pugh, economist for RSM UK, predicts the bank will resist a rate hike, narrowly...

‘The markets have begun to anticipate the start of the long haul back to a semblance of interest rate normality. The forward market is pricing in a 63% chance of a Bank of England (BoE) rate hike at Thursday’s Monetary Policy Committee (MPC) meeting and a total of four hikes over the course of the next 12 months.

‘But at 63% probability, this is still a close call. We expect the vote to be 5v4 in favour of leaving interest rates at 0.1%. This might imply a glass half-empty/half-full policy of keeping the BoE rate at near-zero for another MPC meeting, or two, with forward guidance preparing the markets for a rate hike in December or early 2022.

The Bank will also release its latest economic forecasts at noon today.

Last night America’s central bank began scaling back its stimulus package, by cutting its $120/month bond purchases by $15bn per month.

But the Federal Reserve also insisted it was too early to start raising interest rates.

Chair Jerome Powell predicting that inflationary pressures will ease, and that employment and economic growth will strengthen in the coming months.

He said last night:

We think we can be patient. If a response is called for, we will not hesitate,”

“We don’t think it is a good time to raise interest rates because we want to see the labor market heal further.

That cautious mood lifted Wall Street to record highs last night, and we’re expecting European markets to hit new highs today.

The Opec+ group are holding their monthly meeting to set oil output. They are currently adding 400,000 barrels per day each month, and are under growing pressure from countries including the US to boost production to ease the global energy crisis.

Ipek Ozkardeskaya, senior analyst at Swissquote, says:

There is little chance that Saudis will give in to that pressure in my opinion, but there is still hope to see them increase supply by a little bit more than the actual 400’000 bpd, to make a little bit more money and help us spend a better winter, without of course letting the prices fall by much.

The agenda

  • 7am GMT: German factory orders for September
  • 9am GMT: UK car sales figures for October
  • 9.30am GMT: UK construction PMI for October
  • Noon GMT: Bank of England interest rates decision, and Monetary Policy Report released
  • 12.30pm GMT: Bank of England press conference

Updated

 

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