Time for a recap.

The Bank of England has dropped the broadest possible hint that the next move in interest rates will be downwards after forecasting inflation will fall below 2% within months, despite keeping borrowing costs unchanged for a fourth consecutive time.

Threadneedle Street stressed that more evidence was required that inflation would stick at the target set by the government before the Bank could deliver a first cut to borrowing costs since the start of the pandemic. It warned that risks from fast-rising prices remained amid the cost of living crisis.

In a widely expected decision, the Bank’s monetary policy committee (MPC) voted by a majority to keep interest rates at the current level of 5.25%, the highest level since the 2008 financial crisis.

However, one member of the panel – the independent economist Swati Dhingra – pushed for an immediate reduction in borrowing costs, in a powerful signal to financial markets that the central bank was edging closer to taking action.

Two more policymakers, Jonathan Haskel and Catherine Mann – pushed for a further quarter-point increase in the Bank rate.

BoE governor Andrew Bailey said the recent falls in UK inflation were good news, but cautioned that the Bank needed to have more confidence that price rises would keep slowing, and stay low.

Bailey told reporters in London that inflation may rise a little in January, but is expected to then drop to the 2% target this spring, before rising again.

He said:

“We have had good news on inflation over the past few months. It has fallen a long way, from 10% a year ago to 4%. But we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.”

Bailey also warned that the Bank couldn’t simply cut rates once inflation hits 2%, but explained that the bank has dropped its previous guidance that the next move in rates was more likely to be higher than lower.

Chancellor Jeremy Hunt banged this message home too, saying it was good news that interest rates have peaked.

Here’s the rest of today’s news:

The money markets are indicating that the Bank of England is very likely to leave rates on hold at its next meeting, in mid-March.

But, it suggests there is a 10%-ish chance of a cut – even though two policymakers vote for a rise at this week’s meeting, and only one for a cut.

Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited, says Jonathan Haskel and Catherine Mann’s votes for higher interest rates seem ‘rather incongrous’:

“As expected, there was no change in UK monetary policy at this meeting of the Bank of England. Given that the voting split and the tone of the minutes were slightly dovish, the two votes for a hike seemed rather incongruous.

We were focused on changes in forecasts, specifically to wages and CPI, both of which have come lower. The press conference had a relatively balanced tone, nevertheless, we noted Governor Bailey’s comments around keeping the March meeting live.

Currently, a rate cut in March is priced at 12%.”

Chancellor Jeremy Hunt has said it is “positive news” that interest rates appeared to have peaked.

Speaking to reporters after the Bank of England held base rate at 5.25% today, Hunt said:

“It’s obviously very positive news for families with mortgages that interest rates appear to have peaked, but we should remember that inflation never falls in a straight line.”

The Bank of England has sent three clear signals to markets that policymakers are shifting from a hawkish stance to a neutral one, says Kallum Pickering of Berenberg.

Those signals are the shifting balance of votes (one policymaker wanting a cut, while the number of votes for a rise fell from three to two); the removal of the guidance that the next move would probably be higher, and new forecasts showing inflation hitting 2% this spring.

Pickering adds:

This opens the door for rate cuts soon as long as inflation heads lower at a pace roughly in line with the BoE’s updated forecast. On the news, money markets continued to expect five 25bp cuts in 2024 with a first cut in Q2 – market participants are split on whether the first cut will come in May or June.

Gurpreet Gill, macro strategist at global fixed income at Goldman Sachs Asset Management, says the Bank remains cautious:

“The Bank of England removed its hiking bias but remains cautious on pivoting towards rate cuts. We continue to think the downtrend in inflation and subdued activity will see the Bank descend from its “table mountain” posture this spring, with rate cuts at subsequent meetings throughout the year.”

“With market pricing for UK monetary easing now converging to our outlook and the potential for looser fiscal policy presenting upside risks to bond yields, we are cautious on UK gilts.”

Paul Dales of Capital Economics predicts that rate cuts could come sooner than the BoE implies, saying:

While leaving interest rates at 5.25% for the fourth meeting in a row today, the Bank of England sent a signal that the next move will be a cut, but it pushed back strongly against the idea that rates will be cut soon or far.

Our forecast that inflation will fall further and faster than the Bank expects suggests it will change its tune in the coming months. A rate cut in June is still possible and we think rates will end 2025 at 3.00%. That’s lower than current market pricing of 3.25-3.50%.

Carsten Jung, senior economist at IPPR, warns that the Bank may act too slowly:

The fight against inflation is not yet over, but the end is in sight. This is largely due to global supply chains recovering and energy costs falling and not due to rising unemployment, as the Bank and most economists initially expected.

“Errors were made, regarding how we’ve been tackling inflation. There was too little focus on - and understanding of - the ripple effects of global shocks and too much attention on people asking for a pay rise. This matters because, as a result, the BoE tightened the screws too much. This will hurt the recovery. Similar to the US central bank, the Bank should reverse course and cut rates sooner this year.

“But even though inflation is coming down people’s incomes have still not caught up with the increased prices of the last years, with hundreds of thousands having newly fallen into destitution. More support is needed to support them. And we need more creative policy action to bring prices down, including on food and energy.”

Interest rates have peaked. The next move in borrowing costs will be down. But not yet. Those were the three key messages from the Bank of England in its latest assessment of the state of the economy, our economics editor Larry Elliott writes.

Those conclusions may not be immediately apparent from the minutes of the latest meeting on Threadneedle Street of the monetary policy committee (MPC) – the body tasked with setting interest rates to hit the government’s 2% inflation target – because the MPC had a three-way split.

Six members voted to keep interest rates unchanged at 5.25%, two voted for them to rise to 5.5% while one voted for a reduction to 5%.

Here’s Larry’s full analysis:

The Bank of England have released a video of governor Andrew Bailey explaining today’s decision to leave rates on hold.

In it, he makes some points we’ve already heard in today’s press conference:

We’ve held rates because, even though there has been good news on inflation, we need to be sure that it falls back to our 2% target and stays there sustainably.

That means we need to see more evidence that inflation will fall further, and stay low, before we are able to lower interest rates.

Bailey adds that we can’t yet declare victory in the battle against inflation, but insists “we’re heading in the right direction”.

We don’t need to say inflation back at the 2% target before cutting interest rates, governor Andrew Bailey insists – just more confidence that it is heading there sustainably.

Q: Cash-strapped homeowners and renters will want to know why you’re not acting now, and cutting interest rates. Are you saying that things will get worse later in the year?

Andrew Bailey says he very much understands the situation faced by those people.

And he says the Bank has two messages:

1) It needs to get inflation down to target, and keep it there on a sustained basis. Although inflation is seen rising somewhat later this year, it’s not heading back to 10% (the 40-year peak in 2022).

2) The question it faces now is how long to maintain the current stance.

Bailey says:

We will not maintain it for any longer than we need to do to achieve the objective of inflation being at 2% at a sustained basis.

Keeping inflation at 2% is the best thing we can do for households, the governor adds.

Over at Threadneedle Street, the Bank of England is holding a press conference to explain today’s decision.

Andrew Bailey, the Bank’s governor, starts by saying that we’ve had good news.

Inflation has fallen a long way, Bailey says, from 10% a year ago to 4% in December.

Things are moving in the right direction.

But, Bailey says, the Bank has to be more confident that inflation will fall to its 2% target, and stay there,

We are not yet at a point where we can lower interest rates.

As such, the level of Bank Rate “remains appropriate” at 5.25%, he insists

(although three of the MPC didn’t agree with him!)

The minutes of the Bank of England’s meeting show that the two hawks, MPC members Jonathan Haskel and Catherine L Mann, pushed to raise interest rates to 5.5% to tackle the risks of “more deeply embedded inflation persistence”.

Mann and Haskel told colleagues that this would help to return inflation to target sustainably in the medium term.

But across the table, Swati Dhingra argued that the MPC should cut rates now – pointing out that monetary policy operates with a lag (so much of the previous increases since December 2021 haven’t fully fed through to the economy).

Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates would come with a risk of overtightening, Dhingra pointed out – and after all, UK inflation was already on a firm downward trajectory.

The remaining six members were happy, though, to sit on their hands – concluding that the risks to inflation were more balanced.

The minutes say:

Although services price inflation and wage growth had fallen by somewhat more than had been expected, key indicators of inflation persistence remained elevated.

There were questions, on which further evidence would be required, about how entrenched this persistence would be, and therefore about how long the current level of Bank Rate would need to be maintained.

The Bank of England says inflation will hit its target of 2% in the second quarter of this year – down from 4% in December.

However, it’s not celebrating – as inflation is expected to increase again in the second half of this year.

CPI inflation is expected to be around 2.75% at the end of 2024, based on market expectation for interest rates.

The Bank blames “the persistence of domestic inflationary pressures”, adding:

CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.

Newsflash: The Bank of England has left UK interest rates unchanged, in a rare three-way split!

Bank Rate will remain at 5.25%, a 16-year high.

That will disappoint borrowers, such as mortgage holders, hoping to see a drop in borrowing costs today.

But it’s bang in line with City forecasts.

But, the decision is not unanimous … two members of the Bank’s Monetary Policy Committee preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.

The Bank says:

Six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition.

Three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member (Swati Dhingra) preferred to reduce Bank Rate by 0.25 percentage points, to 5%.

Excitement is building in the City as the clock ticks towards noon, when the Bank of England will set UK interest rates.

As flagged in the introduction, the Bank is expected to leave UK interest rates unchanged at 5.25% today, their highest level since 2008.

But there’s a lot of interest in how soon the BoE will start cutting rates, given the falls in inflation in the last year and concerns that UK could drop into recession.

Mike Riddell, Head of Macro Unconstrained at Allianz Global Investors, predicts that the Bank will start to cut interest rates by the summer. But, he warns, “the water is getting muddier”.

Riddell says:

Only a month ago, markets were convinced that the Bank of England would begin a rate cutting cycle in March, as the UK economy had stagnated and inflation was rapidly dropping.

The next move in UK interest rates will almost certainly be down, but the timing has become more uncertain. The UK economy, and indeed much of the rest of Europe, has been showing some signs of life again. Businesses and consumers are saying they’re more confident about the outlook. The UK housing market is also picking up, perhaps buoyed by a fall in mortgage rates. It seems likely that the Bank of England will revise its growth forecast for this year higher as a result.

Inflation optimism has faded a little too. The BoE will be relieved to see that the UK labour market has cooled further, but the reality is that wage growth remains elevated and at a level that is inflationary. Inflation itself is still running way too hot, and on some measures, surprisingly ticked higher in January. The recent escalation in the Middle East puts further upside risk to inflation.

Newsflash: shadow chancellor Rachel Reeves has pledged that Labour will not raise corporation tax if it wins the next election.

Speaking at Labour’s Annual Business Conference this morning, Reeves says that the next Labour government will cap the headlin rate of corporation tax at 25% for the duration of the next parliament.

And, if competiveness comes under threat, Labour “will act”, she says – an indication that it could be cut.

Reeves says:

“We reject the calls from those on the right wing of the Conservative Party to cut corporation tax. Our current rate is the lowest in the G7.

“We believe that 25 per cent rate strikes the correct balance between the needs of our public finances, and the demands of a competitive global economy.

“The next Labour government will make the pro-business choice and the pro-growth choice: We will cap the headline rate of corporation tax at its current rate of 25 per cent for the next parliament. And should our competitiveness come under threat, if necessary we will act.

Our Politics Live blog has more details:

Corporation tax was raised from 19% to 25% last April, after chancellor Jeremy Hunt reversed a plan by his predecessor, Kwasi Kwarteng, to keep it at 19%.

Belgium-based financial services company Euroclear earned €4.4bn last year from Russian assets it is currrently holding which were frozen after the Ukraine war.

In its annual results this morning, Euroclear says it made €5.5bn of net interest earnings in 2023, of which €4.4bn relate to interests linked to Russian sanctions.

Subject to Belgian corporate tax, these earnings will generate over €1bn for the Belgian State in 2023.

Western sanctions means Euroclear is unable to pass on coupon payments and redemptions to sanctioned entities, so cash is stacking up on its balance sheet – which had swelled by €38bn by the end of 2023 to €162bn.

Euroclear says it incurred €62m of direct costs related to Russian assets, on top of €24m of lost business from sanctioned clients.

Across the world, there are over $300bn of frozen Russian assets. In December, the US proposed that working groups from the G7 explore ways to seize this money, and use it to fund the reconstruction of Ukraine.

UK foreign secretary David Cameroon ramped up the pressure at Davos last month, saying there was a “moral, political, legal, and economic case for using the money to repair Ukraine’s war damage.

Euroclear says it will retain profits on Russian assets until it is provided with further guidance on the distribution or management of such profits.

It says:

2023 also saw various parties contest the consequences of the application of sanctions, with a significant number of legal proceedings ongoing, almost exclusively in Russian courts. Claimants have initiated legal proceeding aiming mainly to access the assets blocked in Euroclear’s books. Despite all legal actions taken by Euroclear and the considerable resources mobilised, the probability of unfavourable rulings in Russian courts is high since Russia does not recognise the international sanctions. Euroclear will continue to defend itself against all legal claims.

In parallel, the Board notes that the European Commission is contemplating various options to use the profits generated by the reinvestment of sanctioned amounts held by financial institutions, including Euroclear, for the financing of Ukraine’s reconstruction.

Newsflash: Inflation in the eurozone has fallen back, partly reversing December’s jump.

Statistics body Eurostat reports that euro area annual inflation is expected to be 2.8% in January 2024, down from 2.9% in December.

Food, alcohol & tobacco is expected to have the highest annual rate in January (5.7%, compared with 6.1% in December), followed by services (4.0%, stable compared with December), non-energy industrial goods (2.0%, compared with 2.5% in December) and energy (-6.3%, compared with -6.7% in December).

UK manufacturing activity contracted last month, as the Red Sea crisis hits supply chains and contributes to rising costs, new data shows.

Data firm S&P Global Insight’s latest survey of purchasing managers shows that the downturn in the UK manufacturing sector continued in January.

UK firms reported that supply chain difficulties rose, as shipping firms rerouted vessels away from the Suez Canal following the attacks by Houthi rebels.

Some firms estimated that a minimum of 12-18 days could be added to vendor lead times for goods ordered from the Asia–Pacific region.

Rob Dobson, director at S&P Global Market Intelligence, said:

“Cost and stock management initiatives are being complicated by the Red Sea crisis. Diverting purchased inputs, especially those sourced from the APAC region, around the Cape of Good Hope is raising prices and extending supplier lead times.

Some of our panel members estimate that a minimum of 12-18 days could be added to some expected deliveries, disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas. One small ray of light from the January data is manufacturers expect some of these issues may be temporary, with an increasing number (over 50%) still forecasting output to be higher 12 months out.”

Manufacturers also reported that output and new orders fell again last month, leading to additional job losses and cutbacks in purchasing and stock holdings.

This left the UK’s manufacturing PMI still in contraction territory, at 47.0 in January, up from 46.2 in December but below the earlier flash estimate of 47.3.

The eurozone’s factory sector has shrunk again, but at a slower rate, as Red Sea disruption leads to supply delays.

Data provider S&P Global Insight reports that the slump in the eurozone’s manufacturing sector eased in January, with factory output and new orders declining at their softest rates since last April.

Its latest survey of purchasing managers shows that cutbacks to purchasing activity, stocks of inputs and employment also cooled, while business confidence rose to a nine-month high.

It adds:

Decreases in both input costs and output prices gathered momentum in January, despite suppliers’ delivery times lengthening for the first time in a year following disruption to ships passing through the Red Sea.

This lifted its HCOB Eurozone manufacturing PMI to a 10-month high of 46.6, up from 44.4 in December, but still below the 50-point mark separating expansion from contraction.

German athletic gear and footwear maker Adidas has warned that profit margins are being hit by shipping disrupion in the Red Sea.

Adidas CEO Bjorn Gulden told analysts that “exploding” freight rates are driving up costs, while shipping delays are causing some delivery issues.

Gulden said:

“Currently the spot rates are exploding again.

“We have contracts that go through the summer but if we need to ship more than what the contract says or we need to accelerate something, that now has a pretty high premium.”

Shipments are currently delayed by about three weeks, which Gulden said is causing some “delivery issues” especially to Europe.

BoE policymakers could be split three ways when they set interest rates today, predicts Michael Hewson of CMC Markets:

No changes are expected to monetary policy today with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. Of the 19 meetings Catherine Mann has voted in she has voted to increase the base rate at 17 of them so a hold will be a rare event for her.

There is also the possibility of a dovish outlier with the potential for Swathi Dhingra voting for a rate cut, prompting a split in the opposite direction to what we saw in December.

Since joining the MPC, Dhingra has only voted to raise rates twice in the 11 meetings she has voted in, so if anyone is going to break ranks and starting voting to cut rates it will be her.

Ben Laidler, global markets strategist at eToro, expects the Bank of England to start opening the door to interest rate cuts later this year.

The Bank of England (BoE) has been the most hawkish of major central banks and this has made Sterling one of the best recent currency performers. With UK inflation still double its 2% target, economic growth has been better-than-feared, and the government set for more tax cuts at its March budget.

But enough inflation-fighting progress has been made for the BoE to begin opening the door to lower interest rates starting this summer, with four cuts likely in the second half. This would lag behind the US Fed and Europe’s ECB but be welcome, and borrowers have already started to benefit from the fall in bond yields.

However, Tomasz Wieladek, chief European economist at T. Rowe Price, predicts the Bank will sound hawkish today, and signal that the markets are expecting too many rate cuts:

In December, UK inflation turned out to be stickier than expected, while survey data suggested a rebound in output and employment in the services sector. Mortgage approvals have begun to rise and mortgage rates are now falling, which will allow the mortgage and housing market to recover further over the next 6-12 months.

Economic activity will continue to rebound over the next couple of months as a result of the 2% National Insurance cut, which became effective at the beginning of the year. This will raise demand in the economy, while any additional tax cuts may increase demand further.

Greenpeace activists dressed as Shell board members have held a demonstration outside the energy giant’s headquarter this morning.

They conducted a mock Shell profits party behind a burning sign reading “Your Future”, to highlight the climate damage caused by fossil fuels.

Maja Darlington, Campaigner at Greenpeace UK, said:

“Fires are raging across Colombia, Britain has been wracked by floods, 2023 smashed global temperature records, but Shell is posting yet more obscene profits from climate-wrecking fossil fuels. While customers struggle with the cost-of-living crisis, Shell shovels over $20bn to shareholders and drills for yet more oil and gas, climate disasters are multiplying and hitting hardest those who have done the least to cause the crisis.

“It’s time to end the fossil fuel party. It would take the average British worker over 640,000 years to earn as much as Shell did last year. Our government must make oil companies like Shell stop drilling and start using their immense wealth to pay for the damage they are causing, before all our futures go up in flames.”

Profits at oil giant Shell have dropped by almost a third, but that hasn’t stopped it announcing another share buyback scheme and lifting its dividend.

Shell has reported annual adjusted profits for 2023 of $28bn, 29% down from its record earnings of almost $40bn in 2022.

The drop in profits is due to lower oil and gas prices, lower volumes, and lower refining margins, Shell says.

In the last quarter of 2023, Shell made $7.3bn, up from $6.2bn in the third quarter of last year, but lower than the $9.8bn made in Q4 2022.

The oil giant has also announced a new share buyback programme of $3.5bn, and is also lifting its dividend by 4%.

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

These are tricky times for central bankers. Growth is being held back by high interest rates, while inflation is still over target despite falling back from the peaks of the last two years.

So the Bank of England has plenty to ponder, as it prepares to set interest rates at noon today.

The City is confident that the Bank will leave interest rates on hold at their current 16-year high of 5.25%. With inflation at 4% – twice the BoE’s 2% target – policymakers probably won’t feel confident easing policy.

The money markets reckon there’s a 99% chance that the Bank holds rates unchanged today, with a 1% possibility of a shock rise to 5.5%.

The Bank may also cut its forecast for inflation this year, while investors also expect the BoE to signal when rate cuts are likely to start this year.

Rates have been held at 5.25% since last August. But the nine members of the Bank’s monetary policy have been split at recent interest votes – with some hawkish members pushing for higher borrowing costs.

April LaRusse, head of investment specialists at Insight Investment, says:

“We don’t expect any change in UK rates tomorrow, but the vote is going to be fascinating. At the last meeting of the Monetary Policy Committee in December three members of the committee voted to increase interest rates to 5.5%.

A lot has changed since then; the US Federal Reserve have pivoted to a more dovish outlook and markets are now pricing in a series of UK interest rate cuts starting in May. With inflation now considerably below the Banks own forecasts we expect a shift in tone – but the Bank is going to face a tricky job to keep market perceptions on a realistic path.”

Last night, America’s Federal Reserve left interest rate on hold, while Fed chair Jerome Powell tried to cool expectations that the Federal Reserve would begin cutting interest rates as soon as March.

Powell insisted a March cut was not the Fed’s “base case”, seen as an indication that the Fed could delay easing monetary policy until May.

That, and jitters about the health of US regional bank New York Community Bancorp, knocked stocks in New York last night. It cut its dividend and posted a surprise loss, renewing fears over the health of similar lenders.

The S&P 500 index of US shares lost 1.6%, while the tech-focused Nasdaq Composite lost 2.2%. Google’s parent company, Alphabet, lost 7% after missing advertising revenue targets in its latest results.

Also coming up today

The UK Labour party will be wooing business chiefs, and vice versa, today as it holds its largest ever business conference.

About 400 senior business leaders will gather in London for speeches, panels and roundtables, at an event where tickets sold out in just a few hours.

With a general election due within a year, Labour is expecting business leaders from companies such as Google, Shell, AstraZenaca, Airbus, and Goldman Sachs.

They hope the conference will demonstrate the party’s “commitment to work hand in glove with the business community” and will use it as an opportunity to reveal its business policy plans after two major industry reviews.

The agenda

• 8.30am GMT: Sweden’s central bank, the Riksbank, sets interest rates.

• 9am GMT: Eurozone manufacturing PMI report for January

• 9.30am GMT: UK manufacturing PMI report for January

• 10am GMT: Eurozone flash inflation reading for January

• Noon: Bank of England interest rate decision

• 12.30pm GMT: Bank of England press conference

• 1.30pm GMT: US weekly jobless data