Shares in low-cost airline Wizz Air have slumped by 22% today, the biggest drop in the FTSE 250 today, after it reported sharply reduced profits for the last quarter.

The carrier has been one of the worst affected by the Pratt & Whitney engine issues in Airbus planes, which have forced it to ground more than a fifth of its fleet on average over the three months to June.

Operating profits were down to €44.6m, compared to €79.9m in the same period in 2023.

With lower growth and almost €40m in leasing costs to cover the grounding – albeit partly offset by compensation from the manufacturers – Wizz lowered its full year forecast profits by almost €200m, to €350-400m.

While the Budapest headquartered carrier has slightly stalled in its ambition to challenge Ryanair’s crown as Europe’s biggest budget airline, chief executive, József Váradi, said that performance had improved despite the problems, adding: “We remain on track to return to annual capacity growth [next year], underpinned by the pipeline of Airbus deliveries.”

The Bank of England’s interest rate cut hasn’t brought much cheer to the City today.

The FTSE 100 index of blue-chip shares has sunk by 1% today, and just closed 85 points lower today at 8283 points.

Banks were among the big fallers, with NatWest tumbling 8%, HSBC down 6.5% and Lloyds losing 5.75%.

Here’s a video clip of BoE governor Andrew Bailey explaining today’s interest rate cut:

Here are BNP Paribas’s thoughts on today’s interest rate cut:

• Thursday’s decision to cut Bank Rate by 25bp to 5.0% was followed by a relatively hawkish Bank of England press conference. This suggests to us that the MPC members for whom the decision was a close call may prefer a relatively gradual pace of monetary policy easing from here.
  

• We are a little more optimistic than the BoE on services inflation over the coming months, and so we continue to hold our view that it will cut again in September. However, we see risks skewed towards a delay until November.
  

• The BoE did not explicitly push back on market pricing, however, a medium-term inflation forecast that undershoots the 2.0% inflation target is to us an implicit sign that the BoE may see the neutral rate as a little lower than markets think.

S&P Global Market Intelligence fears that today’s rate cut could be a “risky decision”.

The danger is that the fundamentals of inflation and wages may not yet be in place to deliver medium-term price stability.

Raj Badiani, economics director for Europe at S&P Global Market Intelligence, explains:

The BoE could be open to some reputational damage if today’s decision was premature and results in a damaging start-stop monetary loosening cycle.

Nevertheless, today’s rate cut decision is good news for both the UK’s budding economic recovery and the new Labour government’s pledge to deliver stronger UK growth amid limited fiscal options.

The decision will be welcomed by millions of cash-strapped households who hope today’s rate cut is the start of the final chapter of the cost-of-living crisis.”

Peder Beck-Friis, economist at bond-trading giant PIMCO, predicts the Bank of England will proceed cautiously – and probably won’t cut interest rates at its meeting next month:

We think another cut in September is unlikely, unless incoming inflation and labour market prints surprise to the downside, and expect the next cut in November as a baseline.

Further out, however, we see room for the BOE to cut more than financial markets expect — as tight fiscal policy, a cooling labour market, and a likely low neutral rate should allow more rapid cuts next year and beyond.

UK mortgage-holders should benefit from today’s interest rate cut.

Homeowners on tracker mortgage rates will see their annual payments cut by more than £340 on average as a result of the base rate reduction from 5.25% to 5%, PA Media reports.

According to industry body UK Finance, based on outstanding mortgage balances, the average tracker mortgage borrower will see their monthly payments cut by £28.44.

Someone on a standard variable rate (SVR) mortgage meanwhile will see their monthly payments fall by £14.50, assuming their lender passes on the rate cut in full. SVRs are set by lenders individually.

Here’s another chart showing the upward revision to the Bank’s growth forecasts:

Q: Is the Bank of England shocked by the £20bn black hole in the public finances uncovered by its former employee, Rachel Reeves, and what are the ramification?

Governor Andrew Bailey tries to argue that the Bank leaves fiscal matters to the government.

He reiterates his earlier point that the Bank focuses more on private sector pay growth, not public sector wages – and that ‘back of the envelope’ calculations show little impact on inflation from public sector pay rises.

Asked about Middle East tensions, Andrew Bailey says the Bank of England must be “very vigilant” about whether they will lead to higher inflation pressures.

Q: You say you don’t want to cut interest rates too much or too quickly – can you define that, or is it just ‘vibes’?

Bailey won’t give a definitive answer – saying only that there are a number of potential paths for inflation; each MPC member will “recalibrate” their view, as evidence comes in.

Q: Are UK interest rates heading back to the near-0% level we saw before the recent surge in inflation?

Andrew Bailey says it’s “unlikely” that we’ll return to the situation we saw from 2009, when borrowing costs hit record lows.

That’s because those very low interest rates were due to major shocks – first the financial crisis, and later the Covid-19 pandemic.

Q: What measures should the government introduce in the budget to boost growth?

Andrew Bailey tries to swerve this curveball too, saying he agrees with both Rachel Reeves and her predecessor Jeremy Hunt that important things need to be done to improve the productivity of the UK economy.

Q: What impact would a Donald Trump presidency have on the UK economy?

Andrew Bailey says the Bank does not take a view on the US election.

We’ll see who wins and what their policies are.

Q: How much damage has been caused by the Bank’s refusal to cut interest rates sooner?

Deputy governor Dave Ramsden, who had voted for a rate cut in May and June, says all MPC members believe interest rates should remain at restrictive levels to keep squeezing the persistent portion of inflation.

Away from the Bank of England’s press conference, Rachel Reeves has pushed back against Conservative claims that she inherited a strong economy.

Asked whether the Tories’ decisions in office may have led to today’s rate cut, the Chancellor told broadcasters:

“Decisions around interest rates are of course decisions for the independent Bank of England, but I have been left with a £22 billion black hole in the public finances.

“I am determined to close that black hole so that we can fix the foundations of our economy.

“That will require tough decisions, but that is what we were elected to do.”

Q: What’s the Bank of England’s advice to people wondering whether to remortage now, or wait?

The Bank is “rather careful” not to give financial advice, governor Andrew Bailey replies.

He points out that mortgage rates are around 1 percentage point lower than this time last year, as the market has adjusted to forecasts of falling inflation.

Bailey says:

Inflation has come down more rapidly than all of us feared this time last year.

He points out that mortgage rates are priced off the ‘swaps curve’ – which reflects what financial markets think will happen to interest rates in future.

Q: What impact will April’s rise in the minimum wage have? Are businesses at the limit of what they can absorb?

Deputy governor Dave Ramsden says the Bank flagged this as a risk to inflation in its May report – when its economists estimated it would 0.3 percentage points to pay growth.

Ramsden says wage growth since has been in line with expectations.

Q: Are the markets getting ahead of themselves by predicting another rate cut by the end of this year?

Andrew Bailey refuses to comment on market expectations, which will disappoint borrowers hoping for further cuts in interest rates.

Q: When will UK interest rates stop being at painful levels?

Andrew Bailey doesn’t give a clear date.

He says the economy is coming out of last year’s shallow recession, but the current growth path appears to be below potential.

That means a small output gap is opening up, meaning monetary policy should remain at restrictive levels to suppress inflation.

Bailey says interest rates, at 5%, are still above the neutral rate (known as r* in economics) – this is the rate where borrowing costs are neither restrictive nor stimulative.

Onto questions…..

Q: Is the door open for future rate cuts, or does today’s move mean the Bank of England is ‘one and done’?

Governor Andrew Bailey tells today’s press conference that the committee is “highly alert” to the risks of inflation persistence.

Bailey resists giving any firm guidance either way, saying:

We will go from meeting from meeting, as we always do. It’s this judgement about resilience.

He says the Bank has become more confident that inflation is falling sustainable to target, meaning it could cut rates.

He also points to the final paragraph from the minutes of this week’s meeting, which says:

Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further. The Committee continued to monitor closely the risks of inflation persistence and would decide the appropriate degree of monetary policy restrictiveness at each meeting.

The Bank’s latest economic forecasts suggest inflation will fall below its 2% target in the next two and three years, based on market expectations for interest rates.

On the market-implied path that rates fall to 3.5% over the next three years, the Bank expects CPI inflation to drop to 1.7% in two years, and 1.5% in three years.

Governor Andrew Bailey adds that there is still a question about whether the persistent component of inflation will drop to levels consistent with its 2% target.

He says the Bank will continue to pay close interest to services inflation (which was 5.7% in June).

But, he adds, the Bank shouldn’t change course in response to “every data surprise” that comes in…

Andrew Bailey adds that “we have truly come a long way” in returning inflation to target.

He shows a chart showing how inflation has fallen “significantly” from its peak over 11% in late 2022, to 2% in May and June.

Bailey cautiond that inflation is expected to rise later this year, perhaps to around 2.75%, before then reverting back to the 2% target again.

The UK’s Institute of Directors has welcomed today’s interest rate cut.

Anna Leach, chief economist of the IoD says it will provide relief to businesses – and households – hurt by the high cost of finance:

“Today’s 5-4 vote by the MPC for a rate cut will give some welcome relief to businesses and households squeezed by the high cost of finance.

Although key measures of domestic inflation persistence have not come down as much as the Bank would have liked, they are clearly content that sufficient progress has been made to warrant a slight reduction in rates.

“We’re not expecting much more by way of rate cuts this year. The IoD’s economic confidence measure has improved materially over the past 6 months and broader data on the economy points to momentum holding up despite the high level of interest rates. With wage growth and services inflation still high, and headline inflation expected to rise in the coming months, monetary policy is set to stay restrictive for a good while yet.”

Former chancellor Jeremy Hunt is keen to take some credit for today’s interest rate cut.

He has posted on X (formerly Twitter) that the previous government’s “difficult decisions” brought inflation down.

Hunt also claims that the recent “inflation-busting public sector pay rises” announced by the government will make it harder for the Bank to cut rates again in future.

However…. the drop in UK inflation is primarily driven by cheaper energy costs, and falling prices of imported goods.

And… many economists insist that public sector pay rises will not fuel inflation (after all, state schools and hospitals will not put their prices up….)

Just time for one last look at the money markets – which suggest there’s a 63% chance of an interest rate cut in two minutes….

The MPC took its decision last night, but they’ll announce it on the dot of noon.

Although Goldman Sachs expects a UK interest rate cut at noon today, they also warn that the decision is a close call.

GS economist James Moberly predicted last week that BoE governor Andrew Bailey, deputy governors Sarah Breeden and Clare Lombardelli would join existing doves Swati Dhingra and Dave Ramsden, and vote for a cut today. That would give a 5-4 majority on the monetary policy committee.

Moberly wrote:

The totality of the data continues to show significant progress on curbing inflationary pressures, and we think that the updated projections will continue to show inflation slightly undershooting the target two to three years ahead even if the MPC lowers Bank Rate in line with the market-implied path.

We think that this will be enough for Bailey, Breeden, and Lombardelli to join Ramsden and Dhingra in voting for a cut, despite recent strength in services inflation.

That said, limited communication from these Committee members means that their votes are difficult to predict. Taken together with the cautious tone of Chief Economist Pill’s recent speech, which indicates that he is unlikely to support a cut, we therefore view the decision to lower Bank Rate as a close call and see a low bar for the MPC to delay the first cut until September.

Chief economist at PwC UK, Barret Kupelian, explains how an interest rate cut could help the UK economy:

“Economic theory states lower interest rates lead to cheaper borrowing costs, as a result helping propel spending across the economy. The prospect of lower interest rates in the UK in the backdrop of an extraordinary cost of living crisis and anaemic growth should therefore be welcome news.

How households will react, however, is not as clear as what really drives their behaviour is their perception, rather than the reality, of the economic outlook.

Back in the City, Smith & Nephew shares have jumped by nearly 11% to a one-year high this morning.

The company, which makes artificial hips and knees, wound dressings and other surgical materials, reported better than expected half-year profits on the back of higher demand for its orthopaedic products.

Andy Murray, who made it to the quarter finals in doubles in the Paris Olympics and is playing tonight, had the firm’s hip resurfacing device fitted in his right side in 2019.

Smith & Nephew’s share price hit £12.45 earlier and is now up by nearly 6% at £11.89.

The shares have risen by a fifth in the past month, after the activist investor Cevian disclosed that it had taken a 5.1% stake in Smith & Nephew, making it the firm’s second-biggest shareholder. Previously, they had lost mare than half their value since an all-time high hit in February 2020.

Profit rose by 12.8% to $471m in the half year to 29 June, ahead of analysts’ expectations of $462m. The company has struggled in recent years after the Covid-19 pandemic led to surgery delays and supply disruptions, and has also been hit by high raw material costs following Russia’s invasion of Ukraine.

Chief executive Deepak Nath said:

“There is still more work to be done and we expect to see further progress in the second-half of the year.”

Revenue from its orthopaedics division rose by 5.8% to $581m in the second quarter, lifted by strong growth in hip and knee implants outside the US, as well as from other reconstruction procedures.

Hedge fund owner Paul Marshall is closing in on The Spectator magazine, reports Sky News’s Mark Kleinman.

Sources have said Marshall’s Old Queen Street Ventures vehicle could strike a deal to buy the Spectator as soon as this month.

Marshall, who holds a stake in GB News, had been expected to be a frontrunner in the race to buy the Telegraph – but Sky say there is “growing doubt” about whether he would participate in the newspaper auction.

Both the Telegraph titles, and the Spectator, are up for sale after the government blocked their sale to an Abu Dhabi-backed fund.

Marshall has described himself as “a committed Church of England Christian” – he worships at the evangelical Holy Trinity, Brompton – and has said he wants to make “free enterprise once again a pillar of human flourishing”.

There is cautious optimism in the UK factory sector, reports James Brougham, senior economist at Make UK.

Following today’s rise in the UK manufacturing PMI, Brougham says:

“As the first issue of this data since the new government came to power, all eyes have been on what this significant electoral majority may manifest for industrial confidence in the second half of the year. Cautious positivity is in the air as the sector has seen continued expansion for three consecutive months, the longest sustained positive run for two years.

Eased worries have translated into a slowdown in destocking, subsequently returning demand for the sector’s products to growth. However, just as this demand returns, so too does the ghost of the past that haunted the sector for so long. Manufacturer’s input price inflation has struck its highest point in one and a half years, reminding the sector that it is uniquely sensitive to demand-side pressures.

Given activity should continue to pick up towards the ends of the year, this input price pressure will likely continue, so the perfect intervention from Government of a long term and robust industrial strategy delivered at speed is more needed than ever to restore investment confidence across the sector.”

The pound is continuing to lose ground on the foreign exchanges this morning.

Sterling has now lost almost a cent against the US dollar, to $1.2767, its lowest since early July.

The recovery in UK manufacturing last month is a sharp contrast with the eurozone, where the sector contracted again (see earlier post):

The increase in the UK’s manufacturing PMI in July is a “welcome boost” to the sector, says Dave Atkinson, UK Head of Manufacturing, SME & Mid-Corporates at Lloyds Bank:

“Today’s figures confirm three consecutive months of growth and will provide a welcome boost to the sector despite some of the uncertainties of late.

“July’s growth may give businesses the breathing space they need to reconsider stalled investment plans to support them to remain competitive and consider longer term growth strategies.

The eurozone’s factory sector continued to shrink last month, as manufacturers were hit by a drop in new orders, and rising costs.

Output and employment levels contracted at a faster rate last month, according to the latest PMI survey from S&P Global.

The report found that eurozone factory output contracted at its fastest rate of 2024 in July. It also highlights a “marked acceleration” in cost pressures, with input prices increasing at the fastest rate in a year-and-a-half.

Here’s the details:

• HCOB Eurozone Manufacturing PMI at 45.8 (Jun: 45.8). Unchanged.

• HCOB Eurozone Manufacturing PMI Output Index at 45.6 (Jun: 46.1). 7-month low

Eurozone manufacturers are suffering from weak demand, reports Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank:

“The widely held belief that the eurozone’s recovery would pick up speed in the second half of the year is taking a hit, thanks to the latest HCOB PMI index for the manufacturing sector.

Earlier this year, it looked like the sector might gradually climb out of the production slump it had been in for months, but the doubts that surfaced in June have been intensified by an accelerated decline in production in July.

Given this weak data, we’ll probably need to lower our GDP growth forecast for the year from 0.8%.”

Overnight, data has shown that China’s manufacturing activity in July shrank for the first time in nine months as new orders tumbled.

The Caixin/S&P Global manufacturing PMI fell to 49.8 in July from 51.8 the previous month, the lowest reading since October last year and missing analysts’ forecasts of 51.5.

UK government bond prices are strengthening this morning, pushing down borrowing costs (the yield on the debt).

That’s another sign that the City is anticipating a cut to UK interest rates today.

Reuters has the details:

British two-year government bond yields fell to their lowest since May 2023 and five-year yields hit a six-month low on Thursday ahead of a Bank of England decision which may well see the rates cut from their current 16-year high.

Two-year yields briefly dropped more than 4 basis points to 3.760% while five and 10-year yields fell as low as 3.718% and 3.925%, all down a similar amount.

Interest rate swaps price in a 62% chance of a BoE rate cut today and 56 bps of easing over the course of 2024.

There are nine members of the Bank of England’s monetary policy committee, and today’s vote is unlikely to be unanimous.

BNP Paribas, Deutsche Bank and Goldman Sachs all predict the MPC will split 5-4, narrowly in favour of cutting interest rates from 5.25% to 5%.

At the last meeting, in June, two policymakers – Swati Dhingra and Dave Ramsden – voted for a cut, but were outvoted by the other seven.

Sanjay Raja, Deutsche Bank’s chief UK economist, told clients:

To be sure, as most economists and market participants have noted, the August decision will likely be finely balanced. No, we don’t expect a unanimous vote for a rate cut. Our baseline expectations are for a very slim majority (5-4) voting in favour of dialing down restrictive policy.

James Smith, developed market economist for ING, says today’s Bank of England decision will be a “close call”.

He expects a majority of policymakers to vote for a rate cut, telling clients:

“Some of the recent economic recovery can also be traced back to expectations of imminent rate cuts. And decent growth for the rest of 2024 relies, in part, on those cuts being delivered, a fact that won’t have been lost on BoE officials. Remember that the passthrough of higher rates has been more rapid in the UK relative to some other parts of Europe or, indeed, the US.

The bottom line is that there is just about enough in the recent data to give the Bank confidence to begin lowering rates.

ING also suggests four scenarios for today’s decision – ranging from a cut today and hints of further easing, to a hold with no guidance as to when cuts may come.

Professor Costas Milas, of the Management School at University of Liverpool, points out that new economic research suggests the Bank of England should cut interest rates today:

The BoE’s MPC has a very narrow window of opportunity (today, that is) to cut interest rates before the recently announced public sector wage increases above inflation (and the wage increases for junior doctors) trigger a wage-price spiral.

More importantly, however, brand-new research (not mine), just published in the very prestigious Journal of Monetary Economics (the “Bible” for policymakers) finds that monetary tightening in the US takes about 43 months to lower “services inflation” significantly.

So, if these results also carry over to the UK (where, for instance, “services inflation” remains high at 5.7%), the natural implication is that the MPC should cut the Base Rate immediately and be patient, that is, not worry much about service-sector inflation.

The pound is weakening as traders anticipate the Bank of England’s interest rate decision at noon today.

Sterling has dropped by over half a cent against the US dollar to $1.2795, a three-week low.

It’s also lost half a eurocent, to €1.1834.

A weakening pound could show that traders are anticipating a UK interest rate cut.

Kyle Rodda, senior financial market analyst at capital.com, says:

For the markets, a cut from the Bank of England is a matter of when and not if; however, provided the Bank of England signals it’s the beginning of a cycle, a cut would likely boost the FTSE 100 and weaken the Pound.

Alternatively, the decision to hold rates would likely inspire the greatest volatility: rates markets imply a 57% chance the Bank of England cuts tonight, and the pricing out of that move would likely undermine equities and give a shot in the arm to the Pound.

Shares in Next have jumped 7.5% in early trading after it raised its profit forecasts again this morning (see earlier post).

They’ve touched £97.66, which looks to be an alltime high.

Profits have dipped at Shell, although the energy giant has still raked in over $14bn so far this year.

Shell has reported adjusted earnings of $6.3bn for the second quarter of this year, down from $7.7bn in the first quarter of the year.

It attributes the drop in earnings to weaker profit margins from oil refining, and weaker liquified national gas (LNG) trading.

Shell chief executive officer Wael Sawan says:

“Shell delivered another strong quarter of operational and financial results. We further strengthened our leading LNG portfolio, and made good progress across our Capital Markets Day 2023 financial targets, including $1.7 billion of structural cost reductions since 2022.

Today, we have also announced a further $3.5 billion buyback programme for the next three months. We continue to demonstrate that we are delivering more value with less emissions.”

Shelll has recently paused the construction of a large biofuel plant in Rotterdam, and has been criticised for watering down a key green energy target.

Philip Evans, campaigner at Greenpeace UK, says:.

“Wildfires raging across the Arctic Circle and temperature records being broken by the day should be a wake-up call.

But Shell continues to bank billions from digging up climate-wrecking fossil fuels. Shell’s reckless pursuit of profit is causing global climate chaos - and it is planning a new drilling frenzy that will only exacerbate the crisis.

“We cannot let countries and communities that have done the least to cause climate change pay the price for Shell’s greed. The new Labour government must prove it is different to its predecessor by reining in the fossil fuel giants and imposing bold new taxes on polluters to force them to pay their climate debts at home and abroad.”

Nationwide’s house price report also shows the general election had little impact on prices or activity, says Jeremy Leaf, north London estate agent.

Leaf adds:

Today’s knife-edge decision on interest rates is much more relevant to buyers and sellers in terms of confidence to move and direction of travel for future mortgage pricing.

“Nationwide has proved a reliable long-standing indicator of house-price movements, demonstrating market resilience once again, which indicates further inherent strength over the next few months at least.”