Key events
There is just a 20% chance that the Bank of England will raise interest rates at midday today, according to money markets.
Retention – maintaining the Bank’s interest rate at 3.75% is an 80% chance.
Next warns UK economic growth will slow despite raising profit forecast
Retail chain promotions in the City Next jumped after the company raised its profit forecast again.
Next delighted shareholders this morning by announcing it had increased its profit forecast for this financial year by £12 million to £1.255 billion.
The increase is the result of a slight increase in sales expectations and some additional cost savings, primarily in warehousing services, it said.
This appears to be the fourth increase in earnings since Next this year.
However… the company also lowered its forecast for UK sales growth this year from +2.8% to +2.0%.
Next predicts slow, steady decline over the year and warns chancellor John Healy do not raise taxes in next month’s budget, stating:
Our main concerns are rising inflation, higher mortgage rates and a weak labor market. These concerns will only be exacerbated if they are accompanied by tax increases.
Next The company’s shares rose 3.2% to £150, putting it at the top of the FTSE 100.
With high energy prices driving up inflation in the UK, the Bank of England will not be pleased to hear the latest transit data from the Middle East.
Freight ship transit through the Strait of Hormuz fell to three ships on Wednesday, down from 12 the day before.
While this rules out any vessels that may have passed through the waterway with their Automatic Identification System transponders turned off to avoid detection, it underscores how oil and gas flows from the Middle East remain seriously affected by the war with Iran.
Reuters has more details:
Of the three vessels, an empty Supramax bulk carrier entered the strait via the Iranian route, while an empty oil products tanker entered via a dark route, Kpler shipping data showed at 0445 GMT.
Data showed the Panamax tanker exited the waterway along a dark route.
Today’s interest rate decision comes at an increasingly difficult time for UK policymakers, says Daniela Hathornesenior market analyst of the company Capital.com:
This week’s data painted a decidedly mixed picture, with inflation moving ever higher than target and producer costs rising, but the labor market continuing to soften.
The result is an uncomfortable choice between protecting against a second wave of inflation and preventing unnecessary damage to an already fragile economy.
QT explained
Why is the Bank of England selling bonds at all?
In 2009 (after the financial crisis), the Bank of England began buying bonds with newly created money to raise bond prices and lower long-term interest rates. This process, called quantitative mitigation (quantitative easing) also aims to support inflation and increase asset prices and thus stimulate economic activity.
Following another surge in quantitative easing in the wake of the Covid-19 pandemic, the Bank increased its bond holdings to £895 billion.
But now this process is being reversed. QT.
Quantitative tightening There are two ways to do this: either sell the bond or simply hold it until maturity and then not reinvest the money.
The aggressive bond sales have been criticized because the Bank is selling bonds for less than what it paid for them.
So, given that QT increases government borrowing costs and creates losses for taxpayers, why do it at all?
Bank says:
Unlike quantitative easing, which is used to lower interest rates and therefore support inflation, the purpose of QT is not to affect interest rates or inflation. Instead, the goal is to ensure that QE can be repeated in the future if necessary to achieve the inflation target.
There is a full explanation here.
While the Bank of England may not raise rates today, money market prices suggest borrowing costs will rise over the next year or so.
As of last night, investors were forecasting a four-quarter point rate hike by the end of 2027, which would take the bank rate from 3.75% to 4.75%.
Introduction: Bank of England to set rates and bond sales program
Good morning and welcome to our ongoing coverage of business, the global economy and financial markets.
This is a crisis day for the Bank of England. Britain’s central bank will announce its latest interest rate decision at midday, and whether it has made any changes to its bond-selling program.
City officials are quite confident that the Bank will leave the interest rate unchanged at 3.75%, despite inflation rising further from its 2% target yesterday.
But while maybe three members of the monetary policy committee might vote for an increase, the other six would probably vote for them… (but you never know!).
The problem facing the Bank of England is that it has a mandate to control inflation, but there are signs that consumers are struggling – and raising rates will add to that pressure on households.
Kathleen Brooks director of research at HTB, explains:
The labor market is weak, wage employment is falling, real wage growth is negative and job openings are also at multi-year lows.
Growth in July was stronger than expected, but was driven by capital spending on artificial intelligence and a contraction in construction and manufacturing last month.
Bank of England Policymakers may also be feeling a little uncomfortable with other central banks raising rates, including the US Federal Reserve yesterday (to the chagrin of Donald Trump).
As Chairman of the Fed Kevin Varsh noted:
“The obvious fact is that [US] Inflation is too high and has been this way for too long.
“This summer’s inflation readings do not tell me that underlying trends have improved significantly.”
The Bank’s decision to engage in quantitative tightening (QT) – selling bonds bought to stimulate the economy – is harder to call and potentially more explosive.
Economists expect the Bank to slow the pace of QT – perhaps to an annual pace of £50 billion, down from £70 billion last year. It may even halt the sale of longer-term bonds, where it has been criticized for helping push borrowing costs to multi-year highs.
[This is because bond yields rise when prices fall, and prices are pushed down if one major bond-holder is determined to sell their gilts].
The bank has already been criticized by the Reform Party for insisting on QT given the losses incurred by taxpayers.
Guardian wrote earlier this week that QT needs to be reconsidered, explaining:
No other major central bank behaves this way. Whatever you think of the losses, the Treasury’s demand to settle them immediately turns monetary policy into fiscal intervention. A report this week said the Bank and Treasury are developing changes to QT to ease pressure on rising interest rates. Independence appears to have been abandoned in favor of quiet coordination. The MPC’s decisions cannot be taken for granted.
Andrew Bailey, the Bank’s governor, calls the overall value of QT “neutral” – but, as economist Patricia Pino points out, only when measured over six decades. In fact, billions of dollars in cash demands are coming to parliament. Governments have not set budgets, voted in elections or run public services for 60 years. It is unsustainable for the Bank to make decisions and force ministers to face political consequences to voters.
Agendas
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10am PT: Eurozone inflation report for August.
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12:00 BST: Bank of England decision on interest rates and QT.
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13:30 BST: US initial jobless claims data.
