Bank of England expected to leave UK interest rates on hold and slow bond-selling QT programme – business live | Business

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Bank of England expected to leave UK interest rates on hold and slow bond-selling QT programme – business live | Business

Introduction: Will Bank of England cut QT bond sales today?

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

All eyes are on the Bank of England today as it prepares to announce its latest monetary policy decision at noon UK time, but for once interest rates are not on everyone’s mind.

The BoE is widely expected to leave Bank Rate unchanged at 4%, a day after UK inflation remained painfully high over its target at 3.8%.

The real interest is whether it adjusts its bond-selling programme, giving a helping hand to chancellor Rachel Reeves.

Under that “quantitative tightening” (QT) programme, the Bank has been selling some of the government bonds it bought during the financial crisis and the Covid-19 pandemic. QT has come under growing criticism for pushing up borrowing costs — as the Bank’s steady selling has weighed on bond prices, which lifts bond yields.

The Bank is due to make its annual assessment of QT today, and many City economists expect it to slow the unwinding process.

Over the last months, the Bank conducted £100bn of QT, through active sales and by not replacing bonds as they mature. Economists are expecting policymakers will slow the pace of reduction in gilts to around £72bn.

A slowdown in gilt sales would help Reeves by easing the pressure on elevated gilt yields, which hit a 27-year high last month. Lower yields could help give the chancellor some headroom in her autumn budget calculations.

Laith Khalaf, head of investment analysis at AJ Bell, says:

“The gilts held by the Bank of England have turned from making a tidy profit for the government into a costly expense now interest rates have risen and the Quantitative Easing (QE) programme is being slowly unwound.

In essence, we are now paying for the cost of the extraordinary stimulus provided by the Bank of England in the wake of the financial crisis, which started over 16 years and eight chancellors ago. Rachel Reeves is in the unfortunate position of being the mug now holding the enormous bill to present to the taxpayer.

Last night, the Federal Reserve cut US interest rates for the first time this year, responding to signs that America’s jobs market is weakening.

The agenda

9am BST: Norges Bank to set Norwegian interest rates
Noon BST: Bank of England monetary policy decision
1.30pm BST: US weekly jobless claims data

Key events

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Just 30 minutes until the Bank of England releases its decision on interest rates, and on how quickly it will unwind its crisis-era quantitative easing portfolio over the next year.

Victoria Scholar, head of investment at Interactive investor, sets the scene:

“The Bank of England is expected to keep rates unchanged at 4% during its policy decision meeting today, particularly in light of yesterday’s inflation data which matched analysts’ expectations. Nonetheless inflation is running much hotter than the central bank would like and is expected to push higher in September before pulling back. Elevated inflation makes it harder for the central bank to continue on its monetary loosening path, raising the likelihood of a higher-for-longer interest rate environment which could have negative effects on borrowing and the housing market.

At its previous decision meeting, the Monetary Policy Committee (MPC) cut interest rates by 25 basis points to 4%, in a very narrow vote that divided the BoE’s rate setters. This time, the monetary policy committee is expected to be much more united in its decision with a wider vote split in favour of a hold.

December could be the next live rate decision, once monetary policymakers have greater clarity on the fiscal outlook in terms of the government’s tax and spending plans which will be revealed in late November’s Autumn Budget.

Since today’s hold is widely anticipated, greater focus lunchtime’s announcement will be on the Bank of England’s quantitative tightening. In light of recent bond market volatility, the central bank is expected to slow the pace at which it sells its government bond holdings.”

ShareLisa O’Carroll

German industry chiefs have called on the European Commission chief Ursula von der Leyen to slash red tape and dump two laws for every new law added to European statute books.

They said the “one in two out rule”, which has echoes of a one-in and one-out policy pursued by Tony Blair when prime minister of the UK, is an essential part of any effort to accelerate competition conditions that will make it easier to take on rivals such as the Chinese.

They have also called for “simplification” of environmental laws and demanded urgent action from the German government to cut energy costs, the highest in Europe, just pipping Denmark and Ireland.

Germany’s four top business organisations said:

“EU legislation must become better and faster – with mandatory impact assessments and competitiveness checks for all economically relevant laws, stringent application of the “one in, two out” principle, and the consistent elimination of regulatory duplication and disproportionate burdens.”

They are the BDA, the Confederation of German Employers’ Associations, BDI, the Federation of German Industries, DIHK, the German Chamber of Industry and Commerce and ZDH, the German Confederation of Skilled Crafts.

They said the German government had heeded some of their calls to cut red tape but it was not enough.

Berlin needed to “reduce existing overregulation through further omnibus packages and carry out regular reviews of laws in the long term”, the said.

The groups added:

“Complex regulations and excessive reporting requirements must not paralyse the innovative and investment power of our companies. Ambitious simplifications in environmental law are also necessary to speed up planning and approval procedures.”

The joint statement was released in response to a speech by Von der Leyen at a conference in Berlin on Thursday.

Deliveroo has announced that its founder, Will Shu, will step down as CEO once its £2.9bn takeover by rival DoorDash is completed.

Shu says:

“I have decided that now is the right time for me to step down. Taking Deliveroo from being an idea to what it is today has been amazing.

Today the Company’s growth and profitability are accelerating and we are delivering on our mission to transform the way people shop and eat, but after 13 years I want to contemplate my next challenge.”

Deliveroo agreed to be taken over by DoorDash in May, in a deal that put Shu in line for a £172m payout.

Norges Bank cuts interest rates

We have a rate cut to digest… in Norway.

The Norges Bank has cut its policy rate from 4.25% to 4% today, judging that highest interest rates have helped to cool the Norwegian economy and dampen inflation in recent years.

Governor Ida Wolden Bache says:

“The job of bringing inflation back to target has not been completed, but a cautious easing of monetary policy will pave the way for returning inflation to target without restraining the economy more than needed.”

The Norges Bank also indicates that “a somewhat higher policy rate will likely be needed ahead compared with the outlook in June”.

They say:

“If the policy rate is lowered too quickly, inflation could remain above target for too long. On the other hand, an overly tight monetary policy stance could restrain the economy more than needed to bring inflation down to target.”

Shares in Next have tumbled around 6% this morning, after it gave a gloomy assessment of the UK economy (see earlier post).

Next are the top faller on the FTSE 100 index, despite reiterating its profits and sales guidance for this year.

Investors will have noted that Next believes “the UK economy is likely to weaken going forward,” and warned that “The medium to long-term outlook for the UK economy does not look favourable.”

There may also be disappointment that Next hasn’t raised its guidance, something it managed back in July.

Mamta Valechha, consumer discretionary analyst at Quilter Cheviot, says:

“The primary concern going into the second half of Next’s financial year is the tough economic outlook in the UK. Management has ramped up its political statement on the UK economy, sounding the alarm while criticising the government as job vacancies shrink and applications rise. However, whilst there is a reason to be cautious, management does not believe it is not approaching a cliff edge.

“Despite these challenges, Next is well positioned to weather any looming storm or uncertainty. We see continued strength in Next’s platform with Next’s brand continuing to do well, up 6%, with opportunities to invest in quality. In third party brands which continues to power ahead (up 13%), they are seeing opportunities in sports, premium and luxury, whilst in International they are seeing growth across all brands and channels as the group scales.

Updated at 10.45 CEST

Pets at Home slashes profits forecast; CEO leaves

A Pets at Home store at Fort Kinnaird in Newcraighall, Edinburgh. Photograph: Murdo MacLeod/The Guardian

Retailer Pets at Home has just startled the City by announcing the immediate exit of its CEO, and slashing profit forecasts, sending its shares sliding.

Shortly after the London stock market opened, Pets at Home revealed that CEO Lyssa McGowan has “left the business with immediate effect”, and that a search for a permanent replacement was underway.

Ian Burke, non-executive chair, has assumed the role of executive chair, meaning he’ll be running the business until a permanent CEO has been recruited.

Pets at Home also reports a “performance gap” at its retail operations versus its plans, and now expects underlying pre-tax profits in the range £90-100m this financial year.

The City had been expecting pre-tax profits this year of £115m, down from £133m last year.

Shares in Pets at Home have tumbled by 20% in the last few minutes. The company had benefited from the surge in pet ownership in the Covid-19 pandemic, but says the pet retail market has remained subdued.

Next reports falling vacancies and rising applications

The health (or otherwise) of Britain’s jobs market will be on the Bank of England’s mind when it sets interest rates today – and the latest update from retailer Next may concern them.

Next has told the City this morning that its vacancies have fallen across the board, down 35% overall over the last two years, but with deeper falls at its stores.

At the same time, applications have increased by +76%, with applications per vacancy 2.7 times higher than two years ago.

In other words, more people are chasing fewer jobs – a recipe for higher unemployment and lower wage growth.

Next cites three causes:

Increasing cost of employment (due to the higher minimum wage, and increased employers’ national insurance contributions)
Mechanisation and AI, which are replacing some manual and desk-based functions
Increasing legislative barriers to employment (warning that the upcoming Employment Rights bill will reduce jobs and eliminate earnings potential).

The company says:

The pressure on employment is unlikely to be like past recessions, where structural changes have wiped out whole industries, resulting in mass redundancies and regional slumps. These changes are likely to affect people employed in most sectors, and so the effects will be more gradual over time.

Our guess is that most companies will respond to the increasing cost of employment by not filling vacancies, rather than large-scale redundancies (that has certainly been our experience). This, to some extent, is good news because it means we are unlikely to see widespread or sudden economic shocks.

The problem is likely to be felt by those looking to enter the workforce or move jobs – the challenge will be finding suitable vacancies. That certainly resonates with the stories we hear about the difficulties young people are experiencing when trying to find work.

Next also reported strong financial numbers for the last six months: full-price sales rose 10.9% in the six months to July, with pre-tax profits up 13.8%.

Bank of England: What the experts expect

Andrew Wishart, senior UK economist at Berenberg, says there is “no chance” of a change in interest rates today, so the focus will instead be on the pace of quantitative tightening (QT).

Wishart adds:

We expect the BoE to slow the pace of balance sheet reduction from £100bn to £60bn per annum (consensus £72bn). That would both keep the amount of active sales the BoE undertakes broadly steady and decrease the payments HM Treasury (HMT) makes to the BoE to cover its losses, thereby reducing the budget deficit. Slower QT would be a win-win for bond holders.

Kathleen Brooks, research director at XTB, points out that educing QT is not without risk, explaining:

The bonds on the BOE’s balance sheet have been losing value as bond prices have fallen, and yields have risen in recent years. In contrast, the amount that the BOE pays in interest on bank reserves has been rising, and the BOE has required Treasury transfers to manage this.

Ultimately, this will be for the Chancellor to solve, and it could lead to bank taxes included in this Autumn’s budget.

Sanjay Raja, UK economist at Deutsche Bank, suggests the Bank could tweak its guidance on the path of interest rates:

The vote split. We expect a 7-2 vote split to keep Bank Rate on hold. Alan Taylor and Swati Dhingra, we think, will opt for a quarter-point rate cut in September.

The forward guidance. If there’s any surprise in the MPC minutes, it’s likely to come from the Bank’s forward guidance. There are three paths here the MPC can take: one, stick to its current guidance of ‘gradual and careful’ rate cuts, two, tweak its current guidance to ‘gradual and cautious’ rate cuts, or three, simply, drop the current guidance entirely. We place a 40/20/40 probability for each of the three paths. Indeed, there’s a material risk, in our view, that the MPC abandons its ‘gradual and careful’ guidance surrounding the downward path for Bank Rate.

The QT decision. We expect the MPC to reduce its QT envelope from £100bn to £70bn with a landing zone of £65-75bn.

It would be a big shock for the City if the Bank of England doesn’t leave interest rates on hold at midday at 4%.

The money markets are indicating there’s a 97% chance of ‘no change’, and just a 3% possibility of a hike back to 4.25%.

Last month, the Bank’s nine policymakers were badly split – with four voting to hold rates at 4.25%, four favouring a cut to 4%, and one initially plumping for a large cut to 3.75%, before joining the ‘smaller cut’ gang in a second vote.

A chart showing UK interest rate moves Photograph: Bank of England/GuardianShare