Introduction: Another Bank of England rate rise looms
Good morning.
Britain’s mortgage time bomb is ticking louder today, with interest rates likely to be raised for the 13th time in a row at noon.
After Wednesday’s inflation shock, the Bank of England is expected to raise borrowing costs again as it tries to cool the cost of living crisis.
Bank rate is forecast to rise by at least a quarter of one percent, from 4.5% to 4.75%, but some in the City of London believe the BoE could unleash a half-point hike, to 5% – a level last seen in April 2008.
The Bank hopes that tightening monetary policy will squeeze rising price pressures out of the system. Yesterday, we learned that inflation failed to fall as hoped in May, with the annual CPI rate stuck at 8.7% – well over the UK’s 2% target.
Most alarmingly, core inflation (stripping out food, energy, alcohol and tobacco) rose in May.
Underlying or core inflation rose in May, by 7.1%, up from 6.8% in April, and the highest rate since March 1992; the services annual rate of inflation rose from 6.9% to 7.4%. Very bad news for anyone with a mortgage or any other debt. Interest rates will be higher for longer…
— Robert Peston (@Peston) June 21, 2023
The Bank of England is already facing heavy criticism for its failure to keep inflation close to its 2% target, including from some MPs, after leaving rates at record lows after the pandemic until December 2021.
Mike Riddell, head of Macro Unconstrained at Allianz Global Investors, argues that the Bank has “little choice” other than to continue hiking rates.
Riddell says:
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Whilst headline inflation is flat vs last month, core inflation has accelerated even further. This leaves the Bank of England (BoE) with little choice other than to continue hiking rates, to weaken demand
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It seems very unlikely to that the BoE would deliberately run monetary policy too loose
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If problems on the supply side do not improve, then the BoE will be forced to further reduce demand to get wage growth lower. If it doesn’t, then the BoE may as well not have an inflation target
Raising interest rates will hurt borrowers, at a time when mortgage holders are already facing sharp increases in costs if they need a new deal.
The Resolution Foundation has calculated that, due to the rising interest rates, people looking to remortgage their homes will pay an average £2,900 a year more from 2024.
More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, according to the Institute for Fiscal Studies.
Yesterday, JP Morgan economist Karen Ward, who advises the chancellor, Jeremy Hunt, warned that the Bank has to “create a recession” if it is to control inflation.
Labour are warning that “people are being hit hard by a Tory mortgage penalty”. They are proposing a five-point plan to cushion the hit from soaring mortgages and halt repossessions.
Under Labour’s plans, banks would be required to allow lenders to switch to interest-only repayments, extend their mortgage repayment period, reverse these measures at any point, and would have to wait at least six months before seeking to repossess a property, and make sure none of this had an impact on borrowers’ credit ratings.
The agenda
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7.45am BST: French business confidence
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8.30am BST: Switzerland’s central bank sets interest rates
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9am BST: Norway’s central bank sets interest rates
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9.30am BST: Latest realtime economic activity data for the UK
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Noon BST: Bank of England decision on interest rates
Key events
The markets are currently predicting that UK interest rates will be pushed up to around 6% by the end of the year, up from 4.5% at present.
The Bank of England will hike rates today, but unfortunately it will be too little, too late.
After 18 months of delay and blaming Covid/weather/Ukraine, markets are no longer giving the BoE the benefit of the doubt or a pause.
The expectation is 5.9% rates in six months. pic.twitter.com/Jy1zahoxoD
— Alberto Gallo – Andromeda (@macrocredit) June 22, 2023
Tensions is mounting in the City of London, as investors brace for the Bank of England’s interest rate decision at noon.
There’s real uncertainty about which way the Bank’s policymakers will jump today. The money markets currently suggest a quarter-point increase is more likely (57% chance) while a half-point hike has slipped to (43%).
Joel Kruger, market strategist at LMAX Group, sets the scene….
“The broad expectation is that the Bank of England will raise interest rates by 25 basis points, though some are now considering the possibility of a more aggressive 50 basis point move.
“It cannot be ignored that in recent weeks there has been a clear drive higher in UK inflation. Moreover, strong employment data should only add to the case for the BoE to lean more to the hawkish side in its communication.
Economist James Meadway, of the Progressive Economy Forum, argues that the UK is experiencing an “institutional, systemic failure”, and that the Bank would be wrong to raise interest rates today.
Interest rate rises will *not* affect inflation – not, at least, without causing severe harm to millions of people.
No one should give an inch to this rubbish. What we’re living through is an institutional, systemic failure with the Bank of England in the middle of it.
— James Meadway (@meadwaj) June 22, 2023
You basically can’t. Inflation is a distributional conflict. So you need to work out who is going to pay and who you want to protect. This govt has decided most people will have to pay.
— James Meadway (@meadwaj) June 22, 2023
Last year’s inflation shock was triggered by Russia’s invasion of Ukraine, forcing up energy and food prices, which are now rippling through the economic system.
Higher interest rates in the UK didn’t make wholesale gas, for example, any cheaper, but the Bank argues that it must stop inflationary expectations becoming embedded.
Yesterday’s inflation report showed that service sector inflation accelerated in May, which will have alarmed the BoE.
There’s just an hour to go until the Bank of England reveals this month’s decision on UK interest rates.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says BoE policymakers are stuck in an uncomfortable platform — inflation staying hot and sticky, but previous rate rises haven’t yet had their full effect
That’s because monetary policy famously acts with a lag, partly due to the prevelance of fixed-term mortgages.
Streeter explains:
The cumulative effect of the rapid tightening in monetary policy over the past year, hasn’t yet been felt by a big chunk of homeowners and businesses as they’ve not had to refinance their debt.
So, many wealthier consumers will have been propped up by savings built up during the pandemic, with money in accounts gaining in interest. For them, big spending has been a post-pandemic habit hard to break, which is likely to be part of the reason why companies are still enjoying fatter margins, not yet beaten down by a bulk of cash strapped shoppers.
A fast train of realisation is set to hit that budgets are set for a big squeeze as refinancing costs escalate, and deadlines loom for a large span of borrowers. The cost-of-living crisis hit lower income families hard first, whose spend bigger chunks of their income on essentials, but now we are arriving at a stop where many wealthier households will feel their budgets being sideswiped.
Here’s a clip of shadow chancellor Rachel Reeves outlining Labour’s proposals to protect mortgage-holders who are struggling to cope with higher interest rates:
People across Britain work hard, pay their mortgages and rents, and now are being clobbered.
Today, Labour sets out our 5 point plan to ease the hit from the Tory mortgage penalty.
Labour will not stand by as millions face a mortgage catastrophe made by the Tories. pic.twitter.com/pIn1V8lymU
— Rachel Reeves (@RachelReevesMP) June 22, 2023
Reeves has also ruled out backing plans that would see subsidies or financial support for mortgage holders – a proposal pushed by the Liberal Democrats, but opposed by the government
She told BBC Radio 4’s Today programme.
“I recognise the challenge of inflation, and a big fiscal injection of cash into the economy, especially an untargeted injection, would not be the right approach.
Chancellor Jeremy Hunt made a similar argument earlier this week.
Following the latest economic data, the Bank of England is likely to continue raising interest rates at noon today, says Dr Luciano Rispoli, Senior Lecturer in Economics at the University of Surrey.
Dr Rispoli says:
This is because of higher-than-expected CPI inflation and positive monthly GDP readings.
But the burning question is by how much will the BoE increase interest rates?
Dr Rispoli predicts the Bank will resist lifting interest rates by half a percentage point – as some in the City expect – and stick with a smaller, quarter-point rise. That’s because the Bank doesn’t want to weaken the economy:
In fact, while it is true that inflation remains elevated, increasing the Bank Rate by 0.5% would increase mortgage rates/costs further, with a depressing effect on an already bearish housing market.
“Apart from economic data, I believe the Bank of England will also consider the recent ‘hiking pause’ of the Federal Reserve and the continued ‘hiking cycle’ of the European Central Bank. In this setting, I believe increasing the base rate by 0.25% seems the right compromise between tackling inflation and avoiding depressing an already fragile economy with higher interest rates.
Ocado shares soar on takeover talk
Online grocer Ocado is defying today’s gloom, with its shares soaring over 40% as takeover speculation grips the City.
The Times reports this morning that “speculation of bid interest from more than one American suitor” lifted Ocado’s share price yesterday.
“The talk was that technology heavyweights such as Amazon were pondering the merits of an £8-a-share move,” The Times added.
And this morning, Ocado’s shares have rocketed to 608p from 430p last night, to its highest level since late February.
Ocado’s shares have been languishing since they surged to £29 early in the pandemic, as home shopping demand jumped.
Victoria Scholar, Head of Investment at interactive investor, says:
Ocado has fallen out of favour with investors lately, trading down 40% over the past 12 months even after today’s jump, attracting potential opportunistic interest from parties looking to pounce on its depressed share price.
It was a stay-at-home stock market winner during the pandemic with shares surging in 2020, however the economic reopening ever since has prompted a downward trendline to emerge with many investors unwinding their holdings.
Ocado have declined to comment on the share price move, as have Amazon…
There’s a gloomy mood in the City of London today, ahead of the Bank of England’s interest rate decision at noon.
The FTSE 100 index of blue-chip shares has hit its lowest level since the start of June, curently down 60 points or 0.8% at 7498 points.
AJ Bell head of financial analysis Danni Hewson says fears that higher interest rates will hurt the economy are weighing on stocks:
“For markets the cure of higher interest rates could be worse than the disease of high inflation amid speculation a 50-basis point rise could be in the offing. Hawkish rhetoric from the US Federal Reserve is also doing little for sentiment.
“Inflation is proving more stubborn than expected in the UK and the brains trust in Threadneedle Street seem to have little answer other than employing the blunt instrument of rate hikes to try and bring things under control.
More than half of the public thinks the UK is currently in a recession, a poll has found.
Officially, the UK avoided a technical recession over the winter, with modest growth of just 0.1% in the October-December and January-March quarters.
But, some 61% of people told pollster Ipsos they thought the UK was in recession.
And who can blame them? Growth of just 0.1% doesn’t feel much different to a contraction of 0.1%, and the cost of living crisis is inflicting economic pain on many households.
PA Media have more details:
The poll suggests widespread economic pessimism amid rising interest rates and stubbornly high inflation, with two-thirds of people saying they expect both inflation and interest rates to increase in the next six months.
The figures are a slight improvement on those found by a similar poll in May, when 81% of people said they expected the cost of food would increase, but they continue to suggest significant negativity about the state of the economy.
Expectations for 2024 are similarly low. Some 71% of people told Ipsos they expected the cost of their weekly food shop to increase next year, while 66% said they thought utility bills would rise.
Britain’s “red-hot inflation” has opened the door to a large, half-point increase in UK interest rates today, which would be the first since February, Bloomberg points out.
Bank could be split over rate decision
Today’s interest rate decision is unlikely to be unanimous, when it’s announced at noon.
There are nine policymakers on the Bank of England’s monetary policy committee, and they have a range of view of the path of inflation and the economy.
Last month, the MPC split by 7–2 when they voted to increase Bank Rate by 0.25 percentage points, to 4.5%.
Two policymakers, Swati Dhingra and Silvana Tenreyro, opposed that move, arguing that previous rate rises had not yet had their full effect, and that inflation would fall sharply this year.
Tenreyro (in her last meeting at the MPC) and Dhingra could be the least likely to support a rate rise today (but you never know, given recent inflation shocks….).
Other, more hawkish, MPC members may favour a large increase in borrowing costs.
Tomasz Wieladek, chief European economist at U.S investment firm T. Rowe Price, predicts that at least three of the Monetary Policy Committee’s nine members will vote for a half-point hike today.
Wieladek adds:
“I think it’s a very finely balanced decision.”
Matthew Ryan, head of market strategy at global financial services firm Ebury, agrees that some MPC members will push for a half-point increase:
“The BoE has been backed into a corner, and will have no choice but to continue raising interest rates aggressively in the coming meetings.
We now think that one, or perhaps even both, of members Dhingra and Tenreyro will vote for an immediate hike on Thursday, having opted for no change at the past few MPC meetings.
We could also see a handful of votes in support of an even larger rate increase, and a 50bp hike is now a very realistic possibility.
Market implied probabilities of a 50-bps hike have risen from 25% to around 50% since yesterday’s alarming inflation print. Today’s #BoE decision is shaping up to be a crucial one and offers the MPC a chance to set the tone on stubborn inflation https://t.co/svY1wEOeC0
— Richard Snow (@RichardSnowFX) June 22, 2023
Steve Matthews, liquidity fund manager at Canada Life Asset Management, expects the Bank of England to raise its Base Rate by 25bps to 4.75% today, resisting the option of a larger 50-basis point hike to 5%.
But further rate rises are also coming, Matthews warns:
“Markets are pricing in five further hikes before the end of the year with speculation that there is scope for a 50bps rise somewhere along the way.
On balance, we expect the BoE to raise its Base Rate by 25bp on Thursday to take it to 4.75% and subsequent hikes in August and September to take the rate to 5.25% in the event that the economy does not rapidly cool over the summer.”
UK mortgage rates rise again
UK fixed-rate mortgages have grown even more expensive, the latest data from Moneyfacts shows, as lenders anticipate rising interest rates.
The average 2-year fixed residential mortgage rate has risen to 6.19%, up from 6.15% on Wednesday. At the start of May, the figure was 5.26%, before concerns over UK inflation started driving up borrowing costs.
The average 5-year fixed residential mortgage rate has nudged higher too, to 5.82% from 5.79% on Wednesday.
A few more mortgage products are available today, after lenders cut their options over the last week or so.
There are currently 4,507 residential mortgage products available. This is up from a total of 4,498 on the previous working day, Moneyfacts reports.
“The plank of England” – what the papers say about interest rates
Today’s newspapers do not make pleasant reading for the Bank of England, as it attracts heavy criticism for failing to keep inflation at its 2% target.
Ex-business secretary Jacob Rees-Mogg accused the Bank’s governor, Andrew Bailey, of “burying his head in the sand”.
“Having been too slow at the start, they now risk an overreaction that risks damaging economic consequences.
“But it’s extraordinary arrogance for the Bank to blame everything but its own monetary policy.”
The Sun have also dubbed Bailey the “Plank of England”, and mocked up a wooden effigy of the governor; they say homeowners will pay a crippling price for his failure to control inflation.
PLANK OF ENGLAND Hapless Bank of England boss Andrew Bailey is fuelling mortgage crisis & inflation – he had single job and he’s failing https://t.co/CSqyplyReP
— KulganofCrydee (@KulganofCrydee) June 22, 2023
The Daily Mail reports that senior Tories and economists turned on the Bank of England last night, as it prepared to heap more misery on homeowners today with another rate rise.
Andrea Leadsom, a former Conservative Treasury minister, accused the Bank of doing “too little, too late” to rein in surging prices.
Leadsom argues that the Bank blundered by continuing to print money through its quantitative easing scheme even as the Covid pandemic was ending, adding:
“Interest rate rises began too late and were too small.”
The Bank’s tightening cycle began in December 2021, when it nudged rates up to 0.25% from just 0.1%.
It then moved in “baby steps” of quarter-point rate increases, until August 2022 when it raised by half a per cent – the largest single increase since 1995.
This chart from May shows the pace of the tightening programme:
The Daily Telegraph reports that the former Bank policymaker Adam Posen predicted interest rates would have to rise to 6.5% or higher to tame soaring prices, which would be likely to tip the economy into recession.
Posen said “policy errors” and Britain’s shrinking workforce – which he partly blamed on Brexit – had left Bank officials “wishfully talking about inflation declines”.
He added:
“The UK policy regime has lost some credibility.”
