BANK OF ENGLAND DECISION Newsflash: the Bank of England has voted to leave UK interest rates on hold. For the second meeting running, the Bank’s monetary policy committee has decided to leave interest rates unchanged at 5.25%, a 15-year high. This follows the 14 increases in borrowing costs from December 2021 to August this year, as the Bank tried to tame infation. The move suggests the MPC is sticking with the ‘Table Mountain’ approach to fighting inflation – leaving borrowing costs at their current high levels until it is confident that inflation will fall back on a sustainable basis to its 2% target. More to follow…. Closing post Time to recap. Stocks continue to soar in London on hopes that UK interest rates have now peaked. The FTSE 100 index is up 1.5%, while the smaller FTSE 250 has surged by 3%, despite the Bank of England insisting that monetary policy is likely to need to be restrictive for an extended period of time. Government bonds have also rallied, a sign that investors don’t expect borrowing costs to rise higher. The BoE’s warning came as it left UK interest rates on hold at their current level of 5.25%. It warned that the economy will be on the brink of recession next year, with the economy expected to flatline for the next four quarters if interest rates follow the path expected by financial markets. During a press conference, governor Andrew Bailey declined to say whether the pain being suffered by households was a price worth paying. But he pledged to keep monetary policy restrictive for long enough to “squeeze inflation” out of the system, saying: “Monetary policy is currently restrictive in the sense that if we maintain this stance for long enough, we will squeeze inflation out of the system and that’s what we will do.” Bailey also predicted that inflation will fall below 5% in October, thanks to lower energy bills… ...while appearing unamused that his predecessor, Mark Carney, had endorsed Labour shadow chancellor Rache Reeves last month. Here’s a video clip of Bank of England governor Andrew Bailey explaining today’s interest rate decision: Markets rally on hopes interest rates have peaked Britain’s FTSE 250 share index, which tracks medium-sized companies, is soaring higher. The FTSE 250 has jumped by 3%, or 520 points, to 17,706 points, putting it on track for its third best day of the year. Susannah Streeter, head of money and markets at Hargreaves Lansdown, says the City believes interest rates, at 5.25%, are at their current peak. Streeter explains: Although this wasn’t a unanimous vote, there is a growing strength of feeling that previous rate hikes need more time to feed through. There are deepening concerns about the faltering economy as the high borrowing costs batter financial resilience and policymakers paint a stark picture of a stagnation scenario lasting until 2025. The minutes highlight that UK GDP is expected to have been flat in the third quarter, weaker than initial estimates. The economy only just eked out growth in August and there has been a surge in company insolvencies. Although inflation was still more than three times the bank’s target, it’s expected to have taken another big step down in October, and private sector wage growth is also showing signs of easing. It’s far from surprising that the majority of policymakers want the economy to take a breather from this painful cycle of rate hikes. Larry Elliott: the next move in interest rates will probably be down. Despite the Bank of England’s hawkish tone, the next interest rate move is likely down, predicts our economics editor, Larry Elliott. Having attended the briefing at the Bank today, he writes that policymakers risk leaving rates too high for too long, given weak economic outlook and shrinking inflation: Rising unemployment. Cuts in business investment. Falling house prices. An economy that at best is going to move sideways and could easily dip into recession. The Bank of England’s latest quarterly update on the state of the UK economy makes grim reading, not least for Rishi Sunak. The prime minister is leading a government well behind in the opinion polls and sorely in need of some good news before a general election that has to be held by January 2025 at the latest. According to Threadneedle Street, there is not going to be much between now and polling day to raise the spirits of voters. The Bank’s best estimate – based on the City’s expectations of interest rates remaining unchanged at 5.25% until the third quarter of 2024 – is for the economy to show no growth at all in 2024. There is an even chance that it will be worse than that, with the economy slipping into recession. Unemployment is expected to rise steadily to just above 5% by the start of 2025. A 5% drop in house prices this year is expected to be repeated in 2024. Charts: UK economy facing stagnation The Bank of England’s monetary policy report contains this depressing graph, predicting stagnation for the UK economy for more than a year: The outlook for the global economy is better, but not much. The Bank says: Global growth has remained subdued over the course of 2023. UK-weighted world GDP is expected to have grown by around 0.4% in 2023 Q3, similar to Q2 and broadly in line with the projection in the August Report. Four-quarter growth in 2023 Q3 is expected to be around 1.5%, below its 2010–19 average of 2.4%. The latest indicators, such as cross-country purchasing managers’ indices (PMIs), suggest that global GDP growth is likely to remain weak in Q4. Traders in the City of London are shrugging off the Bank of England’s warning that interest rates will probably remain high for some time. The FTSE 100 is now up 1.6% or 117 points at 7460 points, a two-week high. Investors are hopeful that UK interest rates are now at their peak. Nick Rees, FX Market Analyst at Monex Europe, says: The MPC appeared to retain a modest tightening bias in its collective judgement, with Governor Bailey quoted as saying that the discussion of interest rate cuts is “too early”. Furthermore, the Bank’s framing of how long rates will need to be kept restrictive has firmed somewhat too, shifting from “sufficiently long” to an “extended period”. Nevertheless, today’s communications are hardly indicative of policymakers looking to conduct further rate hikes, evidenced not only by the fact that the core of the Committee voted for a hold but also by the minutes highlighting brewing concerns that the Bank has overtightened. The Bank of England’s press conference ended with a question about government policy: Q: What impact would tax cuts, or other fiscal loosening, be on the economy? Andrew Bailey replies that tax cuts are a matter for the government, not the Bank of England, and ducks giving an assessment. The BoE’s forecasts are based on announced government policy, Bailey points out, adding: Whatever were to be announced [in the autumn statement] would be factored into our forecasts. Thames Water cutting 300 roles after "dance with the devil" Away from the Bank of England, under pressure Thames Water is cutting about 300 roles in what it has called a “difficult but necessary” decision. The financial health of Britain’s biggest water supplier has been under scrutiny since it emerged contingency plans were being drawn up for an emergency nationalisation. The debt-ridden company has since secured £750m from existing shareholders but will need to land further funds in the future as it attempts to upgrade London’s creaking water infrastructure. The move will see 89 employees in its retail arm and 39 in its digital division made redundant, while around a further 160 roles which are currently vacant will not now be filled. Gary Carter, national officer at the GMB union, condemned how the company had been managed since its privatisation in 1989. He said: “Thames Water has danced with the devil and now workers are paying the price.” A Thames spokesperson said: “The last year has been an extremely challenging year for the business and we continue to take a rigorous approach to financial discipline throughout the company in order to operate within budget… “We will seek to minimise compulsory redundancies wherever possible, through redeployment and voluntary redundancy.” The Guardian has also learned that Norma Dove-Edwin, the company’s chief digital and information officer, recently left for personal reasons. The former National Grid executive only joined Thames last year. She will be replaced on a temporary basis by technology boss John Brocking. Sir Adrian Montague, who became Thames chairman in the summer, is also on the hunt for a permanent chief executive. Q: Are you prepared to tolerate a mild recession, to bring down inflation? Are we looking at a bumpy landing? Deputy governor Ben Broadbent reiterates his earlier comment that there isn’t a threshold which growth must not fall below, when the Bank is setting policy to control inflation. Bailey wasn"t warned Mark Carney would endorse Rachel Reeves Q: Was it appropriate for former governor Mark Carney to endorse Rachel Reeves? Would you ever do the same? Andrew Bailey says sternly that the Bank of England is “independent, and apolitical”. That is absolutely at the core of this institution, let me be clear about that. But former governors can make their own decisions. Bailey reveals that Carney did not tell him in advance that he would be endorsing shadow chancellor Reeves - a rabbit out of the hat at the Labour Party conference last month. “He has no obligation to tell me that, so I did not know in advance.” Bailey says he is not at the stage of contemplating “life thereafter”. But he insists that the Bank, and he personally, are apolitical, and independent. “That is absolutely central to us,” Bailey declares, before apologising for “the sermon”.