UK interest rates raised to 3% as Bank of England battles inflation – business live

The UK is already in recession, the Bank of England warns, and it could be a prolonged one too.

The Bank estimates that the UK entered recession in the third quarter of this year, and that this downturn will last until mid-2024.

It warns:

The MPC’s latest projections described a very challenging outlook for the UK economy. It was expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term.

Unemployment is expected to rise too, with the jobless rate seen hitting almost 6.5% by late 2025 – up from just 3.5% at present.

Inflation is expected to peak at 11% in the current quarter, the Bank warns, up from 10.1% in September.

That would intensify the cost of living squeeze, but it’s actually lower than expected back in August before the Uk government’s energy price freeze.

Today’s rate rise wasn’t unanimous.

Seven of the nine policymakers on the Monetary Policy Committee voted to raise by 75 basis points, to 3% – a major moment as the BoE tries to cool inflation.

But one MPC member, Swati Dhingra, voted for a half-point rise to 2.75%, while another, Silvana Tenreyro pushed for an even smaller rise, to 2.5% (from 2.25%).

The Bank of England says it has raised interest rates, to 3%, to bring inflation down from its current double-digit levels.

Announcing today’s rate hike, it says:

Inflation is too high. It is well above our 2% target.

High energy, food and other bills are hitting people hard.

If high inflation continues, it will hurt everybody. Low and stable inflation helps people plan for the future.

Raising interest rates is the best way we have to bring inflation down.

We know that many people are facing higher borrowing costs. In particular, many households face higher mortgage rates. And some businesses face higher loan rates.

It’s our job to make sure that inflation returns to our 2% target.

This month we have raised our interest rate to 3%.

In total, since December 2021, we have increased our interest rate from 0.1% to 3%.

What will happen to interest rates will depend on what happens in the economy.

At the moment, we expect inflation to fall sharply from the middle of next year.

Newsflash: The Bank of England has raised UK interest rates by three quarters of a percentage point to 3%, the highest level since the financial crisis in autumn 2008.

Bank policymakers voted to lift borrowing costs, for the 8th time in a row, in an attempt to cool surging inflation and to prevent it becoming embedded in the economy.

It’s the largest rate hike since 1989 – apart from the almost immediately reversed rise on Black Wednesday in 1992 - and will hit mortgage payers on variable rate loans, and push up the cost of business loans and other credit.

Tension is mounting in the City, with just a few minutes to go until the Bank’s decision…

UK house prices are likely to fall 10% next year, estate agent Savills has predicted.

Savills have released fresh housing market forecasts, ahead of the Bank of England decision.

And they show that after over two years of strong growth, the average UK house price is expected to fall by 10% in 2023 when interest rates are expected to peak at 4%.

They also predict that housing transactions will fall to their lowest in over a decade next year, to below 900,000.

Savills adds:

On the assumption that interest rates gradually ease back from the middle of 2024, Savills is forecasting that values will begin to recover and that the average UK house price will rise by a net figure of +6% in nominal terms over the next five years.

This is expected to be accompanied by a fall in housing transactions to levels a little less than three quarters of the pre-pandemic norm, as first time buyers and buy-to-let investors bear the brunt of increased affordability pressures next year, when Bank base rate is expected to peak at 4.0%.

The prime market, for expensive houses, is expected to see smaller falls –- as wealthy buyers are less reliant on borrowing.

There’s thirty minutes to go until the Bank of England announces its eagerly awaited interest rate decision.

The money markets are still expecting the BoE to hike borrowing costs by 75 basis points, taking Bank Rate to 3%. That would be the biggest rate rise since the late 1980s.

Charalampos Pissouros, senior investment analyst at XM, sets the scene:

This will be the first meeting after the budget turbulence, but with the announced fiscal measures being scrapped and Liz Truss stepping down, expectations of a super-sized 100bps increment have eased.

The consensus of both investors and economists is now for 75bps.

Nonetheless, with Rishi Sunak’s government delaying its Autumn budget statement to November 17, there is the chance for BoE officials to play a safer card and hike by only 50bps, as the effects of future fiscal policy on the economy are difficult to be estimated now. Adding further credence to this view is the fact that the Bank itself is projecting a recession by the end of the year, so are disappointing PMIs for October.

Even if policymakers decide to go with 75bps due to inflation rebounding back above 10%, they may hint at slower hikes from December onwards, as the bleak economic outlook does not warrant more aggressive increments.

Both these scenarios may prove negative for the pound, with the former having the potential to throw it off the cliff. For the pound to rally and maintain any decision-related gains, the Bank may have to signal that more triple hikes are in the pipeline, a case that seems unlikely.

A hike in UK interest rates today will plunge more workers into debt and financial hardship, the Unite union has warned.

A survey of 6,000 adults for Unite found that just over half said they cannot or will have difficulty paying their household bills this year.

Almost a third said they have already gone into debt or increased the levels of their debt just to put food on the table, with 14% saying they face food poverty.

Unite general secretary Sharon Graham said:

“Unite’s research shows that many workers face unsurmountable financial pressure.

An interest rate hike will shackle those workers with more debt while corporate profiteering runs rampant.”

The poll also found that 70% of workers have experienced a real-terms pay cut this year, with wage rises failing to keep up with inflation.

Traders are selling sterling on expectations the Bank of England will strike a less aggressive tone than the Federal Reserve did last night, Reuters says.

Unlike the Fed, the BoE is grappling with a sharply slowing UK economy and the aftermath of the government’s disastrous mini-budget.

So while it may hike rates by an historically large three-quarters of a percent today, to 3%, the Bank may resist further hikes of such size.

Lee Hardman, currency analyst at MUFG, told clients:

“We expect the BoE to signal that a larger hike today is unlikely to be the first of a series of larger hikes and that market expectations for further hikes are likely still too aggressive.

“It should encourage a weaker pound.”

The pound has weakened this morning, as markets brace for the Bank of England’s interest rate decision at noon.

Sterling has hit its lowest level against the US dollar since Rishi Sunak became PM, shedding a cent and a half to $1.124.

That’s mainly due to dollar strength after last night’s interest rate hike across the Atlantic.

But, the pound has also dropped over half a cent against the euro, to €1.154, after European Central Bank chief Christine Lagarde warned that a “mild recession” in the eurozone will not be enough to tame inflation.

That’s a hint that eurozone interest rates will keep rising, strengthening the euro.

Neil Wilson of Markets.com says:

The moves in sterling this morning indicate everyone expects a very cautious Bank of England will say 75bps is not the new normal, citing downside risks to the economy and the tighter fiscal policy.

Up in Glasgow, climate activists are protesting outside a bank where they demonstrated every day during Cop26 a year ago, PA Media reports.

Four Extinction Rebellion Scotland (XR) activists locked themselves to an oil barrel with “JP Morgan” written on it at the main entrance to the bank’s offices in Waterloo Street, Glasgow, on Thursday morning.

Gravestones with the words “Cop26 Failed” and “Cop27 Futile” were placed on the pavement and activists hung up banners reading “JP Morgan - World’s Dirtiest Bank” and “Greenwash won’t wash”.

During the Cop26 climate change talks which took place in Glasgow last November, Extinction Rebellion protested every day at JP Morgan’s offices in the city.

The action on Thursday took place ahead of the Cop27 talks that start in Sharm El Sheikh, Egypt, on Sunday.

XR Scotland claims JP Morgan is funding the climate crisis.

Gary Jack, from XR Highlands and Islands, said:

“Even JP Morgan’s own economists reported in February 2020 that the climate crisis threatens the survival of humanity and yet they are still actively promoting continued investments in fossil fuels.”

Britain’s service sector has shrunk for the first time since the pandemic lockdowns of 2021, as the disastrous mini-budget hit confidence.

Service sector activity fell in October for the first time since February 2021, acccording to the monthly survey of purchasing managers from S&P Gobal Insight.

Its services PMI dropped to 48.8 in October, down from 50 (showing stagnation) in September. It’s the latest sign that the economy is weakening, heading towards recession, which will worry the Bank of England.

Services companies suffered from shrinking demand and greater risk aversion among clients, while “escalating energy bills and strong wage pressures” pushed up costs again.

A number of firms said political uncertainty since the mini-Budget, which drove up borrowing costs before it was reversed, had damaged business investment, and deterred clients from agreeing new projects.

The reading is slightly better than the ‘flash’ PMI taken during October, suggesting the recent stability has helped the economy.

Tim Moore, economics director at S&P Global Market Intelligence, says:

“UK service providers reported the steepest drop in business activity for 21 months in October as household spending cutbacks and shrinking business investment combined to dent new order volumes.

A number of firms noted that political uncertainty and rising borrowing costs since the mini-Budget had led to greater risk aversion among clients and a wait-and-see approach to new projects. There were also many reports that higher energy bills had led to reduced spending on non-essential services.

Business confidence also fell, hit by stubbornly high inflation, increased borrowing costs and worries about the UK economic outlook, Moore added:

Aside from the slump at the start of the pandemic, the degree of confidence across the service economy is now the lowest since December 2008.”

BT has warned of more job cuts after it was forced to find more than £500m in additional savings due to soaring inflation and energy bills.

The company, which reported an 18% slump in pretax profits from just over £1bn to £831m year-on-year in the six months to the end of September, said its energy bill will be £200m higher this year.

The telecoms company said it has been forced to raise its cost-savings target from £2.5bn to £3bn by the end of its financial year in 2025 in response to inflation hitting a 40-year high and a surge in energy costs.

“We are leaving no stone unturned to make sure BT can be the most-efficient organisation it can be,” said Philip Jansen, the chief executive at BT, adding:

“Inevitably it means some jobs will not exist in the future but that has been true of the last few years too. We will use natural attrition as much as we can. In these difficult conditions we know we have to double down on our costs.

There are no specific numbers in mind. This [cost-cutting programme] is up until the end of 2025.”

Over in Oslo, Norway’s central bank has hiked its benchmark interest rate by a quarter-point, to 2.5%.

Norges Bank also predicted it will probably raise rates again in December to help curb inflation.

Governor Ida Wolden Bache said in a statement.

“We are raising the policy rate to curb inflation,”

Norges Bank also warned that “the outlook is more uncertain than normal”, so the future path of rates will depend on how the economy evolves.

The UK housing market is already under pressures, even before another rate rise today.

Yesterday, the Treasury Committee were told that rising mortgage costs were hitting mortgage holders and renters.

Ray Boulger, senior mortgage technical manager at broker John Charcol, told MPs that the buy-to-let rental market was feeling the squeeze hardest.

“I think the buy-to-let market is where we’re likely to see a lot more stress than the residential market.

“When you factor in the other impact of energy price increases and cost of living increases that can have a significant impact on what people can borrow.”

Lenders also expect house prices to drop next year, having already fallen in October according to the Nationwide Building Society.

Chris Rhodes, Nationwide’s chief finance officer, told the committee that the building society’s central scenario is that prices fall by 8% to 10% next year.

The “worst case” scenario is potentially a 30% crash (but Rhodes insists that was not likely. There’s much uncertainty in such predictions).

He said:

My best case is slowly increasing house prices and my worst case is potentially a 30% fall, but those are the two extremes which are tail probabilities.

Sainsbury’s has ordered more turkeys for Christmas this year, says CEO Simon Roberts, as he outlines today’s financial results.

That will give Britain’s second-biggest supermarket a buffer in case avian flu hinders supply, he explains.

Orders to keep all captive birds and poultry indoors are being extended across the whole of England from next week, amid the UK’s largest ever outbreak of avian influenza.

Last month, the National Farmers’ Union warned that Christmas turkey supplies could be at risk if the outbreak continues to spread.

Here’s our full story on Sainsbury’s, by my colleague Sarah Butler.