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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England hikes interest rates and warns UK to enter recession with inflation to pass 13% – as it happened

Bank of England Inflation United Kingdom Andrew Bailey Resolution Foundation Economy Interest Rates

Closing post

Time to wrap up, with a quick summary

The Bank of England has warned that the UK will start falling into a recession that will last over a year, as soaring energy prices continue to hammer the economy.

The BoE forecast the UK economy would shrink in the last quarter of this year, and steadily through 2023, the longest downturn since the 2008 financial crisis, in a grim economic outlook.

UK GDP is expected to fall by 2.1% from peak-to-trough, similar to the recession of the early 90s.

Consumer price inflation is now set to hit 13% per year once the energy price cap is lifted later in October. And households face a very painful two-year fall in real incomes, with wages not expected to keep up with prices.

The Bank warned:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Despite the looming recession, the Bank voted 8-1 to raise interest rates to a new 13-year high.

Bank Rate is being hiked by 50 basis points, the biggest upward move since 1995, as the Bank tries to avoid inflation becoming embedded.

Governor Andrew Bailey insisted that the BoE has to battle inflation, as the poorest will suffer most.

“If we don’t act, inflation will become more embedded, it will get worse and we will have to raise interest rates by more — we have to act if we’re going to stop that.”

He told reporters in London that the rise in gas prices due to the Ukraine war was the main factor driving up inflation.

“There is an economic cost to the war.

“But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target.”

Unions argued that companies should rein in their profits, rather than pumping up inflation through higher prices, and give workers the pay rises they need.

Economists have predicted that rates will keep rising, with another 50-basis rise in September possible.

The Bank faced criticism over its handling of inflation, which is already more than four times its 2% target.

Attorney General Suella Braverman said Liz Truss would review the Bank’s mandate if she become prime minister, including its “entire exclusionary independence over interest rates”.

Bailey defended Bank independence, saying:

“One of the great strengths of being an independent central Bank is actually, you know, the political pressures have been very well managed throughout the life of the MPC in my view.

“And obviously, we’ve had many governments throughout that life. That is the best way to manage it in my view. So no, I don’t really want to put emphasis on political pressures.

“One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”

That independence is under more threat than ever before, our economics editor Larry Elliott warns:

Here’s our latest story on the Bank’s recession warning:

And here’s an explanation on the impact on consumers:

Bank of England Governor Andrew Bailey rejected the suggestion that Britain was suffering a sterling crisis, and said recent moves in foreign exchange markets were better understood as a period of dollar strength.

“It is not a crisis in my view at all,” he told Bloomberg TV.

“When you look across currencies, the common theme is the strength of the dollar,” he added.

Sterling has weakened by around 10% against the U.S. dollar so far this year, but is broadly flat against the euro (which fell below parity against the dollar last month).

Economists are predicting that UK interest rates will continue to rise in the months ahead.

Morgan Stanley warns there is a very high risk of a string of 50bp hikes, followed by aggressive cuts next year.

For now, it is sticking with forecasts of 25bp rises in September (to 2%) and November (to 2.25%), followed by a cut a year later.

Morgan Stanley says:

As globally, we see central banks pivoting over 4Q22, we see a dovish November meeting and a final 25bp hike then. We now introduce a cut at the end of next year, at the November meeting.

ING Developed Markets Economist James Smith agrees that another 50-basis point hike in September is ‘very plausible’.

“The fact that the Bank is stepping up the pace of rate hikes while also forecasting a meaningful recession shows just how worried it is that worker shortages and supply issues could keep inflation elevated even as the economy weakens.

“In other words, it’s the supply side of the economy – much more so than what’s happening with demand – that will heavily determine when and after how many more hikes the BoE will stop tightening. The Bank will want to see signs that skill shortages are easing and that wage pressures are showing signs of abating.

“Given that only one official dissented on the decision, and the fact that the Bank reiterated its willingness to act ‘forcefully’ to curb inflation, we think there’s a strong possibility of another 50bp hike in September – particularly if that’s what both the Fed and ECB end up doing too.”

Rail union TSSA has announced that members at Network Rail will join the strike action later this month in their dispute over pay, job security and conditions, meaning further disruption to services.

The walkouts by thousands of members in General Grades and Controllers will take place on Thursday 18 and Saturday 20 August after the union formally served notice to NR.

The RMT is already holding strike action those days, involving workers at Network Rail and 14 train operators on Thursday 18 and Saturday 20 August.

TSSA General Secretary Manuel Cortes says:

“Our union has a strong mandate for strike action at Network Rail in these grades and walkouts will have a huge impact.

“Our members are simply asking for basic fair treatment: not to be sacked from their jobs, a fair pay rise in the face of a cost-of-living-crisis and no race to the bottom on terms and conditions.

“No one takes strike action lightly, but we have been left with little choice. Our General Grades and Controllers are a force to be reckoned with. Without them the rail network does not run, it is that simple.

More rail workers are to strike later this month in worsening disputes over pay, as unions seek wage increases to help workers cope with soaring.

Unite announced that its members employed by Network Rail as electric control room operatives, will join other rail unions in taking action on August 18 and 20.

The union said the electric control room operatives play a crucial role as they are responsible for managing and controlling the power supply to the rail network.

Unite general secretary Sharon Graham said:

“Our members played a crucial role in keeping the rail network functioning throughout the pandemic, ensuring that essential workers and goods could be transported.

“The thanks they get for their sacrifices from their employers is a derisory offer that amounts to a kick in the teeth.

The workers are based at the control rooms in Brighton, York, Paddock Wood, Raynes Park, Romford, Selhurst Road and York.

The possibility of strike action on Scotland’s railway has become more likely after union members rejected a pay deal.

The RMT union - whose members include ticket examiners, conductors and station staff - said on Thursday that 60% of members who voted in a ballot rejected a deal that would increase pay by 5% and create a revenue sharing programme.

According to the Scotsman, RMT organiser Mick Hogg said failure to reach a better deal during meetings next week could result in a ballot for strike action.

As recession looms, the Bank of England’s independence is under threat

Governor of the Bank of England, Andrew Bailey
Governor of the Bank of England, Andrew Bailey Photograph: Reuters

Politically, the Bank has rarely been in a tighter spot, our economics editor Larry Elliott writes:

Today’s 0.5 point increase in interest rates is a clear case of playing catchup, but is being imposed at a time when the economy is weakening.

If the MPC is too aggressive with future interest rate rises it will be blamed for making the recession worse. If inflation proves harder to shift than it expects, it will be blamed for doing too little too late.

Liz Truss, the frontrunner to replace Boris Johnson as prime minister, has been openly critical of Threadneedle Street, effectively accusing the MPC of being asleep at the wheel as the cost of living crisis erupted.

For the first time since it was granted the freedom to set interest rates by Gordon Brown in 1997, the Bank’s independence looks to be under threat.

Here’s Larry’s full analysis.

Britain’s Unite trade union has negotiated a £2,300 cost-of-living payment that will cover 2,730 workers at U.S. truck engine maker Cummins.

It’s a timely example of how some companies are choosing to help their workers get through the cost-of-living crisis.

Unite says:

“The payment was agreed after Unite reps at the company raised the severe problems that workers were having with making ends meet as a result of rampant inflation.”

Via Reuters.

Ian Mills, partner at consultancy Barnett Waddingham, says pensioners on inflation-linked defined benefit schemes may not see their benefits rise fully in line with inflation, as increases could be capped at 5%.

That could be unexpected, and unwelcome, news for them:

Members of some pension schemes who thought they had an index-linked income may be surprised to discover that their increases are limited – with 5% being a typical cap.

Effectively, these people could be in for an 8% cut in their incomes in real terms, which will further exacerbate the cost of living crisis.

“From a scheme perspective, such high inflation can actually be a good thing. Schemes which have capped increases may find that their inflation-linked assets outperform, and that their funding positions improve accordingly.

Citizens Advice Scotland: people likely to die due to this crisis

Some families will have to choose between freezing or starving this winter, warns Citizens Advice Scotland.

Derek Mitchell - the chief executive of Citizens Advice Scotland - says “radical action” from government is needed, following today’s warning that inflation will jump above 13% soon, and remain high through next year.

Mitchell said:

“Soaring inflation means higher prices in the shops and costs on bills for people already struggling badly with the cost-of-living crisis.

“That inflation is expected to stay high for much of 2023 and the looming prospect of a recession means this crisis isn’t going anywhere, risking a legacy of debt, poverty and destitution for years and years to come.

“Some of the most vulnerable people across the UK this winter will face a choice between freezing and starving.

“That’s the reality and we should not pretend otherwise. People are likely to die this winter because of this crisis unless we see urgent and radical action from policymakers.”

Hundreds of Amazon employees have stopped work at the online retailer’s warehouse in Tilbury in Essex in response to a pay rise of only 35p – about 3% – far below inflation as it heads towards 13% later this year.

The GMB union said about 700 of the roughly 3,500 employees at the site, which is one of Amazon’s largest in Europe, gathered in the facility’s canteen for a meeting as they tried to register a protest against the pay deal.

It is understood workers at the facility earn a minimum of £11.10 an hour with those employed for at least three years on a minimum of £11.35. They are calling for a £2-an-hour raise but both groups are being offered the 35p deal.

One worker inside the warehouse posted a video in which they accused Amazon of treating them “like slaves”. “See people what’s going on,” the post on TikTok said. “Keep fight for us and our family”.

Steve Garelick, a regional organiser at GMB, said some workers had faced disciplinary action and a withdrawal of pay over the stoppage that began on Wednesday night and continued into Thursday.

The Bank of England is “caught between a shock and hard landing place” says Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.

The continued acceleration in the rising cost of living and expectations for an even faster rate of inflation clearly forced most of the MPC members into greater action, with only a single member dissenting in favour of a smaller 0.25% increase.

The fresh set of economic forecasts served to highlight the intensifying challenge facing the BoE as it wrestles with the opposing wrenches of inflation and growth.

Blackbourn is also concerned by the even worse outlook for inflation.

CPI inflation is now expected to peak at 13.3%, over 11% above the 2% target, and remain far more persistent through 2023 than previously expected. Worryingly, the expected rate of inflation at the end of September 2023 is expected to still be above the latest figure of 9.4% for June.

The tightness of the labour market and high wage increases are clearly worrying the MPC and Governor Bailey repeatedly referred to potential second-round effects as a concern for greater entrenchment of price increases.

The divergent outlooks for growth and inflation show how stagflationary the UK economy looks right now, particularly compared to other major developed markets, Blackbourn concludes.

As well as a long recession of over a year, the Bank is forecasting an extremely slow recovery:

What does the Bank of England interest rate rise mean for you?

Today’s interest rate hike, to a 13-year high of 1.75%, will affect borrowers and savers.

Hone-owners on tracker mortgages face paying more immediately, while those on fixed-term deals face higher payments more when their term ends.

Rising borrowing costs could cool the housing market, although prices still rose in July according to Nationwide despite earlier increases.

It could also push up the cost of unsecured credit for businesses and individuals. The cost of living squeeze has already led to an increase in consumer credit (on credit cards, personal loans or car finance), so that could end up costing more.

And even if savings rate do go up, they will lag far behind inflation.

Here’s a full explanation:

Truss pledges emergency budget as recession looms

Liz Truss has said she would use an emergency budget to help grow the economy after the Bank of England raised interest rates by the most in 27 years and warned that a long recession was on its way.

Foreign secretary Truss, the favourite to become the next prime minister, argues that today’s economic forecasts show the need for her ‘bold economic plan’.

Truss said (via Reuters):

“We need to take immediate action to deal with the cost of living crisis, grow the economy and delivering as much support to people as possible,”

“As Prime Minister, I’d use an emergency budget to kickstart my plan to get our economy growing and offer immediate help to people struggling with their bills.”

Rival candidate Rishi Sunak has criticised Truss’s plans for £30bn of tax cuts, saying it will fuel inflation and erode people’s living standards.

Bailey: "Very high wage increases" would fuel inflation

Andrew Bailey warned that ‘very high wage’ rises, as well as price rises, will fuel inflation.

And the longer inflation stays high, the more the poorest will suffer.

Back in February, Bailey was widely criticised after saying workers should show restraint when asking for pay increases.

The Institute of Directors has welcomed the Bank’s ‘decisive action’ today.

IoD chief economist Kitty Ussher says:

Concern about inflation is causing firms to hesitate before committing to essential long-term investment.

With energy prices continuing to rise, strong intervention is needed to increase confidence that we will soon be through the worst, so that boardroom decision-makers can plan ahead with greater certainty.

TUC: Firms should show restraint on profits

Unions are demanding that firms rein in their profits to protect the public from soaring inflation.

TUC head of economics Kate Bell says energy firms, in particular, should show more restraint on earnings..

“Working people need an approach to inflation that protects jobs and that helps pay keep up with prices.

“But a rate rise does nothing about the current causes of inflation – global energy, commodity and food prices. It will only add to our problems, making a recession very likely and putting lots of people’s jobs at risk.

“Businesses had tremendous support from taxpayers during the pandemic. They should now help to counter inflation with greater profit restraint – especially energy firms.

“And the government must do more to get pay rising, starting with decent pay rises for public servants, a higher minimum wage, and stronger rights for working people and their unions to bargain for fair pay.”

UK heading into long recession: political reaction

The looming UK recession shows that the government has lost control of the economy, says Rachel Reeves, Shadow Chancellor of the Exchequer.

“This is further proof that the Conservatives have lost control of the economy, with skyrocketing inflation set to continue, while mortgage and borrowing rates continue to rise.

“As families and pensioners worry about how they’re going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis.

“Labour would help households right now by removing the tax breaks that are subsidising oil and gas producers and using that money to help people now, including by cutting VAT on energy bills.

“And with our Climate Investment Pledge and plan to buy, make and sell more in Britain, a Labour government will build the strong, secure and fair economy we need.”

UK Chancellor Nadhim Zahawi agrees that the Bank’s forecasts are worrying.

Interestingly, Zahawi also cites the value of “strong, independent monetary policy”:

“Along with many other countries the UK is facing global economic challenges and I know that these forecasts will be concerning for many people.

“Addressing the cost of living is a top priority and we have been taking action to support people through these tough times with our £37bn package of help for households, which includes direct payments of £1,200 to the most vulnerable families and a £400 discount on energy bills for everyone.

“We are also taking important steps to get inflation under control through strong, independent monetary policy, responsible tax and spending decisions, and reforms to boost our productivity and growth.

“The economy recovered strongly from the pandemic, with the fastest growth in the G7 last year, and I’m confident that the action we are taking means we can also overcome these global challenges.”

Our Politics Liveblog has full details:

UK banks have been quicker to pass the increase in interest rates to borrowers than savers so far, Bailey says.

He points out that when rates fell to record levels after the financial crisis, the official rate got out of line with savings rates.

But it is very important that savers receive the returns they should receive, Bailey adds.

The Bank of England is seeing signs of price rises that “do concern us, frankly” says governor Andrew Bailey.

Some recent price moves suggest the companies are managing to pass on their rising cost to consumers, Bailey explains, which could make inflation more persistent.

[Marmite-maker Unilever, for example, managed to raise its prices by 11% year-on-year in the last quarter]

Bailey also says the tight jobs market could lead to inflationary pressures too, with firms struggling to hire staff.

Bank denies slamming on the brakes after being asleep at the wheel

Q: A year ago you predicted inflation would peak at 4%, now you’re predicting it will peak at 13.3%. Critics say you’ve been asleep at the wheel, and are now slamming on the brakes at exactly the wrong time - haven’t they got a point?

I don’t think they do, Andrew Bailey hits back, pointing to the very big external shocks from Covid disruption and the Russian invasion, which hit the UK one after the other.

No-one could have predicted a Ukrainian war a year ago, governor says.

He also pushes back against criticism that the Bank provided too much support during the pandemic -- arguing that UK GDP has only risen slightly above pre-pandemic levels, even with the quantitative easing conducted by the BoE.

Deputy governor Ben Broadbent also defends the Bank’s handling of the monetary policy levers.

Broadbent argues that if the Bank has known in late 2020 what Putin was planning, interest rates would have needed to rise into double-digits, causing a severe recession, to keep inflation at 2% today.

Vladimir Putin’s weaponisation of gas supplies will drive inflation even higher than feared by the end of the year, explains Newsnight’s Ben Chu:

There is a lot of uncertainty in the Bank’s forecasts, as it simply can’t know how energy prices will change (due to factors well out of its control).

But the broad picture is bleak for poorest households.

Q: Are there any scenarios that are not catastrophic for the least well-off, and pretty devastating for average earners?

Andrew Bailey replies that the Bank is very conscious that the poorest are hit hardest by the inflation in essential goods and services, such as food and energy.

“If we don’t bring inflation back to target, given the huge scale of the energy shock, it’s going to get worse, and it will get worse precisely, I’m afraid, for those who are least well off in society.”

Bailey adde he has “huge sympathy and huge understanding” for those who are struggling most with this, who will wonder why he has raised interest rates today

Doesn’t that make it worse, from that perspective, in terms of consumption? I’m afraid it doesn’t, because, I’m afraid the alternative is even worse, in terms of persistent inflation.”

The Bank of England’s new forecasts are frankly dire:

Q: Is the Bank giving up on trying to tred the narrow path of managing inflation and growth, and simply focusing on squashing inflation?

Bailey denies it, saying the analogy still holds for the BoE - and is also used by other central banks as policymakers try to steer through the current economic challenges.

Deputy governor Ben Broadbent points out that we also faced economic shocks since 2020 due to the Covid-19 pandemic.

“We are facing, and have for some time been facing, these ever-increasing trade-off inducing shocks.

They are intrinsically shocks, which in the near term push up inflation but also weaken growth.”

Bailey: BoE independence is a great virtue

Bailey also gave a full-throated defence of central bank independence, saying it makes it easier to take monetary policy decisions.

“One of the great strengths of being an independent central Bank is actually, you know, the political pressures have been very well managed throughout the life of the MPC in my view.

“And obviously, we’ve had many governments throughout that life, and that is the best way to manage it in my view. So no, I don’t really want to put emphasis on political pressures.

“One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”

Andrew Bailey also declines to comment on Liz Truss’ criticism of the Bank of England (she wants to review if its mandate is fit for purpose).

But Bailey also makes an important point: Under independence, the government sets the Bank of England’s price stability target each year, and the BoE tries to hit it.

That structure is very clear, Bailey says, and it has been reviewed once before [the original goal was to aim for the RPIX inflation measure at 2.5%, but was switched to 2% CPI in 2003]

Onto questions....

Q: If Liz Truss becomes prime minister and makes £30bn of tax cuts, will interest rate need to rise even faster and further?

Andrew Bailey says the Bank will not get involved in the Conservative leadership race, but looks forward to working with the next prime minister, whoever it should be.

Inflation hits the least well-off hardest, Andrew Bailey points out.

If the Bank doesn’t act to stop inflation becoming persistent, the consequences will be worse in future, meaning interest rates need to be higher, the governor tells the press conference at the BoE.

[However, higher interest rates will not bring wholesale gas prices, the major driver of inflation, down to pre-Ukraine invasion levels].

Looking ahead, Bailey says all options will be on the table when the MPC meet again in September.

IE: we shouldn’t assume interest rates will rise by another 50 basis points at the next meeting too.

Unemployment is expected to rise from next year, Andrew Bailey warns.

The Bank also forecasts that wage pressure will adjust down quickly as inflation falls back (from over 13% by the end of this year).

The mix of high near-term inflation and weak activity is a ‘challenging backdrop’ to seting interest rate, he says.

But there are ‘no ifs or buts’ in the Bank’s commitment to getting inflation back to the 2% target in the medium term.

BoE governor: Russian shock now largest contributor to UK inflation

Bank of England governor Andrew Bailey is holding a press conference now, to explain today’s interest rate rise.

Bailey points out that near term inflationary pressures have intensified significantly, due to the surge in energy prices since the Bank’s previous forecasts in May.

The Russian shock is now the largest contributor to UK inflation by some way.

There is an economic cost to the war....but it will not deflect us from setting monetary policy to bring inflation back to the 2% target.

Pound hit by recession warning

The pound has dropped after the Bank of England warned the UK will fall into a long recession.

Sterling is now down half a cent at $1.2090, having been up half a cent earlier.

You might expect a hefty interest rate rise to support a currency, but not when it’s accompanied by such a worrying assessment of the economic outlook:

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, explains:

“Sterling has fallen fairly sharply against its major peers so far this afternoon following a very doom and gloom assessment of the UK economy from the Bank of England. The vote on interest rates was actually rather hawkish, with eight of the nine MPC members in support of an immediate 50 basis point rate increase. Silvana Tenreyro was the lone dissenter in favour of a standard 25 basis point hike.

“The BoE’s communications and accompanying macroeconomic projections were, however, very downbeat. We’ve run out of fingers and toes keeping track of the number of occasions that the MPC has revised upwards its inflation forecasts in the past year. UK headline inflation is now expected to peak at 13.3% in October, and remain just shy of double-digits in twelve months time.

Of particular concern is the bank’s appraisal on the impact of the cost of living crisis on economic activity. Policymakers now expect the UK economy to contract throughout all of 2023, with a peak-to-trough fall of more than 2%. This is a far sharper downturn than market participants had accounted for, hence the initial knee-jerk sell-off in the pound.

Updated

The Bank hiked interest rates to 1.75% (even though the UK economy is heading into recession), because it fears inflationary pressures are becoming “more persistent and broadening”.

It points out that many companies have been successfully raising prices* which will push up consumer costs in the shops.

The Bank also points to the UK’s ‘tight’ labour market -- a signal that it is worried about a wage-price spiral, as workers seek pay rises to help with the worst cost of living crisis in decades.

The Bank says:

In a tight labour market and an environment in which companies were finding it easier to pass on price increases, a higher and more protracted path for CPI inflation over the next 18 months could increase the risk that an eventual decline in external price pressures would not be sufficient to restrain expectations of above-target inflation further ahead.

It argues that faster tightening will being inflation down to 2% quicker:

[* for example Unilever, Heinz and Reckitt Benckiser].

The Bank forecast that the UK economy will start shrinking in the fourth quarter of this year, and then keep contracting through next year.

That would be the longest recession since after the 2008 financial crisis.

Output would fall by 2.1% from peak-to-trough during this recession, similar to the 1990s recession, and smaller than after the ‘08 crash.

UK to enter recession, Bank of England warns

The Bank of England is also warning that the UK economy will enter recession later this year.

The Bank has cut its growth forecasts, and now sees the economy falling into recession from the October-December quarter.

In a grim warning about the economic outlook, it says:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Updated

Inflation to hit 13% later this year

UK inflation is set to soar over 13% by the end of this year, the Bank warns, and remain elevated in 2023.

Announcing today’s interest rate decision, it says the surge in gas prices mean inflation will be even higher than previously feared.

Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.

As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

The MPC voted 8-1 to lift UK interest rates to 1.75%, with Silvana Tenreyro the only dove voting for a smaller rise, to 1.5%.

Bank of England lifts interest rates to 1.75%

Newsflash: The Bank of England has made its biggest increase in UK interest rates in 27 years.

The UK central bank has lifted borrowing costs by 50 basis points, for the first time since the Monetary Policy Committee was given control of interest rates in 1997.

It’s the largest rise in UK interest rates since 1995.

That takes UK interest rates to a 13-year high of 1.75%, up from 1.25%, as many economists expected, and the sixth interest rate rise in a row.

The MPC took the plunge as inflation is set to soar over 10% in the coming months, as gas prices drive up UK energy bills this winter.

Updated

Excitement is building at the Bank of England...

Full story: Liz Truss would review Bank of England mandate, says Tory ally

Liz Truss would review whether the Bank of England’s mandate is “fit for purpose”, a cabinet backer has said, suggesting she would examine its “exclusionary independence on interest rates”, as the Bank prepares to announce its crunch rates decision in just a few minutes.

The attorney general, Suella Braverman, told Sky News the Tory leadership frontrunner would look again at the Bank’s powers.

“Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard,” she said.

She added:

“Liz Truss has made clear that she wants to review the mandate that the Bank of England has, so that’s going to be looking in detail at exactly what the Bank of England does and see whether it’s actually fit for purpose in terms of its entire exclusionary independence over interest rates.”

It came hours before the Bank was expected to raise interest rates by half a percentage point – the biggest increase since 1995.

The energy price cap will also be changed quarterly instead of every six months, Ofgem announced on Thursday.

More here.

Here’s a breakdown of what the markets expect from the Bank of England at noon, from Fawad Razaqzada, market analyst at City Index and FOREX.com.

What are analysts expecting about BoE’s rate decision?

Economists expect the Bank of England to hike interest rates by 50 basis points to 1.75% from 1.25%, in light of hawkish commentary from Governor Andrew Bailey. The markets are also almost fully pricing in a 50 basis point hike on Thursday, and about 100 more by February 2023.

How will pound react to BoE’s policy decision?

A lot will depend on the forward guidance and vote split – see below for more. In terms of the rate decision itself, a 50-basis point hike is expected and as such won’t come as surprise. But if the BoE once again opts for 25 bp hike, this will surprise the markets and could send the pound tumbling back to $1.20.

Vote split

Size matters, but so does the vote split. In June, the MPC had voted 6-3 in favour of a 25bp hike, although this time Governor Bailey will be pushing for a 50-basis-point move, which means all those 3 hawks who had dissented in June, will be happy this time.

Still, the decision to hike by 50 basis points is unlikely to be unanimous in my view, given that there are doves in the BoE camp such as Silvana Tenreyro and Jon Cunliffe. So, we are probably looking at a 7-2 or 6-3 split in favour of 50 bp hike.

Forward guidance

If the BoE’s policy statement echoes that of Federal Reserve and Reserve Bank of Australia to give it more flexibility on policy, then the pound could fall. So, watch out for a statement in the lines of “the size and timing of future hikes will be guided by the incoming data.”

However, if the BoE is more explicit in terms of acting forcefully to tackle 40-year-high inflation, then this could see the pound make more ground against the dollar and euro.

In the City, the financial markets are calm as traders await the Bank’s decision.

The FTSE 100 index of blue-chip shares is slightly higher, while the pound has risen almost half a cent against the US dollar to $1.219, near Monday’s five-week high.

Full story: Is Bank of England about to break precedent on interest rates?

There’s an hour to go until the Bank’s eagerly awaited interest rate announcement, which could bring the biggest increase in borrowing costs in 27 years:

After edging rates up by a quarter-point at a time, the financial markets are betting that Threadneedle Street’s monetary policy committee (MPC) will announce a 0.5 percentage-point jump at noon, something that has never happened since the Bank was granted independence in 1997.

The previous time interest rates were raised by such a margin, John Major was the prime minister, Ken Clarke was the chancellor and Eddie George was the Bank of England governor. That was back in 1995, when the Treasury still had the final say over interest rates.

If the Bank does break new post-independence ground, it will not just be because the annual inflation rate is at a 40-year high of 9.4% and expected to rise further over the months ahead.

Nor will it be simply a matter of playing catch-up after repeatedly underestimating price pressures, even though that is a factor. This time last year, the MPC was forecasting that inflation would peak in late 2021 at just 4%.

Rather, the jump will be because the Bank’s fear of inflation becoming embedded in the economy outweighs concerns that the economy is about to enter recession or, indeed, may already be in one. David Blanchflower, a former MPC member, has said he believes the UK is in the early stages of a recession that began some months ago.

What makes the committee’s job more difficult is that the economy is giving off mixed signals, as is often the case at a key turning point.

Unemployment is back to low levels last seen in the 1970s and there are record job vacancies....

More here:

Key event

Torsten Bell, chief executive of living standards at think tank the Resolution Foundation, says the Bank of England is “very worried” that a recession is looming.

The UK is being hit by several economic shocks, notably the surge in energy prices due to Russia’s invasion of Ukraine.

As Bell points out on the Today Programme, raising interest rates won’t bring down the price of gas.

“Some of those wider shocks are easing and that’s to do with global supply chains and due to the spikes in global commodity prices that I was just mentioning, but others are getting worse and that’s to do with the Russian war and what that’s done to energy prices.

“That isn’t going to go away and interest rate rises are only relevant to that insofar as they prevent that becoming embedded in our wage setting processes in the months and years ahead. They can’t do anything about that actual rise in energy prices.

So, while the Bank may raise interest rates by 50 basis points today, Bell would be surprised to see several such large hikes.

“I think there is pressure from the global situation for people to put up interest rates by large amounts. We may see one rise of half a percentage point today.

“I’ll be surprised if we see several months of that because actually, if you look at what the Bank of England have been saying to us, they’re also very worried about the state of the economy - that there may be a recession looming.

We may get a forecast of recession in the updated forecast from ... the Bank of England later today.”

UK construction activity falls by most in over two years

In another worrying economic signal, output at UK construction firms has fallen for the first time since the pandemic lockdown of January 2021.

Civil engineering was the worst-performing segment in July, with business activity falling at the fastest rate since since October 2020. House building declined for the second month running.

S&P Global’s monthly survey of purchasing managers also found that rising inflation, fragile consumer confidence and higher interest rates were all hitting demand.

This pulled the UK construction PMI, which measures activity, down to 48.9 in July, down from 52.6 in June. Any reading below 50 shows the sector shrank, and this is the fastest decline since May 2020.

UK construction PMI

Tim Moore, Economics Director at S&P Global Market Intelligence, says:

“July data illustrated that cost of living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity.

Total industry output fell for the first time since the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.

But, UK builders weren’t alone. Eurozone construction activity fells at the sharpest rate since February 2021 last month, as new orders fell and costs rose.

UK car sales have continued to fall, as the cost of living squeeze hits demand and computer ship shortages constrain supply.

Nnew car registrations fell by 9% in July compared with a year ago, the Society of Motor Manufacturers and Traders (SMMT) reports. It’s the fifth monthly decline in a row

Battery electric vehicles (BEV) bucked the trend, with sales up nearly 10%, but the pace of growth here slowed too.

With manufacturers struggling to source semiconductors, the SMMT has also cut its forecast for new car sales this year, to 1.6m from a prior forecast of 1.72m. That would be a 2.8% drop on 2021.

Here’s another clip of Suella Braverman’s interview, where she explains that Liz Truss is very keen on radical reform at the Bank of England.

Braverman argues this doesn’t mean taking away the Bank of England’s independence, but other central banks have ‘different degrees’ of independence, citing the Bank of Japan as an example.

The Bank of Japan, like other major central banks such as the Federal Reserve, the European Central Bank, the Swiss National Bank, is independence, meaning they set interest rates freely without political interference, with mandates to achieve price stability (low inflation).

The Fed has a dual mandate, to also aim for full employment.

Central bank independence has reassured investors that monetary policy will be focused on economic issues, rather than being influenced by political concerns (the temptation to engineer a boom before an election).

The BoJ’s independence has come under some pressure. Shinzo Abe, the former prime minister who was shot dead last month, made hyper-loose monetary policy one of the ‘three arrows’ of his Abenomics economic policy. Negative short term interest rates made it cheaper for consumers and companies to borrow money and spend.

One former BoJ policymaker warned last year that the BoJ’s tools were moving towards the realm of fiscal policy, which could undermine its independence.

Updated

Attorney General Suella Braverman also told Sky News that Liz Truss wants to make the Bank of England ‘more responsive’ to challenges, such as the global fight against inflation.

She’s very interested in looking at how the Bank of England operates, maintaining its independence of course, but also ensuring that it’s much better placed and more responsive in the future to economic challenges like the type we’re seeing at the moment.

Ofgem has confirmed that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”.

The energy regulator said reviewing the price cap for household bills in Great Britian every three months would allow it to “adjust much more quickly” to volatility in the market. More here:

Truss would review Bank of England's mandate

Attorney General Suella Braverman has confirmed that Liz Truss would review whether the Bank of England’s current arrangements are “fit for purpose” if she becomes prime minister.

Braverman, an ally of Liz Truss, told Sky News:

“Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”

She added that the review will examine whether the Bank’s ‘entire exclusionary independence’ over interest rates was appropriate.

“Liz Truss has made clear that she wants to review the mandate that the Bank of England has, so that’s going to be looking in detail at exactly what the Bank of England does and see whether it’s actually fit for purpose in terms of its entire exclusionary independence over interest rates.”

The Bank cut rates to record lows of 0.1% in March 2020, after the Covid-19 pandemic began.

It left them there until last December, concerned that unemployment would rise when the furlough job protection scheme ended.

Liz Truss, the frontrunner to become the next UK prime minister, wants to look to change the Bank of England’s mandate to ensure it controlled inflation.

Speaking at a hustings of Conservative party members in Cardiff on Wednesday, Truss said she wanted to review the BoE’s mandate, which has a target of 2% inflation, the Financial Times reports.

She told the event:

“The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation.”

Truss added:

“The last time the mandate was looked at was in 1997 under Gordon Brown. Things are very, very different now.”

Truss has previously cited the Bank of Japan as an example of success tackling inflation.

Core inflation in Japan is running at just 2.2%, but the BoJ’s main challenge has been fighting deflation despite introducing negative interest rates and running the biggest quantitative easing (government bond-buying) program of all major central banks.

Since last December, the Bank has already increased its key interest rate, Bank Rate, from 0.1% to 1.25%, in response to the rising cost of living.

But the Bank admits it will take time to work (monetary policy operates with a time lag) -- and it certainly hasn’t cooled UK inflation yet:

Analysts at ING say a 50bp hike looks highly likely, especially after Governor Andrew Bailey specifically put a hike of this size on the table in his comments last month.

ING explain:

Admittedly, there’s a chance we simply get another 25bp move, given there’s not much in the recent economic data flow to suggest the BoE needs to move more aggressively than it did in June.

But concerns among hawkish committee members about job market tightness and a weaker pound point to a larger move this week - especially given that this is what markets are pricing.

Looking further ahead, ING have been pencilling in another 25bp hike in September, before a pause, but accept this may be a slight underestimate.

We highlighted last week that persistent worker shortages, as well as potential tax cuts depending on the result of the Conservative leadership contest, could ultimately see the Bank deliver another 25-50bp on top of what we’ve been forecasting.

UK interest rates are set by vote, by the nine members of the Bank’s monetary policy committee. Some are keener than others to raise rates sharply.

At the last meeting in June, three MPC members wanted a 50 basis-point rise, but were outvoted by the other six who favoured a smaller, quarter-point increase to 1.25%.

Those three hawks were Jonathan Haskel, Catherine Mann and Michael Saunders (whose MPC term ends this month).

Bloomberg reckons that deputy governor Dave Ramsden, chief economist Huw Pill, and governor Andrew Bailey are most likely to join the hawks, while deputy governor Jon Cunliffe and external member Silvana Tenreyro were the most dovish.

Introduction: Bank of England on brink of biggest rate hike since 1995

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

The Bank of England could make a little piece of history today, by raising UK borrowing costs by the highest amount since Gordon Brown gave it control of interest rates 25 years ago.

The Bank sets interest rates at noon, and many (but not all) City economists predict that its policymakers will plump for a 50 basis point rise. That would lift Bank Rate to 1.75%, up from 1.25%.

If so, it would be the first 50bp rise since 1995, 27 years ago, taking interest rates to their highest since December 2008.

Hiking borrowing costs sharply could push the UK closer to recession. However, the Bank’s Monetary Policy Committee could take the plunge in an attempt to squell inflation - now at a 40-year high of 9.4%, far far above its 2% target.

Governor Andrew Bailey set the scene last month, telling a City audience that the Bank could abandon its policy of increasing rates in quarter-point steps.

At a speech at Mansion House in London, Bailey declared:

“Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,”

The MPC has already raised UK interest rates by 0.25 percentage points five times this year, and a Reuters poll this week found that more than 70% of 65 economists expected a half-point increase today.

Katharine Neiss, chief European economist at PGIM Fixed Income, says the BoE may use today’s meeting to put through one more final, substantive rate hike before the economy starts to soften materially.

There are already signs the UK economy is starting to cool, says Neiss, adding:

There is still a lot of uncertainty around how the recent energy price and inflation shocks will impact economic activity, as well as the cumulative impact of rate rises by the BoE since last December, as these will take some time to feed through.

There is broad agreement that the economy is set to cool further, but what remains an open question is by how much, and this is going to determine the path of policy going forward.

It’s already been a summer of hefty rate hikes, with the European Central Bank raising its benchmark rate by 50 basis points last month, and the US Federal Reserve hiking by 75 basis points in both June and July.

A winter of misery is approaching, with inflation heading into double-digits soon.

Yesterday, the Resolution Foundation thinktank predicted the UK’s annual inflation rate could hit 15% at the start of 2023, due to further sharp increases in energy prices.

That would intensify the squeeze on households, particularly poorer ones, who need more help from the government to get through the coming months.

Resolution’s Jack Leslie warned that the jump in gas prices since the Ukraine war began meane UK energy bills could hit £3,600 early in 2023.

Consumer price inflation will now peak higher and later than the Bank of England previously thought, with CPI inflation plausibly moving above 15 per cent next year (without Government measures to reduce prices).

Higher and more persistent inflation both mean that the Bank of England faces a protracted period of challenging policy making.

More importantly, low-to-middle income families are likely to face disproportionately higher living cost levels for the foreseeable future.

The Bank will release its own economic forecasts at noon, and are expected to show inflation heading higher than it expected three months ago.

The agenda

  • 8.30am BST: Eurozone construction PMI for July
  • 9am BST: UK car sales for July
  • 9.30am BST: Eurozone construction PMI for July
  • 12pm BST: Bank of England interest rate decision
  • 12.30pm BST: Bank of England interest rate decision
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