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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

ECB hikes interest rates by record 75bp and slashes growth forecasts – as it happened

Liz Truss ECB United States United Kingdom Bank of England Inflation United Nations Fracking Kwasi Kwarteng Ukraine
Sunflowers and the skyline of Frankfurt with the headquarters of the European Central Bank.
Sunflowers and the skyline of Frankfurt, with the headquarters of the European Central Bank. Photograph: Kai Pfaffenbach/Reuters

Closing post

Time to wrap up.

The eurozone’s central bank has hiked interest rates by a historic amount as it attempts to tame rampant inflation.

The European Central Bank lifted all three of its policy rates by 75 basis points, the second increse in borrowing costs in a row.

President Christine Lagarde warned that further hikes are coming at future meetings, as inflation remains far too high and is likely to stay above target for an extended period

The ECB also slashed its growth forecasts, and lited its inflation outlook, following the surge in gas prices as Russia has cut supplies to Europe.

During a press conference, Christine Lagarde said that further interest rate rises would be needed to bring inflation down to the 2% target.

She said there were four reasons the eurozone was slowing.

  • High inflation is dampening spending and production throughout the economy, and those headwinds are reinforced by gas supply disruption

  • The rebound in demand for services after the re-opening of economies from pandemic lockdowns will lose steam

  • A weakening of gloal demand, as other central banks also raise interest rates (ie, the Federal Reserve) and ‘worsening terms of trade’ will mean less support for the euroarea economy

  • Uncertainty remains high, and confidence is falling sharply.

She also urged eurozone governments to focus their energy support packages, denied the ECB had a target rate for the euro, and admitted that the Bank had got its forecasts wrong.

Lagarde also explained that the ECB’s ‘really dark’ downside scenario shows the eurozone falling into recession next year, if Russia stops all gas supplies to Europe.

UK Prime Minister Liz Truss has capped consumer energy bills for two years at around £2,500 for the average household, averting the anticipated 80% surge in October.

Truss also announced a six-month support scheme for businesses, but further details are yet to be released.

The package could cost £130bn or more, depending on how high wholesale gas prices remain over the coming months.

Truss also announced schemes she said would increase energy resilience, including launching a new round of about 100 new oil and gas licences and lifting the moratorium on fracking for shale gas, as well as accelerating new sources of energy supply, including nuclear, wind and solar.

Economists say the package should mean inflation peaks lower than feared, while the recession could be shallower.

But charities have warned that the plan won’t protect the poor, while it has also been criticised for being badly targeted.

The pound has dipped back towards yesterday’s 37-year lows, as markets digest the daunting economic challenge facing the new government.

In other news:

The owner of Primark has warned it is expecting lower profits next year as it grapples with a strong dollar and soaring costs that have pushed the fast-fashion retailer’s annual energy bills up by about £100m.

Lloyd’s of London has warned of a “challenging year” of natural catastrophes, Russia’s invasion of Ukraine and inflation as the world’s oldest insurance market braced for a £1.1bn hit from unrecoverable planes and cargoes related to the war in Ukraine.

Shares in Darktrace, the artificial intelligence and cybersecurity company, have slumped by almost 35% after the US private equity firm Thoma Bravo walked away from a potential takeover of the business, whose founder, Mike Lynch, is fighting extradition to the US on fraud charges.

Britain’s competition watchdog has paved the way to clear Morrison’s takeover of convenience store chain McColls’s, by ruling that it only creates competition concerns in a few areas.

Telecoms companies are being investigated over whether they misleading consumers about inflation-busting bill increases when promoting deals in their marketing campaigns.

Kim Kardashian has ventured into the world of finance, launching her own private equity firm with the help of a former partner from the US powerhouse the Carlyle Group.

NIESR, the economic think tank, have just published their verdict on Liz Truss’s energy bill freeze --> its not sufficiently targeted and unnecessarily expensive.

They point out that he new price cap will be noticeably higher than it was in April this year: the poorest households will face energy bills of £1,900 (a rise of £400 a year), which is unsustainable in terms of disposable income and savings.

  • This policy is a universal subsidy that will disproportionately benefit the richest households who also have the highest energy consumption: this makes the policy inefficient and expensive, taking the total cost to between £100bn-150bn which is substantially greater than the cost of the furlough scheme during Covid.

  • A much more cost-effective option would be a variable price cap (whereby the cost of energy per unit rises with usage): this would further cut the energy bills of the poorest and lower-income households, incentivise energy saving and could have paid for itself.

The gloves are off in the ECB’s fight against inflation, explains Carsten Brzeski of ING.

Brzeski says today’s single largest rate hike since the start of the monetary union is an historic move.

With today’s decision, it is clear that the ECB has given up on inflation targeting and forecasting and has joined the group of central banks focusing on bringing down actual inflation.

It’s not so much a new strategy based on conviction but rather a strategy based on missing alternatives.

Royal Mail workers from the Communication Workers Union (CWU) on the picket line at the Glasgow Mail Centre last month.
Royal Mail workers from the Communication Workers Union (CWU) on the picket line at the Glasgow Mail Centre last month. Photograph: Andrew Milligan/PA

Back in the UK, Royal Mail has denied holding secret talks over a possible takeover approach.

In a curt statement to the City, the postal operator says:

We are aware that in recent media interviews, Dave Ward, the General Secretary of the CWU has indicated that we are in “secret talks” with a private equity investment group, he believes, regarding a takeover of Royal Mail.

The Company wishes to make clear that this is not true. We are involved in no such talks.

Earlier this week, the Communication Workers Union said Royal Mail’s bosses should be investigated over talks with Luxembourg-based private equity firm Vesa Equity Investment. Vesa, owned by billionaire Daniel Kretinsky, is Royal Mail’s largests shareholder.

Last month, ministers said they would conduct a national security review into the ownership of Royal Mail, after it emerged the Czech billionaire has increased his stake.

Royal Mail staff have held fresh industrial action today, starting a two-day strike in a bitter dispute over pay and conditions.

Martin Wolburg, Senior Economist at Generali Investment, says ECB chief Christine Lagarde struck a hawkish line at today’s press conference:

Sky-rocketing inflation pushed the ECB into accelerated frontloading. It again surprised on the upside by embarking on 75 bps rate increase.

During the press conference President Lagarde maintained a hawkish tone leaving no doubt that further rate hikes are ahead.

While emphasizing data-dependency it became very clear the focus will remain on bringing inflation down over the medium term and to tame inflation expectations.

Announcing the biggest increase in eurozone interest rates ever might bolster the ECB’s reputation as the guardian of price stability in Europe.

But it may not have a tangible effect on inflation, warns Wolfgang Bauer, Fund Manager at M&G Investments, given the energy squeeze:

Increasing energy and other commodity prices are creeping into core inflation as higher input prices force businesses to pass on the pain - at least in part - to their customers.

This cost-push inflation, to a large degree caused by supply shocks, is very hard to fight with monetary policy tools. To put it bluntly, even the most ambitious interest rate hike by the ECB won’t reopen Nord Stream 1.

Christian Lindner, Federal Minister of Finance, speaks in the German Bundestag today
Christian Lindner, Federal Minister of Finance, speaks in the German Bundestag today Photograph: Wolfgang Kumm/AP

The European Central Bank’s interest rate hike has made clear that “we are economically in an extraordinarily challenging situation” and must be ready for the challenge of fighting inflation, said German Finance Minister Christian Lindner.

Lindner told the Bundestag lower house of parliament that:

“The first priority is fighting inflation because otherwise it will wash away our economic foundation.”

Inflation in Germany (on an EU-harmonised basis) hit a record high of 8.8% in August – driven by energy, goods and food prices.

With Christine Lagarde’s press conference now over, economists at the CEBR predict there will be two more rate hikes, at least, before the year is out.

That would push up borrowing costs by at least another 75 basis points, they add.

That’s on top of today’s unprecendented 75bp hike, and the 50bp increase in July – when the ECB started tightening for the first time in a decade.

Eurozone interest rates
Eurozone interest rates Photograph: CEBR

Powell knocks euro and pound down

Both the euro and the pound have now dropped against the US dollar, as America’s top central banker pledged to ‘keep going’ until the job of taming inflation was done.

Jerome Powell has told a conference organised by the Cato Institute that the Federal Reserve needs to act strongly and forthrightly.

The longer inflation remains above target, the greater the risk, Powell adds – which won’t dampen expectations that the Fed raises interest rates by 75 basis points, again, at its next meeting.

The pound has taken a knock, now down half a cent at $1.147, while the euro is back below parity –- despte the biggest interest rate increase ever this morning.

Reuters has the details:

The Federal Reserve is “strongly committed” to controlling inflation but there remains hope it can be done without the “very high social costs” involved in prior inflation fights, Fed chair Jerome Powell said on Thursday.

Referring to former Fed chair Paul Volcker’s battle against inflation in the early 1980s, when Fed policy triggered a recession and the unemployment rate topped 10%, Powell said in comments at a Cato Institute conference Volcker was trying to uproot years of rising inflation expectations. Volcker “followed several failed attempts,” to lower inflation, Powell said.

“My colleagues and I are strongly committed (to lowering inflation)...We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play.”

One key difference between the US and Europe, Lagarde says, is that US inflation is predominently driven by demand, while in the eurozone prices are being driven by supply (the surge in energy prices).

The US jobs market is much tighter too – with three vacancies to each unemployed person, compared with three unemployed people per vacancy in the eurozone.

Updated

ECB president Christine Lagarde has also warned that inflation is “still predominantly a supply driven-phenomenon” – affected by factors beyond the central bank’s control:

She explains:

I cannot reduce the price of energy. I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market.

And I am very pleased to see that the European Commission is considering steps to that effect because monetary policy is not going to reduce the price of energy.

Christine Lagarde says she takes the blame for the ECB’s failure to forecast the full extent of the jump in inflation this year.

She says those errors were ‘predominently related to energy’, pointing out that certain events (such as the Ukraine war, the pandemic, and the cuts to gas supplies) couldn’t be anticipated.

I take the blame, because I’m the head of the institution.

Yes, we made forecasting errors, but those errors were made by all forecasters. We are not very different to them.

Lagarde adds that staff are ‘constantly’ working to improve their economic models.

Striking a hawkish tone, Lagarde says that future interest rate rises “have to be timely, and of a magnitude that brings us more quickly” to levels that will bring down inflation to the EB’s 2% target.

But, she doesn’t know (or won’t say) what the terminal rate will be.

She also indicates that several more rate hikes will be needed.

Probably more than two (including this meeting) but probably less than five.

Updated

Lagarde says the ECB ‘does not target’ any exchange rate for the euro, but it has noted its depreciation against other currencies, notably the dollar (where it’s down 12% this year, below parity).

This weakness has a direct, and indirect impact, including adding to inflationary pressures by making imports pricier.

But Lagarde insists the ECB has not, and will not, target a particular exchange rate.

Updated

"Really dark" downside scenario shows recession and gas rationing

The European Central Bank’s policymakers have drawn up a “really dark downside scenario” in which the eurozone falls into recession next year.

It includes a ‘total shutdown of Russian gas supply’ – which Christine Lagarde points out has already almost happened with the closure of Nord Stream 1 (there are still flows through other pipelines).

That scenario also shows there would be rationing of energy, and doesn’t factor in higher gas supplies from other producers – such as Asia-Pacific suppliers, Norway, or the US.

Updated

Christine Lagarde is now explaining that today’s decision to hike borrowing costs at a record amount was unanimous.

And she warns that Europe is not yet at the ‘neutral rate’ of interest (where rates are neither stimulating the economy nor hampering growth).

That means further hikes will be needed ‘at the next several meetings’ to reach that point.

A long-lasting war in Ukraine remains a significant risk to growth, especially if firms and households faced energy rationing, Lagarde says.

In that scenario, confidence could deteriorate further, and supply-side constraints could worsen, as food and energy costs could remain persistently higher than expected.

So, the ECB says growth risks are to the downside, while inflation risks are to the upside.

The depreciation of the euro has added to the build up in inflationary pressures, Lagarde points out.

[the euro fell below parity against the dollar for the first time in 20 years this summer]

The ECB president also warns that price pressures are spreading to more and more sectors, partly due to rising energy costs across the economy.

Lagarde warns eurozone governments over energy bailouts

Christine Lagarde has urged eurozone governments to target their energy support packages on the firms and households who really need it.

She tells reporters at today’s press conference that packages should be structured to spend public money efficiently, and to prevent fuelling inflation.

Fiscal support measures to cushion the impact of higher energy prices should be temporary and targeted at the most vulnerable households and firms to limit the risk of fuelling inflationary pressures, to enhance the efficiency of public spending, and to preserve debt sustainability.

Four reasons why eurozone economy will slow

After a strong summer supported by tourism, the eurozone is expected to slow substantially over the remainder of this year, Christine Lagarde says.

She cites four factors – including Russia’s cuts to gas supplies.

  1. High inflation is dampening spending and production throughout the economy, and those headwinds are reinforced by gas supply disruption

  2. The rebound in demand for services after the re-opening of economies after pandemic lockdowns will lose steam

  3. A weakening of gloal demand, as other central banks also raise interest rates (ie, the Federal Reserve) and ‘worsening terms of trade’ will mean less support for the euroarea economy

  4. Uncertainty remains high, and confidence is falling sharply.

Lagarde also warns that the slowing economy will push up the unemployment rate, from a record low of 6.6%.

Updated

Lagarde explains that today’s 75 basis-point interest rate hike is a “major step”.

It will frontload the transition from the prevailing highly accommodative level of policy rates towards levels that will return inflation to 2% in an timely way.

Lagarde also explains that the ECB expects to raise interest rate further to dampen demand, and guard against a persistent upward shift in inflation expectations.

She then explains that (as covered earlier) the ECB has lifted its inflation forecasts and slashed its growth projections.

Very high energy prices are hitting people’s incomes, while the “adverse geopolitical situation”, especially Russia’s unjustified aggression towards Ukraine, hitting the confidence of businesses and consumers, Lagarde adds.

Watch Christine Lagarde's press conference

European Central Bank president Christine Lagarde is holding a press conference now to outline today’s decision.

It’s being streamed live here.

Updated

ECB's record rate hike: what the experts say

The European Central Bank has been forced into its biggest ever rate hike by soaring prices, says Seema Shah, Chief Global Strategist at Principal Global Investors:

“The ECB has joined the 75bps club. Today’s policy rate increase, the largest in the single currency area’s history, comes despite the oncoming recession and is testament to the enormity of the inflation challenge facing the central bank. With inflation at a record high and almost five times greater than the ECB’s 2% target, and inflation expectations unbearably elevated, the ECB’s hand has been forced.

Shah also fears the ECB’s downgraded growth forecasts are still too optimistic:

Unlike the Fed where the recession is still a couple of quarters away, the energy crisis means that a Euro area recession is already brushing up against the ECB, likely limiting how high ECB rates can realistically rise – irrespective of the very-pressing inflation problem.”

Thomas Verbraken, executive director at MSCI Research, says the ECB now sees the risks of entrenched inflation as more serious than the economic slowdown.

“The ECB’s monetary tightening had been behind the curve, but today’s decisive 75bps rate hike shows that the Central Bank is committed to bringing inflation down.

It seems the risk of entrenched inflation is now outweighing the risk of an economic slowdown in their policy decisions.

But…Hinesh Patel, portfolio manager at Quilter Investors, says the rate hike is a ‘sideshow’ to the broader issue of debt sustainability.

“However, the ECB governing council’s decision to further increase rates is a sideshow to the increasing risks of sovereign debt sustainability. More important is the disappointing lack of news on measures to be deployed to reduce the risk of another sovereign debt crisis.

ECB slashes growth forecasts

The European Central Bank also warns that the eurozone economy has suffered a ‘substantial’ slowdown, as the energy crisis hits growth.

It predicts the economy will stagnate later in the year and in the first quarter of 2023.

Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity.

In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.

The ECB’s policymakers have cut their growth forecasts ‘markedly’ – they now see growth of 3.1% in 2022, just 0.9% in 2023 and 1.9% in 2024.

Many economists predict the eurozone could slide into recession over the coming quarters. And today’s sharp hike in interest rates won’t help.

Updated

The ECB’s forecasters have significantly revised up their inflation projections.

Inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024 – so still above its 2% target in two years time.

Updated

ECB announces record increase in eurozone interest rates

An exterior view of the European Central Bank (ECB) in Frankfurt.
An exterior view of the European Central Bank (ECB) in Frankfurt. Photograph: Ronald Wittek/EPA

The European Central Bank has lifted interest rates across the eurozone by a record amount, as policymakers try to curb inflation.

The ECB’s governing council has voted to raise all three key interest rates by 75 basis points, or 0.75% percentage points – a bigger hike than ever before.

This pushes the ECB’s ‘main refinancing rate’ to 1.25%, up from 0.5%, while the ‘marginal lending rate’ paid by banks borrowing from the ECB goes up to 1.25%.

The deposit facility (paid on bank deposits) rises to 0.75% from 0% (it was negative until late July, when the ECB started raising rates).

It also plans to continue lifting interest rates, after inflation hit a record high of 9.1% in August.

The ECB says:

The Governing Council took today’s decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.

According to Eurostat’s flash estimate, inflation reached 9.1% in August. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation. Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.

Updated

Truss 'could have used less money more wisely'

Liz Truss’s energy bill freeze may be ‘politically astute’, but it is also relatively expensive and poorly targetted.

So says Salomon Fiedler of German bank Berenberg, who calls it a ‘costly intervention’:

Because the programme does not specifically target the most needy but is rather broad-based, it will be relatively expensive. The support package for households may cost around £100 billion (over 4% of UK GDP). Further measures for businesses may take the total price tag to around £150 billion. It seems likely that this spending will be mostly debt-financed.

Aditional large-scale fiscal stimulus is “problematic” at a time when inflation is already extremely high, Fiedler adds:

In addition, a general energy price freeze would remove incentives to reduce gas consumption.

This likely will (1) make the policy more expensive and (2) increase the scarcity of gas for sectors not covered by the freeze even further. The measures may be politically astute for a new prime minister. But in economic terms, the government could have used less money more wisely.

Updated

Economists: UK recession risks eased by energy package

Economists believe the government’s support package will limit the damage to the economy from the energy crisis.

Samuel Tombs of Pantheon Economists says a recession looks ‘far less likely’, as consumers will have more money to spend on other goods and services.

Paul Dales of Capital Economics says it will ‘limit’ the size of the recession, but also mean higher government borrowing in future.

It seems that the size and structure of the Prime Minister’s policy to freeze utility prices is broadly as expected and will reduce inflation and limit the size of the recession.

But it will come at the cost of higher interest rates and higher government debt, although we estimate that this policy on its own won’t break the government’s main fiscal mandate.

Chris O’Shea, Centrica CEO has welcomed the energy price guarantee package:

‘We know people are deeply worried about the increase in their energy bills this winter. Extraordinary circumstances call for us all to think differently and we know this bold customer support package from the new Prime Minister and Chancellor will bring immediate relief to hard pressed households.

We applaud the speed and scale of action. Alongside this support, we will continue to donate 10% of British Gas energy supply profits to help thousands of vulnerable households for the duration of the crisis.’

Of course, the package also means the government takes on the risks from higher wholesale gas prices.

Updated

Markets calm after energy announcement

There’s not much immediate reaction in the markets to Liz Truss’s announcement – perhaps because the package has already been reported in recent days.

The pound has inched higher, now up 0.15% at $1.1550 against the dollar.

That’s only a cent and a half about Wednesday’s 37-year low, and still leaves the pound down over 14% this year against the strong US currency.

UK gilts (government debt) are calm too, after some sharp price falls earlier this week. The yield, or interest rate, on 2-year bonds has dipped back below 3%, showing prices have inched up.

£40bn liquidity support for energy suppliers

The Treasury and the Bank of England will launch a £40bn scheme to ensure energy firms are not hit by a liquidity squeeze amid volatile markets.

Liz Truss told MPs:

“I’m announcing today that with the Bank of England, we will set up a new scheme worth up to 40 billion to ensure that firms operating in the wholesale energy markets have the liquidity they need to manage price volatility.

“This will stabilise the markets and decrease the likelihood that energy retailers need our support like they did last winter.”

Earlier this week, our financial editor Nils Pratley explained that some suppliers could soon collapse unless the retail industry was supported properly. He identified two challenges:

First: if the industry’s proposal for a giant “deficit fund” with accompanying loans has been rejected, then cash has to flow to the suppliers very quickly to allow them to keep buying energy. Without government guarantees, immediate liquidity support, or both, the sector would be bust within a week, says independent energy analyst Peter Atherton.

Second: if the government is subsidising the wholesale price of gas, it needs to ensure energy is still being bought efficiently via conventional hedging contracts. As it is, the state could end up underwriting some rotten and inefficient business models in a sector where more than 30 firms have failed already. If it were starting from scratch, the government would probably establish a central buying mechanism – but that is hard to do on the hoof.

Updated

The energy support package is expected to curb inflation by “up to five percentage points”, Liz Truss has said.

That would mean a significant lessening of the squeeze on households – and would also lower the (rising) bill on UK government debt linked to RPI inflation.

Fracking ban lifted and more North Sea licences

A new oil and gas licensing round will be launched as early as next week, Truss says, expected to lead to more than 100 new licences to drill in the North Sea.

And the government is lifting its moratorium on the production of UK shale gas production.

This will enable developers to seek planning permission where there is local support, which could get gas flowing in as soon as six months, the government says.

And a new body, Great British Nuclear, is being set up to help the UK ht its target of generating 24 gigawatts of power from nuclear by 2050.

That’s on top of a new energy supply task force:

Updated

UK renewable and nuclear generators are to move onto new contracts, which will break the link between renewable electricity prices, and soaring gas contracts.

These generators will move onto ‘contracts for difference’, which will guarantee them a fixed price over a number of years, rather than benefitting from surges in the wholesale markets.

Many older nuclear, solar and wind generators are on renewable obligation (RO) contracts, under which they sell at the current wholesale rate.

The market structure has led to those on RO contracts benefiting from higher prices, potentially making windfall profits. Energy UK, the trade body, had urged ministers to make it possible for RO contracts to be exchanged for CfDs – which is now happening.

But as we covered earlier, shadow climate change secretary, Ed Miliband has warned that these long-term fixed-price contracts would “lock in” massive profits for electricity companies:

A fund is to be set up to help those using heating oil, living in park homes, or on heat networks , to give them “equivalent support.” to other UK consumers.

Six-month scheme to help businesses, public sector and charities with energy bills

Truss also announces there will be help for businesses, charities and public sector bodies with their energy costs, but only for the next six months.

This will offer “equivalent support, but there is limited detail about how their energy bills will be subsidised.

Truss adds that there will be more support for vulnerable firms – such as hospitality.

A review will take place in three months’ time to consider whether the scheme should become more targeted, our political correspondent Jessica Elgot explains:

Updated

Truss also rules out introducing a fresh windfall tax to pay for the new energy guarantee.

She claims it would undermine the national interest and hamper efforts to develop homegrown energy production.

Truss announces 'energy price guarantee'

Prime minister Liz Truss has announced the government will introduce an ‘energy price guarantee’ which means the typical households will pay no more than £2,500 per year for each of the next two years.

This will supercede the Ofgem price cap, which was due to rise to £3,549 per year for dual fuel for an average British household next month.

Truss says the pledge will give households certainty over their energy bills, with the same support being made available to Northern Ireland (where the price cap doesn’t apply).

The costs of the scheme will be set out by chancellor Kwasi Kwarteng later this month – so we don’t know how much it is expected to cost (the final bill will depend on wholesale gas prices).

Liz Truss is announcing the energy bills rescue plan to the House of Commons now.

She will unveil the programme in a speech, which will open a general debate on energy costs.

Andy Sparrow’s Politics Live blog has all the details:

The recent fall in wholesale gas prices means Britain’s price cap wouldn’t rise quite as much as feared next year, analysts at Cornwall Insight say.

Cornwall have now calculated that the cap would rise to £5,015 for an average bill in April, not over £6,600 as it prevously feared.

Cornwall says this is due to “announcements by European policymakers and a currently well supplied GB energy system”.

But it adds:

It is important to note that these are still extraordinarily high and would represent a significant increase in household energy bills.

It doesn’t diminish the importance of action being taken by government today.

Updated

Oil hits eight-month low on recession worries

Oil prices have dropped to their lowest level since January, on concerns that a global economic slowdown will hit demand for energy.

Brent crude has dropped below $87.50 per barrel, extending recent losses. Back in June, Brent was trading at $120 per barrel, but has been dropping as recession fears have risen.

Ole Hansen, head of commodity strategy at Saxo Bank, says the latest Covid-19 lockdowns in China could also hit demand.

Before the slump below $90 in Brent and WTI $85 the market had briefly rallied on Putin threats that he would cut supplies to countries agreeing on a price cap for Russian oil and gas.

Supply issues had little impact, even as EIA lowered its annual oil production forecast for this and next year while raising its global demand outlook amid rising gas-to-fuel switching activity, mainly in Europe.

The likelihood of an Iran nuclear deal adding supply is also fading.

More rail workers will be balloted for strikes, amid increasing industrial unrest across the country over the cost of living crisis.

The Transport Salaried Staffs Association (TSSA) said its members at Govia Thameslink Railway (GTR) will vote in the coming weeks on whether to join the wave of stoppages in the rail industry over jobs, pay and conditions.

GTR operates the Thameslink, Southern, Great Northern and Gatwick Express routes, and TSSA members at GTR are in jobs including platform and ticket office staff, train crew, engineers, control, administration and management.

TSSA general secretary Manuel Cortes said:

“This is a clear signal to GTR that our members are not willing to be pushed around in the face of an escalating Tory cost-of-living crisis and a government which wants to slash jobs on the railways.

“I want to encourage our members to vote yes, both to strike action and action short of a strike, because we know we are in a fight for the future of our railways.

Resolution Foundation’s Torsten Bell is unimpressed by the political debate about how the energy support package should be paid for:

The month-ahead price of UK gas has dipped 5% this morning, down to 384p per therm.

That’s around 40% below the highs in mid-August, but still nearly triple the price a year ago. The European benchmark month-ahead gas price is also 6% lower.

Both prices fell last week, on optimism that Europe was filling its storage faster than expected, and planning reforms to stop soaring gas prices pushing up electricity. But they then jumped on Monday, after Gazprom said its Nord Stream 1 pipeline would stay closed.

The more volatile day-ahead UK wholesale gas price has jumped by 33%.

The government’s energy bill rescue package could be one of the largest welfare programmes ever, say analysts at Jefferies.

Based on expectations for today’s announcement, they say it could reduce domestic bills by 55% compared to market pricing, and cost up to £155bn or 7% of GDP.

This would initially be funded by the government and recovered through the tax base over time.

The costly package looks to offer something for everyone, albeit without directly addressing underlying supply/demand issues, in our view.

Cost of UK interventions

Jefferies add:

However, it fails to address the underlying issue of supply/demand risks in the upstream gas and power markets, as reflected by current record-high commodity prices.

It could be argued that this could be exacerbated, with the potential for demand to increase as the cap is reduced. To add to this, it seems paradoxical that taxes are being cut yet are being relied upon to fund one of UK’s largest ever welfare [programmes], in its entirety.

Uncertainty over Liz Truss’s economic plans will weigh on the pound, explains Dr Costas Milas of Liverpool University’s school of management:

The long-run value of sterling is affected by economic fundamentals: sterling strengthens (weakens) when UK interest rates rise (fall) relative to US ones

The short-run movements of sterling are further affected by economic policy uncertainty.

In other words, policy measures such as “unfunded” tax cuts, discussion about a VAT cut to 15% (or even 10%) and, therefore, worries about the huge rise in UK debt (as a result) are “hitting” sterling.

So even if a generous cost of living package is announced today, worries about its effectiveness will persist therefore keeping economic policy uncertainty elevated. As a result, pressure on sterling will persist.

The value of sterlng against the dollar, against economic uncertainty
The pound has weakened against the dollar (blue line) as economic uncertainty has risen (red line) Photograph: Dr Costas Milas of Liverpool University

The pound is dipping back below $1.15 as investors wait to see how the energy bill package will be funded, explains Matthew Ryan, head of market strategy at Ebury.

“While in theory this (Truss’s plan) could be perceived as a clear positive for the UK economy in the near-term and provide a source of encouragement for the pound, as it would help stave off the risk of a deep recession, investors are yet to see it that way.

“The issue for market participants is that such enormous spending would place a huge burden on the UK’s already strained finances, merely swapping near-term gain for long-term hardship.”

Shares in Darktrace, the UK cyber security firm, have plunged by 30% after private equity group Thoma Bravo pulled out of takeover talks.

Darktrace told shareholders that discussions with Thoma Bravo have terminated, after the two sides couldn’t agree the terms of a firm offer.

Darktrace’s board say they remain “very confident in the Company’s future prospects”, and have also reported a 45% jump in revenues for the last financial year, but shares have dropped to 356p, from 514p last night.

They floated last year at 250p, and jumped to 900p within months, before sliding back as analysts questioned the prospects for Darktrace, whose security products use AI to learn to protect firms from attack

My colleague Rob Davies reported earlier this week that there were clouds hanging over Darktrace, including analysts’ criticism of its business model, concerns about its workplace culture, and the battle to extradite its founder, British billionaire entrepreneur Mike Lynch, to the US to face fraud charges.

The pound is dipping back towards yesterday’s 37-year lows, as concerns that Britain is sliding into recession hit the markets.

Sterling is back below $1.15 against the US dollar, as investors fret about the extra borrowing needed to fund the energy rescue package.

The pound vs the US dollar over the last decade
The pound vs the US dollar over the last decade Photograph: Refinitiv

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:

The pound has shifted up slightly from lows not seen against the dollar since 1985, when Ronald Regan was in power and Freddie Krueger had returned to screens as the monster under the bed.

Now the energy shock is the nightmare to deal with on Downing Street, with Liz Truss set to unveil her expensive subsidy plan later today to deal with the bill horror.

She’s still also set on slashing taxes, and adding a fresh burden to Britain’s debt pile in the hope it’ll kick start growth in the economy. But warnings from the Bank of England are loud and clear, the UK won’t be able to avoid a recession, so the best case scenario is for now is that the troubled waters ahead are shallow and not deep.

Updated

UK surveyors expect weakest home sales since at least 2012

The number of homes sold in Britain over the next 12 months is set to fall by the most in at least a decade, as fears of recession and rising interest rates hurt the market.

The Royal Institution of Chartered Surveyors has reported that its members also seen the biggest fall in enquiries from new buyers since April 2020, when the Covid pandemic hit the economy.

RICS also reports that prices were rising at the slowest pace since January 2021 and were expected to level off – echoing warnings from Halifax yesterday.

Primark owner warns on profits

A Primark store in Liverpool, Britain.
A Primark store in Liverpool, Britain. Photograph: Phil Noble/Reuters

The owner of Primark has warned that profits will take a hit from the cost of living crisis and energy bills, sending its shares sliding.

Associated British Foods warned that profit margins at Primark are expected to fall this year, as consumers are hit by inflation and its own costs soar.

It blamed recent movements in currencies – such as the fall in the pound against the dollar – and surging energy prices, along with the “declining disposable income for consumers as a consequence of inflation”.

ABF says:

In recent weeks the US dollar has strengthened significantly against sterling and the euro, and energy costs remain volatile and higher.

Primark has also decided not to make further price rises next year, beyond its already planned increases for autumn/winter, and its spring/summer ranges next year, due to the squeeze on customers.

Against this current volatile backdrop and a context of likely much reduced disposable consumer income, we have decided not to implement further price increases next year beyond those already actioned and planned.

We believe this decision is in the best interests of Primark and supports our core proposition of everyday affordability and price leadership.

Shares in ABF have fallen almost 8%, the top FTSE 100 faller.

The Labour party are continuing to push for a windfall tax on the energy producers who are making large profits from the surge in wholesale prices.

Renewable energy producers have reportedly agreed in principle to accept new long-term contracts at fixed prices well below current rates.

Those new ‘contracts for difference’ would break the link between electricity from sources such as nuclear, solar and windfarms and the sky-high prices being paid for electricity generated by burning gas in power stations.

In the short term, it could cut bills, as we explained last week:

But the shadow climate change secretary, Ed Miliband, has warned that those long-term fixed-price contracts would “lock in” massive profits for electricity companies:

He told BBC Radio 4’s Today programme:

“This is a proposal from Energy UK, and let’s be clear about this proposal: This would lock in massive windfall profits for these electricity generators.

“Let me explain why: what Energy UK have said is we’ll accept slightly lower prices now, so we can have much higher prices over the following 15 years.

“This would be a terrible deal for the British people, a terrible deal for billpayers.


“It is much better - if there are these unexpected windfalls, and there are - the right thing to do, the fair thing to do, is not to do some dodgy deal with these companies, but to do a windfall tax.”

Lloyd’s of London takes £1.1bn hit from Ukraine war

Lloyd’s of London has warned of a “challenging year” of natural catastrophes, the invasion of Ukraine and inflation as the world’s oldest insurance market took a £1.1bn hit from unrecoverable planes and cargoes related to the war in Ukraine.

The group said it had set aside the sum for customers affected by the conflict, mostly for grounded aircraft, ships trapped in the Black Sea and disrupted exports of cereals and agricultural products from Ukraine and Russia.

Lloyd’s also insures ships transporting grain from Ukraine’s ports under a UN-brokered deal in July. It has worked with the UK government to implement sanctions imposed over the war, including cancelling Russian firms’ insurance cover.

These charts show the daunting economic challenges facing the government, as the cost of living crisis pulls more families into fuel poverty.

Here’s the full analysis:

Truss’s plan to tackle soaring energy bills could be a make or break moment for her entire premiership, some Tory MPs concede.

Our political team explain:

The new prime minister is expected to announce to MPs that bills will be frozen at about £2,500 a year until 2024 as part of a package of support costing up to £130bn, funded by the taxpayer, as she tries to address the most significant economic crisis in a generation.

Senior Tories predicted the bailout would generate enough goodwill to guarantee her survival in No 10 until at least Christmas, but warned she had a big challenge keeping her deeply divided party in line beyond the new year.

In one move that will cheer some Tory backbenchers, it is understood that Truss will announce an immediate end on a pause on fracking for shale gas, with new drilling potentially beginning within weeks as part of her hydrocarbon-based push for greater energy security.

The practice is hugely controversial – the moratorium was imposed in 2019 because of earthquakes the practice can trigger – and Truss has previously said fracking would only happen in areas where there was local support. It is not known if this would be changed

Truss could lift ban on fracking

Liz Truss’s government could also lift the ban on fracking, as part of its push to control energy markets.

Levelling Up Secretary Simon Clarke has told Sky News this morning that:

“If we want energy sufficiency we have to look at every source including clearly new nuclear, more renewables but we also want to look at technologies like fracking,”

“We have to do so in the most sensitive possible way with community consent at the absolute heart of our policies.

“The net zero commitment that the Government has made by 2050 is critical. But in the near-term we need all kinds of gas as a transition fuel and that is something the Prime Minister will be saying more about.”

The Telegraph is reporting that Truss will scrap the UK’s fracking ban today, and seek to make more use of North Sea reserves.

Restarting fracking wouldn’t deliver extra energy resources in time for this winter, though.

And back in February (before the Ukraine war upended energy markets), now-chancellor Kwasi Kwarteng argued that additional UK production wouldn’t materially affect the wholesale market price.

The cost of insuring UK government debt against default has risen to a 27-month high this week – another sign of market nervousness.

As Britain issues its own currency, it should never need to default. The Bank of England can create all the pounds needed to service the debt (although this monetary financing would break central bank independence). But it’s a sign of edginess about the UK’s economic outlook….

…As is this, also from Ed Conway of Sky News.

Introduction: UK energy relief package and ECB meeting ahead

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

The financial markets are growing more nervous over UK assets as prime minister Liz Truss prepares to announce an emergency energy package to protect consumers and businesses from soaring bills.

The plan, which will be unveiled this morning, could freeze the utility price cap at £2,500 until 2024, rather than the average bill rising over £3,500 next month as planned.

Investors are concerned that the package, which could cost upwards of £130bn, will be funded by higher borrowing. So while it would bring urgently-needed relief this winter, the package could also add to inflation in the medium-term – with prices already rising at over 10% per year.

These fears drove the pound to its lowest level in 37 years yesterday, as it briefly dropped as low as $1.1403. That’s the weakest point against the dollar since Margaret Thatcher was PM – one Thatcherite comparison Truss will not appreciate.

The pound has now shed almost 15% of its value this year – and is a long way shy of its pre-EU referendum levels of almost $1.50.

Dollar strength is another factor – the greenback has hit its highest levels in two decades against the euro and the yen too.

Truss’s pledge to cut taxes to spur growth could also put pressure on the Bank of England to keep interest rates higher for longer.

Concerns about ‘Trussonomics’ helped push UK benchmark borrowing costs to the highest level in over a decade this week, with the yield (or interest rate) on 10-year gilts rising over 3%, meaning it costs more to borrow.

Analysts at MUFG Bank have warned that the pound could fall further against the dollar (the £-$ rate known as ‘cable’ in City jargon).

They told clients that Britain’s budget deficit (what the government borrows to balance the books) and current account deficit (the shortfall in imports and exports, and net financial income) are a concern:

  • New PM Liz Truss is set to outline plans for significant fiscal stimulus including further support to combat the energy crisis and lower taxes.

  • New measures will help to improve UK growth and inflation outlook. Normally an improving cyclical outlook and higher rates would encourage a stronger GBP (pound) but structural problems from twin deficits remain a concern as financing conditions tighten.

  • We are not yet confident that the lows are in place for cable as the USD continues to strengthen broadly.

New chancellor Kwasi Kwarteng yesterday tried to calm nervous markets.

At a meeting with top City bank bosses and investors, and Bank of England governor Andrew Bailey, he insisted that the BoE’s indepencence, was “sacrosanct” in the fight against inflation.

Capital Economics predict a price freeze would ‘dramatically lower’ the near-term path of inflation, and mean a less severe recession:

Rather than rise from 10.1% in July to around 14.5% in January, it may mean that inflation peaks around 11.5% in November and falls faster next year. The smaller drag on real incomes means that the recession may be shallower too, perhaps with a peak to trough fall in GDP of around 0.5% rather than 1.0%.

But, by supporting demand, it would boost inflation further ahead, potentially meaning higher borrowing costs:

As such, the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside.

Also coming up today

The European Central Bank could announce the largest interest rate increase in its history today, as it grables with record inflation.

Economists predict the ECB could raise borrowing costs by 75 basis points, after the energy crisis drove up euro-area inflation to 9.1% in August, over four times above its 2% target.

IG’s Joshua Mahony warns that such a sharp increase in rates would come with risks:

The risk for the eurozone here is that by setting up a 75bp hike, they create a rod for their own back, with markets expecting similar sized moves as inflation continues to rise.

The Russian decision to shut off all gas exports to Europe provides expectations that energy will continue to drive headline inflation higher, while a declining euro also bring imported inflation. With that upward trajectory for inflation in place, this sharp rise in borrowing costs could come at the expense of fiscal stability in less stable member states such as Italy.

The agenda

  • 7.45am BST: French trade balance for July

  • 11.30am BST: UK energy bill relief package announced

  • 1.15pm BST: European Central Bank decision on interest rates

  • 1.30pm BST: US weekly jobless figures

  • 1.45pm BST: European Central Bank press conference

Updated

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