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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England warns Brexit delay would hurt growth, after leaving rates on hold - as it happened

The Bank of England in London
The Bank of England in London Photograph: Yui Mok/PA

Finally, Britain’s FTSE 100 index has closed 42 points higher at 7,356, up 0.6%.

International Airlines Group (+3.5%), Vodafone (3.2%) and AstraZeneca (+2.8%) led the risers.

Next fell the most (-5.2%)) after blaming warm weather for a poor start to autumn trading, while JD Sports shed 2.7% after regulators probed its takeover of Footasylum.

Goodnight! GW

If you’re just tuning in, here’s our news story on the Bank of England’s interest rate decision.

Brexit uncertainty and the slowdown in global growth has weakened the economy and made an interest rate cut more likely, the Bank of England has said.

The central bank said interest rates would remain at 0.75% after a unanimous vote of the monetary policy committee (MPC) on Thursday, but it signalled that further Brexit uncertainty amid a US-China tariff war could warrant a rate cut in the near future.

Taking a tougher line on the impact of the UK’s decision to leave the EU than its previous analysis of the economy, the bank said it feared that Brexituncertainty was in danger of becoming entrenched, leading to a weaker outlook.

In the minutes of its September meeting, the MPC said delays to an agreement on the UK’s trading relationship with the EU would harm consumer and business confidence.

This trend would be made worse by the trade war between China and the US, which has had the effect of cutting the economic growth rates in both countries this year, the committee said....

Here’s the full story:

Saga, the insurance and travel company aimed at the over-50s, has apologised after customers were sent a brochure advertising a cruise “exclusively for Brits”, prompting a furious backlash.

Twitter user Anthony Bale, who is a university professor, said his mother was “outraged” after being sent the magazine, the front page of which outlined the characteristics of the cruise.

He posted a photograph of the promotion, which read: “Exclusively for Brits. Exclusively adults only. Exclusively for over-50s.”

Here’s the offending brochure:

And here’s the full story:

Roger Jones, London & Capital’s Head of Equities, has crunched through the Bank of England’s interest rate decision, and detected a new dovish flavour:

He says:

“No surprises from the Bank of England today but the tone is more dovish with the statement making reference to falling inflation. This represents an about-turn from comments made earlier this year when the Bank of England tried to present a more hawkish tone.

The creditability of the Bank of England has definitely fallen over the last 4 years due to ultimately poorly timed decisions and constant reversals in guidance commentary. The next meeting will be after the 31st October Brexit potential deadline so all options have been kept open. However, under any outcome it is difficult to see rates going up over the next year and hence the market is pricing in one 25bp cut.”

The Federal Reserve’s latest intervention into the money markets has proved a little too popular.

The Fed’s offer of $75bn of liquidity today was oversubscribed, with banks making $84bn of bids for short-term funding.

That highlights that there are strains in the ‘plumbing’ of the financial system. The Fed yesterday blamed tax bills and the cost of settling bond payments, which left banks temporarily short of cash. But these aren’t unusual payments, so shouldn’t really cause problems....

Updated

Traders on the floor at the New York Stock Exchange
Traders on the floor at the New York Stock Exchange Photograph: Brendan McDermid/Reuters

Wall Street has opened higher, with the Dow Jones industrial average up 90 points or 0.3% at 27,237.

Traders are still pondering last night’s Federal Reserve meeting, and the split between policymakers over future interest rate moves.

Ken Odeluga of City Index says stocks are rising “on the back of a Fed statement that at worst did no harm.”

Just in: The US jobs market continues to look healthy, according to the latest weekly jobless report.

Just 208,000 Americans filed new claims for unemployment benefit last week, up 2,000, but still a low level in historical terms.

The number of ‘continuing claims’ fell to 1.672m, from 1.674m, suggestingUS citizens continued to find work.

Over in America, the Federal Reserve is holding another liquidity operation to ensure US banks can cover their overnight liquidity needs.

This is because the ‘repo rate’ (the cost of short-term lending between banks) has spiked this week. Policymakers insist this isn’t a sinister development, but obviously want to ensure there’s no shortage of dollars out there...

Brexit isn’t the only problem dragging back UK growth, says PwC chief economist John Hawksworth:

There have also been continuing signs of weakness in the global and Eurozone economies, linked to ongoing US-Chinese trade tensions and heightened geopolitical risk in the Middle East and elsewhere.

These international risk factors underlie recent rate cuts by the Fed and the ECB and could have caused the MPC to stay its hand even in the absence of Brexit.”

The Bank of England has now left interest rates on hold for 13 months running, since raising them from 0.5% to 0.75% in August 2018

Sajiv Vaid, portfolio manager at Fidelity International, argues that they will be forced to cut borrowing costs soon.

The job of the MPC has unquestionably been made difficult by navigating monetary policy against the uncertainty caused by the Brexit shenanigans over the last year or so, and one can make the case that until there is clarity on the matter the MPC are best served by holding fire. I would argue that given the anaemic growth in the UK is already trending below the Banks own projections and with little clarity on the timing of a Brexit resolution (soft or hard) or even a general election, the case for an ‘insurance cut’ has become even more pertinent

The tone of the MPC remains too ambiguous with regards to the path of interest rates and I expect the data to continue to disappoint. When looking at the ‘known knowns’ I think the case for a rate cut is compelling and I expect the MPC to come to the same conclusion by year end.”

BoE: Brexit delay would hurt growth

Newsflash: The Bank of England has warned that the economy would suffer from another Brexit delay.

It points out that uncertainty over Britain’s future has already hurt the economy....and further confusion would not help.

For most of the period following the EU referendum, the degree of slack in the UK economy has been falling and global growth has been relatively strong. Recently, however, entrenched Brexit uncertainties and slower global growth have led to the re-emergence of a margin of excess supply.....

It is possible that political events could lead to a further period of entrenched uncertainty about the nature of, and the transition to, the United Kingdom’s eventual future trading relationship with the European Union.

The longer those uncertainties persist, particularly in an environment of weaker global growth, the more likely it is that demand growth will remain below potential, increasing excess supply. In such an eventuality, domestically generated inflationary pressures would be reduced.

That last line looks to be a hint that interest rates could stay lower for longer, if Brexit continues to be kicked down the road.

If there is a no-deal, the Bank expects the pound to fall, inflation to jump, and growth to weaken. If that happened, interest rates could either rise or fall, it claims, depending on the balance between supporting the economy and keeping prices down.

But if Britain headed towards a smooth Brexit, the BoE expects demand to rise, leading to higher interest rates.

The BBC’s Faisal Islam has a good take:

Bank: UK to avoid recession this year despite Brexit fears

The Bank of England has also warned that ‘underlying growth’ in the UK has weakened, and cited weak business investment due to Brexit uncertainty.

However, it also forecasts that GDP will rise in the current quarter, having shrunk in April-June. If so, that would keep Britain out of a recession.

The BoE says:

Brexit-related developments are making UK economic data more volatile, with GDP falling by 0.2% in 2019 Q2 and now expected to rise by 0.2% in Q3. The Committee judges that underlying growth has slowed, but remains slightly positive, and that a degree of excess supply appears to have opened up within companies.

Brexit uncertainties have continued to weigh on business investment, although consumption growth has remained resilient, supported by continued growth in real household income. The weaker global backdrop is weighing on exports.

Bank: Trade war is intensifying

The Bank of England has issued a statement accompanying its decision.

It warns that trade tensions are worsening (a point also made by the Fed last night, and the OECD this morning):

Since the MPC’s previous meeting, the trade war between the United States and China has intensified, and the outlook for global growth has weakened. Monetary policy has been loosened in many major economies. Shifting expectations about the potential timing and nature of Brexit have continued to generate heightened volatility in UK asset prices, in particular the sterling exchange rate has risen by over 3½%.

Bank of England interest rate decision

Newsflash: The Bank of England has left UK interest rates on hold, at 0.75%.

It’s a unanimous vote, with all nine policymakers favouring no change today.

More to follow....

Trump: Powell's job is safe

Newsflash: US president Donald Trump has played down the suggestion he could sack Federal Reserve president Jerome Powell for not aggressively slashing interest rates.

In an interview with Fox News, Trump also said he was “not thrilled” with the Fed, which trimmed borrowing costs yesterday.

Reuters has the details:

U.S. Federal Reserve Chairman Jerome Powell’s job is safe, U.S. President Donald Trump said in a Fox News interview that aired on Thursday, adding that he was “not thrilled” with the U.S. central bank.

“It’s safe,” Trump, asked about the chairman’s job, told Fox News in the interview, taped during the president’s trip to California on Wednesday after the Fed’s decision to lower interest rates.

Last night’s rate cut brought the Federal funds rate down to 1.75%-2%, much higher than the 0% in the eurozone.

Oil rises again

Back in the markets, the oil price has suddenly spiked.

Brent crude is up 2.7% this morning to $65.31, from $63.60 last night. The spike followed a report that Saudi Arabia has asked Iraq for 20 million barrels of oil, to supply its refineries.

That has reignited fears that last weekend’s drone attack on the Abqaiq oil refinery has caused more damage than Saudi authorities have admitted. Yesterday, oil minister Prince Abdulaziz bin Salman said production would be fully restored by the end of September....

John McDonnell MP, Labour’s Shadow Chancellor, says Westminster politicians should heed the OECD’s warning about a no-deal Brexit.

“This report is a clear and stark warning of what we face if Johnson takes this country over the cliff edge of no deal Brexit. It confirms the absolute necessity of preventing this needless threat to our economy.”

The OECD has long warned that Brexit would be bad for the UK economy, and today it has claimed that a disorderly No Deal could trigger a long slump.

My colleague Philip Inman explains:

Today’s report estimates that losing unfettered access to EU markets after 31 October will likely plunge the UK into a recession next year. The loss of trade, investment and technical knowledge plus a further fall in the pound will prolong Britain’s low rate of growth until at least 2022.

Laurence Boone, the OECD’s chief economist, said an agreement to smooth Britain’s exit was important to protect businesses and the economy.

“The best thing is to avoid a no-deal Brexit and to stay closely aligned to the EU as possible,” she said.

More here:

Here are some charts from the OECD’s new economic outlook report, showing how economic uncertainty and trade tensions are hurting growth and investment:

OECD world economic forecasts
OECD economic forecasts

The OECD has also downgraded its growth forecast for several advanced economies, including the UK.

Here’s the details

  • US: 2.4% growth in 2019 (down from 2.8%); 2.0% in 2020 (down from 2.3%)
  • Eurozone: growth of 1.1% in 2019 (down from 1.2%); 1.0% in 2020 (down from 1.4%)
  • China: growth of 6.1% in 2019 (down from 6.2%); 5.7% in 2020 (down from 6%)
  • Japan: growth of 1% in 2019 (up from 0.7%); 0.6% in 2020 (no change)
  • UK: growth of 1% in 2019 (down from 1.2%); 0.9% in 2020 (down from 1%)

The OECD’s chief economist, Laurence Boone, says escalating trade tensions are causing serious harm to the world economy.

She told Reuters:

“What looked like temporary trade tensions are turning into a long-lasting new state of trade relationships.”

“The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations,”

Trade growth is now negative, having grown by 5% in 2017, she added.

Hopes for an end to the trade war between Washington and Beijing were dashed in May, when negotiations collapsed. Both sides then announced fresh tariffs, but have recently delayed or watered them down, ahead of fresh talks in October.

OECD cuts global growth forecast to post-crisis low

Newsflash: The Organisation for Economic Co-operation and Development has warned that global growth has slowed to its weakest since the financial crisis.

The OECD has slashed its global growth forecast for 2019, from 3.2% to 2.9%.

That would be the weakest annual performance since the great recession a decade ago.

It has also cut its growth forecast for 2020, from 3.4% to 3%.

The Paris-based organisation warns that the costs of the US-China trade war are mounting, and the world risks falling into a prolonged period of weak growth unless governments act.

More to follow....

Tom Leman, head of retail & consumer at Pinsent Masons, argues that too many retailers are still playing ‘catch-up’ - - and Brexit worries aren’t helping.

Here’s his take on August’s retail sales figures.

“Whilst monthly stats are a useful indicator of the market they do not tell the full story. The challenging global political environment makes it difficult to make too many assumptions, from these figures, about the health of the retail sector. The threat of a no-deal Brexit makes it almost impossible to predict retail sales and consumer spending in September and October.

Traditional retailers who have evolved their business to reap the rewards of changing consumer behaviours are ahead of the game. These retailers articulate clearly what they stand for and deliver the right products in the right way to customers. But, there are many, generally stuck in the middle, still playing catch-up who need to focus on business evolution to remain competitive.”

Economist Rupert Seggins has crunched today’s retail sales figures...and also pointed out that the monthly data should be treated cautiously.

UK retail sales drop in August

Just in: UK retail sales fell in August, suggesting that consumers are becoming more cautious.

The Office for National Statistics reports that retail spending dropped by 0.2% last month. That’s weaker than expected, with economists forecasting sales would be flat.

The ONS blames “non-store retailing” for this fall -- suggesting that people spent less money online last month. It says:

Internet sales fell on the month by 0.8% when compared with July 2019.

Other stores reported the largest fall of 5.8% but non-store retailing was the largest contributor to the monthly fall because of its large weight of 50.7%.

July’s figures have been revised higher, though, so it’s not all bad.

Over the last three months, retail sales grew by 0.6%, which the ONS calls “moderate growth”.

And on an annual basis, the amount of items bought was 2.7% higher than a year ago .

The ONS says:

This is a slowdown compared to the stronger growth experienced earlier in the year which peaked at 6.7% in March 2019.

Next hit by warm weather

A branch of Next.

High street retailer Next has been burned by the unusually hot autumn weather.

The company warned this morning that the “warm start to September” has adversely affected trading this month. This sent its shares sliding 5% at one stage, to the bottom of the FTSE 100 leaderboard.

CEO Simon Wolfson argues that the weather, rather than Brexit, is the problem:

It is very hard to determine whether the uncertainty over Brexit is having any effect on consumer spending and we can find no evidence that it is affecting spending on small ticket price items.

Certainly, the first few weeks of the Autumn season have been disappointing. However, we believe that the warm start to September has done much more to hinder sales than the political temperature.”

Next also says its prices will go down rather than up in event of a no-deal Brexit (although that is not its preferred outcome).

The Government’s new temporary tariff regime announced in March will reduce Next’s import duty costs by around £25m. “All things being equal we would pass this saving onto consumers and the proposed tariffs would reduce our cost of goods by around 2%.”

Next has also acquired Authorised Economic Operator status (Morrisons has this too and likened it to speedy boarding at the ports). As a precaution it has moved shipments away from the Dover Calais route to alternative ports or airports.

Wolfson, whose father chaired the company in the 1990s, revealed that Next is managing to drive its rents down, although only when they come up for renewal. He also quipped:

“I remember my dad quipping that a business only discovers its fixed costs when sales decline!”

Total sales at Next are up 3.8% over the last six month, with a 12.6% jump in online trading making up for a 5.5% slump at its retail stores.

Norway raises interest rates

Newsflash: Norway’s central bank has defied the prevailing mood, by raising interest rates.

The Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.50%.

Unlike rival central banks, it has concluded that the outlook requires slightly higher interest rates, saying:

Underlying inflation is close to the inflation target. Growth in the Norwegian economy remains solid, and capacity utilisation is somewhat above a normal level. This suggests in isolation a higher policy rate. A higher policy rate may also mitigate the risk of a renewed acceleration in debt growth and house price inflation

Switzerland’s national flag.

Switzerland’s central bank has left interest rates on hold, at their record low of -0.75%.

These negative rates are in an attempt to prevent the Swiss franc strengthening too much.

The SNB declined to match the European Central Bank, which eased monetary policy again last week. Instead, it has pledged to remain active in the currency markets, if needed.

European stock markets have opened higher, as trader digest last night’s cut in US interest rates....and Fed chair Jerome Powell’s comments afterwards.

The main indices are all higher, led by Italy and France.

European stock markets
European stock markets Photograph: Bloomberg TV

Powell’s message to the markets was broadly this: The US economy is in good shape, but problems overseas and the trade war aren’t helping. We’ll be guided by the data, but it’s best to be proactive. The Fed doesn’t see a recession looming, but we’d take action if we did.

Alex Kuptsikevich, FxPro financial analyst, says Powell’s optimism may have reassured investors.

The Federal Reserve cut the key rate by a quarter of a percentage point to 1.75%-2.00%. In the press conference, Powell noted the “favourable” economic forecast, explaining that this easing step was to “provide insurance against ongoing risks”. Strictly speaking, these comments turned out to be a little hawkish than the market expected, pointing to a possible pause in policy easing.

Overall, Powell was very optimistic about the state of the economy, noting healthy growth rates of employment and consumer activity, despite the lower capital expenditures of companies.

Powell’s speech proved to be very convincing, as the economy has recently provided very positive economic data.

A few hours before the rate decision, we saw the highest number of construction permits in 12 years. The day before, the Fed had published robust industrial production data, indicating a likely upward reversal in business activity not only in the consumer but also in the manufacturing sector.

Investors take out record number of 'no deal' Brexit contracts

The Financial Times has spotted that City investors are positioning themselves to profit from a no-deal Brexit (or at least limit their losses!).

The FT’s Philip Stafford explains:

Investors have taken out a record number of options contracts to bet on or hedge against moves in UK interest rates, amid rising concerns that Britain may depart the EU at the end of October without an agreement on its future relationship with the bloc. Open interest — a measure of traders’ live positions in futures and options on UK rates over the next three months — surged to 18.4m contracts on Tuesday at ICE Futures Europe, the main derivatives exchange in London.

The options, if exercised, would allow investors to profit from unexpected rate cuts or protect themselves from the damage stemming from rapid rate rises.

Britain’s competition watchdog has waded into a takeover between two UK shoe retailers.

My colleague Julia Kollewe explains:

The Competition and Markets Authority fears that JD Sports’ £90m deal to buy its smaller rival Footasylum could be bad for shoppers, and will carry out an in-depth investigation unless JD can address its concerns.

The CMA said its initial investigation found the deal could result in a “substantial lessening of competition” by removing one of JD Sports’ closest competitors.

The CMA is concerned that this could result in a worse deal for customers through higher prices, less choice in stores or worsening customer service. “JD Sports must now address the concerns identified or face a further, more in-depth, investigation,” it said.

Colin Raftery, senior director at the CMA, said: “JD Sports is already by far the largest player in the growing sports fashion sector, so any deal that results in it buying up one of its closest competitors could clearly give cause for concern.

“Our investigation has shown us that JD Sports and Footasylum have been competing strongly across the UK, with a sports fashion offering that few other retailers are able to match. That’s why we’re concerned this deal could lead to higher prices, less choice and a worse shopping experience for customers.”

JD, though, insists that the merger makes sense.

Updated

Marc Ostwald of ADM Investor Services is confident that the Bank of England won’t do anything too dramatic today:

The Bank of England can safely be assumed to stand pat, being hostage as it is to very elevated Brexit uncertainty, though it will be interesting to see if the minutes suggest any tweaks to its forecasts, even though these tend to be generally reactive....

The lower than expected CPI, in no small part due to Clothing, imparts a modest upside risk for today’s Retail Sales, which have defied gloomy signals from most retail sector surveys in recent months.

Several other central banks are also setting monetary policy today, including the national banks of Switzerland, Norway, Indonesia, Taiwan and South Africa.

Introduction: Central banks in spotlight

Mark Carney, Governor of the Bank of England (BOE).
Mark Carney, Governor of the Bank of England (BOE). Photograph: Mike Segar/Reuters

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

Like Supreme Court justices, central bankers have been the ‘adults in the room’ during these times of economic upheaval.

So, after an intriguing Federal Reserve meeting last night, its the Bank of England’s turn in the spotlight today, with the Bank of Japan having already acted overnight - leaving rates on hold.

The BoE is widely expected to leave interest rates unchanged, while it awaits some clarity on Brexit. Yesterday’s drop in inflation, to a three-year low of 1.7%, is no reason to cut borrowing costs, while a rate hike would hurt an already-nervous economy.

The minutes of today’s meeting, also released at noon, will show the BoE’s concerns about Brexit preparedness and the state of the UK. A gloomy outlook could move the pound.

Ipek Ozkardeskaya, senior market analyst at London Capital Group, says:

The Bank of England (BoE) is expected to maintain its monetary policy unchanged at today’s meeting, as Governor Mark Carney will continue assuming an orderly Brexit while keeping an eye on the looming downside risks.

With the worst Brexit scenarios fully priced in, the pound traders could find interesting dip-buying opportunities below the 1.25 level against the US dollar. A negative outcome regarding Johnson’s parliament suspension could send the pound rallying past $1.25.

Before the BoE’s big moment we get new UK retail sales figures. Due at 9.30am, they are expected to show a slowdown in spending.

And while Mark Carney does have a tough job, at least he needn’t worry about being labelled gutless by the prime minister.

Last night, Fed chair Jerome Powell earned another blast from Donald Trump after announcing a small cut in interest rate — too small for the president. In response, Powell hinted that the US Economic would be in a better state without the president’s trade wars.

The Fed’s decision wasn’t unanimous - while 7 governors voted in favour, two opposed any cut while one wanted a deeper move. The FOMC was also remarkably split over the future path of interest rates. Some think they’re done cutting for the year, others expect more easing, and a third group think rates are going up again soon.

The markets initially concluded that the Fed was disappointingly hawkish (sending shares down and the dollar up), but this move later reversed as Powell spoke about being prepared to act aggressively if needed.

So, lots for investors to ponder today, with the weekly US jobless report

The agenda

  • 9.30am BST: UK retail sales for August
  • 12pm BST: Bank of England interest rate decision
  • 1.30pm BST: US weekly jobless report
  • 3pm BST: US home sales report for August

Updated

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