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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England's no-deal Brexit warning; Wall Street recovery continues- as it happened

Bank of England press conference

Traders work on the floor of the New York Stock Exchange today.
Traders work on the floor of the New York Stock Exchange today. Photograph: Brendan McDermid/Reuters

And finally.... Wall Street has closed higher, for the third day in a row.

The Dow Jones industrial average gained 264 points to 25,380, up around 1%. That means it’s put on over 900 points in the last three days - quite a bounceback.

The S&P 500 also gained just over 1%, while the tech stock revival left the Nasdaq 1.7% higher.

Donald Trump’s tweet citing progress in talks with China’s president Xi over their trade conflict boosted morale in New York.

Traders are also anticipating a good US jobs report tomorrow, while also hoping that the US Federal Reserve might see fit to ease up on interest rate hikes.

On that note, goodnight! GW

Back in New York, shares continue to recover from last month’s losses.

The Nasdaq is up 1.5%, as technology stocks such as chipmakers rebound.

Andy Haldane chairing the Industrial Strategy Council meeting today
Andy Haldane chairing the Industrial Strategy Council meeting today Photograph: Joel Rouse/BEIS

Brexit optimism, and the prospect of UK interest rate rises next year, are driving the pound higher and higher tonight.

Sterling has gained more than two cents, a big move, against the US dollar to almost $1.30.

This has slightly weighed on stocks, with the FTSE 100 dropping 13 points or 0.2% to 7,114.

Heads-up, UK savers and borrowers.

Richard Falkenhäll, senior FX strategist at Nordic bank SEB, predicts two UK interest rate hikes in 2019 - possibly starting in just three months time.

He says:

With inflation staying above the target next year and the year after, and with a tight labour market, the BoE will continue with a slow tightening of policy with one or two hikes per year. We expect the next hike in May 2019, followed by one in November 2019.

Falkenhäll suspects the BoE is too optimistic about UK growth, but also reckons earnings growth could strengthen:

There is uncertainty related to the domestic cost pressure in the UK where we believe inflation will fall back faster than the BoE projects. There are signs of accelerating wage growth and it will be important to see if this development continues. If wage growth accelerates further towards 3.5-4%, the next hike could be in February 2019, if there is a EU withdrawal deal in place.”

UK Industrial Strategy Council membership announced

The door at 10 Downing Street Cabinet meeting, 10 Downing Street, London, UK - 30 Jan 2018

A group of top business leaders, academics, economists, entrepreneurs are meeting today at Number 10 Downing Street to tackle Britain’s long-standing productivity crisis.

The Industrial Strategy Council will oversee the government’s efforts to boost innovation, improve the business environment, raise wages, enhance Britain’s infrastructure networks, and play a key role in areas such as artificial intelligence and clean growth.

It’s a tough gig -- UK productivity has been a problem since at least the second world war, resisting a series of governments’ efforts to raise output closer to Japanese or German levels.

But the council, whose membership is being announced today, has a high-quality, experienced bench of talent (and gender-balanced, too).

It will “hold the government to account”, says business secretary Greg Clark, by producing success measures for the industrial strategy, and holding the government to account on them.

Here’s the full membership list:

  • Andy Haldane (Chair) - Chief Economist, Bank of England
  • Dame Kate Barker - Commissioner of the National Infrastructure Commission and recently Chair of the Industrial Strategy Commission.
  • Emma Bridgewater - Founder of Emma Bridgewater Ceramics.
  • Professor Diane Coyle - Bennett Professor of Public Policy at the University of Cambridge.
  • Jayne-Anne Gadhia - Ex-Chief Executive, Virgin Money. Member of the Scottish Business Taskforce.
  • Christine Gaskell - Local Enterprise Partnership (LEP) Chair, Cheshire and Warrington.
  • Rupert Harrison - Managing Director of BlackRock.
  • Dame Vivian Hunt - Managing Partner UK and Ireland, McKinsey, Chair of CBI London Council.
  • Dame Rotha Johnston – Chair of Northern Ireland Screen.
  • Professor Juergen Maier - Chief Executive of Siemens plc.
  • Sir Paul Marshall - Co-founder and Chairman, Marshall Wace LLP.
  • Sir Charlie Mayfield - Chairman, John Lewis Partnership, Chair of Be the Business
  • Lady Nicola Mendelsohn - Advertising executive; Vice-President for Europe, the Middle East and Africa for Facebook. Non-Executive Director of Diageo.
  • Archie Norman - Chair, Marks & Spencer. Formerly Chief Executive of Asda, Chair of ITV, McKinsey Consultant and Director at GEEST, Railtrack and Kingfisher.
  • Hayley Parsons - Welsh entrepreneur and investor, and Founder of GoCompare
  • Roy Rickhuss - General Secretary of Community and member of the Executive Council of the General Federation of Trade Unions and the Iron and Steel Trades Confederation.
  • Professor Dame Nancy Rothwell - President and Vice-Chancellor of the University of Manchester and Professor of Physiology, Co-chair of the Council for Science and Technology and past President of the Royal Society of Biology
  • Professor Jennifer Rubin - Executive Chair of the Economic and Social Research Council (ESRC), Professor of Public Policy at Kings College London
  • Rohan Silva - Co-founder of Second Home, Senior Visiting Fellow at LSE Cities.
  • Matthew Taylor - Chief Executive, Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA).

Prime Minister Theresa May explains why the Strategy matters:

“Our modern Industrial Strategy is key to building a successful economy that works for everyone and creating high-quality jobs across the UK.

“This Council gathers some of the most influential figures in business, academia, and civil society. Together, they will share their expertise and skills to measure the progress of our strategy and ensure it is boosting people’s wages and improving productivity of British businesses.”

In other news, US president Donald Trump has claimed progress in the US-China trade wars.

That has helped push shares up in Wall Street, where the Dow Jones industrial average has gained 190 points (0.75%) in the first hour of trading.

Is the Bank playing tricks?

It’s a little late for Halloween japes, but is Mark Carney really serious when he suggests the Bank of England could raise interest rates in a no-deal Brexit scenario?

He’s absolutely right that inflation could rise sharply if the pound slumps, and expensive tariffs are imposed on European goods. Also, if supply into the economy is squeezed (because goods can’t get into the UK), new inflationary pressures would be created as consumers and businesses fought to get their hands on raw materials and finished goods.

But in that situation, the economy would also be reeling from a serious shock. Businesses and households would need reassurance, not a painful interest rate hike to drive up the cost of credit.

Our economics editor, Larry Elliott, reckons the Bank is trying to concentrate minds in Westminster and Brussels.

He writes:

The idea that the MPC would actually kick the economy on the way down is highly implausible. It is the equivalent of George Osborne saying before the referendum that there would be an emergency budget to raise taxes and cut spending by £30bn in the event of a vote to Leave.

But Osborne was trying to influence millions of voters: Mark Carney and his MPC colleagues are seeking to concentrate minds among a much smaller constituency: the policymakers negotiating a deal and the MPs who will eventually vote on it. Which is why Project Fear Mk II might just work.

Ed Conway of Sky News isn’t convinced either, saying:

Consider what happened two years ago. The then-chancellor and the Bank warned before the referendum that interest rates might rise if the UK voted leave. Most economists and commentators, myself included, said that this seemed deeply implausible.

Lo and behold, at the first practicable moment after the referendum the Bank cut interest rates. It even pumped an extra few tens of billions of pounds into the economy through quantitative easing.

In short, it did precisely the opposite of what it warned about before the referendum. It is hard to conclude that the same working assumptions shouldn’t apply this time around as well.

The pound has continued to climb, and is on track for its best day since January.

Sterling has risen as high as $1.293, up more than one and a half cents, on hope that the UK and EU are making progress.

Mark Carney’s comments about how the economy should pick up pace under a smooth Brexit is also helping:

Mark Carney warns that a no-deal Brexit would put the UK into new territory.

There’s no real precedent for a big supply shock hitting a major advanced economy, in the era of inflation targeting, he points out.

Q: Did you really tell the cabinet that the Chequers deal would allow the UK to claw back three-quarters of its lost output since the referendum?

Governor Carney declines to comment on his recent briefing with cabinet ministers, but he does repeat that Chequers would be “better than average”.

And that’s the end of the press conference.

Q: What exogenous risks could hurt the UK economy?

Mark Carney say the Bank expects UK growth to fall below potential in the last three months of 2018, partly due to fluctuations in the data as Brexit looms.

Deputy governor Ben Broadbent weight in, saying Britain’s open economy makes it particularly susceptible to external jolts.

The eurozone does look like it’s growing slower than last year, Broadbent points out (growth halved to 0.2% in the last quarter).

Back to Brexit....

Q: Is the prime minister’s Chequers deal closer to WTO terms, or closer to a “very very close” relationship with the EU, in terms of your forecasts?

Chequers is closer to the latter than to the WTO scenario, says Carney -- in other words, it would be “better” than the Bank’s current average forecast for the Brexit deal.

But he cautions that nothing is agreed yet.

It’s government policy, it’s a proposal, therefore there are certain things where Chequers is very clear and certain other things which are up for negotiation, he points out.

Carney: We need legal certainty from EU over derivatives

Q: How confident are you in the financial sector’s preparations for Brexit?

Carney says he is confident that UK banks have taken appropriate steps to prepare for Britain’s exit from the EU.

But he indicates he is less confident with preparations by European banks, saying we need to move to “actual legal certainty” about how cross-border issues are handled after Brexit.

This is a MASSIVE issue; there are literally trillions of euros of derivative contracts between banks in the City and the rest of the EU. A no-deal Brexit creates huge issues.

Earlier this week, Brussels indicated that they would allow EU traders to use UK derivatives clearing services even if Britain crashes out of the EU without an exit deal. Those comments are welcome, Carney says, but it’s not enough.

Mark Carney gets a break from the barrage of Brexit bouncers, with a googly about central bank independence.

Q: The US Federal Reserve is under pressure from Donald Trump not to tighten policy, while the European Central Bank has also been criticised by politicians over its stimulus plans. Does this concern you, and why is central bank independence important?

The governor jokes that he’s “in favour” of central bank independence, before explaining (at some length) that it underpins credibility. Households, businesses and the financial markets can have more confidence that the Bank of England will control inflation and protect financial stability, if it is both independent and accountable.

That’s particularly valuable at times when economies are at risk of sudden shocks.

Q: Your report shows that wages are going up, but the savings ratio is going down, so are households spending every extra penny they get?

Carney says that households have concerns about the general economic situation, but much less concern about their personal financial situation.

Bank of England Governor Mark Carney at today’s inflation report press conference.
Bank of England Governor Mark Carney at today’s inflation report press conference. Photograph: Kirsty O’Connor/PA

There is “clearly a range” of possible Brexit outcomes, Carney continues with an expressive hand wave, particularly about the final end-state relationship.

Q: Are you worried that the Bank could become a rule-taker if Britain and the EU agree a financial services deal based on equivalence (as was reported by The Times this morning).

Carney declines to comment, but does point out that the government has downplayed that report.

Q: Some pro-Brexit economists say a no-deal Brexit is nothing to fear - so why should people listen to the Bank of England instead?

Carney reminds the press conference that the BoE correctly predicted the pound would slump if Leave won the 2016 referendum, and the knock-on impact on inflation and incomes.

He adde that the Bank’s forecasts are underpinned by its network of agents across the country, and its panels with businesses. They mean the Bank can see the current impact of Brexit, and how a disorderly exit will hit supply and demand.

[I think this is a reference to Economists For Free Trade, who have some very optimistic forecasts for the post-Brexit world]

Q: You say a no-deal Brexit isn’t likely, but is it more likely than at our previous press conference three months ago?

Tough to say, says Carney. But the looming deadline is concentrating minds, and causing companies to defer investment plans.

Q: You say a no-deal Brexit would deliver “an immediate and material hit” to the economy -- what will that mean in practice?

At a minimum, there will be logistical challenges getting goods through ports, and a knock-on impact on some firms’ ability to run at full capacity, says Carney,

Q: What will that mean for ordinary people?

It depends on the ability of individual firms to prepare for it, the governor replies cagily, particularly those which currently have seamless access to the EU.

Q: The government has said this week that austerity is over, but won’t austerity be back if there is a disorderly exit from the EU?

Fiscal decisions are a matter for politicians; we set monetary policy around them, Carney says - declining to stray from ‘his lane’.

Regarding the budget.... there has been a shift in the sand towards a more accommodative fiscal stance (because Philip Hammond boosted spending and cut taxes on Monday), but the Bank is still digesting the consequences.

On possible future interest rate rises, Mark Carney says he does expect a “rebound” in the economy if a Brexit deal is agreed.

We are currently at the point of “maximum uncertainty” over Brexit now, so it’s understandable that businesses are being very cautious, and holding their spending back.

Carney: No-deal Brexit could force us to raise interest rates.

Q: Are you saying that you can’t rule out raising interest rates, even if a no-deal Brexit pushes the UK into recession?

Carney says a no-deal, no transition Brexit is unlikely, but the Bank has to be ready.

Second, it all depends what happens to supply, demand, and the exchange rate, he reiterates.

Thirdly, there would be a “potentially fairly large” hit to supply, more rapid than one is accustomed to in an advanced economy. So the MPC would have to balance the impact on the exchange rate, and any tariffs, against its desire to provide what support it can to the economy.

There are scenarios where policy would need to be tightened in the event of a no-deal, no-transition, disorderly Brexit, but that isn’t what we expect to happen, Carney concludes.

In other words, the Bank could be forced to raise interest rates if the pound slumped, pushing up import costs, and tariffs were slapped on imported goods too.

Carney is explaining that the Bank must decide how to balance inflationary pressures against any future supply shock.

Whatever happens after Brexit, we will set monetary policy to ensure price stability and support the economy during the transition, Mark Carney pledges.

Three factors will be crucial when deciding future interest rate moves, he explains:

  • Demand: Withdrawal from the EU will effect demand for UK goods. The impact will be more negative if Brexit is disruptive
  • Supply: There will be a drag on supply as the process of adjusting to Brexit unfolds. If this process is gradual, the impact will be limited. But “an abrupt and disorderly withdrawal” could lead to severe disruption at the UK border
  • The value of the pound: It could rise if the financial markets have an optimistic view of Britain’s future prospects, but a “disruptive” Brexit could push the pound down. A weaker pound would push up inflation.

Carney adds that there is little that monetary policy can do to help with large, negative supply shocks.

Updated

On Brexit, governor Carney says that UK companies are now “understandably postponing investment” until they have more clarity about the future.

UK households are more “sanguine”, though.

Bank of England governor Mark Carney begins his press conference, by explaining that Britain’s economy is facing a “series of transitions”.

They are:

  • Global financial conditions are tightening, and trade growth is slowing
  • UK fiscal policy is moving to a more accommodative stance
  • The UK economy is adjusting to a new, and currently uncertain, relationship with the European Union

Here’s our news story on the Bank of England decision:

Bank of England Press Conference begins

The Bank of England press conference is underway. You can watch it here.

Updated

There aren’t any big shocks in the Bank’s new forecasts, but it has trimmed its growth and inflation outlook for 2019:

Bank of England inflation and growth forecasts

You can see the latest quarterly inflation report online, here.

The Bank are helpfully tweeting some charts from today’s quarterly inflation report.

Bank: We could cut or raise rates after Brexit

Importantly, the Bank of England is signalling that interest rates could fall OR rise after Brexit, depending on how events turn out.

It says:

The economic outlook will depend significantly on the nature of EU withdrawal, in particular the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets.

The implications for the appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate. The MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

The Bank has published a handy explanation for today’s decision, and flagged up that interest rates will probably rise “a bit more” over the next few years.

Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.

But things have been changing. Our economy now needs a little less support because it is growing a little faster than it has capacity to and inflation is above our 2% target. To ensure a sustainable return of inflation to the target, we need to keep the economy growing at around its speed limit.

That is why we raised the official interest rate from 0.5% to 0.75% in August.

After raising interest rates in August, this month we have left them unchanged. If the economy performs as we expect, we think we will need to raise interest rates a bit more over the next few years. We expect any rises in interest rates to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than a decade ago.

And here’s a topline view of the economy:

The UK economy in a nutshell

BoE: Smooth Brexit would boost investment growth

The Bank of England is hopeful that UK business investment will pick up -- if Britain secures a smooth transition deal as it exits the European Union.

The Bank says:

Business investment has been more subdued than previously anticipated, as the effect of Brexit uncertainty has intensified.

Under the smooth transition assumption on which the forecast is conditioned, greater clarity is expected to emerge over the coming months, boosting investment growth.

The Bank is also concerned that trade disputes could escalate, hurting the global economy.

It says:

The global economy continues to grow at above potential rates, supporting UK net trade. Growth has softened, however, and become more uneven across countries, and downside risks have risen.

Global financial conditions have tightened, particularly in emerging market economies, and activity has slowed in the euro area. Trade restrictions have increased and there is a risk of further escalation.

The Bank of England has also warned that uncertainty over Brexit is weighing on the economy.

The minutes of today’s meeting say:

“The recent intensification of Brexit uncertainty appeared likely to keep business spending subdued in the near term.

Bank of England interest rate decision

Breaking: The Bank of England has voted to leave UK interest rates unchanged, at 0.75%.

More to follow!

October was a brutal month for the markets, despite yesterday’s Halloween rally.

November has got off to a better start, though, with Europe’s main indices all up:

European stock markets
European stock markets Photograph: Thomson Reuters

Why rates shouldn't rise in 2019

It’s nearly time for the Bank of England to announce its decision on interest rates, and release its latest quarterly inflation report.

That report will show the Bank’s new growth and inflation forecast, so should guide us as to the next rate rise (assuming it doesn’t come today!).

Professor Costas Milas of the University of Liverpool suggests rates shouldn’t rise next year.

He writes:

I have plotted annual GDP growth in the UK (%) together with the Bank’s 1-quarter ahead and 1-year ahead forecasts (most likely outcomes based on market expectations of interest rates). Since 2006, the Bank has over-predicted next quarter’s growth by an average of 0.35% per annum and next year’s growth by an average of 0.94% (!) per annum. Since the EU referendum vote, the Bank has improved its forecasting record but still over-predicts next quarter’s growth by an average of 0.15% per annum and next year’s GDP by an average of 0.31% per annum.

So history is telling us that we will the Bank’s GDP growth rate forecast for 2019 needs to be trimmed by a sizeable 0.31% to infer the “correct” GDP growth rate. This is a good reason to put any planned interest rate hikes for 2019 on hold…

Bank of England growth forecast

The slowdown in UK manufacturing is another example of how a cheap currency isn’t enough, on its own, to spur exports.

But Sacha Chorley, portfolio manager at Quilter Investors, argues that sterling’s weakness since the 2016 EU referendum vote may be cushioning some blows.

He says:

“Manufacturing has been crushed by concerns over Brexit, with so many uncertainties surrounding imports and exports leading to a steady decline in manufacturing growth, which is headed back toward the levels seen immediately after the referendum.

“It is particularly notable that this is happening amid a climate of a depreciated pound. Normally this would be expected to stimulate export orders, so it is possible the figures may have been weaker without the exchange rate on the pound falling. The sub-50 employment score is also notably weak, indicating firms are trying to keep a lid on hiring. This will be linked to new order expectations and cost cutting.

Appledore shipyard to shut

Appledore Shipyard in north Devon.

Newsflash: The Appledore shipyard in Devon is to close, in another blow to British manufacturing.

Babcock, the engineering and defence firm, has decided to shut Appledore after new orders dried up, ending a 163-year history.

In a statement, it says:

Babcock International has today announced it has taken the difficult decision to exit operations at its Appledore facility in Devon, ending its site lease in March 2019.

Babcock’s focus is now firmly on its workforce and its determination to protect their employment within the business. To that end, the company will offer relocation opportunities for all 199 Appledore employees at other Babcock facilities, 140 of whom are already on short-term redeployment to its Devonport operations.

Babcock very much regrets having to take this course of action and recognises the impact it will have on its dedicated and professional workforce. The company will now engage in a consultation period, working closely with its employees and their Trade Unions representatives during this difficult time.

The Appledore Yard was founded in 1855, and is situated on the estuary of the River Torridge in North Devon.

It has produced, or helped produce, survey vessels for the Royal Navy, patrol vessels for the Irish Naval Service, ferries, dredgers and commercial vessels, plus two tall ships for the Tall Ships Youth Trust.

Unions had fought to preserve the shipyard. Yesterday they handed the Minister of Defence a petition with 10,000 signatures, urging it to save Appledore.

Updated

UK manufacturing stumbles: What the experts say

Reaction to the slowdown at British factories last month is flooding in.

Justin Benson, head of automotive at KPMG UK, says manufacturing is misfiring.

“With the UK manufacturing PMI for October dropping by 2.5 points, it suggests that business confidence is on a downward trend. Combine that with Brexit, trade negotiations between the US and China, German elections and Italian debt, the picture it paints is one of increased geopolitical uncertainty.

Shannon Murphy, assistant head of risk underwriting at Euler Hermes, says UK factories will remain under the cosh until they have some certainty on Brexit:

“Our clients are reporting that their customers are cutting contracts for new orders from six months to three. The focus is narrowing from long-term plans as businesses try to manage uncertainty.

Until firms have more clarity about what a future relationship with the EU looks like, investment levels are likely to continue to flatline and confidence will remain low. It’s a good time to review credit management procedures.”

Economist Samuel Tombs of Pantheon fears the UK economy is weakening:

Dave Atkinson, UK head of manufacturing at Lloyds Bank Commercial Banking, is more confident - pointing out that today’s manufacturing PMI report does show (modest) growth last month.

“The drop in the PMI reading is disappointing but let’s not lose sight of the fact it has remained above 50 – the indicator of growth – for 27 consecutive months.

“Our recent sector survey suggested that once we have clarity about the UK’s future trading relationship with the EU we’ll likely see further growth, with many manufacturers expecting this to deliver a shot of confidence to the sector. But the changes in Europe aren’t the only headwind facing exporters, with some automotive firms citing slow growth in emerging markets like China as a driver behind recent operational changes.

“More positively firms across automotive, aerospace and rail sectors are continuing to honour long-term investment plans, despite uncertainty.

Economics professor Prem Sikka says the government must do more:

CIPS: Alarm bells ringing in UK manufacturing

City economists had expected UK factory growth to dip a little last month, but today’s report is much gloomier than feared.

As well as trade wars and Brexit, car manufacturers have been struggling to meet new tougher emissions tests, leading to lower production and a testing backlog.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, says the slump in the UK manufacturing PMI (to just 51.1, from 53.6) is a real worry. He says Brexit has hurt confidence, and is deterring some firms from hiring new staff.

Brock explains:

“Alarm bells were ringing in the sector this month as the Index slipped closer to edge of the no-change mark with purchasing falling for the first time in over two years. Overall activity was marred by a drop in export orders and continuing weak domestic demand as Brexit took another bite out of client confidence.

“To see inflows of new orders first decline since the middle of 2016 following the referendum, will send shivers down the spine of business. Any hope that the current situation would not continue to impact has surely now evaporated. Employment was also affected with lower levels of hiring, as companies tried to control their costs.

Job seekers will find the hiring landscape less friendly during the run-up to departure.

Capital Economics also fear that UK factories are heading towards stagnation:

Markit: UK manufacturing could soon shrink

Rob Dobson, Director at IHS Markit, says Britain’s manufacturers suffered “a worrying turnaround” for the worst last month.

He fears that the sector could actually shrink over the next few months.

At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%.

New orders and employment both fell for the first time since the Brexit vote as domestic and overseas demand were hit by a combination of Brexit uncertainties, rising global trade tensions and especially weak demand for autos.

Markit found that some firms have been protecting cash flow and cost-cutting, rather than restocking their inventories.

Business confidence weakened in October too, Dobson adds, amid “rising Brexit-related uncertainties and escalating global trade tensions.”

UK factories were hit by a drop in foreign demand in October, for the second time in the past three months.

Markit says:

Some companies reported that Brexit uncertainties had negatively impacted inflows of new work from within the EU. Others focussed more attention on rising global trade tensions and weaker demand from the world autos sector.

UK manufacturing growth hits 27-month low

NEWSFLASH: UK manufacturing growth slumped last month, as factories were hit by a drop in orders.

Data firm Markit reports that conditions in the UK manufacturing sector slowed sharply during October.

It blames the trade wars trigged by Donald Trump, and the uncertainty over Britain’s exit from the European Union.

In a new healthcheck, Markit says:

Output growth weakened, while new order inflows and employment both declined for the first time since July 2016 (the PMI survey directly following the EU referendum). The drop in new business was partly driven by rising global trade tensions and Brexit uncertainties.

This dragged the UK manufacturing PMI (a broad measure of activity) down to just 51.1 in October, a 27-month low, from 53.6.

Any reading over 50 shows growth.

UK manufacturing PMI for October 2018
UK manufacturing PMI for October 2018 Photograph: Markit

New orders and employment levels both declined for first time in 27 months, it adds.

More to follow!

Updated

Today’s housing data might dampen the mood at the Bank of England -- house prices growth has slipped to a five-year low.

Prices were flat month-on-month in October, which dragged annual house price inflation down to just 1.6%.

A former Bank of England policymaker, Andrew Sentance, argues that the BoE should stop prevaricating, and raise interest rates today (spoiler alert: it won’t (probably)...)

He writes:

On the productivity front, low interest rates may be contributing to the problem rather than providing the solution. Only when interest rates return to more normal levels will businesses have the right incentives to raise productivity and efficiency.

A further quarter-point rise in interest rates on Thursday is therefore unlikely to dent growth prospects in the UK economy. Indeed, in the US — where interest rates have been raised from around zero to around 2% since 2015 — economic growth has been very strong and resilient.

The MPC and the Treasury need to adjust to low economic growth in the UK. It appears to be the “New Normal”, and the sooner we recognise that the better.

Updated

Pound jumps on Brexit 'financial services deal' reports

Sterling is jumping sharply today, following reports the UK and the EU are close to an agreement on a crucial part of Brexit.

The Times newspaper has got the City excited, by reporting that Theresa May has struck a deal with Brussels that would give UK financial services companies continued access to European markets after Brexit.

A government source told the newspaper that British and European negotiators have reached a “tentative agreement on all aspects of a future partnership on services, as well as the exchange of data”.

The breakthrough is apparently based on the idea of regulatory equivalence -- in broad terms, the EU and UK agreeing that both sides’ rules are equally strict. That would allow City firms to keep operating in Europe, even after they lose their current ‘passporting’ rights.

But there are disadvantages -- equivalence isn’t as concrete as passporting, and one side could be forced by the other side to implement new rules to avoid breaching equivalence (the FT has a good explanation here).

Still, the news has cheered currency traders -- sending the pound soaring by nearly one and a half cents to $1.29.

The pound vs the US dollar
The pound vs the US dollar Photograph: Thomson Reuters

Mohammed Kazmi, portfolio manager at private bank UBP, believes the Bank of England could hint at a 2019 interest rate hike today:

The Monetary Policy Committee meeting is once again coming at a time of great uncertainty for the BoE with the Brexit deal still hanging in the balance. A lack of clarity herein, coupled with rising external risks following the tightening of financial conditions globally, should keep the bank firmly in a wait-and-see mode.

Recent wage growth strength should provide Carney with enough confidence to continue to commit to a rate hike next year, especially with this hike not fully priced until end-2019 now. The pound has been an underperformer recently amongst the majors given the political backdrop and rating agency comments; however, the BoE is unlikely to change this course, with concrete progress on a transition deal required for a turn instead, especially given the stronger dollar backdrop.

Bank of America Merrill Lynch economist Robert Wood concurs that rate will stay on hold today, telling clients (via Reuters):

“Until a deal is done - or not - we suspect the BoE is in suspended animation,”

Updated

Brexit uncertainty makes if effectively impossible for the Bank of England to raise borrowing costs at noon today, economists reckon.

As CNBC puts it:

“If it wasn’t for Brexit uncertainty the Bank of England would probably be thinking about putting interest rates up this week,” Mike Bell, global market strategist at J.P. Morgan Asset Management, told CNBC via email, adding that interest rates look “unnecessarily low.

The agenda: Bank of England interest rate decision

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

The Bank of England is centre-stage today, as it meets to set UK interest rates and update us on its view of the UK economy.

It’s a year since the BoE raised borrowing costs for the first time in a decade (from 0.25% to 0.5%), which was followed by a second small increase in August (to 0.75%).

The City doesn’t expect a hike today, but we could get some firm hints about when borrowing costs return to the giddy heights of 1% or more.

The Bank’s quarterly inflation report will also show if the Monetary Policy is more optimistic about UK growth prospects.

With wage growth running at a nine-year high of 3.1%, and growth holding up despite Brexit uncertainty, the Bank’s policymakers may be getting twitchy. Does Britain really need such low borrowing costs, and weak savings rates, a decade after the financial crisis?

Last month, chief economist Andy Haldane claimed that things are looking up:

“I think there is more compelling evidence of a new dawn breaking for pay growth, albeit with the light filtering through only slowly,”

Of course, the Bank can’t really consider raising interest rate until Britain’s exit from the EU is resolved. Yesterday, Brexit secretary Dominic Raab suggested a deal would be done within three weeks, only to execute a dizzying and ungainly u-turn a few hours later...

But still, Carney’s comments could lift or sink sterling.

Hussein Sayed, Chief Market Strategist at FXTM, says:

Traders’ attention will turn to the Bank of England monetary policy decision today which is expected to keep interest rates on hold.

While Mark Carney’s speech and the Quarterly Inflation Report may move the Pound slightly, it’s still all about the Brexit deal that will decide the fate of the currency.

We’ll discover if the Brexit fog is chilling the economy this morning, when data firm Markit publishes its latest survey of factory firms.

The manufacturing PMI is expected to fall to 53 from 53.8, which would show slowing growth.

The agenda

  • 9.30am GMT: UK manufacturing report for October
  • 12pm GMT: Bank of England interest rate decision
  • 12.30pm GMT: BoE governor Mark Carney’s press conference

Updated

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