UK interest rates now expected to peak at 5.5%; offshore wind power auction flops – as it happened

Time for a quick recap.

Financial markets now only expect one more quarter-point interest rate rise by the Bank of England before it reaches the end of its rate-hiking cycle. That would take Bank rate up to 5.5%, possibly as soon as later this month.

The UK government has been criticised after no offshore wind developers took part in the government’s annual auction to support renewable schemes.

Porous concrete has been detected at the UK’s two busiest international airports, Heathrow and Gatwick.

Heathrow must also cut passenger charges by almost a fifth next year after losing an appeal to the UK competition watchdog.

China’s currency has slipped to a new 16-year low, after weak trade data this week.

A measure of UK employment trends used by the Bank of England has shown that employers fear a recesssion and are cutting back on new hiring.

Costa Coffee has recalled some of its range of sandwiches and wraps after it emerged that they could contain small stones.

Here are the rest of today’s stories:

The UK’s concrete crisis has spread to the country’s busiest airports.

The Financial Times is reporting that Heathrow and Gatwick have both detected RAAC, the type of concrete that recently forced hundreds of UK schools to close.

This shows the far-ranging prevalence of RAAC, which is prone to corrosion and cracking as it ages, the FT points out.

The airports say they were aware of the issue before the government ordered 147 schools to immediately shut buildings made with aerated concrete.

RAAC is a particular concern in buildings that have been poorly maintained, which shouldn’t include major international airports.

Chris Goodier, professor of construction engineering and materials at Loughborough University, and one of the UK’s few experts on Raac, told the FT the presence of the material poses much less of a threat at airports than at schools and hospitals.

Goodier says most airport maintenance staff will have been aware of the presence of the material for some time, explaining:

“There are people there running the place seven days a week with a big full-time maintenance team whose only job is to keep it running 24/7.”

“They’ve got money and they spend money because if they had to close a building it would cost them a lot.

Newsflash: The Bank of England is expected to only raise UK interest rates one more time, to 5.5%, in its battle to cool inflation.

The money markets this afternoon indicate there is less than a 50% chance that Bank rate will rise above 5.5% this year, or in 2024.

Currently, UK interest rates are 5.25%, with the Bank broadly expected to raise them by a quarter of one-percent later this month.

But 5.5% could be the peak, the current trading in interest rate swaps suggests.

Reuters has the details:

• Rate futures at 2pm GMT showed a 69% chance of a quarter-point rate rise to 5.5% on Sept. 22 after the BoE’s next meeting, down from more than 80% early this week.

• The chances of a further rate rise to 5.75% stood at 46% by December and peak at 49% by February 2024, with investors expecting cuts in rates to begin in around a year’s time.

Earlier this summer, the money markets indicated UK interest rates would hit 6% as the BoE struggled to bring down inflation.

But in July, the consumer price index fell by more than expected, to 6.8%.

And on Wednesday, BoE governor Andrew Bailey predicted we will see a “quite marked” fall in inflation by the end of this year. He told MPs that the Bank of England is “much nearer” to ending its run of interest rates increases.

Elsewhere in the markets, China’s renmimbi has weakened to a new 16-year low today.

In onshore domestic trading, the yuan closed at its weakest since December 2007.

Reuters attributes the weakness to capital outflow pressures as China’s economy struggles, adding:

A growing yield gap with other major economies, particularly the United States, has also put fresh pressure on the yuan and a number of other emerging currencies.

Trade data released yesterday showed another drop in Chinese imports and exports, indicating its economy is not bouncing back from the Covid-19 lockdowns which ended at the end of last year.

A strong dollar is not helping the renmimbi either, as Victoria Scholar, head of investment at interactive investor, explains:

The dollar is on track for its longest winning streak since 2014, driven by a string of robust economic data points that suggest it could be more difficult for the Fed to end this rate hiking cycle.

Meanwhile the offshore yuan weakened to its lowest level on record against the greenback after China set its fixing at a two-month low overnight.

The weak economic backdrop in China which contrasts with the resilience of the US have both contributed towards widening interest rate differentials, a weaker yuan, and stronger US dollar.

Three geothermal projects have won government support in today’s auction for renewable energy support.

The Manhay, Penhallow and United Downs projects, all in Cornwall, were all allocated support through the Contracts for Difference Allocation Round, to produce a total of 12MW of power.

Conservative MP Kieran Mullan, who produced an academic study into geothermal for the government this year, has welcomed this “landmark investment”.

That report found that many areas with the greatest geothermal potential lie beneath the towns and cities most in need of investment.

Mullan says:

“The government has stepped up its investment in deep geothermal in a big way today, funding not one but three deep geothermal plants. This follows on from the first UK deep geothermal heat plant being in 37 years being switched on at the Eden project in Cornwall this summer.”

“This just proves the huge potential out there. These projects will deliver clean, reliable electricity that doesn’t wax and wane with the weather like wind and solar. I hope this is just the start of what could be an important part of our transition, particularly when it comes to heat where there are even more potential sites.

Deep geothermal energy is heating more than 250,000 homes in Paris and many more across Europe. It is a clean, green, reliable resource. I got to see for myself how quietly and efficiently this hot water can be utilised visiting a plant in Germany.

No one would know the little building I visited next to a park and a school was heating the local swimming pool, businesses, town hall and hundreds of homes.”

Julia Kollewe

Berkeley Group has become the latest house builder to be hit by slowing demand for new homes.

Reservations for new homes at the upmarket builder have fallen 35% by value in the last four months, reflecting the “elevated macroeconomic and political volatility”.

However, prices are “resilient” and it still expects to make a pretax profit of at least £1.05bn in the current year and beyond.

Like other builders, Berkeley complained about the planning system, and has not bought any land, saying:

“The complexity and protracted nature of the current planning system and lack of clarity surrounding certain regulatory changes affecting our sector, at a time of considerable uncertainty for the UK economy with persistent high inflation and interest rates, continues to deter investment into brownfield regeneration and the wider housebuilding sector.

Consequently, Berkeley has not acquired any land in the period and will only invest very selectively in new opportunities.”

Richard Hunter, head of markets at interactive investor, said:

“In some ways, Berkeley is a different beast to many of its competitors, with a potential edge coming from its mix of an exposure to London and the South East, higher-end properties and the regeneration of brownfield sites in which it is well accomplished. The group has also reined back its land acquisition, making no purchases in this period and with the intention of only investing very selectively in new opportunities.”

But he added:

“Berkeley is far from being immune to the wider issues of mortgage availability and affordability, planning bottlenecks, uncertain consumer propensity to buy and a cloudy outlook.”

The UK government botched today’s offshore wind auction, say Friends of the Earth, who are urging the new energy secretary, Claire Coutinho, to sort out her “failing” department.

Mike Childs, Friends of the Earth’s head of policy, said:

“The failed offshore wind auction was highly predictable. The government has missed yet another open goal that would have boosted energy security and made household bills more affordable.

“Since energy bills shot up last year, ministers have refused to invest in home insulation, despite our housing stock being amongst the worst in Europe and failed to unleash the full potential of our vast onshore wind resources. This week’s wind reforms don’t go nearly far enough.

“Now it’s botched an auction that should have led to a boom in offshore wind with all the economic benefits this would bring. The new Secretary of State, Claire Coutinho needs to get a grip on her failing department – and quickly.”

No new offshore windfarms will go ahead in the UK after the latest government auction, in what critics have called the biggest clean energy policy failure in almost a decade, our energy correspondent Jillian Ambrose explains.

None of the companies hoping to build big offshore windfarms in UK waters took part in the government’s annual auction, which awards contracts to generate renewable electricity for 15 years at a set price.

The companies had warned ministers repeatedly that the auction price was set too low for offshore windfarms to take part after costs in the sector soared by about 40% because of inflation across their supply chains.

The government confirmed on Friday that only 3.7 gigawatts of new clean energy projects secured a contract, compared with 11GW in the previous auction – a significant blow to the UK’s clean energy targets.

The winning projects include solar farms, onshore windfarms and a record number of tidal power projects. However, the absence of giant new offshore windfarms will make the UK’s climate targets far more difficult to achieve.

The government’s “energy security disaster” means the UK will miss out on billions in investment and may also push up bills for hardworking households, the Labour party warned.

Industry insiders said the three biggest offshore wind developers in the UK – SSE, ScottishPower and the Swedish company Vattenfall – were forced to sit out the bidding after ministers refused to heed their warnings.

UK firms cut back on hiring amid recession fears

Phillip Inman

A measure of UK employment trends used by the Bank of England has shown that employers fear a recesssion and are cutting back on new hiring.

The latest KPMG and REC, UK jobs report found that the number of employers hiring sank to its lowest since 2009, excluding the Covid-19 pandemic period, while the number of people looking for work remained steady.

One analyst said the report, compiled by S&P Global, indicated that the economy was showing clear signs of strain after 14 consecutive interest rate rises and put pressure on the central bank’s monetary policy committee (MPC) to halt further increases in the cost of borrowing at the next meeting later this month.

“In one line,” the jobs report supported “a swift conclusion to the MPC’s tightening cycle,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The permanent staff placements index fell to 38.9 in August, from 42.4 in July. It averaged 54.2 in the second half of the 2010s, and 55.3 in 2022, said Tombs. A number below 50 indicates contraction.

The permanent staff availability index, which measures the number of people using recruiters to look for work, edged down to 60.3 in August, from 61.4 in July, but remained well above its 38.0 average in the second half of the 2010s, and its 37.6 average in 2022.

Salary rises also remained broadly steady, with the permanent staff salaries index at 58.2 in August, compared to 58.3 in July. It averaged 60.0 in the second half of the 2010s, and 71.8 in 2022, said Tombs.

“August’s jobs survey provides more ammunition to the core members of the MPC -governor Andrew Bailey and chief economist Huw Pill – who have recently expressed their view that interest rates probably don’t need to rise much further, if at all, in order to sustainably return inflation to the 2% target.”

The MPC regularly comments on REC surveys in its quarterly assessment of the economic outlook, using it as a benchmark for the health of the recruitment market.

Tombs cautioned that the REC survey had proved to be “too gloomy in signalling declining employment” over recent months compared with official employment data from the Office for National Statistics, which has shown permanent staff numbers edging up.

Tombs said:

“The survey is based on recruiters, not firms, so it isn’t registering the recent trend for businesses to hoard labour, due to fears they may not easily be able to replace them further ahead.”

A separate survey of employers by S&P Global showed that they were still adding to their workforces in August, though only modestly.

“We think the reality lies somewhere in between the REC and S&P surveys, and that employment likely will flatline in the second half of this year.

Neil Carberry, REC chief executive, said:

“August is always a slower month for new permanent roles, but this has been exacerbated in 2023 by the lack of confidence to start the new hiring we saw among firms in the Spring.

“As inflation begins to drop, it is likely that firms will return to the market later in the year – employer surveys suggest confidence may be returning. But for now, the labour market has more slack than it has since the heights of the first lockdown. Firms continue to use temps to fill any short-run needs, with the small drop in August representing little change from the past few months.”

The latest bulletin from the ONS showed employment and job vacancies were down, while unemployment and redundancies were up.