Bank of England poised to lift interest rates to 14-year high

Bank of England expected to raise interest rates to 14-year high

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

Despite the risk of a looming recession, the Bank of England is expected to raise UK interest rates for the 10th time in a row today as it continues to battle inflation.

Economists predict the BoE will lift Bank Rate by another half a percent, up to 4%, the highest since autumn 2008 – as this chart from last month shows:

A chart showing UK interest rate rises

UK consumer price inflation eased slightly to 10.7% in November, down from 11.1% in October, offering hopes that price pressures may have peaked.

But last month, the Bank of England’s chief economist warned that high rates of UK inflation could persist for longer than expected.

Huw Pill said:

“The distinctive context that prevails in the UK – of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent.”

Those concerns could spur policymakers on the Monetary Policy Committee to keep tightening policy. All nine MPC members get a vote, and their decision is released at noon.

Another interest rate rise would push up borrowing costs for the approximately 2.2 million people on a variable rate mortgage. More than a million households must renew their fixed-rate deals this year, and already face a jump in repayments.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

In one hand, the double-digit inflation continues taking a toll on the UK economy and on people’s lives. According to the latest data, food inflation in Britain hit the eye-watering level of 16.7% in the 4 weeks to January 22.

On the other hand, the rising rates take a toll on the British housing market.

Yesterday, Nationwide reported that house prices in the UK fell again in January, sliding for the fifth month in a row.

The Bank will also give its latest assessment of the UK economy. Three months ago, it warned the UK faced a lengthy recession, but it could upgrade its outlook today, as the market chaos following last September’s mini-budget has eased.

The BoE isn’t the only central bank battling inflation, of course. The European Central Bank sets its interest rates today too, and is also expected to raise borrowing costs by 50 basis points, or half a percent.

Last night, America’s Federal Reserve lifted its key rate by a mere quarter-point (25 basis points), and signalled a slowdown in its tightening programme.

Fed chair Jerome Powell said:

“We covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do.”

But, Powell also tried to dampen expectations that the Fed could unwind some of its hefty interest rate increases, cautioning:

“If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year.

The agenda

7am GMT: Germany’s trade balance for December
Noon GMT: Bank of England releases interest rate decision, and publishes Monetary Policy Report
12.30pm GMT: Bank of England press conference
1.15pm GMT: European Central Bank interest rate decision
1.30pm GMT: US jobless claims data
1.45pm GMT: European Central Bank press conference

Key events

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Just in: Heathrow Airport is looking for a new CEO.

Heathrow has told the City that chief executive John Holland-Kaye has decided to step down sometime this year.

This follows nine years as the boss of Britain’s biggest hub, a time which included the disruption caused by the Covid-19 pandemic when passenger numbers hit a 50-year low, followed by chaotic scenes last year as passengers missed flights and lost their luggage.

There were also tensions with airlines over the charges which Heathrow is allowed to levy on them:

The board has started a process to select his successor, it says, with Holland-Kaye holding off his departure until the new CEO starts.

The Chair of Heathrow Airport, Lord Deighton said Holland-Kaye had been “an extraordinary leader of Heathrow”, adding:

During the past nine years, he has worked tirelessly and collaboratively with shareholders, Ministers, airlines and other stakeholders to ensure the country can be proud of its ‘front door’. The Board would like to put on record our gratitude to John for his dedication and commitment to Heathrow throughout his tenure as CEO.”

Miliband: Shell record profits are ‘windfalls of war’

Calls for a tougher windfall tax on energy companies are growing louder today, after Shell smashed its profit record by making almost $40bn last year.

Labour MP Ed Miliband, shadow secretary of state for Climate Change and Net Zero, says Shell’s earnings are the “windfalls of war”.

He insists the government must close the loophole in the current windfall tax which lets companies offset tax against spending on new investment in the North Sea.

Miliband told Radio 4’s Today Programme that “people are sick and tired of the way this country is run”.

Because at one in the same time, you’ve got millions of people who cannot afford heat and power.

You’ve got a government that is saying, there’s nothing we can do. Prices are going to go up by another 40% in April and at the same time, Shell is making record profits, the windfalls of war in unexpected unearned profits, and the government fails to levy a proper windfall tax with massive loopholes for fossil fuel companies.

That is why this country has to change and and and why, in my view, the government has to change.

Shell reported this morning that it has taken a $1.9bn charge related to windfall taxes in the EU and UK but did not break down how much it had paid for each one [Shell makes most of its profits outside the UK, which would not be subject to the levy].

Stuart Lamont, investment manager at RBC Brewin Dolphin, says Shell’s record profits will only intensify calls for more to be done to claw back profits from energy companies in the current environment.

The politics of it all aside, the events of the last year have seen Shell’s earnings, cashflow, and debt position improve significantly and shareholders are benefitting through another share buyback programme and an increased dividend.

Global Justice Now are calling for a polluters tax. Dorothy Guerrero, their head of policy, says:

“It’s sickening to see that in a year where people can’t afford to heat their homes because of rising energy bills, Shell is announcing record annual profits of $39.9bn. As thousands of people went out to the streets yesterday to protest and strike against low pay and the rising cost of living, oil giants like Shell are lining the pockets of shareholders with profits made from a global energy crisis.

These profits are made off the destruction of our planet and there are communities all over the world who are already paying the price for that right now. It’s time to bring in a polluters tax, end this facade and finally make them properly pay up for their climate-wrecking damages.”

The weakening UK housing market might encourage Bank of England policymakers towards a smaller increase in interest rates than expected.

Derek Halpenny, head of research for global markets at Japanese bank MUFG, suggests that the decision between raising UK interest rates by a half-point or a quarter-point, is ‘more finely balanced’ than the European Central Bank’s own decision later today (where a 50-basis-point hike seems inked in).

Halpenny says:

The macro outlook does not look as bad and the depth of the contraction the BoE forecast in November is likely to be revised to something less severe.

But the UK housing market has taken a more notable turn weaker and retail sales remains depressed, Halpenny points out:

The RICS House Price Index fell to -42, worse than during covid and the weakest print since 2010. The balance has dropped from +50 four months ago, a faster drop than in the run in to the GFC. The MPC is also more divided and less predictable.

The last vote saw two MPC members vote for no change (Dhingra and Tenreyro) which skews the balance of risks to a smaller move than expected today.

The Bank of England may be split over today’s interest rate decision.

In December, the nine membes of its Monetary Policy Committee split three ways – with six members plumping for a half-point rise, from 3% to 3.5%. But two, Swati Dhingra and Silvana Tenreyro, voted for no change, while Catherine Mann pushed for a three-quarter-point hike to 3.75%.

Michael Hewson, chief market analyst at CMC Markets, says:

The MPC is on the horns of a dilemma as the UK economy continues to struggle with double digit inflation, although the economy may well not be as bad as perhaps was thought at the end of last year, which could prompt a modest tweak to some of its economic forecasts.

The slide in energy prices in recent months has alleviated some of the pressure on wage packets, when it comes to petrol prices, however with food price inflation still at 16%, they will also be acutely aware that a weak pound will make headline inflation much sticker than it needs to be if they show any indication, they are going soft when it comes to hit its inflation target.

We are likely to see a split again, Hewson predicts, with Tenreyro and Dhingra likely to be the most averse to another hike given that they voted for no change in December.

Catherine Mann is likely to push for another 50bps, while the rest of the committee are expected to split between 25bps and 50bps, from the current 3.5%, he adds, warning:

With core prices looking sticky and wages rising at over 7% any procrastination on the MPC’s part when it comes to forward guidance could well do more harm than good.

Analysis: Weaker economy, higher inflation: Bank of England’s dilemma

The Bank of England faced an ‘acute policy dilemma’ this week, as policymakers weigh up whether (as expected) to hike interest rates today – the 10th rise in a row.

Our economics editor Larry Elliott explains:

On the one hand, the economy is showing signs of weakening. Higher mortgage costs have taken the heat out of the housing market, with the Nationwide building society reporting a fifth monthly fall in property prices. Business failures are rising as tougher financing conditions wipe out “zombie” companies only viable while rates were at ultra-low levels.

The International Monetary Fund said this week the economy would contract by 0.6% this year and the UK would be the only member of the G7 group of leading industrial nations to go backwards. Faced with this scenario in previous years, the Bank would have been cutting interest rates, not raising them.

Yet, after peaking at a 40-year-high of just over 11%, inflation as measured by the consumer prices index has fallen back only slightly and is still above 10%. The Bank’s legally mandated job is to bring inflation back sustainably to its 2% target and the MPC is concerned that if it allows price pressures to become embedded they will be hard to shift.

Larry also point out that “anything other than a half-point increase would be a surprise”, at a time when other leading central banks are raising rates, adding:

Assuming that is the case, attention in the markets will turn to whether an 11th and even a 12th successive rate rise is in prospect.

Here’s the full analysis:

Progressive thinktank the IPPR says Shell’s whopping profit transfers are “inexcusable and demands action”.

They say energy customers will be ‘rightly appalled’ by this morning’s news that Shell made $9.8bn (£7.9bn) profits in the final quarter of 2022, and total profits of $39.9bn(£32.2bn) for last year – and announced another $4bn of share buybacks.

Dr George Dibb, head of the Centre for Economic Justice at IPPR, said:

“Bill-payers will be rightly appalled to hear that oil giants like Shell are still seeing sky-high profits. Instead of re-investing those profits in the transition to net zero, they’re spending billions on enriching their own shareholders and executives, announcing a further £3.2bn of share buybacks this morning.

The sheer scale of that transfer of wealth – from bill-payers to shareholders – is inexcusable and demands action from the government.

The UK should follow the example set by the USA and Canada and fairly tax these share buybacks to raise hundreds of millions for the exchequer.”

TUC: Shell profits are “an insult” to working families

The head of the TUC has described Shell’s $40bn of profits last year as “obscene” and “an insult to working families”.

TUC General Secretary Paul Nowak said the government must beef up its windfall tax, so that energy firms pay ‘their fair share’.

“As households up and down Britain struggle to pay their bills and make ends meet, Shell are enjoying a cash bonanza.

“The time for excuses is over. The government must impose a larger windfall tax on energy companies. Billions are being left on the table.

“Instead of holding down the pay of paramedics, teachers, firefighters and millions of other hard-pressed public servants, ministers should be making Big Oil and Gas pay their fair share.

“There is nothing stopping Rishi Sunak and Jeremy Hunt from making that political choice.”

Unite union calls for emergency windfall tax on banks

Trade union Unite is calling for an emergency windfall tax on banks, saying they have enjoyed a profits bonanza from the increase in interest rates last year.

Unite said its research showed that in the first nine months of 2022, leading banks generated £19.8bn of profits.

Higher interest rates boost bank profitability, by increasing the earnings on their cash balances. Since the end of 2021, big banks’ bank net interest income has increased by 37%, the union reports.

Unite general secretary Sharon Graham said:

“It’s time the truth was told. Interest rate rises are putting the fear of death into households across Britain, but we know now that at the same time they are delivering billions in excess profits to the big City banks.

“Our economy is broken. Nothing symbolises that better than the spectacle of politicians demanding pay cuts from nurses whilst doing nothing to get City noses out of the ‘banking-billions’ trough.

“That’s why I am calling for a windfall tax on the excess profits of the big banks. Workers did not create this crisis and they should not be the ones to pay for it.

“It’s time the profiteers and their friends in the city were told profiteering won’t pay and it’s time they paid their fair share.”

Shell makes record $40bn in profits on back of surging gas prices

Alex Lawson

Oil giant Shell has reported record earnings of almost $40bn for 2022 this morning.

The surge in profits caps a tumultuous year – and one that was extremely profitable for oil majors, as Russia’s invasion of Ukraine drove up wholesale energy prices.

My colleague Alex Lawson has the details:

Shell’s annual profits have more than doubled to a record of nearly $40bn (£32.3bn) after a surge in wholesale gas prices linked to the war in Ukraine boosted its performance, as consumers struggled to pay huge energy bills.

The oil and gas company posted profits of $9.81bn in the final quarter of last year, compared with $6.4bn a year earlier. That took annual adjusted profits to $39.87bn, outstripping the $19.3bn notched up in 2021.

Analysts had expected Shell’s chief executive, Wael Sawan, to report adjusted earnings of $7.97bn for the fourth quarter and $38.17bn for the year, in his City debut. It represented an increase on the $9.45bn registered in the third quarter.

Shell shareholders will continue to benefit from the earnings surge: the company has announced a new share buyback scheme, with $4bn to shareholders over the next three months.

Here’s the full story:

The money markets suggest there’s an 87% chance that the Bank of England votes to raise interest rate to 4%, from 3.5%, today.

A smaller rise, to 3.75%, is a 13% chance.

But looking further ahead, the markets are expecting UK interest rates to start falling by the end of this year. Rates are now seen peaking below 4.5% this summer. In the chaotic days after last September’s mini-budget, they were forecast to hit 6%.

Update on market expectations for UK @bankofengland interest rates.
Investors are now pricing in a peak of barely more than 4.25% by the middle of the year, and think rates will actually be falling by the end of the year…(!) pic.twitter.com/AawlJM4dS4

— Ed Conway (@EdConwaySky) January 25, 2023