Pound hits $1.27 as Bank of England pushes back against rate cut predictions – business live | Business

Time to recap, at the end of a busy couple of days for central bankers.

The pound has climbed to its highest level since late-August, after the Bank of England tried to play down hopes that interest rate cuts are coming soon.

Sterling has hit $1.276 against the US dollar, up over one cent today and on track for its best day in a month.

It rallied after the Bank of England left UK interest rates on hold at 5.25%, a 15-year high, as expected. But the decision was a 6-3 split vote – with three policymakers voting to raise rates to 5.5%.

Andrew Bailey, the Bank’s governor, insisted it was too early to consider lowering borrowing costs despite the strain on an economy that contracted in October.

Bailey sais:

“So my view at the moment is, it’s really too early to start speculating about cutting interest rates. We’ve got to see more progress.”

But despite such hawkishness, the money markets are still forecasting UK interest rates will fall by at least one percentage point next year.

That’s despite the BoE warning that the UK is facing a tougher job to crush persistently high inflation than other advanced economics, such as the US and the eurozone.

Andy Burgess, fixed income investment specialist at Insight Investment, says:

“Although the UK economy does face more embedded inflationary pressures than the US, we find it hard to believe that the Bank of England will follow through on its hawkish tone with the market pricing in 1.5% of rate cuts in the US and is at odds with the 4 rate cuts priced into the UK by the end of 2024.

What is more believable is the idea that UK rates are likely to decline, albeit at a slower pace than elsewhere as the Bank works to increase its credibility with investors in 2024. Gilt yields gave back some of the gains made following the Fed meeting but are likely to continue to be heavily influenced by the global rates environment.”

Here’s the full story:

The dollar also weakened against other currencies, after the US Federal Reserve signalled last night that it is moving closer to cutting rates.

Policymakers in the US expect to cut interest rates three times in 2024 – the market, though, was pricing in six quarter-point cuts.

Economists said the Bank of England’s monetary policy committee had maintained a hawkish message today, that sets it markedly apart from the Fed.

Philip Shaw of Investec says:

One [MPC] member, presumably Swati Dhingra, warned that the risks of overtightening had ‘continued to build’. This sentiment though is very much a minority view on the committee.

Indeed BoE Governor Andrew Bailey separately added that ‘there is still some way to go’ in the fight to bring inflation under control.

Overall the messaging continues to indicate that the Bank of England remains a central bank with a bias towards tightening, at least for now.

This may mean there is little relief for mortgage holders in the short term, given borrowing costs have already dropped from their summer highs:

The European Central Bank followed the BoE’s lead by leaving interest rates on hold, with president Christine Lagarde saying the ECB should “absolutely not” lower its guard against inflationary pressures.

In other news…

The cost of living squeeze is hitting Christmas; a traditional festive meal could cost 13% more than last year, with everything from turkey to sprouts rising sharply in price, reflecting high energy bills and poor growing conditions for vegetables.

The boss of Currys has accused the government of failing to understand or care about UK retailers by pushing through a “big hike” in the UK’s minimum wage.

Campaigners are calling for tighter rules to ensure that the imported “used” cooking oil that airlines hope will power cleaner flights is not in fact virgin palm oil.

Thames Water has appointed a former British Gas executive as its new boss with a pay package of up to £2.3m a year and a brief to turn around the heavily indebted utility.

A plan to test the use of hydrogen to heat homes in a village in the north-east of England has been abandoned after months of strong opposition from concerned residents.

New direct high-speed train routes from London to Cologne, Frankfurt, Geneva and Zurich could be up and running within five years, according to the Eurotunnel owner, Getlink, after work to double the capacity of UK rail links to Europe.

The UK’s blue-chip share index has finished the day at its highest closing level since mid-October.

The FTSE 100 has racked up a two-month closing high, finishing 100.5 points higher at 7,648 points, a gain of 1.3%.

That’s its best day since the start of November, with traders cheering the prospect of several cuts in US interest rates next year.

The FTSE 100 had been up 2% at one stage, on track for its best day of 2023, before the Bank of England dampened hopes that it was eying interest rate cuts.

The stronger pound has weighed on the share price of exporters.

Fawad Razaqzada, market analyst at City Index and FOREX.com, says:

Investors were already in a cheerful mood on Wall Street, and they rejoiced the dovish signals the Fed provided them on Wednesday, with the FOMC’s dot plots pointing to three rate cuts in 2024, and effectively ruling out further rate increases.

That caused global stocks to extend their recent gains, while causing the dollar to slump. The fact that the FTSE jumped at the open on Thursday morning, while most GBP crosses fell, meant that traders were expecting to see a more dovish Bank of England today.

But that’s not precisely what happened, as the BoE was a bit more hawkish. This caused the FTSE to come off its earlier highs.

In the financial markets, the pound has now climbed to its highest level since August.

Sterling has hit $1.275 against the US dollar, extending its earlier gains.

This follows the news that the Bank of England has left interest rates on hold, but that three of its nine policymakers voted to raise borrowing costs.

Traders are noting Andrew Bailey’s comments today that it is too early to consider cutting UK interest rates.

HOWEVER, the money markets are pricing in at least four cuts to UK interest rates in 2024.

The latest pricing shows that Bank rate is forecast to fall to 4.1%, down from 5.25% – implying at least four quarter-point rate cuts. Before the BoE’s announcement at noon, the City forecast five quarter-point cuts.

Katharine Neiss, chief European economist at PGIM Fixed Income, says:

“The Bank of England’s Monetary Policy Committee continues to walk along the summit of ‘Table Mountain’, with the Bank Rate unchanged at 5.25%. The hawkish tone continues, with three MPC members voting for a further rate hike, and no MPC member voting for a cut.

The policy statement acknowledges that the inflation challenge is greater in the UK than in either the US or Euro area. Moreover, risks to inflation remain to the upside, with upside risks from energy prices due to the geopolitical landscape a particular worry. Domestically, risks to wage growth have yet to recede, and the recent declines in headline inflation reflect subcomponents that the Bank of England judges to be poor indicators of underlying inflation.

That said, the statement does acknowledge inflation has come down, that monetary policy is ‘restrictive’ with slack in the economy opening up. Perhaps most notably, for one voting member, ‘the risks of overtightening policy had continued to build.’ That suggests that while the Bank of England may not yet be ready to pivot a la the Fed, it may be willing to do so sooner rather than later.”

Analysis: How long can Andrew Bailey hold line on interest rates?

Phillip Inman

The UK’s inflation problem is unique and cannot be likened to the US or the eurozone, the Bank of England argues in its latest health check of the UK economy today, my colleague Phillip Inman reports from the Bank.

In a message that signalled interest rates could increase again before they start falling, the Bank said there are considerable price pressures in the UK that are absent in most of the its main competitors.

And for that reason, while interest rates might fall next year in the US and the eurozone, the first rate cute in the UK is a long way down the track.

In his letter to Jeremy Hunt, the governor of the Bank, Andrew Bailey used tough language to explain why monetary policy will need to be “restrictive for an extended period of time”.

He described the main pressure on prices being generated by high wage demands, mostly in the services sector.

He said the UK inflation rate, far from tumbling, may increase in January, such is the influence of sustained wage increases in the services sector.

The central bank acknowledged that recent data has shown the labour market weakening and wages growth slowing. However, its interpretation of this trend is that far from showing signs of a dramatic decline, wages remain sticky and need to fall much further before interest rate cuts can be considered.

This outlook contrasts with the view of investors, who are betting Bailey and his colleagues will soon buckle to demands for lower rates.

Financial markets took their lead this morning from comments by Federal Reserve chair Jerome Powell that the course of interest rate policy was about to pivot away from increases to a series of cuts.

Stock markets soared after new forecasts from Federal Reserve officials pointed to 0.75 percentage points of cuts next year.

Bailey argues that zero growth in the UK next year and something close to zero in 2025 will be a sign of too much resilience. Interest rates will need to remain high.

In this view, the Bank almost stands alone. Telling the world it will ignore the global trend for reducing borrowing costs transforms what until now has been a gap between the Bank’s rhetoric and the financial markets into a chasm.

There will be analysts who say the Bank has lost control of the narrative before and looks like doing so again.

Right now, the financial markets are unconvinced by the Bank’s stance that a weakening economy is no reason to cut interest rates.

When the Fed has signalled it will be cutting soon in response to low prices growth and tumbling inflation in the eurozone will likely persuade the European Central Bank to do the same next year, how can Bailey hold out?

Back in London, the Bank of England have released a video in which governor Andrew Bailey explains why rates were left on hold at 5.25% today.

Bailey points out that the Bank has raised interest rates five times this year, so it chose to leave borrowing unchanged “because previous increases in interest rates are working and inflation is moving in the right direction”.

He explains:

That’s supported by the conversations we have with businesses around the country about the pressures they face on their costs, and their pricing decisions.

But there is still more to do, Bailey insists, saying:

We need to get inflation all the way back to 2%, and we are likely to need to keep interest rates higher for a while longer to do that.

We’ve come a long way in the last 12 months, and will continue to do what it takes to get inflation all the way down to the 2% target.