Introduction: Stagflation fears rise after grim Bank forecasts
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Stagflation fears are rippling through the City today after the Bank of England slashed its growth forecasts on Thursday, and lifted its inflation forecast.
As we covered yesterday, the Bank halved its forecast for GDP growth this year to just 0.75%, down from 1.5% expected three months ago.
In another blow to the government, the Bank predicted inflation would peak at 3.7% later this year, nearly twice its 2% target, as rising energy prices push up the cost of living again.
Despite this grim outlook, the Bank cut interest rates, arguing that a “continued, gradual easing of underlying inflationary pressures” is underway in the UK economy.
Weaker growth and rising inflation is a toxic combination for chancellor Rachel Reeves; it could be kryptonite to her hopes of sticking to the fiscal rules laid out in last years budget.
As our economics editor Heather Stewart explains
Economic output is expected to have contracted by 0.1% in the final three months of 2024 and expanded by just 0.1% in the current three-month period – narrowly skirting a recession, defined as two successive quarters of decline. The Bank suggests productivity, which Reeves badly wants to improve, has declined.
If the independent Office for Budget Responsibility (OBR) takes a similar view, it could make a sharp downgrade to its growth forecasts when these are published on 26 March, from the 1.9% it was predicting in October.
Whether that wipes out Reeves’s room for manoeuvre against her fiscal rules depends on how the OBR assesses the longer-term outlook. Market expectations of lower rates in the UK may bear down on the government’s cost of borrowing, helping to offset some of the impact on the public finances from weaker growth.
But the MPC’s gloomy prognosis sits in stark contrast to Reeves’s determinedly upbeat messaging on growth in recent week
BoE governor Andrew Bailey also cautioned that while he is very supportive of Reeves’s growth agenda, measures such as a new Heathrow runway or new reservoirs won’t move the growth dial in the short term.
Yesterday’s rate cut brings down Bank Rate to 4.5%, and the City money markets expect at least two more quarter-point cuts by the end of the year.
But if inflation pushes higher, those forecasts could come under pressure.
Van Luu, head of currency and fixed income solutions strategy at Russell Investments,
Making policy in a “stagflation” environment with high inflation and lackluster growth is a formidable challenge. Tax hikes and rises in administered prices will at least temporarily increase price pressures.
The balance between the inflationary impulse and a slackening jobs market will determine the pace of further rate cuts in 2025.
The agenda
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7am GMT: Halifax house price index for January
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7am GMT: German trade data for December
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1.30pm GMT: US non-farm payroll for January
Key events
Huw Pill is then asked whether the Bank could cut UK interest rates by 50 basis points (half a percentage point), as two policymakers voted for yesterday.
Pill doesn’t sound very keen, arguing that the Bank’s new policy of taking a “gradual and careful” approach suggests it won’t be rushing into more sizable moves.
He isn’t ruling anything out, though.
This could be a tough Pill for some to swallow
*BOE’S PILL: NOT IN SITUATION WHERE CAN DECLARE ‘JOB DONE’
*BOE’S PILL: NEED TO MAINTAIN SOME RESTRICTION IN POLICY
*BOE’S PILL: NEED TO BE GRADUAL AND CAREFUL IN EASING
— Michael Brown (@MrMBrown) February 7, 2025
BoE’s Huw Pill: can’t declare “job done” over inflation yet
The Bank of England’s chief economist, Huw Pill, has welcomed signs that pay growth is slowing, but warned that it’s too early to claim victory over inflation.
Speaking to the Bank’s agents on a video call today, Pill says that the Bank now expects average earnings to rise by 3.7% this year. A year ago, it forecast 5.3% – a prediction that proved accurate.
Pill (who got in hot water two years ago for saying Britons ‘need to accept’ they’re poorer) says this fall in pay growth shows that there is an ongoing, successful, process of disinflation underway.
That process of disinflation helped the Bank to cut interest rates yesterday.
Pill adds, though, that pay growth of 3.7% is higher than the Bank expected a few months ago – and cautions that the pace of disinflation may not be not quite as strong as that we had previously thought.
He warns:
That means that we’re not in a situation where we can declare job done.
Pill adds that the Bank still needs to maintain some restrictions to monetary policy to squeeze out remaining persistent domestic inflation pressures, to bring inflation down to the 2% target.
Truss-era mortgage borrowers to benefit from lower rates
Richard Partington
Mortgage borrowers were handed a boost by the Bank of England’s decision yesterday, but none more so than households who had been unlucky enough to remortgage in the period of sky-high borrowing costs around the time Liz Truss was prime minister.
The Bank says more than a quarter of mortgage accounts are expected to see monthly payments decrease between December 2024 and the fourth quarter of 2027. That’s equivalent to about 2.4 million mortgages which had been taken out at higher fixed rates than are currently available.
Figures from the data provider Moneyfacts show the average 2-year fixed residential mortgage rate today is 5.49%, down slightly from the 5.50% available yesterday as the Bank cut its key base rate from 4.75% to 4.5%.
However, that’s down from levels above 6% in late 2022 after the former prime minister’s ill-fated mini budget blew up the bond market.
Mortgage rates depend on financial market expectations for the Bank’s base rate – influenced by the outlook for economic growth and inflation – but also high street lenders appetite for risk and competition.
Millions of mortgage borrowers are still, though, facing a hike in their monthly repayments. The latest data in the Bank’s monetary policy report, published yesterday, shows about half of mortgage accounts – 4.4 million – are due to reprice onto higher rates between December 2024 and the fourth quarter of 2027.
The Bank of England expects the increase in employer national insurance contributions to push wage growth down, and also push up prices a little bit, explains the Bank’s director of monetary analysis, Fergal Shortall.
The Bank of England believes a range of “regulator prices”, including water bills, bus fares, and private school fees, will push up inflation this year, monetary analysis director Fergal Shortall.
The big increase, though, comes from higher energy bills later this year, the Bank forecasts.
Ofwat is allowing water bills in England and Wales to rise by 36% over the next five years, the national bus fares cap has gone up from £2 to £3, and VAT has been applied to private school fees since the start of the year.
The Bank of England is briefing its agents around the country about yesterday’s interest rate cut, and the state of the economy.
The Bank’s director of monetary analysis, Fergal Shortall, flags that inflation is expected to hit 3.7% by late summer – up from 2.5% in December.
He says:
Disinflation is continuing, broadly speaking, as expected, and that supported a further 25 basis points cut in interest rates yesterday, but we are likely to see some bumps in the road over the coming months.
Energy is the biggest factor behind that, Shortall says, but the Bank’s monetary policy committee does expect “a steady return to the 2% [inflation] target”.
Shortall adds that there is “weakness in the activity data at the moment”, suggesting that the economy has been pretty flat since around March last year.
Claims management companies face £250 fee
Kalyeena Makortoff
Claims management companies, which rose to fame during the payment protection insurance (PPI) scandal, will be hit with a £250 fee for filing complaints at the UK’s Financial Ombudsman Service.
The charge, which will come into force in April, will create an new barrier to CMCs that have been accused of flooding the system with complaints, particularly over the motor finance commission scandal. CMCs file compensation claims on behalf of consumers, often on a “no-win no fee” basis. The catch for consumers is that they usually shell out a 40%-plus cut of any payout.
The Financial Ombudsman Service (FOS) said that these “professional representatives” were behind around 103,000 of the 220,000 of the cases – around 47% – sent to the FOS between April and December last year.
The news comes a day after the FOS CEO Abby Thomas unexpectedly resigned. Sky News claims she had clashed with the FOS board on a number of issues, including the CMC charge, having argued for fees as low as £25.
The charges are one of a range of complaints that City bosses have raised about the FOS, which is now facing government scrutiny. Chancellor Rachel Reeves used her Mansion House speech in November to call for changes, saying “reform is needed to create a surer climate for investment.”
Commenting on the new charge, James Dipple-Johnstone, interim Chief Ombudsman at the FOS, said:
“We’ve seen more cases brought by professional representatives, but fewer of these cases leading to a better outcome for their clients. Currently there is little commercial incentive for representatives to ensure the complaints they bring are well-founded or have merit. As a not-for-profit service, we expend our finite resources handling thousands of withdrawn or abandoned cases, which can lead to longer wait times for other customers.
“The charges we are introducing from April will bring better balance to our fee model, helping us to resolve disputes quickly and ensuring a wider contribution towards our running costs.”
The FOS has also cut that £650 processing fee that it charges City firms who face a complaint lodged by a CMC to £475 – if it is rejected or withdrawn. But the change is unlikely to cause much celebration. Companies still have to pay a £650 fee in cases where the CMC complaint is upheld.
Furthermore, CMCs will essentially be given a rebate – getting £175 back if their claims are upheld, and will be able to lodge 10 free cases per year.
It will remain free for consumers to complain themselves. There will also be no charge if the complaints are lodged on their behalf by charities, families and friends who may be helping them.
*NOTE: this post has been updated to reflect that the £650 still applies to City firms if a CMC-lodged complaint is upheld.
Footfall figures released this morning show that consumers returned to the shops in January after a disappointing festive period for the retail sector.
Total UK footfall increased by 6.6% year on year in January, a significant jump from December when retailers saw 2.2% fewer shoppers than the previous Christmas, according to British Retail Consortium (BRC)-Sensormatic data.
High street footfall increased by 4.5%, while visits to retail parks and shopping centres were up 7.9% and 7.4% respectively.
Where does Bank Rate go from here onwards?
Economists are pondering where UK interest rates will head over this year, and beyond, as polcymakers try to fight deflation.
Professor Costas Milas, of the University of Liverpool’s management school, reckons
The Bank of England’s Monetary Policy Report is based on the assumption of market expectations of interest rates, namely that Bank Rate drops to 4.15% in 2026Q2. My feeling is that Bank Rate will drop lower than that.
I estimate a so-called “policy reaction function” where Bank Rate responds to forecasts of inflation one-year ahead, the output gap, and economic policy uncertainty (the latter, of course, also being influenced by Trump’s trade threats). Scenario 1 follows the Bank’s inflation forecasts, with inflation dropping to 2.3% in 2027Q1 (this is the “good inflation” scenario).
In Scenario2 (the “bad inflation” scenario), inflation gets stuck at 3.0% all the way between 2026Q1 and 2027Q1. In both cases, output and economic policy uncertainty developments outweigh, to some extent, the inflationary pressures and Bank Rate drops either to 3.5% (“good inflation” scenario) or to 3.75% (“bad inflation” scenario).
But some investment banks argue that the markets got carried away with yesterday’s interest rate vote, which showed two policymakers wanted a deeper – half-point – cut.
Bank of America say:
The 7-2 vote itself, taken in isolation, was more dovish than consensus expectations, leading the market to price increasing likelihood of cuts at non-Monetary Policy Report (MPR) MPC meetings in the future. However, the report itself told a completely different story, at least on our reading of it.
World food commodity prices fall
World food commodity prices have fallen, in welcome news for global consumers, due to lower sugar, vegetable oil and meat prices.
The UN’s FAO Food Price Index (FFPI) dropped in January, by 2.1 points to 124.9 points, showing that a basket of food commodities became cheaper.
The overall index was 7.3 points, or 6.2%, higher than a year ago, but also 35.3 points (22%) below the peak reached in March 2022 after Russia invaded Ukraine.
The report shows that vegetable prices fell by 5.6% in the month, mainly driven by lower world palm and rapeseed oil prices.
Meat prices fell 1.4%, due to lower international ovine, pig and poultry meat prices.
Sugar fell 6.8%, due to generally favourable weather in Brazil lifting supply prospects.
But dairy rose 2.4%, led by a jump in cheese prices.
Two of the world’s largest aircraft lessors have settled lawsuits in the Irish courts against insurers over jets stranded in Russia following Western sanctions in 2022.
Avolon and BOC Aviation said they had reached commercial resolutions with their insurers in the Irish case and discontinued their proceedings, declining to disclose details of the settlement for commercial reasons.
Singapore-based BOC said it would continue to pursue a separate claim against insurers in London’s High Court, where another ‘mega-trial’ began last year.
Dublin-based Avolon recorded an impairment of $304 million in 2022 to cover the full financial impact of having 10 of its 1,000-plus fleet stuck in Russia. BOC took a write-down of $804 million in the same year relating to 17 aircraft.
A day after hitting a record high, the UK stock market is in more subdued mood today as investors mull over the stagflation risks.
The blue-chip FTSE 100 share index has dipped by 11 points, down 0.13% at 8716 points.
Financial services group Legal & General are the top riser, up 7%, after agreeing a deal to sell its US protection business to Japanese life insurer Meiji Yasuda for $2.3bn in cash.
Under the arrangement, Meiji Yasuda will take a 5% stake in L&G, and the two firms will form a strategic partnership.
Reuters: Shein poised to slash valuation to $50bn in London IPO
Online fast-fashion retailer Shein is set to cut its valuation in a potential London listing to around $50bn, Reuters is reporting,citing three people with knowledge of the matter.
That’s nearly a quarter less than the company’s 2023 fundraising value, reflecting various headwints hitting Shein.
Reuters explains:
The company’s business prospects have come under a cloud in recent days after the Trump administration said it would close the “de minimis” duty exemption in the United States, ending an import rule that had helped Shein keep prices low.
The measure’s removal could hurt Shein’s profitability and push up product prices in the U.S., its biggest market, analysts and industry experts have said.
Shein is also facing challenges in Europe, where parcels sent from China by online retailers will face strict new customs controls as part of a crackdown by the European Commission on “dangerous products” flooding the EU market.
