FTSE 100 Live: Bank of England hikes interest rates to 1.75%, warns of recession

An interest rate hike of 0.5% is confirmed as the Bank of England takes its biggest step yet in the fight against inflation.

The City expected rates to reach 1.75% in what was the biggest single increase in 27 years and the first of its size by the Bank’s Monetary Policy Committee since it was set up in 1997. The BoE also predicted a UK recession starting late this year and lasting for five quarters.

In corporate updates, retailer Next has increased its full-year profits guidance by £10 million to £860 million. It reported a surge in formalwear sales, driven by pent-up demand as social events return after the pandemic.

FTSE 100 Live Thursday

• Bank of England hikes rates

• Bank of England expects UK recession in the fourth quarter of this year

• Analysts react to Bank of England recession predictions

• Pound weakens after Bank of England predicts recession

• Next raises profits guidance

London stock markets hold their nerve after BoE hikes rates and forecasts UK recession

15:34 , Michael Hunter

The City was expecting the Bank of England to raise rates by 0.50% to 1.75% and while policymakers’ forecasts for a UK recession starting this year and lasting five quarters was strikingly bleak, the stock market has held its nerve.

London’s FTSE 100, home to a range of multi-national companies, was steady at 7448.0 in afternoon trade. The FTSE 250 rose by 132 points to 20150.67, helped by mid-cap mining stocks.

“For investors in UK equities, the fortunes of the UK economy are less important than its sectoral composition,” said David Goebel, associate director of investment strategy at wealth manager Evelyn Partners.

“That’s because around two-thirds of its earnings are derived from overseas, while increasing rates tend to favour the value orientated sectors which the UK market has relatively high exposure to.”

Shares in Rolls-Royce made the biggest single fall on the FTSE 100 after it said it did not expect the number of hours flown by its engines to return to pre-pandemic levels until 2024. The engineer’s revenue tracks the amount of time its engines are in the air.

Wall Street stocks steady in cautious trade as attention turns to jobs data

14:47 , Michael Hunter

New York stocks were steady ahead of a run of employment data over the next couple of trading days that will offer some insight into the performance of the US economy and how much room it leaves the Federal Reserve in its fight against inflation.

The S&P 500 held firm at 4,156.0 in early Wall Street trade, where investors were waiting for weekly jobless claims data due later today and then Friday’s non-farm payrolls report for July, one of the most closely-watched pieces of economic data on traders’ calendars and at the Federal Reserve.

The battle global central banks are fighting with soaring inflation at a time of economic misery was thrown into sharp focus by the Bank of England, which predicted a five-quarter UK recession starting late in 2022 as introduced a double-sized hike of 0.50% taking rates to 1.75%.

Pound takes a hit after Bank of England forecasts five quarters of recession starting in late 2022

13:45 , Michael Hunter

The pound is taking a hit from the Bank of England’s bleak outlook for the UK economy -- which now includes a recession starting late in 2022 and lasting five quarters -- which looks to be outweighing the appeal to currency traders of rising interest rates.

Sterling was down 0.5% against the dollar at $1.2083, and it weakened by 0.7% against the euro, with the cost of a unit of the shared currency reaching £0.8428. That came even after a double-strength rate rise of 0.50% took UK interest rates up to 1.75%.

“The increase shows the Bank of England catching up with larger interest rate moves from other central banks, particularly the Federal Reserve,” said David Goebel, associate director of investment strategy at wealth manager Evelyn Partners.

“Although the BoE had the first mover advantage, beginning its hiking cycle in December last year, its reliance on smaller 0.25% moves have left it behind the Fed who have delivered back-to-back 0.75% increases at their last two meetings. With continued expectations for interest rate increases from most central banks, it is difficult to see a markedly stronger pound in the near term.”

James Smith, developed markets economist at ING, said: “The fact that the Bank is stepping up the pace of rate hikes while also forecasting a meaningful recession shows just how worried it is that worker shortages and supply issues could keep inflation elevated even as the economy weakens.

“It’s the supply side of the economy – much more so than what’s happening with demand – that will heavily determine when and after how many more hikes the BoE will stop tightening.”

Analysts were also drawing attention to the UK’s political backdrop, as Rishi Sunak and Liz Truss compete to become the next prime minister, with Boris Johnson reduced to the status of an interim leader while the Conservative party chooses his successor, expected to be appointed next month.

“Naturally, the BoE strayed away from commenting on the current political backdrop, but the stage is set for an important Emergency Budget in September,” said Stephen Gallo, European head of FX strategy at the Bank of Montreal.

Goebel at Evelyn Partners said: “Liz Truss, who bookmakers currently suggest has over a 90% chance of becoming the next prime minister, is vowing to cut taxes, which could stoke inflation further. She has also suggested she would look at changing the mandate of the BoE to make it more effective in fighting future inflation, but without detail on how as yet.”

Thursday’s decline for the pound against the dollar took it’s fall over the year to around 13%.

Highlights: Andrew Bailey gives press conference after Bank of England recession forecasts

13:13 , Simon Hunt

Governor of the Bank of England, Andrew Bailey, has been giving a press conference after the Bank hiked interest rates and warned of a five quarter-long recession beginning in October.

He told reporters: “If we don’t bring inflation back to target ... it’s going to get worse, and it will get worse precisely, I’m afraid, for those who are least well off in society.”

“While I have a huge sympathy and huge understanding for those who are struggling most with this, and I know that they will feel well, why have you raised interest rates today? Doesn’t that make it worse, from that perspective, in terms of consumption? I’m afraid it doesn’t, because, I’m afraid the alternative is even worse, in terms of persistent inflation.”

He added: “We are facing, and have for some time been facing, these ever increasing trade-off inducing shocks .... they are intrinsically shocks, which in the near term push up inflation but also weaken growth.”

On meeting the Bank’s inflation targets, Bailey said: “Returning inflation to the 2% target remains our absolute priority. There are no ifs and buts about that.”

“All options are on the table for our September meeting and beyond that.”

Bank of England expects UK recession in the fourth quarter of this year

13:01 , Michael Hunter

Bank of England policymakers sounded bleak in their latest assessment of the economy, issued alongside news of a 0.50% interest rate rise which took the base rate up to 1.75% as part of their fight against inflation.

The Monetary Policy Committee assessed forecasts that the UK will enter a recession in the fourth quarter of 2022 as the country grapples with soaring energy prices, lifting costs for industry and constraining the spending power of consumers.

It also looked at projections for a “sharp fall” in real household post-tax incomes, in 2022 and 2023 and for consumption growth to “turn negative”.

The BoE’s inflation forecast was lifted to 13%, up from 9.4% at the time of its last Inflation Report and the level just over 11% last discussed on the MPC.

“That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs,” the BoE said. “As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.”

Nonetheless, it said inflationary would dissipate over time, while job losses could increase next year.

“Global commodity prices are assumed to rise no further, and tradable goods price inflation is expected to fall back, the first signs of which may already be evident. Although the labour market may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023,” it said.

Analysts react to Bank of England recession predictions

12:53 , Simon Hunt

Analysts in the City have reacted to the Bank of England’s interest rate rise and warning of a five-quarter long recession set to begin in October.

Adam Harris, Partner at accouting firm Mazars, says: “A 0.5% jump in the base rate is going to mean an unpleasant shock for a lot of businesses. Even the relatively mild rises we have seen in interest rates so far have tipped some businesses into insolvency. Today’s rise will likely trigger more closures.”

“With the base rate forecast by many to reach 3% at some point in the next two years, we are going to see a lot of businesses under financial strain. There are still a large number of ‘zombie’ businesses that have only survived the past decade because of how cheap debt has been. As their repayments become unsustainable, more of them will fail.”

Shane O’Neill, Head of Interest Rates at Validus Risk Management, said: Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50bps hike and we have seen the pound fall more than 0.5% against the dollar and the euro immediately following the release.

“The dreary predictions from the MPC represent ongoing pain for the consumer and focus will quickly turn to politicians to act – with Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade.”

Roger Clarke, CEO of property exchange business IPSX, said: “This is the end of the era of cheap credit. The BoE raising rates is unwelcome news for borrowers and investors.

“Higher rates mean higher financing costs for investors and weaker consumer sentiment. Certain subsectors are more vulnerable than others as a result of the cost of living crisis, particularly retail, with lower spending likely to dampen performance and capital values.”

FTSE 100 takes 0.50% UK interest rate in its stride, pound slips

12:42 , Michael Hunter

The City was expecting the Bank of England’s double-strength rate rise and after it was confirmed, London’s equity markets were stronger.

There was a modest gain of 24 points for the FTSE 100, taking it to 7468.91, up 0.3%. The more UK-focused FTSE 250 made a stronger gain, rising 128 points to 20147.98, up 0.8%.

The pound was modestly lower on the day against the dollar, at $1.2116, down 0.2%.

“We’ve argued that the Bank is probably nearing the end of its tightening cycle. But even if that’s the prevailing view on the committee, we doubt they will say so this week,” said analysis from the Dutch Bank ING in the run-up to the rate call.

“Partly that’s just because everything is so uncertain right now. But also because the hawks in particular won’t want to see UK-US rate differentials widen materially at this stage, amid concerns about adding to recent sterling weakness.”

The 0.50% rate hike was the largest in almost 30 years and double the BoE’s usual step of 0.25%, but it was also widely expected.

Bank of England lifts UK interest rates to 1.75% in 0.50% rise, ups inflation forecast to 13%

12:08 , Michael Hunter

The Bank of England has lifted UK interest rates by 0.50% to 1.75% , as widely expected by City forecasters, as it steps up its efforts to tame inflation.

It also increased its forecast for inflation to peak at 13%, a significant revision from the levels seen in its last inflation reports and the 11% level policy makers last anticipated the Consumer Price Index (CPI) to reach before edging back.

“CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead,” the BoE said.

There was just one vote against the move, which was double the BoE’s usual increases of 0.25%, on the nine-member Monetary Policy Committee (MPC). One member voted for a rise of 0.25%.

The BoE said monetary policy “is not on a pre-set path”, and said the “scale, pace and timing” of any further changes to rates would come with the MPC “particularly alert to indications of more persistent inflationary pressures” pledging it will “act forcefully in response” if necessary.

It is the sixth consecutive hike since December and the biggest increase in the cost of borrowing for 27 years. It will mean an immediate increase in mortgage bills for millions of home owners on tracker or variable mortgages that move in line with the Bank of England rate.

Go-Ahead takeover proceeds after increased £670m offer

11:21 , Simon Hunt

London bus and commuter train operator Go-Ahead Group has been bought for £670 million by Australia’s Kinetic Holding and Spanish operator Globalvia Inversiones after the company agreed to an increased takeover offer.

The Newcastle-based company runs nearly a quarter of London’s buses and Govia Thameslink Railway consisting of Great Northern, Thameslink, Gatwick Express and the Southern network.

It originally agreed in June to be bought by the consortium for £647.7m but another Australian transit business, Kelsian, announced that it would not be making a rival approach, citing “volatile and external events” for the decision.

Under the terms of the increased offer that includes a special dividend of 100 pence, Go-Ahead shareholders will receive 1,550 pence for each share. The previous approach had a special dividend of 50 pence per share.

Michael Sewards, co-CEO of Kinetic, and Javier Pérez Fortea, boss of Globalvia, said: “This transaction will create a leading global, multimodal, mass transit platform. Given our track record and experience we will provide long-term capital and expertise to support the acceleration of Go-Ahead’s strategy and transition to net zero.”

Return of flying lifts revenue at Rolls-Royce

11:00 , Simon Hunt

Rolls-Royce today said it expects the amount of flying time for its engines to return to pre-pandemic levels in 2024 as revenues continue to recover but warned of problems recruiting engineers in the UK’s tight labour market.

The company is paid by customers based on the number of hours its world-famous engines are used so its revenue streams took a massive hit when airlines were grounded during Covid-19 travel restrictions. Underlying revenue in the first half of the year was £5.3 billion, up 4%, helped by an increase in the amount of flying time as air travel returned.

“Engine flying hours are expected to maintain the current trajectory and return to pre-pandemic levels in 2024 as global travel restrictions are lifted,” it said as it reported an underlying loss of £188 million for the period. The Derby-based company also said on recruitment: “We have faced some challenges in hiring, particularly for experienced engineers.”

“We are actively managing the impacts of a number of challenges, including rising inflation and supply chain disruption, with a sharper focus on pricing, productivity and costs,” said CEO Warren East, who has announced his departure.

Serco guidance lifts shares, Ocado up 5%

10:24 , Graeme Evans

Serco’s recent share price resurgence continued today as the outsourcer produced another profits upgrade.

Serco, whose public sector work includes immigration services and London cycle hire, reported a 6% rise in half-year underlying profits to £130 million despite a drag on revenues from the ending of contracts linked to Covid. It also nudged up its full-year guidance, on top of a big increase in May.

Shares have risen by a third this year and added a further 2.4p to 187.4p today as chief executive Rupert Soames said the order book had grown another £500 million to £14.6 billion.

Serco’s strong performance came during another robust session for the FTSE 250 index, which climbed 95.53 points to 20,114.37 after a helping hand from retail stocks including Marks & Spencer and Pets at Home.

Medical products business ConvaTec posted the biggest increase in the FTSE 250, with its shares up 7% or 16.8p to 247p after the company cheered investors by announcing an unchanged dividend and also sticking by guidance for the full year.

The performance of the FTSE 100 was more subdued, partly due to stocks including BT, Lloyds and Unilever trading without the right to the latest dividend.

The FTSE 100 slipped 19.78 points to 7425.90, with Hikma Pharmaceuticals down 9% or 161.5p to 1600.5p after it lowered full-year guidance due to the impact of “persistent challenges” in the US generics market.

The recent revival for Ocado shares continued as the grocery technology business added 6% or 55.4p to 967.6p, while Smith & Nephew rose 25p to 1075p following the ConvaTec results. Investors also returned to Admiral shares as the car insurer rallied 49p to 1977p.

Retail cheer lifts M&S shares 2%, Rolls-Royce down 5%

08:48 , Graeme Evans

Marks & Spencer and other shares in the retail sector are higher on the back of today’s encouraging trading update by Next.

The latest signs of high street spending resilience helped FTSE 100-listed JD Sports Fashion and B&M European Value Retail to improve 2% while Next rose 152p to 6898p.

The FTSE 100 edged up 4.61 points to 7450.29, but there was another setback for Rolls-Royce investors as shares retreated 5% or 4.35p to 86.44p in the wake of interim results.

In the FTSE 250, M&S surged 2% or 3.25p to 140.55p and Pets at Home lifted 10.2p to 344.6p. Other second-tier stocks on the front foot included outsourcing firm Serco after its half-year results sent shares 3% or 5.9p higher to 190.9p.

The FTSE 250 index was 113.65 points higher at 20,132.49.

Next shares rally on raised guidance

08:11 , Graeme Evans

Next continues to defy tough retail conditions, reporting second quarter full-price sales growth of 5% for a £50 million upgrade on previous guidance.

It said there had been a sharp reversal of lockdown trends, with a recovery for store sales and online growth back to the long term trajectory.

The chain said: “Many product trends have also returned to pre-pandemic norms. Lockdown winners such as home and sportswear retreated, while formalwear returned to favour.”

Next increased its full-year profits guidance by £10 million to £860 million, an increase of 4.5% versus last year.

Shares rose 130p to 6876p today.

US markets rally, Brent crude at $96

07:49 , Graeme Evans

Wall Street posted a strong session last night after corporate earnings and a better-than-expected update from the US services sector allayed recession fears.

Tech stocks led the rally as the Nasdaq surged 2.6%, ahead of 1.6% for the S&P 500 and 1.3% advance for the Dow Jones Industrial Average.

Brent crude, meanwhile, traded at $96 a barrel today after one of the smallest production increases in OPEC history saw the cartel agree to add 100,000 a barrels a day in September.

The price fell sharply yesterday as traders focused on figures showing higher US crude inventories and signs that Americans are driving less than they did in the summer of 2020.

Attention now turns to the Bank of England, where policymakers could raise interest rates by 0.5% for the first time since the Monetary Policy Committee was set up in 1997.

The Bank has hiked by 0.25% at every meeting since December, but with little sign that any of these increases have done much to slow inflation. The consumer prices index hit 9.4% in June and is poised to go much higher as energy prices rise.

Michael Hewson, chief market analyst at CMC Markets, said: “The Bank is understandably concerned about the effect that any rate rise could have on the UK economy, and it is undoubtedly slowing.

“However there is no easy option here, given they are already well behind the curve.”

CMC expects the FTSE 100 index to open unchanged at 7445.