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City braces for UK interest rate hike on Thursday
UK government bond yields have jumped this morning as the City braces for a sharp rise in interest rates on Thursday, and further hikes before the end of the year.
The money markets are indicating there is a 75% chance that the Bank of England increases Bank rate to 2.5% this week, up from 1.75% at present.
That would be the BoE’s biggest rate hike since 1989, when inflation was climbing rapidly, follwing six rises already this year:
Today, inflation is five times above its target, at 10.1%. That has led some traders to bet on an outsized rate hike by the Monetary Policy Committee meeting this week (delayed by a week due to the Queen’s death).
The markets are also predicting that rates could reach 3.75% by the end of the year. That implies we could see a second 75bp hike in December, as well as a 50bp rise at the Bank’s meeting in November.
This has pushed up the yield, or interest rate, on five-year UK gilts to 3.24% this morning.
That’s its highest level since late 2008, before the financial crisis caused a global recession, showing that investors are demanding a higher rate of return on UK debt.
The surge in inflation, and prime minister Liz Truss’s pledge of tax cuts to spur growth, have both piled pressures on the Bank of England to speed up its monetary tightening…..
…as have sharp interest rate rises by the European Central Bank and the US Federal Reserve (which could raise its benchmark rates by another 75bp tomorrow).
The one percentage point increase in Sweden’s interest rates this morning has confirmed that central bankers are prepared to hike borrowing costs dramatically, even if it slows growth and hits mortage holders and those relying on credit.
Martin Beck, chief economic advisor to the EY ITEM Club, says the UK government’s move to cap energy bills has shifted the backdrop to this week’s MPC meeting:
The cap means inflation is likely to come in well below current forecasts in the near term and could dampen inflation expectations.
“The EY ITEM Club now expects CPI inflation to peak below 11% in October. Had the cap not been introduced, inflation was likely headed for 14%-15% early next year. A much lower peak – which may dampen inflation expectations among the public – could also reassure the MPC.
On the other hand, lower-than-expected energy bills would support disposable incomes and spending, implying that inflation may be higher in the medium term because of the cap. So, the net effect on the committee’s view on inflation appears ambiguous.
Key events
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The TUC has tweeted about its legal challenge against the UK government’s push to allow employers to hire agency workers to replace striking staff:
BREAKING 🚨 | We’ve launched a legal challenge to protect the right to strike.
— Trades Union Congress (@The_TUC) September 20, 2022
The right to strike is a fundamental British liberty.
But the government is attacking it in broad daylight.
— Trades Union Congress (@The_TUC) September 20, 2022
Threatening this right tilts the balance of power too far towards employers.
It means workers can’t stand up for decent services and safety at work – or defend their jobs and pay.
— Trades Union Congress (@The_TUC) September 20, 2022
Ministers failed to consult with unions, as the law requires. And restricting the freedom to strike violates fundamental trade union rights.
That’s why unions, representing millions of workers in the UK, are coming together to challenge this change in the courts.
— Trades Union Congress (@The_TUC) September 20, 2022
Working people need stronger legal protections and more power in the workplace to defend their living standards – not less.
— Trades Union Congress (@The_TUC) September 20, 2022
The wider US stock market has also dropped in early trading.
The S&P 500 index has shed 45 points, or 1.1%, to 3,854 points.
The tech-focused Nasdaq, and the Dow Jones industrial average of 30 large US companies, are both also down over 1%.
Oil has dropped too, with Brent crude now down over 1%.
Shares in Ford have dropped 7% at the start of trading in New York, after the carmaker warned inflation and supply chain problems will cost it an extra $1bn this quarter.
Ford said last night that supply problems have resulted in parts shortages affecting roughly 40,000 to 45,000 vehicles, primarily high-margin trucks and SUVs that haven’t been able to reach dealers.
Britain’s railway could come to an “effective standstill” on October 1 with workers from Network Rail and 14 train operating companies planning strike action over pay, job security and working conditions, a union says.
The RMT trade union said the 24-hour strike action comes after it received no further offers from the industry to arrive at a negotiated settlement.
RMT announces more strikes, this time 24-hours on October 1
— Jim Pickard (@PickardJE) September 20, 2022
Workers across other industries including postal and bus workers are also planning strikes on Saturday, October 1, to coincide with the Conservative Party annual conference
RMT general secretary Mick Lynch said in a statement.
“Transport workers are joining a wave of strike action on October 1st, sending a clear message to the government and employers that working people will not accept continued attacks on pay and working conditions,”
“The Summer of Solidarity we have seen will continue into the Autumn and Winter if employers and the government continue to refuse workers reasonable demands.”
UK gilt yields are climbing to fresh multi-year highs, as government bonds are hit by inflationary pressures annd the prospect of further interest rate rises.
*UK Two-Year Gilt Yields Up 20 Bps At 3.31%, Highest Since Oct 2008
— *seven (@sevenloI) September 20, 2022
Inflation in Canada has cooled more quickly than expected, thanks to a drop in motor fuel prices.
Consumer price inflation slowed to 7% in the year to August, down from 7.6% in July, and lower than the 7.3% expected.
This was helped by a 9,6% drop in gas prices, month-on-month – the biggest monthly drop since the start of the pandemic in April 2020.
But grocery prices kept climbing, with the cost of food purchased from stores jumpiing by 10.8%, the fastest pace since August 1981.
Inflation Rates…
Australia: 6.1%
Norway: 6.5%
Canada: 7.0%
US: 8.3%
Denmark: 8.9%
Eurozone: 9.1%
Sweden: 9.8%
UK: 9.9%Central Bank Rates…
Australia: 2.35%
Norway: 1.75%
Canada: 3.25%
US: 2.375%
Denmark: 0.65%
Eurozone: 0.75%
Sweden: 1.75%
UK: 1.75%Still behind the curve.
— Charlie Bilello (@charliebilello) September 20, 2022
Economist Julian Jessop points out that German factory gate inflation is rocketing faster than in the UK (where manufacturers are also hiking prices sharply):
Another Bank of England interest rate hike this week will make taking out a new mortgage more expensive, as Ben Laidler of eToro explains:
“The Bank of England is highly likely to follow the lead of other global central banks when it meets on Thursday, by accelerating its hiking pace as it looks to get a grip on out of control inflation, currently at 9.9%. We expect a rise of 0.75%, a seventh consecutive hike, which will take the base rate up to 2.5%.
“A rate hike of this magnitude will be another hammer blow for the millions of mortgage holders who are either on variable rates or who are watching the clock as their fixed rate deal nears its end. To put this single rate rise into perspective, a 0.75% increase for a borrower with £250,000 of mortgage debt amounts to an extra £1,875 in annual interest payments.
Mortgage rates have now doubled in the last year and there is little doubt that these shockwaves will soon shake the housing market. The small silver lining is that long-suffering savers will see a further boost to savings rates, even if these still dramatically lag inflation.
Fears that Russia could move towards full mobilisation in the conflict against Ukraine could also be hitting stocks in Moscow today.
Russia’s parliament on Tuesday approved a bill to toughen punishments for a host of crimes such as desertion, damage to military property and insubordination if they are committed during military mobilisation or combat situations.
The bill, passed in its second and third readings on Tuesday by the lower house of parliament, the Duma, comes amid debate inside Russia about a possible mobilisation, a step which could significantly escalate the conflict in Ukraine.
Russia’s stock market has posted heavy losses, with the Moex index of leading stocks down over 5% so far today.
At one point the Moex was down 10%, before a partial rebound.
The slump came as Russian-installed officials in the Kherson region of Ukraine have said they have decided to hold a referendum on joining Russia.
Officials have also urged the Kremlin to give its permission as soon as possible, the separatist head of the region said on Tuesday.
That move could escalate Moscow’s conflict with the West, and comes after Ukraine conducted a successful counter-offensive in the north east of the country.
Our Ukraine war liveblog explains:
In a post on the Telegram messaging app, Volodymyr Saldo, the Russian-appointed head of Kherson, said he hoped Kherson would become “a part of Russia, a fully fledged subject of a united country”, Reuters reported.
Russian forces control around 95% of Ukraine’s Kherson territory in the south of the country. Saldo did not name a date for the proposed vote.
Reuters’ Andy Bruce has spotted that the pound is the weakest in two years against a basket of currencies:
Economists have warned that sterling may need to weaken further to address the UK’s balance of payments deficit (by making imports more expensive, and exports more competitive).
Strike News 4: Hundreds of workers at the Port of Liverpool have begun a strike in a dispute over pay.
Members of the Unite union have walked out for two weeks until 3 October, after rejecting a deal.
Peel Ports Group, which operates the port, said workers had rejected a “significant pay package” which included an 8.3% rise and a one-off payment of £750.
Unite said it was a real-terms pay cut because of the rate of inflation and Peel could afford a higher increase.
The union’s general secretary Sharon Graham said:
“Workers across the country are sick to death of being told to take a hit on their wages and living standards while employer after employer is guilty of rampant profiteering.”
Strike News 3: More than 60 workers at Quorn’s meat free paste production factory in Billingham, will strike on 30 September and 1, 2, 4, 5, 6, 7 and 8 October.
Workers have rejected a 4% pay offer plus a £1,000 bonus.
They voted to strike after the company refused to meet their demands of a nine per cent pay rise, which was the RPI inflation rate in April, when negotiations began.
Strike News 2: HGV drivers and shunters at Mullers’ Stonehouse factory in Gloucestershire are beginning a fresh round of strike action this week over imposed rota changes.
The Unite union says the walkout could disrupt deliveries of milk and other dairy products to M&S and Waitrose stores.
Nearly 70 staff at the plant have taken nine days of strike action since 25 August, over rota changes which Unite says are detrimental to their quality of life.
Further strikes are now planned for 22, 23, 24, 29 and 30 September and 1 October.
Unions launch legal challenge against UK government to protect right to strike
Strike News 1: A group of British trades unions are starting legal action against the UK government over its new law allowing employers to hire agency workers to replace striking staff.
The TUC and Unison are bringing separate cases following widespread anger over the change in the law, which was announced earlier in the summer following industrial action on the railways.
The TUC is taking action on behalf of 11 unions representing train drivers, prison officers, railway staff, civil servants, journalists, shop workers and others, representing millions of workers.
They arguing that the regulations are unlawful because the then secretary of state for business, Kwasi Kwarteng, failed to consult unions as required by the Employment Agencies Act 1973.
The TUC also says the regulations violate fundamental trade union rights protected by Article 11 of the European Convention on Human Rights.
The TUC warns the new law will worsen industrial disputes, undermine the fundamental right to strike and could endanger public safety if agency staff are required to fill safety critical roles but have not been fully trained.
TUC general secretary Frances O’Grady said:
“The right to strike is a fundamental British liberty but the Government is attacking it in broad daylight.
“Threatening this right tilts the balance of power too far towards employers. It means workers can’t stand up for decent services and safety at work or defend their jobs and pay.
“Ministers failed to consult with unions, as the law requires, and restricting the freedom to strike is a breach of international law. That’s why unions are coming together to challenge this change in the courts.
“Workers need stronger legal protections and more power in the workplace to defend their living standards – not less.”
UNISON general secretary Christina McAnea has warned the government’s changes are a risk to safety.
“The government appears hell-bent on stripping ordinary working people of their historic rights and seems prepared to do anything to achieve that.
“Employees striking for better wages during a cost-of-living crisis is not the problem. Ministers should be rolling up their sleeves and helping solve disputes, not risking everyone’s safety by allowing the use of inexperienced agency workers.
“Changing the law in such a hostile and unpleasant way makes it much harder for workers to stand up to dodgy employers. It also risks limiting the impact of any legal strike.”
Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, reckons Thursday’s Bank of England decision will be a close call – between a half-point and a three-quarter point hike.
“The inevitable response to high inflation and a still very tight labour market is continued Bank of England interest rate hikes. We think that the decision between a 50bp and 75bp rate hike will be a close call among BoE members at this Thursday’s meeting, delayed by a week due to the passing of Her Majesty the Queen, although most economists are erring towards the former.
“Traders will be paying very keen attention to the MPC’s communications after the decision, particularly comments on how high rates could go in 2023. The flash PMIs of business activity for September out on Friday will round up a very busy week for sterling.”
US government bonds are also under pressure, as the markets anticipate another hefty hike in America’s interest rates on Wednesday.
The yield on 10-year Treasuries, the benchmark US sovereign debt, has hit the highest in over a decade.
That has knocked Wall Street futures lower, as investors fret that the Fed could push the US economy into recession as it tries to push down inflation.
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