Published: 12 October 2022
By Suzanne Evans, Director, Political Insight
Having intervened to buy long-dated British government debt to prevent pension funds from collapse, the Governor of the Bank of England (BoE) Andrew Bailey confirmed yesterday that the Bank was sticking to its plan to end support on Friday, having made its fifth attempt in just over two weeks to try and restore order in the bond markets. Speaking at the Institute of International Finance in Washington yesterday, he warned pension funds that they have three days to “rebalance their positions,” saying: “We have announced that we will be out by the end of this week. We think the rebalancing must be done…and my message to the funds involved and all the firms involved managing those funds: You've got three days left now. You've got to get this done." The Pensions and Lifetime Savings Association is calling for the BoE to consider continuing its emergency bond-buying programme to 31st Oct – when Chancellor Kwasi Kwarteng will present the Office for Budget Responsibility’s spending plans - "and possibly beyond,” but Bailey insists that the programme was part of the BoE's financial stability operations, not a monetary policy tool, and had to be temporary. Nevertheless, a few hours later the Financial Times reported that the Bank had signalled privately to lenders that it was prepared to extend the emergency programme if market conditions necessitated it, citing three sources.
Reuters says pension schemes are taking the BoE Governor at his word and scrambling to meet a collective cash call estimated to be at least £320bn. They have spent the past two weeks trying to raise cash by selling off UK government bonds. It is not known how much funds have already been raised in cash, or which funds have met their targets, the news agency says.
Business minister Jacob Rees-Mogg said yesterday that he had full confidence in Andrew Bailey, when asked by Sky News. "Yes of course I've got confidence in the governor of the Bank of England,” he said. "It is so important that we have an independent Bank of England with a respected governor. Andrew Bailey is a respected governor, and the Bank of England's independence is operating as it should. He must make the decisions in relation to market support." Rees-Mogg also said he did not believe there was a systemic problem with pension funds.
Chancellor Kwasi Kwarteng faced a stormy session in parliament yesterday, with Shadow Treasury minister Pat McFadden telling the House of Commons: “This morning, the Bank of England made a further intervention in the markets, warning of and I quote, a ‘material risk to UK financial stability’,” and saying the risk came “directly from the chancellor’s mini-Budget”. Kwarteng insisted his financial plan is a “very, very strong package for business”, and refused to apologise to MPs for the chaos in financial markets it triggered. “And I’d be very pleased to see the Lib Dem growth plan,” he said, in response to further probing, adding: “The anti-growth coalition carps from the sidelines and has nothing to say about growth”. Treasury minister Andrew Griffith also highlighted that interest rates were rising “in every major western economy”, saying: “Perhaps the opposition front benches when they are finished with their British exceptionalism will actually lift their eyes and notice that?”
The FTSE is continuing its downward fall for the sixth straight session. The pound is also slightly down on the US dollar again, at $1.1926.
The economy shrank by 0.3% in August, according to official data from the Office for National Statistics (ONS). GDP growth in July was also revised down to 0.1% from a previous estimate of 0.2% and the economy was now believed to be back at its size just before the coronavirus pandemic struck, having previously been estimated at 1.1% above it, the ONS said. "The economy shrank in August with both production and services falling back, and with a small downward revision to July's growth the economy contracted in the last three months as a whole," ONS Chief Economist Grant Fitzner said. Fitzner highlighted a "notable decrease" in the manufacturing sector and a greater level than usual of maintenance in the North Sea oil and gas sector which slowed output. "Many other consumer-facing services struggled, with retail, hairdressers and hotels all faring relatively poorly," added.
The International Monetary Fund (IMF) said yesterday that high inflation will persist longer in the UK than in similar economies, because the tax cuts in the Chancellor’s mini-budget twould "complicate the fight" against soaring prices. The IMF is now predicting inflation in Britain will be the highest in the G7 at the end of 2023. However, the IMF also said that its forecast was prepared before the government unveiled its mini-budget on 23rd September, and that it would have lifted its estimate for the 2023 growth rate “somewhat” if it had known about it earlier, because the tax cuts announced would boost growth in the short-term. The forecast as it stands is for the UK to grow at a rate of 3.6% in 2022, a 0.4% upgrade from the IMF’s previous forecast in July, and down from 7.4% in 2021. Growth is then expected to decline to 0.3% in 2023, with the IMF downgrading its forecast by 0.2% from a previous 0.5% estimate.
UK grocery prices have hit a fresh record high, rising at their fastest pace in 14 years, according to Kantar. Grocery price inflation hit 13.9% in the 12 weeks to 2 October, with milk, margarine and dog food among the products rising the fastest. This compares to a 12.4% rise in the 12 weeks to 4 September, and is the sharpest increase seen since the data analytics group began tracking prices during the 2008 financial crash. British households are now set to pay £643 more on their grocery bills this year, bringing it to an annual total of £5,265.
The Government has put before parliament plans for a temporary limit on how much revenue low-carbon electricity generators can make, saying it had the potential to save customer billions of pounds. The "Cost-Plus-Revenue Limit" forms part of the broader energy support package announced by Prime Minister Liz Truss last month, a package which included a cap on the price of average household energy bills. It is now outlined in the new Energy Prices Bill, which gives the government emergency powers to carry out the proposals. The measures will apply to generators who currently sell electricity at the same prices as any other supplier, but who do not have to buy gas at high prices to make that electricity. “Low-carbon electricity generators are therefore benefiting from abnormally high prices, while consumers are having to pay significantly more for energy generated from renewables and nuclear, even though they often cost less to produce," the Department for Business, Energy and Industrial Strategy (BEIS) said. Dan McGrail, CEO of trade association RenewableUK, issued a statement in response saying: "A price cap acting as a 100% windfall tax on renewables' revenue above a certain level, while excess oil and gas profits are taxed at 25%, risks skewing investment towards the fossil fuels that have caused this energy crisis”. "As such, to limit the negative impacts, it is essential that a cap is set at a level that doesn't make the UK less attractive to investors than the EU; is technology neutral; and has a clear sunset clause in place," he added. The EU has already made a similar proposal, setting a price limit of €180 per megawatt hour (MWh) on the revenue low-carbon generators get for their power in the market. No price details have yet been set out for the British scheme, which will only apply generators in England and Wales. BEIS said the measures would come into force at the beginning of 2023 and a consultation will be launched with industry before the detail is nailed down.
City minister Andrew Griffith told the Treasure Select Committee yesterday that any lengthy delay in issuing a digital pound would create problems for finance and the economy. The idea is being assessed by government and the Bank of England, and a public consultation is due later this year, Reuters says. The Bank of International Settlements, a forum for central banks, said in June that central bank digital currencies are needed to modernise finance and ensure Big Tech does not take control of money. Around 90% of the world's central banks are now using, trialling, or looking into digital currencies. "If the counterfactual is that either private enterprises or states come forward with their equivalent currencies, and the UK, either the government or the BoE, have no play in that domain at all, then you could end up with some quite difficult consequences in terms of macroeconomic policy, but also the ability to regulate individual transactions," Griffith said. Former Chancellor Rishi Sunak asked the BoE to look at the case for a new "Britcoin" or digital pound last year.
Sports Direct and House of Fraser owner Frasers Group has picked up a 4.5% stake in online clothing retailer N Brown, according to a regulatory filing released yesterday. N Brown owns JD Williams, Simply Be and Jacamo.
FTSE 250 pub operator Marston's said in a trading update yesterday that total like-for-like sales for the financial year just ended were down 1% on the sales before the covid pandemic in 2019. Total retail sales in its managed and franchise pubs were up 2% over 2019, Marston’s said, as drink sales continued to outperform food sales in the 52 weeks ended 1st October, reinforcing the "steadfast trading resilience" of its predominantly community pub estate. Like-for-like sales were "encouraging", and continued to improve in the 10 weeks from 24 July to 1 October, being 3% up on 2019 and 4% up on 2021. At year-end, the group had £65m of headroom against its £280m bank facility, and £10m of cash. "This is a good performance, with the trading momentum we experienced in the summer continuing," said CEO Andrew Andrea.
Nissan Motor Co Ltd will hand over its business in Russia to a state-owned entity for €1 euro, it said yesterday, taking a loss of around $687m. The Japanese automaker will transfer its shares in Nissan Manufacturing Russia to state-owned NAMI, it said, however Nissan will have the right to buy the business back within six years, Russia's industry and trade ministry said. The sale to NAMI will include Nissan's production and research facilities in St Petersburg as well as its sales and marketing centre in Moscow. French automaker Renault, which owns 43% of Nissan, estimated the decision by its Japanese partner would lead to a €331m hit to its net income for the second half of 2022. Renault sold its majority stake in Russian carmaker Avtovaz to a Russian investor in May.
Iron ore pellet maker Ferrexpo has suspended operations in Ukraine after Monday's Russian missile strikes on the country damaged electrical power infrastructure. Jim North, CEO of the FTSE 250 company said no staff had been injured in the attacks, which hit the capital Kyiv and other cities, with many missiles hitting civilian areas, killing 19 people.
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