5.25% and 2035

The business news that matters

A scheduling note: There will be no Off to Lunch on Friday. I will be back on Sunday with the press review

Hello and welcome to the latest edition of Off to Lunch. There are two key stories I want to cover today - the Bank of England’s latest decision on interest rates and Rishi Sunak’s announcement that a collection of net-zero targets will be delayed.

Firstly, interest rates. The Bank of England has announced that interest rates will be held at 5.25 per cent this month. This is the first time that the Bank’s monetary policy committee (MPC) has voted not to raise rates since its meeting in November 2021.

This was a close decision - five members of the MPC voted for a hold and four for a raise.

Financial markets had been betting that the Bank would increase rates again to 5.5 per cent as it tries to get inflation back to its target of 2 per cent (it is currently 6.7 per cent). However, this looked less likely after new data was published yesterday which showed inflation had unexpectedly fallen again in August. Other economic data had already shown that the UK economy was slowing down. You can read more on that data in yesterday’s Off to Lunch here

Andrew Bailey, the governor of the Bank, was one of the nine members who voted to hold rates at 5.25 per cent. You can find the full voting history of the MPC members here and the minutes of the Bank’s meeting here. This is what the minutes say about the decision:

“Five members judged that maintaining the Bank Rate at 5.25% was warranted at this meeting. There were signs that the labour market was loosening. The recent acceleration in Average Weekly Earnings (AWE) was noteworthy but was not apparent in other measures of wages.

“Although it was important not to put too much weight on a single data point, headline and services CPI inflation had fallen back and were lower than had been expected. Regarding activity, contacts of the Bank’s Agents had become more downbeat, and the output PMI in August was now consistent with falling GDP.

“For most members within this group, the latest developments meant that the judgement to keep the Bank Rate unchanged at this meeting rather than increase it was finely balanced. Conditions were likely to warrant a restrictive policy stance being maintained until material progress had been made in returning inflation to the 2% target sustainably. For one member, however, the risks of overtightening policy had continued to build, increasing the likelihood of output losses and volatility that would require sharper reversals of policy. Lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through.”

Does this mean that interest rates have now peaked in the UK after 14 consecutive rate rises? The Bank is due to meet again on November 1 and 2. The minutes from the Bank’s meeting show that the MPC is not ruling out increasing interest rates again, although it emphasised the need to sustain interest rates at this level to get inflation down, rather than the need for more rate rises. The Bank wrote in the minutes:

“Monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the committee’s remit. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

The pound has fallen 0.5 per cent against the dollar on the back of the news and has been falling all week as it became clear that the Bank’s decision was going to be close. The graph below shows how the pound has moved against the dollar so far this year…

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Other stories that matter…

1. Rishi Sunak confirmed in a speech yesterday that the UK will delay a collection of net-zero targets. This includes a ban on the sale of new petrol and diesel cars moving from 2030 to 2035, a ban on new oil and gas boilers being delayed until 2035 and new rules on the insulation of property being eased. Sunak said: “This country is proud to be a world leader in reaching Net Zero by 2050. But we simply won’t achieve it unless we change.” You can read his speech here.

In terms of the reaction to this announcement, Ford, the US car maker, has warned that it damages confidence in investing in the UK. Ford has already invested £430 million into its UK facilities to help electrify its vehicles for the 2030 target. Lisa Brankin, the chair of Ford UK, said: "Our business needs three things from the UK government: ambition, commitment and consistency.” However, Jaguar Land Rover and Toyota (which is investing in hydrogen-powered vehicles) said the move was “pragmatic” and brought the UK in-line with other western countries. The Financial Times is reporting this morning that car makers will still have to hit mandatory targets for how many zero-emission vehicles they sell in the UK. This includes 22 per cent of sales being zero-emission in 2024 and 80 per cent in 2030. Story here.

The two sides of the debate can be neatly summarised in the comment and analysis in the morning newspapers. The Times is among the newspapers to support the delays, saying in its editorial leader column that Sunak was “sensible” and that Boris Johnson had set unrealistic targets as he was “preoccupied with grand projects in service of his own ambition”. You can read that piece here. However, the FT warns in its editorial that the move is “unwise” and will “exacerbate the general uncertainty and lack of trust in the government to stick to its commitments that have led to business investment flatlining since 2016”. You can find that piece here

2. The clothing retailer Next has upgraded profit forecasts for the third time in four months, citing better-than-expected summer sales and the easing of inflation. The company made the upgrade in its half-year results, which were published this morning. As ever, Lord Wolfson, Next’s chief executive, offers plenty of interesting insights in the results. “Some might ask why we publish such detailed reports. Others might think we are too open, and give away too much about our plans,” he says. “Our answer is simple: this report is written as much for ourselves as it is for our investors.” You can find the results here. Shares in Next are up 4 per cent on the back of the results, valuing the company at more than £9 billion. Shares in JD Sports are also up 6 per cent after the sportswear retailer reported a 26 per cent rise in half-year pre-tax profits to £375 million. You can find those results here

3. The Finnish company Metsa Group is to build a start-of-the-art tissue factory in Goole in the East Riding of Yorkshire, which is part of one of the UK’s freeport sites. The investment is worth hundreds of millions of pounds and will create more than 400 jobs. Story by BusinessLive here

4. New research by academics at the University of Cambridge has found that suppressing negative thoughts can be good for your mental health, contradicting the widespread idea that it is healthy to talk about upsetting and distressing events. You can find the research here and a news story by ITV on this here

5. Ed Warner, the former chairman of UK Athletics, says a collection of sports are desperately trying to reinvent themselves to grow their popularity, but are struggling to find the balance between protecting their traditions and being relevant to a new audience. Businesses struggle to find this balance too. You can find the Sport Inc newsletter here

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And finally…

Brighton & Hove Albion will play AEK Athens this evening in their first-ever match in one of the main European football competitions. Ahead of the match the club has posted a video on social media about its extraordinary transformation since it was bought by local fan and betting tycoon Tony Bloom in 2009. You can see the video below and read more about how Bloom has changed the club via a piece in The Guardian here. As flagged earlier this week, The Times also had an interesting interview with Bloom in Saturday’s paper, which you can read here

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Best

Graham