The UK is likely to get its first interest rate cut in three months today, as the Bank of England tries to prod the stagnating economy into life. The City is confident the BoE will ease policy at noon today – a cut to the Bank Rate, from 4.75% to 4.5%, is a roughly 95% prospect according to money market pricing (it was as high as 98% earlier this week).
Economists predict the Bank’s monetary policy committee (MPC) will vote 8-1 to cut, with only the hawkish Catherine Mann opposing a reduction in borrowing costs for the first time this cycle. It may also lower its growth forecasts for this year, and raise its inflation forecast in its latest monetary policy report [MPR].
These are difficult times for the Bank. It has already been assessing the impact of the business tax rises in last autumn’s budget, which could push up prices, hit profit margins, weaken hiring and lift unemployment. Now, it also has the challenge of Donald Trump’s return to the White House, and the risk of a global trade war.
Mark Ashbridge, managing director of Ashbridge Partners, points out that many of Trump’s policies are inflationary – which could push up US borrowing costs, with a knock-on effect on the other side of the Atlantic: “Fundamentally, Donald Trump’s policies are inflationary and what we don’t know at this stage is just how extreme or not these changes might be and therefore the impact of them.
The backdrop to today’s Bank of England decision is “underwhelming”, points out Kathleen Brooks, research director at XTB, which could prompt the central bank to predict lower growth this year.
The money markets currently indicate the Bank will cut interest rates three or four times this year. But some, such as Pimco economist Peder Beck-Friis, think it may cut faster, telling clients: "Looking ahead, we see room for deeper cuts than what financial markets expect. Trade uncertainty is rising, labour demand is falling, fiscal policy is tight, and the policy rate is well above our neutral estimate of 2-3%."
Sterling is weakening a little this morning, as the City anticipates a cut to UK interest rates at noon. The pound, which hit a one-month high yesterday, has lost a third of a cent against the US dollar back to $1.2473.
In other news ...
The $60bn merger between Nissan and Honda to create the world’s third-largest carmaker looks on the brink of collapse this morning. According to reports from Japan, Nissan CEO Makoto Uchida met with Honda CEO Toshihiro Mibe today, and explained that he wishes to terminate their merger discussions. A break-up would scupper the deal which was announced last December.
Talks have apparently stumbled after Honda proposed that Nissan should become a subsidiary, which was not part of the original plan. Bloomberg is reporting that Nissan is seeking a new partner as it prepares to end talks to form a joint holding company with Honda.
AstraZeneca has reported a jump in annual profits boosted by strong sales of its cancer, lung and immunology treatments, a week after it decided not to go ahead with a planned £450m investment in Merseyside, prompting a series of recriminations with the government.
German factory orders have jumped, bringing some relief to Europe’s largest, and most beleagured, economy. Industrial orders jumped by 6.9% month-on-month in December, beating forecasts of a 2% rise, but were still 6.3% lower than a year ago. Firms reported increased demand for large-scale orders such as aircraft, ships, trains, and military vehicles, where new orders were 55.5% higher than in November “due to several large orders”, statistics body Destatis reports.
UK engineering firm IMI has revealed it has been hit by a cyber attack after hackers gained unauthorised access to its systems. In a statement to the City this morning, IMI said it is responding to a cybersecurity incident involving unauthorised access to the company’s systems.
The agenda
• 9am GMT: European construction sector PMI
• 9.30am GMT: UK construction sector PMI
• 10am GMT: Eurozone retail sales for December
• Noon GMT: Bank of England interest rate decision
• 12.30pm GMT: Bank of England press conference
• 1.30pm GMT: US initial jobless claims
We'll be tracking all the main events throughout the day … |
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