Interest rates will have to be raised higher than initially hoped in the face of inflationary pressures, the Bank of England (BoE) governor has suggested.
Speaking at an International Monetary Fund event in Washington, Andrew Bailey also said there had been “a very clear and immediate meeting of minds” with new Chancellor Jeremy Hunt on the need for financial stability and the measures to achieve it.
He added it was an error to “fly blind” by not accompanying the “fiscal event” with an economic forecast by the Office for Budget Responsibility (OBR), which many argue sent the financial markets into turmoil.
The BoE is due to announce its next decision on interest rates, which will impact household mortgages, on 3 November and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%, both of which would be much bigger moves than usual.
Mr Bailey said: “We will not hesitate to raise interest rates to meet the inflation target.
“And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
The bank previously predicted the rate of inflation would peak at 11% in October, while its goal was 2%.
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Mr Bailey said the bank would assess the impact of the government’s energy support scheme and the 31 October budget statement of Mr Hunt, who took up the role on Friday after Kwasi Kwarteng was sacked following the economic chaos fuelled by his unfunded tax cut plans.
He added: “The MPC (Monetary Policy Committee) will respond to all this news at its next meeting in just under three weeks from now.
“This is the correct sequence in my view. We will know the full scope of fiscal policy by then.”
Image: Andrew Bailey says there is a ‘meeting of minds’ with the new chancellor. Pic: HM Treasury
In a further major U-turn on Friday, Prime Minister Liz Truss scrapped a freeze in corporation tax and said she would instead allow it to rise from April, as planned by Boris Johnson’s government.
Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new chancellor, yesterday (Friday).
“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that.
“Jeremy is now working on what will be the fiscal statement. It’s not for me and it’s not appropriate for me to constrain the choices he makes.
“But a very clear message I would give, and it’s a clear message for everybody, including a clear message for markets.
“I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”
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2:08
‘It was a mistake to fly blind’
Mr Bailey also indicated his concerns over the direction taken by the former chancellor, pointing to a statement he issued in the wake of the mini-budget.
He said: “I felt I had to. It’s not something I make a habit of doing but given the situation.
“I also don’t make a habit of commenting on fiscal policy as a rule, because that’s not my job.
“But I made two points on fiscal policy… which are of clear relevance to the central bank.
“One was to emphasise the importance of sustainability of fiscal policy and the second, which was part of that, was to emphasise the need to have the Office for Budget Responsibility involved – that flying blind is not the way to achieving sustainability.”
Mr Bailey said the bank was able to operate monetary policy – chiefly interest rates – to manage the economy and also make financial stability interventions to address issues such as the recent surge in British government bond yields that threatened some pension funds.
The BoE ended its emergency bond-buying on Friday.
“In these difficult times, we need to be very clear on this framework of intervention,” Mr Bailey said.
Microsoft has become only the second publicly traded company after Nvidia to surpass $4 trn (£3.03trn) in market valuation, after registering huge earnings.
On Thursday, shares rose on Wall Street with the S&P 500 and Nasdaq climbing to new record highs.
Stocks in Microsoft jumped after posting better-than-expected results, helped by its Azure cloud computing platform, which is a centrepiece of the company’s artificial intelligence (AI) efforts.
Nvidia tripled its value in just about a year and clinched the $4trn milestone before any other company on 9 July. Apple was last valued at $3.12trn.
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In comparison, the biggest UK company by market value is drug manufacturer AstraZeneca, worth $235.97bn (£178.55bn).
Companies ranked by market value (USD), according to tradingview.com
1. Nvidia (US) $4.43trn 2. Microsoft (US) $4trn 3. Apple (US) $3.12trn 4. Amazon (US) $2.47trn 5. Alphabet (US) $2.35trn 6. Meta (US) $1.95trn 7. Saudi Arabian Oil (Saudi Arabia) $1.56trn 8. Broadcom (US) $1.42trn 9. Berkshire Hathaway (US) $1.03trn 10. Tesla (US) $1.02trn 11. Taiwan Semiconductor Manufacturing (Taiwan) $1trn 29. Samsung Electronics (South Korea) $338.06bn 36. Alibaba (China) $284.62bn 52. AstraZeneca (UK) $235.97bn
While sweeping US tariffs had investors worried about tighter business spending, Microsoft’s strong earnings have shown that the company’s books are yet to take a hit.
Microsoft’s multibillion-dollar bet on OpenAI is proving to be a game changer, powering its Office Suite and Azure offerings with cutting-edge AI and fueling the stock to more than double its value since ChatGPT’s late-2022 debut.
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Food inflation will rise to 6% by the end of the year – posing a “significant challenge” to household budgets in the run-up to Christmas, industry leaders have predicted.
The British Retail Consortium is warning that the chancellor risks “fanning the flames of inflation” if she hikes taxes in the coming budget.
Despite intense price competition between supermarket chains, the BRC has sounded the alarm over the pace of grocery price hikes.
As of this month, food inflation has risen 4% year on year – its highest level since February 2024.
The BRC said this increase is linked to global factors, such as high demand and crop struggles.
Beef, chicken and tea prices are among those that have risen the most this year – but some of the blame is being laid squarely at the chancellor’s door too.
The BRC said it was inevitable that a £7bn burden, through changes to employers’ national insurance contributions and minimum pay rules after last October’s budget, had been partly passed on to customers in the form of higher prices.
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2:29
Will we see tax rises in next budget?
It published the results of a survey of retail industry finance chiefs to illustrate its point – that nerves about what Ms Reeves’s second budget could bring were not helping companies invest in either new employment or prices.
Business was promised it would be spared additional pain after it was put on the hook for the bulk of the chancellor’s tax-raising measures last year.
However, speculation is now rife over who will feel the pain this autumn as she juggles a deterioration in the public finances.
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3:33
Options for wealth tax
A widening black hole is estimated at around £20bn.
The cost of servicing government debt has risen since the last budget, while U-turns on welfare reforms and winter fuel payment cuts have made her job even harder – making further tax-raising measures inevitable.
The survey of chief financial officers for the BRC showed the biggest current fear ahead was for the “tax and regulatory burden”.
Two-thirds of the CFOs predicted further price rises in the coming year, at a time when the headline rate inflation already remains stuck way above the Bank of England’s target of 2%.
It currently stands at 3.6%.
Helen Dickinson, chief executive of the BRC, said: “Retail was squarely in the firing line of the last budget, with the industry hit by £7bn in new costs and taxes.
“Retailers have done everything they can to shield their customers from higher costs, but given their slim margins and the rising cost of employing staff, price rises were inevitable.
“The consequences are now being felt by households as many struggle to cope with the rising cost of their weekly shop.
“It is up to the chancellor to decide whether to fan the flames of inflation, or to support the everyday economy by backing the high street and the local jobs they provide.”
She concluded: “Retail accounts for 5% of the economy yet currently pays 7.4% of business taxes and a whopping 21% of all business rates.
“It is vital the upcoming reforms offer a meaningful reduction in retailers’ rates bill, and ensures no store pays more as a result of the changes.”
The US president has spent months verbally attacking Mr Powell.
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2:18
Fed chair has ‘done a bad job’, says Trump
There were clear tensions between the pair last Thursday as they toured the Federal Reserve in Washington DC, which is undergoing renovations.
When taking questions, Mr Trump said: “I’d love him to lower interest rates,” then laughed and slapped Powell’s arm.
Image: There were clear tensions between the US President and Mr Powell during last week’s visit to the Federal Reserve. Pic: Reuters
The US president also challenged him, in front of reporters, about an alleged overspend on the renovations and produced paperwork to prove his point. Mr Powell shook his head as Trump made the claim.
When Mr Trump was asked what he would do as a real estate mogul if this happened to one of his projects, he said he’d fire his project manager – seemingly in reference to Mr Powell.
Image: Donald Trump challenged Mr Powell in front of reporters. Pic: Reuters
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
The Fed has expressed concern about the impact of Mr Trump’s signature economic policy of implementing new tariffs, taxes on imports to the US.
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1:42
Trump’s tariffs: What you need to know
On Wednesday, the president said he was still negotiating with India on trade after announcing the US will impose a 25% tariff on goods imported from the country from Friday.
Mr Trump also signed an executive order on Wednesday implementing an additional 40% tariff on Brazil, bringing the total tariff amount to 50%, excluding certain products, including oil and precious metals.
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The committee which sets rates voted 9 to 2 to keep the benchmark rate steady, the two dissenters were appointees of President Trump who believe monetary policy is too tight.
In a policy statement to explain their decision, the Federal Reserve said that “uncertainty about the economic outlook remains elevated” but growth “moderated in the first half of the year,” possibly bolstering the case to lower rates at a future meeting.
Nathan Thooft, chief investment officer at Manulife Investment Management, described the rate decision as a “kind of a nothing burger” and it was “widely expected”.
Tony Welch, chief investment officer at SignatureFD, agreed that it was “broadly as expected”. He added: “That explains why you’re not seeing a lot of movement in the market right now because there’s nothing that’s surprising.”