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Might interest rates not peak as high as the market is expecting?

That is certainly the conclusion that has been drawn today following a speech by Ben Broadbent, deputy governor for monetary policy of the Bank of England, in which he discussed the impact of the pandemic and Russia’s invasion of Ukraine.

Speaking at Imperial College London, Mr Broadbent – in language rarely used by a member of the Bank’s rate-setting Monetary Policy Committee (MPC) – more or less told financial market participants that they were pricing in too many future increases in Bank rate.

In his speech, Mr Broadbent discussed recent movements in the market’s expectations for how high Bank rate might go, pointing out that, as recently as the Monetary Policy Report in August, prices in financial markets were consistent with Bank Rate rising to a peak of 3% next spring and then falling back a little over the following year.

But he pointed out that, despite a decline in recent days, that expected peak was now around 5.25%. He said that this was “by some distance” the largest rise in market interest rates between MPC forecasts since the committee was founded in 1997.

Mr Broadbent said that, were that to come to pass, the cumulative impact of interest rate rises over the “entire hiking cycle” would be sufficient to reduce the UK’s GDP by just under 5%.

He added: “It would imply a pretty material hit to demand over the next couple of years.”

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In his crucial concluding remarks, Mr Broadbent said: “Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen.”

His comments immediately had an interest on market expectations. Last night, the market was pricing in a peak for Bank Rate of 4.785% but that has slipped today to 4.68%. A week ago, prior to the new chancellor Jeremy Hunt tearing up most of his predecessor Kwasi Kwarteng’s mini-Budget, market expectations for peak Bank rate were at 5.099%.

Bank of England Deputy Governor Ben Broadbent attends a Bank of England news conference, in the City of London, Britain November 1, 2018.
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Ben Broadbent, deputy governor for monetary policy of the Bank of England

Impact of the energy price guarantee

Central to the MPC’s deliberations, Mr Broadbent made clear, would be the government’s energy price guarantee aimed at protecting households and businesses from soaring energy bills this winter.

He noted that, for as long as it was in place, the guarantee would have the effect of limiting headline inflation and, with it, any related so-called ‘second-round’ effects – the term used to describe how a high level of inflation can feed into further inflation by, for example, prompting workers to demand inflation-busting pay increases.

But he pointed out that the guarantee would also reduce “the severity of the hit to household incomes” by soaring energy prices and, as a result, would support demand – something that would, in normal circumstances, add to inflation. He reminded his audience that the MPC had already judged that the second effect was likely to outweigh the first.

Mr Broadbent pointed out that on Monday, Mr Hunt had said the energy price guarantee would be maintained only for six months, rather than the two-year period originally planned.

He added: “He suggested support was likely to continue, beyond six months, albeit in a more targeted fashion. But we are unlikely to know for a while precisely the form that will take.”

Mr Broadbent said that, if government support for households and businesses on energy prices were to mitigate the impact of higher inflation, there would be “more at the margin for monetary policy to do”.

And he went on: “The MPC is likely to respond relatively promptly to news about fiscal policy.”

That was a clear hint that were Mr Hunt to continue with the energy price guarantee beyond March next year, having said on Monday this week that it would come to an end then, the MPC might have to respond by setting a higher level of Bank rate than might otherwise be the case.

Governor of the Bank of England Andrew Bailey leaving the Bank of England Monetary Policy Report Press Conference at the Bank of England, London, following the decision on interest rates. Picture date: Thursday May 5, 2022.
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Governor of the Bank of England, Andrew Bailey

A change in policy outlook

Mr Broadbent’s remarks today are all the more significant because they underline just how much the policy outlook for the UK has changed during the last week.

It was only as recently as last Saturday that Andrew Bailey, the Bank’s governor, delivered a speech at the International Banking Seminar in Washington in which he 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.”

Since then, in a bid to pacify the bond market, Jeremy Hunt has unwound most of Mr Kwarteng’s unfunded giveaways and set a date, 31 October, on which he is expected to come up with further tax increases and public spending cuts to plug the government’s fiscal hole.

Read more

What are bonds, how are they different to gilts and where do they fit in the mini-budget crisis?

Gilt yields – implied government borrowing costs – have fallen sharply from where they were immediately after the mini-budget.

Mr Broadbent’s comments today suggest that, so too, should market expectations of where Bank rate will peak.

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FCA considering compensation scheme over car finance scandal – raising hopes of payouts for motorists

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FCA considering compensation scheme over car finance scandal - raising hopes of payouts for motorists

Thousands of motorists who bought cars on finance before 2021 could be set for payouts as the Financial Conduct Authority (FCA) has said it will consult on a compensation scheme.

In a statement released on Sunday, the FCA said its review of the past use of motor finance “has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers”.

“Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way,” the statement continued.

Read more: How to tell if you’ve been mis-sold car finance

The FCA said it estimates the cost of any scheme, including compensation and administrative costs, to be no lower than £9bn – adding that a total cost of £13.5bn is “more plausible”.

It is unclear how many people could be eligible for a pay-out. The authority estimates most individuals will probably receive less than £950 in compensation.

The consultation will be published by early October and any scheme will be finalised in time for people to start receiving compensation next year.

What motorists should do next

The FCA says you may be affected if you bought a car under a finance scheme, including hire purchase agreements, before 28 January 2021.

Anyone who has already complained does not need to do anything.

The authority added: “Consumers concerned that they were not told about commission, and who think they may have paid too much for the finance, should complain now.”

Its website advises drivers to complain to their finance provider first.

If you’re unhappy with the response, you can then contact the Financial Ombudsman.

The FCA has said any compensation scheme will be easy to participate in, without drivers needing to use a claims management company or law firm.

It has warned motorists that doing so could end up costing you 30% of any compensation in fees.

The announcement comes after the Supreme Court ruled on a separate, but similar, case on Friday.

The court overturned a ruling that would have meant millions of motorists could have been due compensation over “secret” commission payments made to car dealers as part of finance arrangements.

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Car finance scandal explained

The FCA’s case concerns discretionary commission arrangements (DCAs) – a practice banned in 2021.

Under these arrangements, brokers and dealers increased the amount of interest they earned without telling buyers and received more commission for it. This is said to have then incentivised sellers to maximise interest rates.

In light of the Supreme Court’s judgment, any compensation scheme could also cover non-discretionary commission arrangements, the FCA has said. These arrangements are ones where the buyer’s interest rate did not impact the dealer’s commission.

This is because part of the court’s ruling “makes clear that non-disclosure of other facts relating to the commission can make the relationship [between a salesperson and buyer] unfair,” it said.

It was previously estimated that about 40% of car finance deals included DCAs while 99% involved a commission payment to a broker.

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Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.

“We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”

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ICG takes off with £200m deal for Exeter and Bournemouth airports

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ICG takes off with £200m deal for Exeter and Bournemouth airports

The London-listed investment group ICG is closing in on a £200m deal to buy three of Britain’s biggest regional airports.

Sky News has learnt that ICG is expected to sign a formal agreement to buy Bournemouth, Exeter and Norwich airports later this month.

The trio of sites collectively serve just over 2 million passengers annually.

ICG is buying the airports from Rigby Group, a privately owned conglomerate which has interests in the hotels, software and technology sectors.

Exeter acted as the hub for Flybe, the regional carrier which collapsed in the aftermath of the pandemic.

The deal will come amid a frenzy of activity involving Britain’s major airports as infrastructure investors seek to exploit a recovery in their valuations.

AviAlliance, which is owned by the Canadian pension fund PSP Investments, agreed to buy the parent company of Aberdeen, Glasgow and Southampton airports for £1.55bn last year.

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London City Airport’s shareholder base has just been shaken up with a deal which saw Australia’s Macquarie take a large stake.

French investor Ardian has increased its investment in Heathrow Airport as the UK’s biggest aviation hub proposes an expansion that will cost tens of billions of pounds.

ICG and Rigby Group declined to comment .

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Tech companies are racing to make their products smaller – and much, much thinner

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Tech companies are racing to make their products smaller - and much, much thinner

Some of the world’s leading tech companies are betting big on very small innovations.

Last week, Samsung released its Galaxy Z Fold 7 which – when open – has a thickness of just 4.2mm, one of the slimmest folding phones ever to hit the market.

And Honor, a spin-off from Chinese smartphone company Huawei, will soon ship its latest foldable – the slimmest in the world. Its new Honor Magic V5 model is only 8.8mm thick when folded, and a mere 4.1mm when open.

Apple is also expected to release a foldable in the second half of next year, according to a note by analysts at JPMorgan published this week.

The race to miniaturise technology is speeding up, the ultimate prize being the next evolution in consumer devices.

Whether it be wearable devices, such as smartglasses, watches, rings or foldables – there is enormous market potential for any manufacturer that can make its products small enough.

Despite being thinner than its predecessor, Honor claims its Magic V5 also offers significant improvements to battery life, processing power, and camera capabilities.

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Hope Cao, a product expert at Honor told Sky News the progress was “due largely to our silicon carbon battery technology”. These batteries are a next-generation breakthrough that offers higher energy density compared to traditional lithium-ion batteries, and are becoming more common in consumer devices.

Pic: Honor
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The Magic V5. Pic: Honor

Honor also told Sky News it had used its own AI model “to precisely test and find the optimum design, which was both the slimmest, as well as, the most durable.”

However, research and development into miniaturisation goes well beyond just folding phones.

A company that’s been at the forefront of developing augmented reality (AR) glasses, Xreal, was one of the first to release a viable pair to the consumer market.

Xreal’s Ralph Jodice told Sky News “one of our biggest engineering challenges is shrinking powerful augmented reality technology into a form factor that looks and feels like everyday sunglasses”.

Xreal’s specs can display images on the lenses like something out of a sci-fi movie – allowing the wearer to connect most USB-C compatible devices such as phones, laptops and handheld consoles to an IMAX-sized screen anywhere they go.

Pic: Xreal
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Pic: Xreal

Experts at The Metaverse Society suggest prices of these wearable devices could be lowered by shifting the burden of computing from the headset to a mobile phone or computer, whose battery and processor would power the glasses via a cable.

However, despite the daunting challenge, companies are doubling down on research and making leaps in the area.

Social media giant Meta is also vying for dominance in the miniature market.

Ray-Ban Meta AI glasses are shown off at the annual British Educational Training and Technology conference. Pic: PA
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Ray-Ban Meta AI glasses are shown off at the annual British Educational Training and Technology conference. Pic: PA

Meta’s Ray-Ban sunglasses (to which they recently added an Oakley range), cannot project images on the lenses like the pair from Xreal – instead they can capture photos, footage and sound. When connected to a smartphone they can even use your phone’s 5G connection to ask Meta’s AI what you’re looking at, and ask how to save a particular type of houseplant for example.

Gareth Sutcliffe, a tech and media analyst at Enders Analysis, tells Sky News wearables “are a green field opportunity for Meta and Google” to capture a market of “hundreds of millions of users if these devices sell at similar rates to mobile phones”.

Li-Chen Miller, Meta’s vice president of product and wearables, recently said: “You’d be hard-pressed to find a more interesting engineering problem in the company than the one that’s at the intersection of these two dynamics, building glasses [with onboard technology] that people are comfortable wearing on their faces for extended periods of time … and willing to wear them around friends, family, and others nearby.”

Mr Sutcliffe points out that “Meta’s R&D spend on wearables looks extraordinary in the context of limited sales now, but should the category explode in popularity, it will be seen as a great strategic bet.”

Facebook founder Mark Zuckerberg’s long-term aim is to combine the abilities of both Xreal and the Ray-Bans into a fully functioning pair of smartglasses, capable of capturing content, as well as display graphics onscreen.

However, despite recently showcasing a prototype model, the company was at pains to point out that it was still far from ready for the consumer market.

This race is a marathon not a sprint – or as Sutcliffe tells Sky News “a decade-long slog” – but 17 years after the release of the first iPhone, people are beginning to wonder what will replace it – and it could well be a pair of glasses.

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