Bank of England official hints interest rates may not rise as much as market expects

Published

3 years ago

October 20, 2022

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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.”

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%.

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 e nergy 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.

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.

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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Tesla approves $29bn share award to Elon Musk

Published

17 hours ago

August 4, 2025

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Tesla approves bn share award to Elon Musk

Tesla’s board has signed off a $29bn (£21.8bn) share award to Elon Musk after a court blocked an earlier package worth almost double that sum.

The new award, which amounts to 96 million new shares, is not just about keeping the electric vehicle (EV) firm’s founder in the driving seat as chief executive.

The new stock will also bolster his voting power from a current level of 13%.

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He and other shareholders have long argued that boosting his interest in the company is key to maintaining his focus after a foray into the trappings of political power at Donald Trump‘s side – a relationship that has now turned sour.

Musk is angry at the president’s tax cut and spending plans, known as the big beautiful bill. Tesla has also suffered a sales backlash as a result of Musk’s past association with Mr Trump and role in cutting federal government spending.

The company is currently focused on the roll out of a new cheaper model in a bid to boost flagging sales and challenge steep competition, particularly from China.

The headwinds have been made stronger as the Trump administration has cut support for EVs, with Musk admitting last month that it could lead to a “few rough quarters” for the company.

Tesla is currently running trials of its self-driving software and revenues are not set to reflect the anticipated rollout until late next year.

Musk had been in line for a share award worth over $50bn back in 2018 – the biggest compensation package ever seen globally.

But the board’s decision was voided by a judge in Delaware following a protracted legal fight. There is still a continuing appeal process.

Earlier this year, Tesla said its board had formed a special committee to consider some compensation matters involving Musk, without disclosing details.

The special committee said in the filing on Monday: “While we recognize Elon’s business ventures, interests and other potential demands on his time and attention are extensive and wide-ranging… we are confident that this award will incentivize Elon to remain at Tesla”.

It added that if the Delaware courts fully reinstate the 2018 “performance award”, the new interim grant would either be forfeited or offset to ensure no “double dip”.

The new compensation package is subject to shareholder approval.

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Motor finance operators can breathe big sigh of relief

Published

17 hours ago

August 4, 2025

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Motor finance operators can breathe big sigh of relief

Bank stocks have enjoyed a boost as traders digest the Supreme Court’s ruling on the car finance scandal.

Some of the country’s most exposed lenders, including Lloyds and Close Brothers, saw their share prices jump by 7.55% and 21.62% respectively.

It came after the court delivered a reprieve from a possible £44bn compensation bill.

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Banks will still most likely have to fork out over discretionary commissions – a type of commission for dealers that was linked to how high an interest rate they could get from customers.

The FCA, which banned the practice in 2021, is currently consulting on a redress scheme but the final bill is unlikely to exceed £18bn. Overall, the result has been better than expected for the banks.

Lloyds, which owns the country’s largest car finance provider Black Horse, had set aside £1.2bn to cover compensation payouts.

Following the judgment, the bank said it “currently believes that if there is any change to the provision, it is unlikely to be material in the context of the group”.

The judgment released some of the anxiety that has been weighing over the Bank’s share price.

Jonathan Pierce, banking analyst at Jefferies, said the FCA’s prediction was “consistent with our estimates, and most importantly, we think it largely de-risks Lloyds’ shares from the ‘motor issue'”.

Bank stocks have responded robustly to each twist and turn in this tale, sinking after the Court of Appeal turned against them and jumping (as much as 8% in the case of Close Brothers) when the Supreme Court allowed the appeal hearing.

Concerns about this volatility motivated the Supreme Court to deliver its judgment late in the afternoon so that traders would have time to absorb the news.

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

Published

2 days ago

August 3, 2025

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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.

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.

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.

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.”