The signs point to interest rate cuts within months – here’s why
The conversation about rate cuts has now officially begun.
For months, even as the market began to bet that the Bank of England would soon begin reducing the cost of borrowing, those in Threadneedle Street were adamant that the time for such conversations had not yet come.
In the minutes alongside each of its decisions, the Bank dropped heavy hints that it was just as, if not more, likely that the next move in interest rates would be up rather than down.
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Now, everything has changed. Today we learnt that one of the nine members of the Monetary Policy Committee (MPC) voted for a quarter point reduction in interest rates this month.
In the event, the member, Swati Dhingra, was outvoted by her fellow rate-setters, most of whom wanted to leave borrowing costs at 5.25%. Indeed, at the same meeting two members voted for higher rates.
Even so, this feels like one of those watershed moments – the beginning of a conversation which is increasingly likely to end in action, with Britain’s official borrowing costs being cut, perhaps within a few months.
To see why it’s helpful to consider the Kremlinology whereby the Bank drops hints about its future plans.
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Can the govt afford to cut taxes?
While in public the governor rarely, if ever, says baldly what they plan to do with interest rates in the coming months, there are a few ways in which he signals which way they are inclined to go.
One of them is the phraseology of the minutes, released alongside each decision.
In previous minutes, the Bank had included a telling phrase: “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
The point had been that, while many had come to assume that 5.25% would be the peak for interest rates, another rise was even more likely than a cut.
That phrase has been removed from the latest set of minutes, and replaced with a more neutral wording: “the committee will keep under review for how long Bank Rate should be maintained at its current level.”
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Breakdown of 2023 UK economy
Bang on target
Another signal comes via the so-called “fan charts” the Bank provides of where it expects inflation to go in the coming years.
There are two versions of these charts: one which shows where inflation will go if interest rates are left on hold at their current level, and another which shows where inflation will go if interest rates follow market expectations.
Here, too, there is a clear hint. The chart based on constant interest rates shows a very sharp fall in inflation to well below the Bank’s 2% target.
The accompanying chart showing the impact on gross domestic product – the best measure of economic growth – paints the picture of a deep recession.
On both of these bases, leaving rates on hold indefinitely would clearly be a mistake.
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But, of course, investors are betting that rates won’t stay unchanged; they reckon the Bank will begin to cut them this summer, taking them down from 5.25% to just above 3% in the next few years.
Look at the second set of Bank inflation charts, which follow the thought experiment that the Bank indeed does what markets expect, and you see that far from dropping well below target, inflation hits 2% briefly this year (in part a statistical effect because of how volatile energy prices have been in the past year), rises again, but then eventually comes back to settle at around 2% by the end of 2026.
In short, it’s pretty much bang on target.
Most investors will look at all of this evidence and come to the conclusion that the Bank is not pushing back on their expectations for rates falling in the middle of the year and then continuing to fall in the coming years.
Business
Vivergo: How US-UK trade deal could bring about collapse of huge renewable energy plant in Hull
The smell of yeast still hangs in the air at the Vivergo plant in Hull but the machines have fallen quiet.
More than 100 lorries usually pass through here each day, carrying 3,000 tonnes of wheat. It is milled, fermented and distilled. The final product is bioethanol, a renewable fuel that is then blended into E10 petrol.
This is a vast operation. It took several years to build, with considerable investment, but it is on the verge of closing down. Management and staff are holding out for a last-minute reprieve from the government but time is running out.
It’s been a turbulent journey. The plant was already being annihilated by US rivals, losing about £3m a month. Vivergo and Ensus, based in Teesside, blamed regulations that enable US companies to earn double subsidies.
They were pushing for regulatory change but then a killer blow: The US-UK trade deal, which allows 1.4 billion litres of American ethanol into the UK tariff-free (down from 19%).
“We’ve effectively given the whole of the UK market to the US producers,” said Ben Hackett, managing director at Vivergo.
“If we were to have the same support that the US industry has, if we could use genetically modified crops, we wouldn’t need that tariff. We would be able to compete. If we had the same energy costs. We wouldn’t need those tariffs.”
The government has the weekend to come up with a plan that could keep the business running. If it fails, Vivergo will begin issuing redundancy notices to its 160 staff.
Ben Hackett
It’s a devastating prospect for workers, many of them live in Hull and are nervous about alternative opportunities in the area.
Mike Walsh, a logistics manager who has been working at the plant for 14 years, said: “It’s not a great place to be at the moment. It’s a very well paid, very high-skilled role and they’ve (Vivergo) given everybody an opportunity in an area that doesn’t pay that well…. The jobs market isn’t as good as what people would like. So it does impact the local economy.”
He called on the government to “help us, save us, give this industry a future”.
His colleague Claire Wood, lead productions engineer, said: “I moved here after a career in oil and gas for 10 years, partly because I want to be part of the transition to renewable fuels. I can see so much potential here and it’s absolutely devastating to know that this place might be closed very, very shortly and that all that potential just goes away.”
Thousands more could be affected. Haulage companies may have to lay off truck drivers and farmers could also suffer a blow.
Vivergo makes bioethanol using wheat. That wheat is bought from farms from Yorkshire and Lincolnshire.
Claire Wood
The National Farmers Union has sounded the alarm, saying: “Biofuels are extremely important for the crops sector, and their domestic demand of up to two million tonnes can be very important to balance supply and demand and to produce up to one million tonnes of animal feed as a by-product.”
Another bioproduct is carbon dioxide. The gas can be captured and used to put the fizz in drinks or injected into packaging to preserve food.
If Vivergo and Ensus were to go, Britain would lose as much as 80% of its output of carbon dioxide. Supplies are already tight across Europe, meaning this decision could compound shortages across a range of sectors, from meat-packing to healthcare.
The industry is calling on the government to help. Vivergo says it needs temporary financial support but that the government must create a regulatory and commercial environment in which it can thrive.
It says rules that award double subsidies to companies that use waste product in their bioethanol must be changed. At present, these rules are being used by US companies that make ethanol from Uldr – a by-product of processing corn. They argue this is not a genuine waste product.
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Another option is to grow the market. Industry leaders are calling on ministers to increase the mandated renewable fuel content in petrol from 10% to 15% and for an expansion into aviation fuels. That would allow British companies to carve out a space.
The government has been locked in talks with the company since June.
It said: “We will continue to take proactive steps to address the long-standing challenges it faces and remain committed to a way forward that protects supply chains, jobs and livelihoods.”
However, the time for talking is almost over.
Mr Hackett said he had no idea how the government would respond but he was firm with his stance, saying: “In times of global uncertainty, losing that energy certainty and supply from the UK is a problem.
“I think what they’re missing out on is the future growth agenda. We’re the foundation on which the green industrial strategy can be built. We make bioethanol that today decarbonises transport. Tomorrow it will decarbonise marine. It will decarbonise aviation.”
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