Biggest interest rate rise in decades expected as Bank of England battles inflation

From 3h ago

Introduction: Bank of England to raise rates today

Good morning, and welcome to our rolling coverage of business, the world economy, and the financial markets.

All eyes are on the Bank of England this morning. The UK central bank is on track for its biggest interest rate rise in decades, as it tries to get a grip on stubbornly high inflation.

The BoE is expected to raise its key rate by three-quarters of a percent, taking Bank Rate from 2.25% to 3%, the highest since autumn 2008, at one of the most eagerly anticipated monetary policy meeting for many years.

It would be the eighth rate hike in a row, driving up borrowing costs even as the country risks falling into recession.

A 75 basis-point rise would be the biggest rate hike since 1989 (if you exclude the mayhem on Black Wednesday when rates were briefly hiked skyward from 10% to 12%, in vain).

The Bank will be determined to tighten monetary policy after seeing consumer price inflation hit a 40-year high of 10.1% in September, five times higher than its 2% target, driven by soaring food prices as well as the energy crunch.

It fears that high inflation will set off a wage-price spiral, with workers (understandably) seeking pay rises to protect them from the cost of living squeeze.

Shweta Singh, senior economist at fund manager Cardano, says the Bank faces a very difficult task:

The BoE is faced with an incredibly difficult balancing act of orchestrating large rate hikes in a recessionary economy. Markets are pricing in a terminal rate of 480 bps by September 2023, which is 100bps lower than during early October, but is pretty punchy nonetheless.

The Bank also wants to reassure markets, after the turmoil caused by the disastrous mini-budget which sunk the pound and drove up government borrowing costs.

But policymakers are operating in the dark, after chancellor Jeremy Hunt’s fiscal statement outlining tax rises and spending cuts was delayed until November 17th.

It has been scheduled for three days ago, so the lack of clarity over government policy makes the BoE’s task harder.

Singh explains:

“If September’s fiscal uncertainty was centred around how loose government policy would become, November’s uncertainty is centred around how tight it is set to become.

And, if September’s dilemma for the Bank was that they might not be doing enough tightening, November’s dilemma is that they end up doing too much. It seems therefore that the MPC is still stumbling around in the dark.

The markets are already jittery, after the US central bank raised its key lending rate by another three-quarters of a percent last night, and dampened hopes that it might ease off soon.

Wall Street sank after Federal Reserve chair Jerome Powell warned that US interest rates may peak higher than expected, and remain high longer than hoped to squeeze out inflation.

Powell warned that it was “very premature” to be thinking about pausing rate hikes, and cautioned that:

“Data since our last meeting suggests that the ultimate level of interest rates will be higher than expected.

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(5) Top 3 sentences from Jerome Powell speech yesterday night —

1- ''If we were to over tighten, we could use our tools to support the economy later on; from a risk management perspective, that's a better risk to run than to under deliver on tightening and risk high inflation."

— Madhur Jain (@Madhur_1910) November 3, 2022

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(5) Top 3 sentences from Jerome Powell speech yesterday night —

1- ”If we were to over tighten, we could use our tools to support the economy later on; from a risk management perspective, that’s a better risk to run than to under deliver on tightening and risk high inflation.”

— Madhur Jain (@Madhur_1910) November 3, 2022

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(6) 2- ''The incoming data since our last meeting (labor and CPI) suggest the terminal rate of Fed Funds will be HIGHER than previously expected (4.63%), and we will stay the course until the job is done''.

When asked about stock markets rallying during his press conference:

— Madhur Jain (@Madhur_1910) November 3, 2022

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(6) 2- ”The incoming data since our last meeting (labor and CPI) suggest the terminal rate of Fed Funds will be HIGHER than previously expected (4.63%), and we will stay the course until the job is done”.

When asked about stock markets rallying during his press conference:

— Madhur Jain (@Madhur_1910) November 3, 2022

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(7) 3- ''We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down''.

I think FED is doing right thing to bring down inflation & there would be Stagflation in global economy.

— Madhur Jain (@Madhur_1910) November 3, 2022

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(7) 3- ”We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down”.

I think FED is doing right thing to bring down inflation & there would be Stagflation in global economy.

— Madhur Jain (@Madhur_1910) November 3, 2022

We also find out how the UK and US services sectors fared during October, plus the latest eurozone unemployment stats.

The agenda

9am GMT: Norway’s Norges Bank interest rate decision
9.30am GMT: UK service sector PMI for October
10am GMT: Eurozone unemployment rate for September
Noon GMT: Bank of England interest rate decision
12.30pm GMT: Bank of England press conference
2pm GMT: US service sector PMI for October

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Britain’s service sector has shrunk for the first time since the pandemic lockdowns of 2021, as the disastrous mini-budget hit confidence.

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Service sector activity fell in October for the first time since February 2021, acccording to the monthly survey of purchasing managers from S&P Gobal Insight.

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Its services PMI dropped to 48.8 in October, down from 50 (showing stagnation) in September. It’s the latest sign that the economy is weakening, heading towards recession, which will worry the Bank of England.

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Services companies suffered from shrinking demand and greater risk aversion among clients, while “escalating energy bills and strong wage pressures” pushed up costs again.

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A number of firms said political uncertainty since the mini-Budget, which drove up borrowing costs before it was reversed, had damaged business investment, and deterred clients from agreeing new projects.

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October data revealed the first decline in UK service sector activity for 20 months with the #PMI at 48.8 (Sep: 50.0). Concerns over high inflation, the macroeconomy and the political environment hit client demand. Read more: https://t.co/MCNTCTktk6 pic.twitter.com/Fcfyqsqefn

— S&P Global PMI™ (@SPGlobalPMI) November 3, 2022

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The reading is slightly better than the ‘flash’ PMI taken during October, suggesting the recent stability has helped the economy.

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Tim Moore, economics director at S&P Global Market Intelligence, says:

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“UK service providers reported the steepest drop in business activity for 21 months in October as household spending cutbacks and shrinking business investment combined to dent new order volumes.

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A number of firms noted that political uncertainty and rising borrowing costs since the mini-Budget had led to greater risk aversion among clients and a wait-and-see approach to new projects. There were also many reports that higher energy bills had led to reduced spending on non-essential services.

\n

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Business confidence also fell, hit by stubbornly high inflation, increased borrowing costs and worries about the UK economic outlook, Moore added:

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Aside from the slump at the start of the pandemic, the degree of confidence across the service economy is now the lowest since December 2008.”

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BT has warned of more job cuts after it was forced to find more than £500m in additional savings due to soaring inflation and energy bills.

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The company, which reported an 18% slump in pretax profits from just over £1bn to £831m year-on-year in the six months to the end of September, said its energy bill will be £200m higher this year.

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The telecoms company said it has been forced to raise its cost-savings target from £2.5bn to £3bn by the end of its financial year in 2025 in response to inflation hitting a 40-year high and a surge in energy costs.

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“We are leaving no stone unturned to make sure BT can be the most-efficient organisation it can be,” said Philip Jansen, the chief executive at BT, adding:

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“Inevitably it means some jobs will not exist in the future but that has been true of the last few years too. We will use natural attrition as much as we can. In these difficult conditions we know we have to double down on our costs.

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There are no specific numbers in mind. This [cost-cutting programme] is up until the end of 2025.”

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The boss of supermarket chain Sainsbury’s has warned that life is “tough for millions of households”.

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Chief executive Simon Roberts pointed to the squeeze on families as Sainsbury’s reported an 8% drop in profits for the first half of the year.

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Roberts said the group, which has given low-paid shop workers a second pay rise this year, was investing in keeping prices down for customers.

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He says:

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We really get how tough it is for millions of households right now. Customers are watching every penny and every pound and we know that they are relying on us to keep food prices as low as we can.

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We will have invested more than £500m by March 2023 in keeping prices lower by cutting our costs at a faster rate than our competitors, meaning we have more firepower to battle inflation.

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Roberts has also told reporters that Sainsbury’s is seeing a significant move towards customers buying own-brand goods, with customers also buying some Christmas items early to spread out the costs.

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He isn’t over-optimistic about a surge in sales from the men’s football World Cup.

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Shares in Sainsbury have jumped 3% in early trading, as underlying pre-tax profits were higher than the City had expected.

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Elsewhere this morning, there are reports that Elon Musk has drawn up plans to fire as much as half of Twitter’s 7,500-strong workforce.

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The major cost-cutting overhaul, just days after Musk took control, could come on Friday. Musk is also expected to order remaining staff to return to the office, rather than work from home.

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One investor is backing job cuts, as my colleague Dan Milmo reports:

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\n

Changpeng Zhao, the chief executive and founder of Binance, said “a slimmer workforce would make more sense” at the social media platform. The cryptocurrency exchange has invested $500m (£441m) in Twitter as part of Musk’s $44bn takeover, which completed last week and has been followed by a stream of changes and mooted overhauls of the company ever since.

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According to the latest reports, in the Verge and on Bloomberg overnight, Musk is planning to cut about 3,800 jobs, with staff affected by any layoffs at the San Francisco-based company told as soon as Friday.

\n

Zhao said on Thursday, before the Verge and Bloomberg reports were published, that Twitter has been too slow in rolling out new features under its previous ownership.

\n

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Here’s the full story:

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An exodus of senior management at Twitter is already underway. The company’s advertising and marketing chiefs have recently announced their departures, as well as the chief people and diversity officer, the general manager for core technologies, the head of product and vice-president of global sales.

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Last week, Elon Musk fired the CEO, Parag Agrawal, the chief financial officer, Ned Segal, and the legal affairs and policy chief, Vijaya Gadde, shortly after taking over the company.

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Craig Erlam, senior market analyst at OANDA, says the Bank of England has an unenviable task setting interest rates, given the disruption in Westminster:

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\n

The Bank of England will likely join the Fed in raising rates by 75bps later today.

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The central bank has had the unenviable job of fighting soaring inflation amid enormous economic and political uncertainty. In recent months the country has had three Prime Ministers, three very different economic agendas, and no budgets outlining them. Not ideal for a central bank that’s fighting double-digit inflation.

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It hasn’t handled things perfectly this year either, that’s clear. It’s taken a far more cautious approach than others leaving it in the situation now that it must raise rates aggressively and publish economic forecasts with little insight into government spending and tax plans. The outlook is uncertain enough without that.

\n

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Victoria Scholar, head of investment at interactive investor, predicts the Bank could be divided today – with some policymakers pushing for a smaller rate rise of half-a-percent:

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\n

The Monetary Policy Committee’s vote is likely to be divided with the potential for a less aggressive 50 basis point hike instead. The size of the increase will signal how concerned Bank of England policymakers are about inflation versus a recession as it looks to curtail further price rises without inadvertently causing unnecessary economic pain.

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An estimated two million borrowers on variable rate mortgages look set to face increased payments after today’s decision while around another two million are on fixed-term mortgages which need re-mortgaging, some at higher rates by the end of 2024.

\n

The mortgage market has been in turmoil during the aftermath of the mini-budget sending rates soaring and leading to the withdrawal of some products temporarily from the market. However the market has since calmed down thanks to the new government which has reinstated some sense of political stability.

\n

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Jim Reid of Deutsche Bank reminds us that the markets had anticipated a much higher rate rise, before the mini-budget unravelled:

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\n

Since the BoE’s last meeting in September, an awful lot has happened in the UK, including a mini-budget that triggered market turmoil, a temporary BoE intervention to buy longer-dated gilts, a policy reversal on most of that mini-budget, and then Liz Truss’ replacement as PM by Rishi Sunak. That volatility has been reflected in market pricing for today’s decision as well.

\n

Straight after the last meeting, overnight index swaps were pricing in a 75bps hike, but at the height of the mini-budget turmoil they went as far as pricing in more than 200bps worth by today, including a decent chance of an intermeeting hike. However, as the situation has calmed down, pricing has returned to its original starting point of a 75bps hike again, which is what our UK economist is forecasting for today as well.

\n

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Labour’s shadow chancellor Rachel Reeves warns that another interest rate rise today will hurt businesses and households, and hit growth in the economy.

","elementId":"d5f620ae-9daa-438e-b221-eac260eb46ec"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

She’ll tell the Anthropy conference in Cornwall that the government’s failure to tackle weak growth, low productivity, underinvestment and widening inequality has left the UK particularly exposed to economic shocks.

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Reeves is expected to warn that:

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“Rising interest rates will mean families with already stretched budgets will be hit by higher mortgage payments.

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“It will mean higher financing costs for businesses.

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“For many firms who have had a tough couple of years this will mean desperately difficult decisions about whether to carry on.

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“And it will mean profound implications for growth as demand is sucked out of the economy and even those firms who are keeping their head above water face difficult decisions about whether to invest or expand.

\n

","elementId":"ff7d6183-f633-44d5-b665-ab9a026d7efe"},{"_type":"model.dotcomrendering.pageElements.TweetBlockElement","html":"

Today at 12pm, interest rate changes will be announced.

For families across Britain that means higher mortgage rates.

It means anxiety and yet more pressure on household finances.

And it means this 12 year Tory circus destroying our economy must end. 1/2

— Rachel Reeves (@RachelReevesMP) November 3, 2022

\n","url":"https://twitter.com/RachelReevesMP/status/1588062477375488002","id":"1588062477375488002","hasMedia":false,"role":"inline","isThirdPartyTracking":false,"source":"Twitter","elementId":"65bb2b79-6d40-4de0-a72c-830e4f3a2c8a"},{"_type":"model.dotcomrendering.pageElements.TweetBlockElement","html":"

Yes, Britain needs economic stability, but we deserve more than that.

With Labour you will get a government of economic responsibility, with a real plan for growth that means we can thrive – not just lurch from Tory crisis to crisis. 2/2

— Rachel Reeves (@RachelReevesMP) November 3, 2022

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Mortgage rates are expected to jump on Thursday in response to the largest increase in the Bank of England’s base rate since 1989, as the central bank tries to bring down an inflation rate expected to remain in double figures until at least next spring.

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Homebuyers with tracker or variable rate mortgages will feel the pain of the rate rise immediately, while the estimated 300,000 people who must remortgage this month will find that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis.

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The average two-year fixed rate has fallen to 6.47% from 6.65% in mid-October – as the effects of the disastrous Kwasi Kwarteng mini-budget ease – but remains three times the rate offered by lenders earlier this year.

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A five-year fixed rate mortgage that could be bought for 6.51% on 20 October has slipped only marginally to 6.31%.

","elementId":"0b1db892-91dc-42cd-bafa-68bf600a343b"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2022/nov/03/interest-rates-likely-to-jump-as-markets-await-bank-of-england-decision","text":"Interest rates likely to jump as markets await Bank of England decision","prefix":"Related: ","role":"thumbnail","elementId":"5b1684c4-ff19-4d4d-9b3c-389fdc6621b9"}],"attributes":{"pinned":false,"keyEvent":true,"summary":false},"blockCreatedOn":1667461427000,"blockCreatedOnDisplay":"07.43 GMT","blockLastUpdated":1667461769000,"blockLastUpdatedDisplay":"07.49 GMT","blockFirstPublished":1667461769000,"blockFirstPublishedDisplay":"07.49 GMT","blockFirstPublishedDisplayNoTimezone":"07.49","title":"Rate rise would drive up mortgage costs","contributors":[{"name":"Phillip Inman","imageUrl":"https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/contributor/2007/09/28/phillip_inman_140x140.jpg?width=300&quality=85&auto=format&fit=max&s=ff3dad18a53e7f4c53a0f9e4e844fabf"}],"primaryDateLine":"Thu 3 Nov 2022 10.11 GMT","secondaryDateLine":"First published on Thu 3 Nov 2022 07.43 GMT"},{"id":"636361a28f0829e97d302c17","elements":[{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Good morning, and welcome to our rolling coverage of business, the world economy, and the financial markets.

","elementId":"a10ca440-b3e7-4e81-83c9-22ec5c53f177"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

All eyes are on the Bank of England this morning. The UK central bank is on track for its biggest interest rate rise in decades, as it tries to get a grip on stubbornly high inflation.

","elementId":"a0c665cb-f491-4c25-9391-4d8b148a27d1"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

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It would be the eighth rate hike in a row, driving up borrowing costs even as the country risks falling into recession.

","elementId":"2d758479-aa56-4019-9fcc-f0b56741ef13"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

A 75 basis-point rise would be the biggest rate hike since 1989 (if you exclude the mayhem on Black Wednesday when rates were briefly hiked skyward from 10% to 12%, in vain).

","elementId":"288b7af4-b498-4285-a850-3bb390f0f9f3"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2012/sep/13/black-wednesday-bad-day-conservatives","text":"Black Wednesday, 20 years on: a bad day for the Tories but not for Britain","prefix":"Related: ","role":"thumbnail","elementId":"29596004-1f2d-407d-8523-e70b71b25217"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

","elementId":"a3277763-e551-47c3-b808-9be777cbc779"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

It fears that high inflation will set off a wage-price spiral, with workers (understandably) seeking pay rises to protect them from the cost of living squeeze.

","elementId":"491ea908-5953-4804-aa1b-45f34b243e1b"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Shweta Singh, senior economist at fund manager Cardano, says the Bank faces a very difficult task:

","elementId":"661d916e-a93f-4159-a1bc-49f87e6bde4c"},{"_type":"model.dotcomrendering.pageElements.BlockquoteBlockElement","html":"

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The BoE is faced with an incredibly difficult balancing act of orchestrating large rate hikes in a recessionary economy. Markets are pricing in a terminal rate of 480 bps by September 2023, which is 100bps lower than during early October, but is pretty punchy nonetheless.

\n

","elementId":"61046f3a-d6a9-4a53-ad16-d6c77a79a07a"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The Bank also wants to reassure markets, after the turmoil caused by the disastrous mini-budget which sunk the pound and drove up government borrowing costs.

","elementId":"9a8742ae-1be4-4177-a949-8b807b18beb6"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

But policymakers are operating in the dark, after chancellor Jeremy Hunt’s fiscal statement outlining tax rises and spending cuts was delayed until November 17th.

","elementId":"620f8fa5-383b-48b6-b3ac-91b21e10602c"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

It has been scheduled for three days ago, so the lack of clarity over government policy makes the BoE’s task harder.

","elementId":"e1b5e4b7-f348-4efa-9338-478a2e05e668"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Singh explains:

","elementId":"1595c5f0-ecc5-4ea0-aeaa-491ad6e1da62"},{"_type":"model.dotcomrendering.pageElements.BlockquoteBlockElement","html":"

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“If September’s fiscal uncertainty was centred around how loose government policy would become, November’s uncertainty is centred around how tight it is set to become.

\n

And, if September’s dilemma for the Bank was that they might not be doing enough tightening, November’s dilemma is that they end up doing too much. It seems therefore that the MPC is still stumbling around in the dark.

\n

","elementId":"ca4f4638-2364-48d6-bd00-655d280d1107"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/commentisfree/2022/nov/02/the-uk-economy-is-about-to-be-thrown-into-a-black-hole-by-its-own-government?CMP=Share_iOSApp_Other","text":"The UK economy is about to be thrown into a black hole – by its own government | Larry Elliott","prefix":"Related: ","role":"thumbnail","elementId":"584a39a8-8062-44dc-908e-d4b1c01d1118"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

The markets are already jittery, after the US central bank raised its key lending rate by another three-quarters of a percent last night, and dampened hopes that it might ease off soon.

","elementId":"341934fc-df4e-4031-ae0d-0eeddca0a299"},{"_type":"model.dotcomrendering.pageElements.RichLinkBlockElement","url":"https://www.theguardian.com/business/2022/nov/02/fed-interest-rate-increase-inflation","text":"Fed announces sixth consecutive hike in US interest rates to fight inflation","prefix":"Related: ","role":"thumbnail","elementId":"a63b75c3-f289-40a9-ba8b-95eb55212950"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Wall Street sank after Federal Reserve chair Jerome Powell warned that US interest rates may peak higher than expected, and remain high longer than hoped to squeeze out inflation.

","elementId":"90144faf-85f5-40b5-bb30-a9f689a3fae3"},{"_type":"model.dotcomrendering.pageElements.TextBlockElement","html":"

Powell warned that it was “very premature” to be thinking about pausing rate hikes, and cautioned that:

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“Data since our last meeting suggests that the ultimate level of interest rates will be higher than expected.

\n

","elementId":"5527f12b-02a4-47c1-b0e5-ab41001b8108"},{"_type":"model.dotcomrendering.pageElements.TweetBlockElement","html":"

(5) Top 3 sentences from Jerome Powell speech yesterday night —

1- ''If we were to over tighten, we could use our tools to support the economy later on; from a risk management perspective, that's a better risk to run than to under deliver on tightening and risk high inflation."

— Madhur Jain (@Madhur_1910) November 3, 2022

(6) 2- ''The incoming data since our last meeting (labor and CPI) suggest the terminal rate of Fed Funds will be HIGHER than previously expected (4.63%), and we will stay the course until the job is done''.

When asked about stock markets rallying during his press conference:

— Madhur Jain (@Madhur_1910) November 3, 2022

(7) 3- ''We have ways to go when it comes to raising interest rates, and we will ensure financial conditions are tight enough to bring economic activity and inflation down''.

I think FED is doing right thing to bring down inflation & there would be Stagflation in global economy.

— Madhur Jain (@Madhur_1910) November 3, 2022

We also find out how the UK and US services sectors fared during October, plus the latest eurozone unemployment stats.

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The agenda

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9am GMT: Norway’s Norges Bank interest rate decision

9.30am GMT: UK service sector PMI for October

10am GMT: Eurozone unemployment rate for September

Noon GMT: Bank of England interest rate decision

12.30pm GMT: Bank of England press conference

2pm GMT: US service sector PMI for October

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Key events

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