UK five-year mortgage rates hit 6% as Kwarteng meets bank chiefs – business live

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The Guardian

Introduction: Fitch cuts outlook for UK rating to ‘negative’ from ‘stable’

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

A second rating agency has threatened to downgrade the UK’s credit rating, warning that the unfunded tax cuts in Kwasi Kwarteng’s mini-budget will drive up borrowing.

Fitch has cut the outlook on the UK’s AA- investment grade credit rating, to Negative from Stable, following a similar move from S&P.

Fitch warned that the “large and unfunded fiscal package” could lead to a significant increase in the government’s deficits over the medium term, and undermine the previous government’s fiscal consolidation strategy.

In a rather scathing verdict of Kwarteng and Liz Truss’s plans, Fitch says:

The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact, and the inconsistency between fiscal and monetary policy stance given strong inflationary pressures, have in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength.

Fitch also criticises Kwarteng for hinting that there could be more tax cuts, and fears the government’s politicial credibility, and the credibility of its fiscal policy, are both hurt.

Monday’s humiliating u-turn on abolishing the top rate of UK income tax didnt change Fitch’s wider assessment either:

Although the government reversed the elimination of the 45p top rate tax (expected to cost £2bn in FY22-2023), the reportedly negative impact of the tax package, and related financial market volatility, on public opinion and the government’s weakened political capital could further undermine the credibility of and support for the government’s fiscal strategy.

Fitch estimates that “without compensatory measures”, the general government deficit will remain elevated at 7.8% of GDP in 2022 and increase to 8.8% in 2023.

Borrowing will be pushed up by rising interest payments on inflation-linked bonds, household support packages, the energy price cap and tax cuts.

This would lift the UK government debt to 109% of GDP by 2024 from an estimated 101% in 2022, reflecting “both higher primary deficits and a weaker growth outlook”.

Also coming up today

National Grid is set to publish its outlook for both gas and electricity supplies this winter today, outlining how Britain’s power system will cope with harsh weather.

The report comes amid growing concern that factories could be forced to shut down as Vladimir Putin chokes Europe’s gas supplies.

We also find how UK, and eurozone, construction companies fared last month, and the Office for National Statistics releases its weekly economic insights.

The agenda

  • 7am BST: German factory orders for August

  • 8.30am BST: Eurozone construction PMI for September

  • 9.30am BST: UK construction PMI for September

  • 9.30am BST: ONS’s latest economic activity and business insights

  • 12.30pm BST: European Central Bank’s Monetary Policy Meeting Accounts published

  • 1.30pm BST: US weekly jobless claims

Key events

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UK business inflation expectations rise in September

Fitch are right to be worried about inflation, judging by the latest data from the Bank of England.

British businesses’ expectations for consumer price inflation in one year’s time rose to 9.5% last month, up from 8.4% in August, a BoE survey of chief financial officers shows.

Bosses also expect to keep raising prices – output prices are forecast to rise by 6.6% in the year ahead, up from expectations of 6.5% in August.

The survey was conducted in the first half of September, before the mini-budget, and will add to the BoE’s concerns that inflation expectations are rising.

Fitch also warned that the UK faces the risk of “prolonged inflationary pressures”:

The agency forecasts that inflation will average 8.9% this year (it was 9.9% in August), before gradually declining to 4% in 2024.

This, they say, will spur the Bank of England to raise interest rates to 5% next year (from 2.25% at present.

Although the energy price cap will lead to a lower inflation peak, rising core inflation (6.3% in August) reflects strong pressures from domestic demand and a tight labour market.

A weaker GBP [the pound] could also feed price dynamics through higher import prices. We consider that these factors and the fiscal stimulus announced will lead the BoE to increase its policy rate to 5% in 2023 and maintain rates at 4% by end-2024.

Fitch’s threat to downgrade the UK’s credit rating shows the anxiety over the serious concerns about the government’s push for unfunded tax cuts, Interative Investor’s Victoria Scholar adds:

There are serious concerns about the government’s unfunded stimulus measures and what the increased levels of borrowing will spell for the UK’s inflationary conundrum as well as its debt levels down the line.

The UK is already dealing with historically high debt levels in the aftermath of the pandemic when billions were spent on expensive emergency programmes such as the furlough scheme, track and track and the vaccine roll-out.

Construction firms gloomier as recession worries grow

Activity among British construction companies improved unexpectedly last month, but builders were also hit by a fall in new business as the economic outlook deteriorated.

The Construction Purchasing Managers’ Index, which measures activity in the sector, rose to 52.3 in September from 49.2 in August – showing a return to growth, as supply chain problems eased.

But, business optimism hit the lowest since July 2020 as new orders stalled.

Housebuilders reported that activity rose, but civil engineering projects declined again.

Construction firms said clients were slow, or reluctant, to sign off projects due to inflation concerns, squeezed budgets and worries about economic outlook.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, warned that the outlook is weak:

Forward-looking survey indicators took another turn for the worse in September, with new business volumes stalling and output growth expectations for the year ahead now the lowest since July 2020.

This reflected deepening concerns across the construction sector that rising interest rates, the energy crisis and UK recession risks are all set to dampen client demand in the coming months.”

Here’s our news story on Fitch’s cut to the UK’s credit rating outlook:

Photograph: Andrew Boyers/Reuters

Energy news: Shell has warned that its profits this quarter will be hit by a drop in refining margins, and a squeeze on its chemicals division too.

Margins at Shell’s refining business – which turns crude oil into products such as petrol and diesel – are expected to fall to $15 a barrel, down from $28/barrel in the last quarter. This will knock up to $1.4bn off Shell’s adjusted underlying earnings.

Margins at its chemicals unit have tumbled dramatically too – to minus $27 per tonne, from $86 per tonne in the previous three months.

This suggests that Shell’s run of record profits could be ending, with Brent crude having dropped steadily since June.

Victoria Scholar, head of investment at interactive investor, explains:

In what is a notoriously cyclical business, Shell is grappling with a dysfunctional and volatile gas market as well as expectations of softening oil demand, particularly from China as the global economy cools.

Shell has been a major FTSE 100 winner this year amid the equity market turmoil, up by around 40% year-to-date.

This morning, though, Shell are down 3.7%, near the bottom of the FTSE 100 leaderboard.

Rather than clearing the crisis in-tray, problems keep piling up for the Truss administration, says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown:

Another threat of a ratings downgrade comes hard on the heels of mortgage rates shooting up to 14 year highs and the steep rise in oil prices, which threaten to keep fanning the fires of inflation.

The Prime Minister’s speech yesterday had nothing new to reassure markets and with political divisions widening within her party of how to pay for big tax cut promises, ratings agencies are far from impressed. Fitch followed S&P to cut the outlook on the UK’s AA investment grade rating to negative from stable.

This matters because even without a downgrade the UK’s borrowing costs have risen sharply, and if the ‘stable’ rosette is ripped off, foreign creditors are going to demand even more money to fund the government’s growing debt pile. Moody’s has also warned that large unfunded tax cuts risks damaging the country’s debt affordability.

Bloomberg: Uninvestable’ UK market lost £300bn in Truss’s first month

At least £300bn has been wiped off the value of Britain’s stock and bond markets during Liz Truss’s first month in power.

Bloomberg has calculated that the market value of its UK gilt and inflation-linked gilt indexes has lost around £200bn since the Conservative Party chose their new leader in early September.

The FTSE 350 Index, which includes the blue-chip FTSE 100 and the domestically focused FTSE 250 — is down by about £77bn since the September 2 close.

The market value of Bloomberg’s gilt and inflation-linked gilt indexes (UK government bonds) has lost around £200bn. Company bond prices have also fallen.

We should remember that financial markets globally also had a rocky September, hit by concerns of a world recession as central banks hike interest rates to battle inflation.

But UK bonds fell much more sharply than rivals after the mini-budget, while shares in property companies tumbled on fears of higher interest rates to cool the inflationary impact of unfunded tax cuts.

Investors have been spooked by Truss and Kwarteng’s plans, warns Liberum Capital strategist Joachim Klement.

Klement says:

“The feedback we get from investors is that they consider the UK uninvestable as long as there is such government chaos.”

Here’s Bloomberg’s full story: ‘Uninvestable’ UK Market Lost £300 Billion in Truss’s First Month

Sterling is a little higher against the US dollar this morning, after sliding back yesterday.

The pound has gained a third of a cent to $1.136, towards the two-week high near $1.15 early on Wednesday.

The pound vs the US dollar in the last quarter Photograph: Refinitiv

The US dollar had weakened a little recently, on hopes that weaker economic data might prompt the US Federal Reserve to slow its interest rate rises.

But Mark Haefele, chief investment officer at UBS Global Wealth Management, predicts the dollar will remain in demand.

“We expect the dollar, along with the Swiss franc, to remain supported by safe-haven flows amid uncertainty over the outlook for inflation, Fed policy, and the war in Ukraine.”

UK bond prices are a little weaker this morning, which is pushing up the interest rate on government debt.

Benchmark 10-year government bond yields have risen to 4.08%, from just over 4% last night.

Before the mini-budget, these 10-year gilts were trading at a yield of 3.5%, before Kwasi Kwarteng’s plans for unfunded tax cuts alarmed markets.

They surged to 4.5% last week before the Bank of England pledged to buy up longer-dated bonds to stabilise the markets and protect the pensions industry.

The yield, or interest rate, on 10-year UK gilts Photograph: Refinitiv

The yield on 30-year gilts has risen to 4.26%, from 4.18%. They also rose yesterday after the Bank of England resisted buying any gilts through its emergency scheme, following the recovery in bond prices.

How to avoid a credit rating downgrade

Lowering the UK’s outlook to negative, from stable, could be the first step towards a full-blown downgrade by Fitch.

Fitch say there are several factors that could trigger a cut… or alternatively lead to an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Public Finances: Failure to implement a credible fiscal strategy that restores market confidence and is consistent with government debt/GDP declining over the medium term.

  • Macro: Evidence that policy uncertainty and/or new trading arrangements with the EU will undermine the UK’s macroeconomic performance and financial stability over time.

  • -Structural: Political developments that lead to deterioration in governance indicators and/or undermine the territorial integrity of the UK.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • Public Finances: Implementation of a credible fiscal strategy that is consistent with government debt / GDP declining over the medium term.

  • Macro: Reduces risks to macro-financial stability, for example, through sustained easing of inflationary pressures and improved market confidence in the government’s fiscal strategy.

Some history: the UK lost its prized AAA credit rating with both Fitch and Moody’s back in 2013, while S&P followed suit after the EU referendum in 2016.

Fitch also downgraded the UK after the Brexit vote (from AA+ to AA), and then lowered the rating to AA- when the pandemic hit.

As the FT points out, the ratings agencies are still monitored by investors:

Credit rating agencies have lost some of their power since the 2008-09 financial crisis, when they failed to warn of the risk in many complex products they had given triple-A ratings.

But their sovereign ratings are still closely watched.

Political uncertainty is also weighing on the UK, Fitch adds.

The new government of Prime Minister Liz Truss has sought to assuage concerns regarding transparency and institutional independence after comments about potential revisions to the BoE’s mandate during the Conservative leadership contest and the roll-out of a large fiscal package without the involvement of the Office of Budget Responsibility.

Reduced popular support for the ruling Conservative Party, the social impact of the cost of living crisis and increased frequency of strikes could constrain the new Prime Minister’s room for manoeuvre.

Polling company YouGov showed yesterday that Truss’s popularity had deteriorated dramatically, while several polls have given Labour very large leads since mini-budget.

Fitch: UK economy to contract next year

Fitch has also warned that Britain’s economy will shrink next year, despite the mini-budget.

We forecast the economy to contract in 2023 despite the energy tariff support and the proposed tax cuts. In addition to the energy crisis and weaker external demand (including contraction in the eurozone), the likely tighter domestic financing conditions will lead to a contraction of 1.0% in 2023 before growth recovers to 1.8% in 2024.

Yesterday, Liz Truss claimed that an “anti-growth coalition” was holding the UK back – including opposition parties, unions, remainers and environmental campaigners (and quite possibly anyone who disagrees with the government).

Fitch, though, points out that Truss’s administration haven’t shown how their growth plan will actually improve the economy:

Although the government seeks to lift growth to 2.5% over the medium term, it has yet to fully outline how and in what timeframe it plans to directly address structural challenges related to low investment, labour supply and continued uncertainty over the implementation and evolution of the Trade Cooperation Agreement (TCA) with the EU.

There could be progress on that last point soon — Simon Coveney, the Irish foreign minister, is flying to London for talks with his UK counterpart, James Cleverly, today over Northern Ireland’s Brexit arrangements.

Chancellor to hold crisis talks with high street banks over rising mortgage rates

Fitch’s warning comes as Chancellor Kwasi Kwarteng prepares to meet high street bank bosses to discuss the crisis in the mortgage market following the mini-budget.

The talks comes as home­owners face the biggest increase in mortgage costs for 14 years, with the average rate on a new two-year fixed mortgage rising above 6%.

A chart showing how UK mortgage affordability has worsened

These soaring rates mean some homeowners’ monthly payments are increasing by hundreds of pounds a month when they remorgage, and are also pricing new home-buyers out of the market.

My colleague Rupert Jones explains:

Moneyfacts, a financial data provider, said the average new two-year fixed rate had risen again and broken through 6% on Wednesday. It went up to 5.97% on Tuesday, having already risen to 5.75% on Monday.

The average two-year fix has increased from an average of 4.74% on 23 September, the day of the mini-budget. At the start of December last year the average was 2.34%.

Mortgage costs surged as the money markets dramatically lifted their forecasts for UK interest rates after the mini-budget.

This morning, the money markets suggest the Bank of England will have hiked base rate to 5.5% by next summer, from 2.25% today.

Introduction: Fitch cuts outlook for UK rating to ‘negative’ from ‘stable’

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

A second rating agency has threatened to downgrade the UK’s credit rating, warning that the unfunded tax cuts in Kwasi Kwarteng’s mini-budget will drive up borrowing.

Fitch has cut the outlook on the UK’s AA- investment grade credit rating, to Negative from Stable, following a similar move from S&P.

Fitch warned that the “large and unfunded fiscal package” could lead to a significant increase in the government’s deficits over the medium term, and undermine the previous government’s fiscal consolidation strategy.

In a rather scathing verdict of Kwarteng and Liz Truss’s plans, Fitch says:

The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact, and the inconsistency between fiscal and monetary policy stance given strong inflationary pressures, have in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength.

Fitch also criticises Kwarteng for hinting that there could be more tax cuts, and fears the government’s politicial credibility, and the credibility of its fiscal policy, are both hurt.

Monday’s humiliating u-turn on abolishing the top rate of UK income tax didnt change Fitch’s wider assessment either:

Although the government reversed the elimination of the 45p top rate tax (expected to cost £2bn in FY22-2023), the reportedly negative impact of the tax package, and related financial market volatility, on public opinion and the government’s weakened political capital could further undermine the credibility of and support for the government’s fiscal strategy.

Fitch estimates that “without compensatory measures”, the general government deficit will remain elevated at 7.8% of GDP in 2022 and increase to 8.8% in 2023.

Borrowing will be pushed up by rising interest payments on inflation-linked bonds, household support packages, the energy price cap and tax cuts.

This would lift the UK government debt to 109% of GDP by 2024 from an estimated 101% in 2022, reflecting “both higher primary deficits and a weaker growth outlook”.

Also coming up today

National Grid is set to publish its outlook for both gas and electricity supplies this winter today, outlining how Britain’s power system will cope with harsh weather.

The report comes amid growing concern that factories could be forced to shut down as Vladimir Putin chokes Europe’s gas supplies.

We also find how UK, and eurozone, construction companies fared last month, and the Office for National Statistics releases its weekly economic insights.

The agenda

  • 7am BST: German factory orders for August

  • 8.30am BST: Eurozone construction PMI for September

  • 9.30am BST: UK construction PMI for September

  • 9.30am BST: ONS’s latest economic activity and business insights

  • 12.30pm BST: European Central Bank’s Monetary Policy Meeting Accounts published

  • 1.30pm BST: US weekly jobless claims

October 6, 2022 at 04:28PM Graeme Wearden

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