Business
UK may already be in recession Bank of England
The Bank of England has raised interest rates from 1.75% to 2.25% – the highest level for 14 years – and warned the UK may already be in a recession.
The central bank had previously expected the economy to grow between July and September but it now believes it will shrink by 0.1%.
It is the Bank’s seventh rate rise in a row as it tries to tame soaring prices.
It takes borrowing costs to their highest since 2008, when the global banking system faced collapse.
Inflation – the pace at which prices rise – is currently at its highest rate for nearly 40 years, leaving many people facing hardship.
Prices are also widely predicted to head higher in October, despite a government plan to limit soaring gas and electricity prices for households and businesses.
Raising interest rates makes it more expensive to borrow which should, in theory, encourage people to spend less and cool prices.
But many households with mortgages will see their costs rise. People on a typical tracker mortgage will have to pay about £49 more a month, while those on standard variable rate mortgages will see a £31 increase.
Those on fixed-rate deals will not be immediately affected, although their costs could jump when their deals come up for renewal.
The Bank now expects the UK economy to shrink between July and September. This comes after the economy already shrank slightly between April and June and will push the UK into recession, defined as when an economy shrinks for two consecutive quarters.
It said a smaller-than-expected bounce back in July from the June bank holiday to celebrate the Queen’s Platinum Jubilee and the additional bank holiday in September for the Queen’s state funeral had both hit the economy.
The Bank, however, said it now expected inflation to not rise as high as it originally expected, saying the government’s help on energy bills for households and firms would help limit soaring prices.
It now expects inflation to peak at just under 11% in October, having previously forecast it would reach 13% next month.
Nevertheless, inflation is currently nearly five times the Bank of England’s 2% target and even if it peaks in October, it is expected to remain above 10% “over the following few months” before starting to fall.
As the Bank acts to calm inflation, the new chancellor Kwasi Kwarteng is preparing to announce a “mini-budget” on Friday when he is expected to cut taxes and reveal other measures to boost economic activity. There has been some concern that the plans could fan inflation.
On Thursday the Bank said: “Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the [rate-setting] committee will respond forcefully, as necessary.”
Paul Dales, chief UK economist at Capital Economics. said: “That new ‘stronger demand’ bit seems like a not-so-subtle reference to the loosening in fiscal policy that’s expected to be announced tomorrow.
“In short, the Bank has indicated it will raise rates further to offset some of the boost to demand from the government’s fiscal plans.”
Some economists had expected the Bank to lift rates by 0.75 percentage points this month, in line with similar moves by the US Federal Reserve and the European Central Bank, and three of the MPC’s nine members voted for such a rise.
‘Nothing left to cut back’
In Grimsby, self-employed auditor Kristine Green said she had “nothing left to cut back on” as she struggled to cover the monthly cost of her variable rate mortgage.
She said her repayments had already gone up four or five times in the past year.
“There were two instances where the increases happened in such quick succession, I didn’t even get a letter about it from my mortgage provider.”
She said with the latest increase on Thursday, her mortgage would soon be edging on £460-470 per month, about £100 more than what she was paying this time last year.
Higher interest rates will also drive up borrowing costs for businesses, many of which already face crippling energy and fuel bills.
Jonathan Fell, managing director of family theme park the Ice Cream Farm in Cheshire, said he had taken out millions of pounds in loans to develop the business in recent years.
Although some were on fixed five-year terms, an emergency government loan he was granted during the pandemic follows the base rate set by the Bank of England.
“Any further rate increases would be hugely worrying,” he said. “It could actually finish the business depending on how far it goes.”
The Bank of England has continued on its path of interest rate raises, but the real question now is how high are rates going to go. Financial markets predict that the rate will go close to 5%, and that is higher than in the US and the Eurozone. This reflects higher inflation here.
Today the Bank held back from a 0.75 percentage point jumbo rate rise, as the US Fed had done last night. Foreign exchange markets were looking to see whether the UK would follow the US tough rhetoric against inflation too. But it was a close vote.
The Bank expressed some relief that inflation would now peak at 11% next month, thanks to the government’s energy interventions. But rates are still going up because the Bank sees more inflation arising from the British economy itself, even as the energy shock has been muffled.
All eyes are now on November, when the Bank will calculate a new forecast to assess all of the government’s interventions, which bring down inflation but also raise borrowing.
Already the rise in mortgage rates is weighing on the housing market. The Bank believes we are already in a recession. The rate rises will keep coming. Precisely how many is the question.
Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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