Bank of England tipped to leave interest rates on hold; Shell profits drop

Introduction: Bank of England rate decision

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

These are tricky times for central bankers. Growth is being held back by high interest rates, while inflation is still over target despite falling back from the peaks of the last two years.

So the Bank of England has plenty to ponder, as it prepares to set interest rates at noon today.

The City is confident that the Bank will leave interest rates on hold at their current 16-year high of 5.25%. With inflation at 4% – twice the BoE’s 2% target – policymakers probably won’t feel confident easing policy.

The money markets reckon there’s a 99% chance that the Bank holds rates unchanged today, with a 1% possibility of a shock rise to 5.5%.

The Bank may also cut its forecast for inflation this year, while investors also expect the BoE to signal when rate cuts are likely to start this year.

The Bank of England is likely on Thursday to deliver a brighter outlook for the UK economy, reducing its forecast for inflation this year and potentially opening the way to interest-rate reductions that could boost growth https://t.co/bmoBKJQBuZ

— Bloomberg Markets (@markets) February 1, 2024

Rates have been held at 5.25% since last August. But the nine members of the Bank’s monetary policy have been split at recent interest votes – with some hawkish members pushing for higher borrowing costs.

April LaRusse, head of investment specialists at Insight Investment, says:

“We don’t expect any change in UK rates tomorrow, but the vote is going to be fascinating. At the last meeting of the Monetary Policy Committee in December three members of the committee voted to increase interest rates to 5.5%.

A lot has changed since then; the US Federal Reserve have pivoted to a more dovish outlook and markets are now pricing in a series of UK interest rate cuts starting in May. With inflation now considerably below the Banks own forecasts we expect a shift in tone – but the Bank is going to face a tricky job to keep market perceptions on a realistic path.”

Last night, America’s Federal Reserve left interest rate on hold, while Fed chair Jerome Powell tried to cool expectations that the Federal Reserve would begin cutting interest rates as soon as March.

Powell insisted a March cut was not the Fed’s “base case”, seen as an indication that the Fed could delay easing monetary policy until May.

That, and jitters about the health of US regional bank New York Community Bancorp, knocked stocks in New York last night. It cut its dividend and posted a surprise loss, renewing fears over the health of similar lenders.

The S&P 500 index of US shares lost 1.6%, while the tech-focused Nasdaq Composite lost 2.2%. Google’s parent company, Alphabet, lost 7% after missing advertising revenue targets in its latest results.

The S&P 500 extended its losses and fell 1.6% today after #Fed Chair Jerome Powell ruled out rate cuts starting as soon as March – a hawkish stance relative to market expectations, in my view. I don’t think this Fed-induced equity pullback will last. More on my take 👇

— Jean Boivin (@Jean_Boivin) February 1, 2024

Also coming up today

The UK Labour party will be wooing business chiefs, and vice versa, today as it holds its largest ever business conference.

About 400 senior business leaders will gather in London for speeches, panels and roundtables, at an event where tickets sold out in just a few hours.

With a general election due within a year, Labour is expecting business leaders from companies such as Google, Shell, AstraZenaca, Airbus, and Goldman Sachs.

They hope the conference will demonstrate the party’s “commitment to work hand in glove with the business community” and will use it as an opportunity to reveal its business policy plans after two major industry reviews.

The agenda

8.30am GMT: Sweden’s central bank, the Riksbank, sets interest rates.
9am GMT: Eurozone manufacturing PMI report for January
9.30am GMT: UK manufacturing PMI report for January
10am GMT: Eurozone flash inflation reading for January
Noon: Bank of England interest rate decision
12.30pm GMT: Bank of England press conference
1.30pm GMT: US weekly jobless data

Key events

Next up is the BoE with its rate decision and latest Monetary Policy Report at 12pm. The committee are expected to be leave rates on hold today, while delivering a reduced inflation forecast that may path the way for easier policy. Voting will be closely watched

— The Dude (@Redpanda73) February 1, 2024

Kalyeena Makortoff

The chancellor, Jeremy Hunt, has said there will be less room for tax cuts in the spring budget next month, just days after the International Monetary Fund warned that the UK needed to focus on repairing its public finances.

Hunt, who in November announced he was cutting the main rate of national insurance contributions paid by employees from 12% to 10%, was widely believed to be gearing up for another tax giveaway after dropping a series of hints about what could be the Conservatives’ last budget before a general election.

However, the chancellor said he needed to manage expectations.

Hunt told the BBC’s Political Thinking with Nick Robinson podcast:

“It doesn’t look to me like we will have the same scope for cutting taxes in the spring budget that we had in the autumn statement.”

Eurozone manufacturing downturn cools in January

The eurozone’s factory sector has shrunk again, but at a slower rate, as Red Sea disruption leads to supply delays.

Data provider S&P Global Insight reports that the slump in the eurozone’s manufacturing sector eased in January, with factory output and new orders declining at their softest rates since last April.

Its latest survey of purchasing managers shows that cutbacks to purchasing activity, stocks of inputs and employment also cooled, while business confidence rose to a nine-month high.

It adds:

Decreases in both input costs and output prices gathered momentum in January, despite suppliers’ delivery times lengthening for the first time in a year following disruption to ships passing through the Red Sea.

This lifted its HCOB Eurozone manufacturing PMI to a 10-month high of 46.6, up from 44.4 in December, but still below the 50-point mark separating expansion from contraction.

Adidas CEO says Red Sea disruptions cause delays and higher costs

German athletic gear and footwear maker Adidas has warned that profit margins are being hit by shipping disrupion in the Red Sea.

Adidas CEO Bjorn Gulden told analysts that “exploding” freight rates are driving up costs, while shipping delays are causing some delivery issues.

Gulden said:

“Currently the spot rates are exploding again.

“We have contracts that go through the summer but if we need to ship more than what the contract says or we need to accelerate something, that now has a pretty high premium.”

Shipments are currently delayed by about three weeks, which Gulden said is causing some “delivery issues” especially to Europe.

Shell’s chunky profits of $28bn last year have prompted more calls for a stronger windfall tax on the sector.

Imogen Dow, warm homes campaigner at Friends of the Earth, said:

“2023 was one of Shell’s most profitable years ever as the oil and gas industry continues to rake in billions while billpayers face another winter of soaring energy prices.

“It’s been more than two years since energy prices first shot up and still the UK’s cold homes crisis remains unaddressed, at detriment to the millions struggling to stay warm and well this winter.

“By rolling out a street-by-street insulation programme, and rapidly expanding the UK’s homegrown renewable power production, the government can bring down bills quickly, keep millions warmer and slash carbon emissions. This can and should be funded in part through a windfall tax on the fossil fuel companies fuelling the climate crisis and driving up energy prices.”

The last two years’ energy price boom has seen oil giants like BP and Shell and their investors emerge as winners – at the expense of people and the planet, warns Sophie Flinders, data analyst at Common Wealth:

Shell has U-turned on climate targets and instead has committed to increasing their oil and gas production. In 2021 it seemed that fossil fuel companies and governments alike had committed, in principle, to working towards a fossil fuel free planet.

Today’s results remind us that for Big Oil, profits and payouts to shareholders are more important than preventing climate breakdown.

Shell’s $28bn profits for 2023 show that our energy system is broken, warns Simon Francis from the End Fuel Poverty Coalition.

Francis says:

Oil and gas companies continue to post obscene profits at the expense of the British public – millions of whom are spending this winter shivering in cold, damp and mouldy homes.

“Shell’s profits may be down from record numbers, but people’s energy bills continue at unaffordable levels, with more and more people being pushed into poverty.

“Households have £3bn of energy debt, pensioners are too afraid to put on their heating despite the cold, and businesses up and down the country are struggling to survive.

“The UK should be doing everything to keep our citizens warm this winter, but instead this government is choosing to side with the oil and gas industry and is wasting valuable time debating new oil and gas licences which ministers admit will do absolutely nothing to lower bills or increase UK energy security. “

In the banking sector, Deutsche Bank AG is planning to cut 3,500 jobs over the coming years, Bloomberg reports this morning.

The cuts are coming as CEO Christian Sewing tries to lift profitability and return more money to shareholders.

Bloomberg explains:

The reductions, most of them back-office roles, are part of cost savings that the Frankfurt-based bank had previously announced.

The lender detailed them as it raised its mid-term revenue target and said it will return €1.6bn to investors in the first half of this year, including through a €675m share buyback.

Deutsche Bank AG plans to cut 3,500 jobs over the coming years as Chief Executive Officer Christian Sewing seeks to make good on a pledge to lift profitability and return more money to shareholders.

German lender announces new, €675 million share buybackhttps://t.co/OknrdsjETE

— Global Markets Investor (@GlobalMktObserv) February 1, 2024

The pound has lost ground against the US dollar ahead of the Bank of England’s interest rate decision, due at noon.

Sterling has slipped by almost half a cent, to $1.2645, as the dollar strengthens after Federal Reserve chair Jerome Powell said last night a rate cut in March was not the US central bank’s “base case.”

Shares in Shell have hit their highest level in three weeks in early trading.

They rose by 2% at the start of trading in London to £24.97, the highest since 10 January.

Bank of England decision: What the analysts expect

BoE policymakers could be split three ways when they set interest rates today, predicts Michael Hewson of CMC Markets:

No changes are expected to monetary policy today with the main question being around whether our resident hawks decide to vote with the majority for no change and temper their hawkishness. Of the 19 meetings Catherine Mann has voted in she has voted to increase the base rate at 17 of them so a hold will be a rare event for her.

There is also the possibility of a dovish outlier with the potential for Swathi Dhingra voting for a rate cut, prompting a split in the opposite direction to what we saw in December.

Since joining the MPC, Dhingra has only voted to raise rates twice in the 11 meetings she has voted in, so if anyone is going to break ranks and starting voting to cut rates it will be her.

Ben Laidler, global markets strategist at eToro, expects the Bank of England to start opening the door to interest rate cuts later this year.

The Bank of England (BoE) has been the most hawkish of major central banks and this has made Sterling one of the best recent currency performers. With UK inflation still double its 2% target, economic growth has been better-than-feared, and the government set for more tax cuts at its March budget.

But enough inflation-fighting progress has been made for the BoE to begin opening the door to lower interest rates starting this summer, with four cuts likely in the second half. This would lag behind the US Fed and Europe’s ECB but be welcome, and borrowers have already started to benefit from the fall in bond yields.

However, Tomasz Wieladek, chief European economist at T. Rowe Price, predicts the Bank will sound hawkish today, and signal that the markets are expecting too many rate cuts:

In December, UK inflation turned out to be stickier than expected, while survey data suggested a rebound in output and employment in the services sector. Mortgage approvals have begun to rise and mortgage rates are now falling, which will allow the mortgage and housing market to recover further over the next 6-12 months.

Economic activity will continue to rebound over the next couple of months as a result of the 2% National Insurance cut, which became effective at the beginning of the year. This will raise demand in the economy, while any additional tax cuts may increase demand further.

Shell chief executive Wael Sawan says the group “delivered another quarter of strong performance”.

“As we enter 2024 we are continuing to simplify our organisation with a focus on delivering more value with less emissions.”

Greenpeace protests outside Shell’s GQ

Greenpeace activists dressed as Shell board members have held a demonstration outside the energy giant’s headquarter this morning.

They conducted a mock Shell profits party behind a burning sign reading “Your Future”, to highlight the climate damage caused by fossil fuels.

Photograph: Henry Nicholls/AFP/Getty Images

For safety reasons, no alcohol was consumed, says Greenpeace. The ‘champagne’ featured was 0% ABV. Photograph: Greenpeace/Getty Images

Maja Darlington, Campaigner at Greenpeace UK, said:

“Fires are raging across Colombia, Britain has been wracked by floods, 2023 smashed global temperature records, but Shell is posting yet more obscene profits from climate-wrecking fossil fuels. While customers struggle with the cost-of-living crisis, Shell shovels over $20bn to shareholders and drills for yet more oil and gas, climate disasters are multiplying and hitting hardest those who have done the least to cause the crisis.

“It’s time to end the fossil fuel party. It would take the average British worker over 640,000 years to earn as much as Shell did last year. Our government must make oil companies like Shell stop drilling and start using their immense wealth to pay for the damage they are causing, before all our futures go up in flames.”

Shell has beaten City profit expectations, by posting earnings of $28.25bn for last year.

Analysts had expected Shell’s full-year 2023 net profit to come in at around $27.5bn, reports CNBC.

Shell profits drop, but shareholders still benefit

Profits at oil giant Shell have dropped by almost a third, but that hasn’t stopped it announcing another share buyback scheme and lifting its dividend.

Shell has reported annual adjusted profits for 2023 of $28bn, 29% down from its record earnings of almost $40bn in 2022.

The drop in profits is due to lower oil and gas prices, lower volumes, and lower refining margins, Shell says.

In the last quarter of 2023, Shell made $7.3bn, up from $6.2bn in the third quarter of last year, but lower than the $9.8bn made in Q4 2022.

The oil giant has also announced a new share buyback programme of $3.5bn, and is also lifting its dividend by 4%.