Bank of England widens bond purchases to battle dysfunctional markets; real wages fall again – business live

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Here’s our news story on how the rise in long-term sickness has pulled down the unemployment rate:

Here’s the chart showing how public sector pay has lagged behind private sector workers, showing the difficulty in making spending cuts on the scale needed to pay for Kwasi Kwarteng’s tax cuts.

UK wages continued to lag inflation over the summer, leaving workers with real terms pay cuts.

Regular pay (excluding bonuses) rose by 5.4% per year in June-August, the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic.

Total pay (including bonuses) rose by 6.0% per year in June-August, up from 5.5% a month ago.

With UK consumer price inflation running at 9.9% in August, that means real pay fell.

This was particularly acute in the public sector, where average regular pay rose by 2.2%, compared with 6.2% in the private sector.

The ONS also reports that the number of job vacancies in July to September 2022 fell by 46,000, to 1,246,000, the third consecutive quarterly fall.

The UK’s unemployment rate has fallen to its lowest since 1974, driven by a record number of people leaving the jobs market.

The number of people classed as inactive – neither in work nor looking for it – rose by 252,000 in the three months to August. That’s the biggest such increase since records began in 1971, the Office for National Statistics reports.

And worryingly, the number of people economically inactive because they are long-term sick increased to a record high.

It pushed up the UK’s economic inactivity rate up to 21.7%, which is 1.4 percentage points higher than before the pandemic.

It also nudged the unemployment rate down to 3.5%, the lowest since 1974, and pushe down the number of unemployed people per vacancy to a record low of 0.9 in June-August.

The ONS reports that the fall in available workers was largely driven by those who are long-term sick or because they are students, with the biggest increases in the 50-64 and 16-24 ranges.

In other news, Heathrow has warned that the outlook for demand this winter is uncertain, given the growing economic headwinds, the escalating Ukraine war, and risks of a new wave of Covid-19.

Britain’s largest airport also predicted Christmas would be busy, and reported that it handled 5.8 million passengers during September, 15% below levels seen in 2019.

Although travel demand recovered from the pandemic, Heathrow was forced to cap flight numbers due to labour shortages, after passengers suffered delays, cancelled flights and lost luggage.

Here’s the full story:

The market was always going to retest the Bank’s resolve and put the Budget to the sword, points out Neil Wilson of Markets.com.

He says the situation “all seems rather messy and panicky”, and predicts the Bank may need to extend its intervention in the bond markets for longer (rather than ending on Friday).

To expand your emergency intervention in the market once is unfortunate, to do so twice looks like carelessness. Friday probably won’t be the last day of the Bank’s intervention in the gilt market – you’d think it will need to continue right up until either something really breaks and it gives up, or the Chancellor reveals his cunning plan to restore order…

Time-limited central bank backstops are not prone to succeeding in the long run. Usually, the market waits for the intervention to end before retesting the limits. Markets are like toddlers – always testing the boundaries, wildly overreacting and usually working to cause maximum mayhem at the most inconvenient times. Gilts trade a tad firmer after a steep selloff yesterday, but you wonder how long it holds.

Meanwhile, the Chancellor – not as cunning as a fox who’s just been appointed professor of cunning at Oxford University – is bringing forward OBR forecasts and details of his debt-cutting plan to October 31st…cue plenty of Halloween horror show puns for headline writers and commentators alike. The truth is markets have already been spooked – the task in three weeks is to restore calm.

Pat McFadden MP, Labour’s Shadow Chief Secretary to the Treasury, is urging the government to reverse last month’s mini-budget after the Bank of England stepped in again to calm markets.

McFadden says:

“That the Bank of England has been forced to step in for a second day running to reassure markets shows the government’s approach is not working, and creates renewed pressure for the Chancellor to reverse his Budget.

“This is a Tory crisis made in Downing Street, being paid for by working people.

“They have lost all credibility and control and they must respect our nation’s independent institutions, go back to the drawing board and reverse this damaging Budget.”

Shares in British pension providers have dropped in early trading.

Aviva (-2.9%), Legal and General (-2.5%) and Prudential (-1.6%) are all among the FTSE 100 fallers, after the Bank of England warned that dysfunction in the UK government debt market posed a “material risk to UK financial stability”.

UK government bond prices have strengthened a little in early trading, but remain at worrying levels.

The yield, or interest rate, on 10-year UK bonds has dropped to around 4.6%, from 4.7% last night (reminder, the yield on a bond goes down when the price goes up).

This yield surged over 5% in the days after the mini-budget, forcing the Bank of England launched its ?65bn bond-purchase programme.

The yield on UK 10-year bonds has dropped too, to 4.37% from 4.49% last night.

Index-linked gilts yields are lower too, although this only makes a small impact in Monday’s selloff.

The Bank of England has acted again to protect the UK’s government bond market because the markets are spooked by ‘Trussonomics’, explains Holger Schmieding, chief economist at Berenberg.

Schmieding says (via Retuters):

“The Bank of England has demonstrated with its recent temporary pivot that they are highly aware of market volatility and they are able to dampen it. So, I expect the interventions to work.

“But the need for them to intervene is a sign of how unsettled UK markets are in the wake of Trussonomics.

Schmieding added that the decision to start buying inflation-linked bonds is “a bit of a surprise”

“But they might intervene in various parts of the markets that are unsettled and that is partly a reflection of how the rate the exposure of major players.”

While the Bank is making a new attempt to calm the markets, its bond-buying programme is still due to end on Friday, points out Torsten Bell of Resolution Foundation:

Ed Conway of Sky News points out that the market reaction will be important – will this calm the selloff?

Former Financial Times editor Lionel Barber tweets that it’s ‘hard to understate’ the damage caused by Kwasi Kwarteng’s mini-budget:

Reuters’ Andy Bruce points out that the UK will auction ?900m of long-dated index-linked gilts today – the pricing, and demand, for that sale will be interesting too….

This chart shows how the yield (interest rate) on long-term inflation-linked UK bonds has surged in recent months.

Yields rise when prices fall. These index-linked bonds are heavily bought by pension funds, to protect themselves against rising inflation.

So the drop in prices has hit pension funds hard.

The Bank of England must have been alarmed by the selloff in the UK bond market yesterday, explains Sir John Gieve, a former deputy governor of the Bank.

The tumble in prices yesterday prompted it to widen its operations to support financial stability today.

Gieve tells Radio 4’s Today Programme:

I think the moves yesterday must have alarmed them.

The message may have been, the market felt that there were still important investors who were exposed to a spiral developing, of having to sell gilts in order to find cash to meet demands in the markets.

That’s why they intervened the first time, and they must have decided they needed a bit longer to see those investors safe.

So by starting to buy index-linked bonds too, the BoE hopes to prevent investors being forced to sell into a falling market.

Gieve suggests that the bond-purchase programme could potentially be extended by a few more days, or even a couple more weeks, until Kwasi Kwarteng presents his medium-term fiscal plan on 31 October.

But even if that happened, the operation is still time-limited.

Newsflash: The Bank of England is expanding its emergency bond buying operation for the second time this week, in a fresh attempt to calm the markets and protect pension funds.

The central bank is widening the scope of its daily programme in which it buys up UK government debt, to include purchases of index-linked government bonds (which are linked to inflation).

Announcing the move, the Bank says there has been a “further significant repricing of UK government debt, particularly index-linked gilts”, which could threaten the UK’s financial stability.

It warns:

Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.

That ‘fire sale’ dynamic is driven by pension funds using the Liability Driven Investment strategy. As government bond prices fall, LDI funds are forced to sell assets to cover losses, driving prices lower.

The move will act as a “further backstop to restore orderly market conditions”, the Bank says, by mopping up excess sales of index-linked gilts which the markets can’t cope with.

This ?65bn bond-buying programme is still due to end on Friday. Yesterday, the Bank doubled the size of its daily bond purchases, to a maximum of ?10bn from ?5bn.

But despite that move, UK borrowing costs hit the highest level since the turmoil immediately after the mini-budget.

This pushed the yield (or interest rates) on 30-year UK bonds up to 4.6% on Monday (from below 3% at the start of September).

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

The perilous state of the UK’s public finances has been laid bare this morning, with an authorititive warning that Kwasi Kwarteng must find ?62bn of spending cuts or tax rises to balance the books.

The Institute for Fiscal Studies says that the panicked reaction on international money markets to the chancellor’s “mini-budget” will drive up the size of the black hole in the UK finances, by increasing the the cost of extra borrowing.

My colleague Phillip Inman explains:

The ?45bn cost of the mini-budget will wipe out any financial space left to the chancellor by his predecessor, swelling Britain’s debt as as share of national income for at least the next five years.

The IFS director, Paul Johnson, said that while it was “technically possible” for Kwarteng to balance the books via spending cuts, he warned public sector spending had already suffered a huge hit over the last decade and that there was “not much fat left to cut”.

The scale of the tax cuts in the mini-budget (to the basic rate of income tax, corporation tax and stamp duty) had prompted a seismic shock to the outlook for the public finances that left them deeper in the red, the IFS explained.

“This is because the permanent tax cuts were bigger than had been expected,” and because the expectations for Bank of England interest rates have rocketed to almost 6%, pushing mortgage rates towards 8%.

The government’s growth plans will only have a limited impact, the IFS says, meaning that hefty cuts to public services and tight control of welfare benefits, on a scale similar to the austerity a decade ago, would be needed to pay for those tax cuts.

Here’s the full story:

The International Monetary Fund will give its assessment on the global economy later today, as fears of a damaging downturn rise.

Last night, JPMorgan Chase chief executive Jamie Dimon predicted the American economy will tip into a recession next year, which could drive stocks lower create “panic” in the credit markets.

7am BST: UK unemployment report

8am BST: Kantar’s latest supermaket grocery market share report

10am BST: Institute for Fiscal Studies presents its Green Budget 2022

2pm BST: International Monetary Fund releases its World Economic Outlook