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European Central Bank raises rates by 50 basis points, pledges further hike in March

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Christine Lagarde, president of the European Central Bank speaks at an event.

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The European Central Bank on Thursday confirmed expectations of a 50 basis point interest rate increase, taking its key rate to 2.5%.

In a statement, it pledged to “stay the course in raising interest rates significantly at a steady pace” and, in unusually firm language, said it intended to hike by another 50 basis points in March.

It said keeping rates at restrictive levels would control price rises by dampening demand and keeping inflation expectations under constrained. Decisions at future meetings will be data-dependent, it added.

The move follows four hikes in 2022 which brought euro zone rates out of negative territory for the first time since 2014.

Euro zone inflation fell for the third straight month in January, flash figures published Wednesday showed, but headline inflation remained high at 8.5%. Core inflation, which excludes energy and food, was flat at 5.2%.

Attention now turns to Thursday’s speech and press conference by Lagarde, which begins at 2:45 p.m. Frankfurt time, for an indication of the central bank’s latest outlook on the economy and further details of its plans for hiking and quantitative tightening.

In December, it announced that from March it would begin to reduce its 5 trillion euro ($5.49 trillion) balance sheet by 15 billion euros per month on average until the end of June 2023.

On Thursday, it said that in line with current practice it would continue partial reinvestments of its maturing debt.

“The remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP (Asset Purchase Programme) and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers,” its statement said.

This is a breaking news story. Please check back for updates.

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Japanese yen weakens as Bank of Japan makes no changes to yield curve range

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Morning commuters in front of the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, Jan. 16, 2023. The Bank of Japan made no changes to its yield curve control policy on Wednesday.

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The Japanese currency weakened against the U.S. dollar after the Bank of Japan surprised markets by keeping its yield curve tolerance band unchanged.

The Japanese yen weakened 2.6% against the U.S. dollar after the decision was announced and last stood at 131.47, hovering at its strongest levels since June, 2022.

“Japan’s economy is projected to continue growing at a pace above its potential growth rate,” the Bank of Japan said in a statement. The central bank left its interest rate unchanged at an ultra-dovish -0.1% – in line with expectations and maintaining the same rate it’s kept since 2016.

The decision to make no changes to its monetary policies comes after the central bank caught global markets off guard in its previous meeting by widening its tolerance range for the yield on its 10-year government bond from 25 basis points to 50 basis points in December.

Since the move last month, 10-year JGB yields have exceeded the upper ceiling several times.

The yield on the 10-year JGB exceeded the upper ceiling of its band for a fifth straight session on Wednesday morning before dropping to 0.385%.

‘Knee-jerk’ reaction

Nomura head of FX strategy Yujiro Goto said while the move would be a disappointing one for traders bullish on the Japanese yen, the weakening of the currency may be temporary.

“I think the initial reaction [for the yen reaching] 130 to 131, or potentially 132 is a knee-jerk reaction after the ‘no change’ today,” he said on CNBC’s “Street Signs Asia.”

“In the medium term, over the next 2-3 months, I think the trend for the yen should be still on the downside towards 125, even after the disappointment today,” he said,

Goto said the currency will strengthen on hopes of a policy shift in the near-term future, highlighting the nearing end of BOJ Governor Haruhiko Kuroda’s term.

“Markets should keep expecting [the BOJ] to tweak or change [its] monetary policy after some point, especially after Kuroda’s retirement,” he said.

Shigeto Nagai of Oxford Economics said the BOJ’s move to widen its band “fueled” expectations for more changes ahead.

“Today, the BOJ really wanted to calm down that speculation and anticipation for normalization,” he said, adding the central bank will continue to be pressed for change.

More pressure ahead

As inflation continues to rise in Japan, the central bank will face further pressure ahead of its leadership change.

“Inflation in Japan is doing something that it hasn’t done for 40 years,” Viraj Patel of Vanda Research said in a tweet, adding that the Bank of Japan risks “falling into” the same trap as the U.S. Federal Reserve in labeling inflation as “transitory.”

The Bank of Japan used wording that was similar to the Fed’s description of inflation before the U.S. central bank began continuously hiking rates to tame rising prices, describing it as “pass-through.”

“The year-on-year rate of increase in the consumer price index is likely to be relatively high in the short run due to the effects of a pass-through to consumer prices of cost increases led by a rise in import prices,” the central bank said in its latest statement.

The Bank of Japan revised its forecasts for 2023’s core inflation nationwide from 2.9% to 3%. Nationwide inflation data is expected Friday.

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Bond yields to climb ‘for the wrong reasons’ next year, strategist says

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LONDON — Government bond yields are likely to rise in 2023 “for the wrong reasons,” according to Peter Toogood, chief investment officer at Embark Group, as central banks step up efforts to reduce their balance sheets.

Central banks around the world have shifted over the past year from quantitative easing — which sees them buy bonds to drive up prices and keep yields low, in theory reducing borrowing costs and supporting spending in the economy — to quantitative tightening, including the sale of assets to have the opposite effect and, most importantly, rein in inflation. Bond yields move inversely to prices.

Much of the movement in both stock and bond markets over recent months has centered around investors’ hopes, or lack thereof, for a so-called “pivot” from the U.S. Federal Reserve and other central banks away from aggressive monetary policy tightening and interest rate hikes.

Markets have enjoyed brief rallies over the past few weeks on data indicating that inflation may have peaked across many major economies.

“The inflation data is great, my main concern next year remains the same. I still think bond yields will shift higher for the wrong reasons … I still think September this year was a nice warning about what can come if governments carry on spending,” Toogood told CNBC’s “Squawk Box Europe” on Thursday.

September saw U.S. Treasury yields spike, with the 10-year yield at one point crossing 4% as investors attempted to predict the Fed’s next moves. Meanwhile, U.K. government bond yields jumped so aggressively that the Bank of England was forced to intervene to ensure the country’s financial stability and prevent a widespread collapse of British final salary pension funds.

Toogood suggested that the transition from quantitative easing to quantitative tightening (or QE to QT) in 2023 will push bond yields higher because governments will be issuing debt that central banks are no longer buying.

He said the ECB had bought “every single European sovereign bond for the last six years” and, “suddenly next year … they’re not doing that anymore.”

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The European Central Bank has vowed to begin offloading its 5 trillion euros ($5.3 trillion) of bond holdings from March next year. The Bank of England, meanwhile, has upped the pace of its asset sales and said it will sell £9.75 billion of gilts in the first quarter of 2023.

But governments will continue issuing sovereign bonds. “All of this is going to be shifted into a market where the central banks are notionally not buying it anymore,” he added.

Toogood said this change in issuance dynamics will be just as important to investors as a Fed “pivot” next year.

“You notice bond yields, are they collapsing when the market falls 2-3%? No, they are not, so something is interesting in the bond market and the equity market and they are correlating, and I think that was the theme of this year and I think we have to be wary of it next year.”

He added that the persistence of higher borrowing costs will continue to correlate with the equity market by punishing “non-profitable growth stocks,” and driving rotations toward value sectors of the market.

Some strategists have suggested that with financial conditions reaching peak tightness, the amount of liquidity in financial markets should improve next year, which could benefit bonds.

However, Toogood suggested that most investors and institutions operating in the sovereign bond market have already made their move and re-entered, leaving little upside for prices next year.

He said that after holding 40 meetings with bond managers last month: “Everyone joined the party in September, October.”

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Bank of Japan shocks global markets with bond yield shift

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The Bank of Japan on Tuesday shocked global markets by widening the target range for its 10-year government bond yield.

Kazuhiro Nogi | Afp | Getty Images

Global markets were jolted overnight after the Bank of Japan unexpectedly widened its cap on 10-year Japanese government bond yields, sparking a sell-off in bonds and stocks around the world.

The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese Government Bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.

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In a policy statement, the BoJ said the move was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”

The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation towards its 2% target after a prolonged period of economic stagnation and ultra-low inflation.

The BoJ — an outlier compared with most major central banks — also left its benchmark interest rate unchanged at -0.1% Tuesday and vowed to significantly increase the rate of its 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.

The YCC change prompted the Japanese yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 was down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to over 0.43%, its highest level since 2015.

U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to exceed 3.66% and the 30-year bond rising by around 9 basis points to 3.7%. Yields move inversely to prices.

Shares in Europe also retreated at the open, with the pan-European Stoxx 600 shedding 1% in early trade before recovering slightly. European government bonds also sold off, with Germany’s 10-year bund yield adding almost 9 basis points to 2.2840%.

‘Testing the water’

“The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy.”

That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BoJ, but argued that the “popular bet does not mean that is the policy reality, or the intended policy perception.”

“Fact is, there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to relieve JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.

“For one, there was every effort made to emphasize that policy accommodation is being maintained, whether this was in reference to intended as well as potential step-up in bond purchases or suggesting no further YCC target band expansion (for now).”

Spikes in volatility

The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”

“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.

The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”

Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move may be an overreaction, telling CNBC there was “absolutely nothing stunning” about the BoJ’s decision.

“You have to take this BoJ measure in the context of a positioning in dollar-yen that was obviously not expecting this tweak. It’s a tweak,” he said.

Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week — a 40-year high, but still well below the levels seen in comparable Western economies.

Costa said the Bank of Japan’s move was not geared toward combating inflation but addressing the “infrastructure and the dynamics of JGB trading” and the gap in volatility between the trade in JGBs and the rest of the market.

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Bank of Japan Lets a Benchmark Rate Rise, Causing Yen to Surge

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TOKYO—The Bank of Japan made a surprise decision to let a benchmark interest rate rise to 0.5% from 0.25%, pushing the yen higher and ending a long period in which it was the only major central bank not to increase rates.

The

BOJ

said the yield on the 10-year Japanese government bond could rise as high as 0.5% from a previous cap of 0.25%. The central bank has set a target range around zero for the benchmark government bond yield since 2016 and used that as a tool to keep overall market interest rates low.

The 10-year yield, which had been stuck around 0.25% for months because of the central bank cap, quickly moved up to 0.46% in afternoon trading. 

The yen rose in tandem. In Tuesday afternoon trading in Tokyo, one dollar bought between 133 and 134 yen, compared with more than 137 yen before the BOJ’s decision.

The Nikkei Stock Average, which had been slightly higher in the morning, was down more than 2% as investors digested the possibility that companies would have to pay higher interest on their debt. Also, the weak yen has pushed up profits for many exporters, so a stronger yen could be negative for stocks. 

Gov.

Haruhiko Kuroda,

who is nearing the end of 10 years in office, is known for making moves that surprise the market, although he had made fewer of them in recent years.

Market players had anticipated that time might be running out on the Bank of Japan’s low-rate policy, but they generally didn’t expect Mr. Kuroda to move at the year’s final policy meeting.

The Bank of Japan’s statement on its decision Tuesday didn’t mention inflation as a reason to let the yield on government bonds rise as high as 0.5%. Instead, it cited the deteriorating functioning of the government bond market and discrepancies between the 10-year government bond yield and the yield on bonds with other maturities. 

The bank said Tuesday’s move would “facilitate the transmission of monetary-easing effects,” suggesting it didn’t want the decision to be interpreted as monetary tightening.

The move is “a small step toward an exit” from monetary easing, said

Mitsubishi UFJ Morgan Stanley Securities

strategist Naomi Muguruma. 

Ms. Muguruma said the BOJ needed to narrow the gap between its cap on the 10-year yield and where the yield would stand if market forces were given full rein. 

“Otherwise magma for higher yields could build up, causing the yield to rise sharply when the BOJ actually unwinds easing,” she said. 

Japan’s interest rates are still low compared with the U.S. and Europe, largely because its inflation rate hasn’t risen as fast. The Federal Reserve last week raised its benchmark federal-funds rate to a range between 4.25% and 4.5%—a 15-year high—while the European Central Bank said it would raise its key rate to 2% from 1.5%.

In the U.S., inflation has started to slow down recently but is still running above 7%. In Japan, consumer prices in October were 3.7% higher than they were a year earlier.

Japan has seen prices rise like other countries, owing to the impact of the war in Ukraine as well as the yen’s weakness. However, the pace of inflation is milder in Japan, where consumers tend to be highly price sensitive.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

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ECB hikes rates, sees significant increases ahead as it announces plan to shrink balance sheet

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President of the European Central Bank Christine Lagarde attends a hearing of the Committee on Economic and Monetary Affairs in the European Parliament on November 28, 2022 in Brussels, Belgium.

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The European Central Bank opted for a smaller rate hike at its Thursday meeting, taking its key rate from 1.5% to 2%.

It also said that from the beginning of March 2023 it would begin to reduce its balance sheet by 15 billion euros ($16 billion) per month on average until the end of the second quarter of 2023.

It said it would announce more details about the reduction of its asset purchase program (APP) holdings in February, and that it would regularly reassess the pace of decline to ensure it was consistent with its monetary policy strategy.

The widely-expected 50 basis point rate rise is the central bank’s fourth increase this year.

It hiked by 75 basis points in October and September and by 50 basis points in July, bringing rates out of negative territory for the first time since 2014.

The euro rose from a 0.5% loss against the dollar to a 0.4% gain following the announcement, but European equities in the Stoxx 600 index plunged 2.4%.

“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target,” the ECB said in a statement.

The central bank said it was working on inflation forecasts that had been “significantly revised up,” and sees inflation remaining above its 2% target until 2025.

It now expects average inflation of 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

However, it sees a recession in the region being “relatively short-lived and shallow.”

It comes after the latest inflation data for the euro zone showed a slight slow in price rises in November, although the rate remains at 10% annually.

At a press conference following the announcement, ECB President Christine Lagarde told CNBC’s Annette Weisbach: “One of the key messages, in addition to the hike, is the indication that not only will we raise interest rates further, which we had said before, but that today we judged that interest rates will still have to rise significantly, at a steady place.”

“It is pretty much obvious that on the basis of the data that we have at the moment, significant rise at a steady pace means we should have to raise interest rates at a 50 basis point pace for a period of time,” she said.

Regarding the announcement on quantitative tightening, she said the ECB wanted to follow the principles of being predictable and measured.

The central bank’s decision to make on average 15 billion euro reductions in its APP over four months represents roughly half the redemptions over that period of time, and was based on advice from its market team and all central banks and other officials involved in its decision making, Lagarde explained.

“It seemed an appropriate number in order to normalize our balance sheet, bearing in mind that the key tool is the interest rate,” she said.

The U.S. Federal Reserve on Wednesday increased its main rate by 0.5 percentage points, as did the Bank of England and Swiss National Bank on Thursday morning.

“In contrast to the Bank of England, this is a hawkish hike, given the language on [quantitative tightening] and a definitive start date,” said analysts at BMO Capital Markets.

However, they noted the ECB was lagging other central banks in reducing its balance sheet and that reinvestments under its pandemic emergency purchase program would continue.

“The language in the statement has an operational feel to it, and the Bank is leaving the path of QT open-ended,” they wrote in a note.

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European Central Bank says bitcoin is on the ‘road to irrelevance’

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The bitcoin logo displayed on a smartphone with euro banknotes in the backgrouund.

Andrea Ronchini | NurPhoto via Getty Images

The European Central Bank gave a strong critique of bitcoin on Wednesday, saying the cryptocurrency is on a “road to irrelevance.”

In a blogpost titled “Bitcoin’s last stand,” ECB Director General Ulrich Bindseil and Analyst Jürgen Schaff said that, for bitcoin’s proponents, the apparent stabilization in its price this week “signals a breather on the way to new heights.”

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“More likely, however, it is an artificially induced last gasp before the road to irrelevance — and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000,” they wrote.

Bitcoin topped $17,000 Wednesday, marking a two-year high for the world’s largest digital coin. However, it struggled to maintain that level, falling slightly to $16,875. Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, warned that the bounce is likely just a bear market rally and would not be sustained. “This is just a bearish retest,” he told CNBC.

The remarks from the ECB officials are timely, with the crypto industry reeling from one of its most catastrophic failures in recent history — the downfall of FTX, an exchange once valued at $32 billion. And the market has been largely down in the dumps this year amid higher interest rates from the Federal Reserve.

Bindseil and Schaff said that bitcoin didn’t fit the mold of an investment and wasn’t suitable as a means of payment, either.

“Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive,” they wrote. “Bitcoin has never been used to any significant extent for legal real-world transactions.”

“Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation,” they added.

Analysts say that FTX’s insolvency is likely to hasten regulation of digital currencies. In the European Union, a new law called Markets in Crypto Assets, or MiCA, is expected to harmonize regulation of digital assets across the bloc.

Bindseil and Schaff said it was important not to mistake regulation as a sign of approval.

“The belief that space must be given to innovation at all costs stubbornly persists,” they said.

“Firstly, these technologies have so far created limited value for society — no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.”

They also raised concerns with bitcoin’s poor environmental credentials. The cryptocurrency’s technical underpinnings are such that it requires a massive amount of computing power in order to verify and approve new transactions. Ethereum, the network behind bitcoin rival ether, recently transitioned to a new framework that backers say would cut its energy consumption by more than 99%.

“This inefficiency of the system is not a flaw but a feature,” Bindseil and Schaff said. “It is one of the peculiarities to guarantee the integrity of the completely decentralised system.”

It’s not the first time the ECB has raised doubts about digital currencies. ECB President Christine Lagarde in May said she thinks cryptocurrencies are “worth nothing.” Her comments came on the back of a separate scandal for the industry — the multibillion-dollar implosion of so-called stablecoin terraUSD.

– CNBC’s Arjun Kharpal contributed to this report

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ECB may have to restrict growth to control inflation, Lagarde says

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The ECB is dealing with both record-high inflation and a slowing economy, with many economists predicting a recession in the region before the end of the year.

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The European Central Bank will keep raising interest rates and may even need to restrict economic activity to tame inflation, ECB President Christine Lagarde said on Friday, singling out rates as the bank’s key instrument over balance sheet reduction.

The ECB has raised rates by an unprecedented 200 basis points since July to tackle inflation, and said that more policy tightening is coming via rate hikes and the reduction of its 5 trillion euro ($5.2 trillion) debt holding.

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“We expect to raise rates further – and withdrawing accommodation may not be enough,” Lagarde said in a speech at a conference.

“Interest rates are, and will remain, the main tool for adjusting our policy stance,” she said. “Acknowledging that interest rates remain the most effective tool for shaping our policy stance, it is appropriate that the balance sheet is normalised in a measured and predictable way.”

At 1.5%, the ECB’s deposit rate is not far from the so-called neutral rate, where the bank is neither stimulating nor holding back growth. Most estimates of the neutral rate are between 1.5% and 2%, suggesting that after an expected December hike “accommodation” will have been removed.

The problem is that inflation, running at 10.6%, is far above the ECB’s 2% target and even a recession, now almost certain over the winter months, is unlikely to ease price pressures enough to let the ECB step off the brakes.

Investors are now split between pricing a 50 and 75 basis-point hike in December after back-to-back 75 basis point moves, and see the reduction of bond holdings, also known as quantitative tightening, starting in the first half of 2023.

The ECB will outline plans for balance sheet reduction in December and the process is expected to start with the bank allowing some, but not all, bonds to expire.

“The ECB will ensure that a phase of high inflation does not feed into inflation expectations, allowing too-high inflation to become entrenched,” Lagarde said.

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U.S. Treasurys as traders look to PPI inflation data

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Treasury yields fell on Tuesday as markets awaited the release of October’s producer price index figures and digested U.S. Federal Reserve speaker commentary.

At around 4:20 a.m. ET, the yield on the benchmark 10-year Treasury was down by around three basis points to 3.8367%. The 2-year Treasury yield was last at 4.3677% after declining by four basis points.

Yields and prices have an inverted relationship. One basis point is equivalent to 0.01%.

Traders looked ahead to the latest PPI figures which are due later in the day. The PPI reflects wholesale inflation by measuring how prices paid to producers for goods and services develop.

Markets are hoping that the data will provide more clarity on whether overall inflation is cooling, after consumer inflation figures released on Thursday hinted at this.

Fed Governor Christopher Waller suggested on Monday that last week’s data was only part of the bigger picture and other data points would have to be considered before drawing any conclusions.

He also indicated that the Fed would consider slowing rate hikes, but a pause to them is not imminent.

Federal Reserve Vice Chair Lael Brainard also hinted at a potential slowdown of rate hikes in remarks made on Monday.

Investors have been following Fed speaker comments closely as uncertainty about the central bank’s future policy and concerns about the pace of rate hikes leading the U.S economy into a recession have continued.

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UK on the brink of recession after economy contracts by 0.2% in the third quarter

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The Bank of England has warned that the U.K. is facing its longest recession since records began a century ago.

Huw Fairclough | Getty Images News | Getty Images

LONDON — The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.

The preliminary estimate indicates that the economy performed better than expected in the third quarter, despite the downturn. Economists had projected a contraction of 0.5%, according to Refinitiv.

The contraction does not yet represent a technical recession — characterized by two straight quarters of negative growth — after the second quarter’s 0.1% contraction was revised up to a 0.2% increase.

“In output terms, there was a slowing on the quarter for the services, production and construction industries; the services sector slowed to flat output on the quarter driven by a fall in consumer-facing services, while the production sector fell by 1.5% in Quarter 3 2022, including falls in all 13 sub-sectors of the manufacturing sector,” the Office for National Statistics said in its report Friday.

The Bank of England last week forecast the country’s longest recession since records began, suggesting the downturn that began in the third quarter will likely last deep into 2024 and send unemployment to 6.5% over the next two years.

The country faces a historic cost of living crisis, fueled by a squeeze on real incomes from surging energy and tradable goods prices. The central bank recently imposed its largest hike to interest rates since 1989 as policymakers attempt to tame double-digit inflation.

The ONS said the level of quarterly GDP in the third quarter was 0.4% below its pre-Covid level in the final quarter of 2019. Meanwhile, the figures for September, during which U.K. GDP fell by 0.6%, were affected by the public holiday for the state funeral of Queen Elizabeth II.

U.K. Finance Minister Jeremy Hunt will next week announce a new fiscal policy agenda, which is expected to include substantial tax rises and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will need to be made in order to stabilize the country’s economy.

“While some headline inflation numbers may begin to look better from here on, we expect prices to remain elevated for some time, adding more pressures on demand,” said George Lagarias, chief economist at Mazars.

“Should next week’s budget prove indeed ‘difficult’ for taxpayers, as expected, consumption will probably be further suppressed, and the Bank of England should begin to ponder the impact of a demand shock on the economy.”

This is a breaking news story and will be updated shortly

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