Market Loop - Bank of England makes history

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2nd November 2022

Bite-sized business news from the UK and beyond

Good morning In case you missed it – it’s been a crisis strewn year in the UK and beyond – with political instability, the war in Ukraine, energy bills, public sector strikes and the cost-of-living crisis, Partygate and also the passing of Queen Elizabeth II. So no surprises to see that Collins Dictionary has chosen “permacrisis” as the word of the year 2022. It’s a noun defined as “an extended period of instability and insecurity”.

Today's stories

Bank of England makes history
BP bumper profits raises call for more energy taxes

ECONOMY
Bank of England makes history

What happened?
Yesterday the Bank of England became the first major central bank to reverse the bond buying scheme, known as quantitative easing or QE, when it sold £750m of UK government bonds.

How did we get here?
The aim of QE is to lower interest rates on savings and loans thereby stimulating spending in the economy. It’s been used by central banks the world over to tackle economic shocks like financial crises, Brexit and the pandemic.

QE began in March 2009 when the Bank of England started buying bonds as a response to the global financial crisis. Between 2009 and 2021 the Bank bought £895bn worth of bonds.

Here’s how QE works
The Bank buys UK government bonds or corporate bonds from other financial companies and pension funds using money it creates electronically, sometimes referred to as printing money.

When it does this, the price of these bonds tend to increase which means that the bond yield, or interest rate that holders of these bonds get, goes down. The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses. That helps to boost spending in the economy and keep inflation low.

But QE has been controversial with many blaming it for widening inequality
QE injected nearly £1tr of cash into the economy with much flowing into other assets like shares and property, that give it a higher return.

In turn, that increased the value of shares and property, making households and businesses holding these assets wealthier. This led to a bigger gap between rich and poor households.

Zooming out: QE was supposed to be a temporary measure when it was first implemented and is generally viewed as successfully averting major economic depressions since 2009.

But unwinding QE is an important part of the Bank's fight against inflation, which is currently running at 10%, rather than the 2% target. However there is a long road to go with the Bank taking a tentative step yesterday to only sell less than 0.1% of the bonds bought over the past 13 years.

Other stories to keep you in the loop

Treasury warns of tax rises to fill financial hole
Royal Mail postal workers to strike on Black Friday
UK house prices fall for first time in 15 months
Pandemic furniture star Made.com nears collapse
Ocado shares soar as it signs deal with South Korean retailer
Twitter's blue tick will cost $8 a month, says Elon Musk
Uber settles £615m backdated UK VAT bill after legal ruling
Work from home trend may have peaked, says LinkedIn

ENERGY
BP bumper profits raises call for more energy taxes

What happened?
Yesterday BP became the latest energy giant to report huge profits in the three months to September. The London-based oil and gas producer posted a trebling in profits to £7.1bn driven by higher oil and gas prices.

Consumers are facing a cost of living crisis fuelled by higher energy prices following Russia’s invasion of Ukraine. But Big Oil has been a clear winner, making big profits:

Last quarter Chevron, Shell, TotalEnergies and ExxonMobil announced a combined record $51bn in profits.
Saudi Arabian juggernaut Aramco quarterly profits jumped 39% to a staggering $42bn.

These profits have raised calls for windfall taxes on the industry
In May the UK government introduced a 25% windfall tax on British profits generated by the industry with an estimated £5bn expected to be raised. BP expects to pay $800m in windfall taxes this year while rival Shell said it will pay none due to tax loopholes.

But critics say they should be taxed more especially when investors are receiving large payouts. BP has made global profits totalling $22.8bn in the first nine months of this year. Of this, an extraordinary $13.2bn will be given to the company’s shareholders.

In the US President Joe Biden urged major American oil firms to stop "war profiteering", threatening to hit them with higher taxes if they do not increase production which would help lower prices.

Zooming out: Huge energy profits look set to continue. Europe and the US want to keep oil prices low for consumers (and to punish Russia). But Saudi Arabia, Russia and their oil and gas producing allies want to keep prices high (and profits flowing) — and they control most energy exports.

Stat of the day

EY’s average partner pay in the UK has hit a record £803,000 after a surge in demand for the Big Four firm’s consultants fuelled a sharp increase in full-year profits

Interesting links from around the web

Nearly every country on earth is named after one of four things
The UK’s most instagrammable restaurants
How much money do you really need to quit your job?

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Market Loop - Bank of England makes history

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