Bank of England continues interest rate rise campaign

This is an audio transcript of the FT News Briefing podcast episode: ‘Bank of England continues interest rate rise campaign’

Marc Filippino
Good morning from the Financial Times. Today is Friday, August 4th. And this is your FT News Briefing. 

[MUSIC PLAYING]

Amazon and Apple churned out surprisingly good earnings last quarter. And the Bank of England still has a lot of work to do to bring down inflation. Plus, the FT’s Christopher Miller explains why Ukraine is using drones to attack Moscow. 

Christopher Miller
To sow chaos and bring the war back to Russians so that they have a sense of what the war that their government is waging on Ukraine feels like. 

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day. 

[MUSIC PLAYING]

Amazon did much better last quarter than Wall Street expected. Yesterday’s earnings report showed that the slowdown in the company’s cloud computing division had levelled off, and Amazon also reported stronger than anticipated online sales. Investors liked all this. They loved all this. Amazon’s share price jumped more than 10 per cent in after-market trading. Apple also had a great quarter and beat expectations. Total revenue fell a smidge, but the company’s net profit rose about 2 per cent. 

[MUSIC PLAYING]

The Bank of England yesterday announced it’s raising rates again. The quarter-percentage-point hike makes its 14th straight for the BoE. Pretty straightforward move when you think about it. You have inflation hovering around 8 per cent. But if you look under the hood, things for the British economy aren’t so clear-cut. Here to talk about how investors are feeling about all this is the FT’s markets editor Katie Martin. Hi, Katie. 

Katie Martin
Hey, Marc. How you doing? 

Marc Filippino
I’m doing all right. So, Katie, the BoE’s Monetary Policy Committee landed on a quarter-point rate rise, as I said, but it wasn’t unanimous. One person wanted to pause rates. Two people wanted a half a percentage point. Those are very different things. 

Katie Martin
Yes. So six-three is quite good fun, six-two-one. You don’t often get a split like that. And really that kind of illustrates the situation that the Bank of England is in. So they acknowledged in the statement that came along with the decision that policy is restrictive, right. It’s tight. You know, that’s their way of saying we know this is hurting. But what they’re trying to do is balance out this idea that wage growth has been really punchy, but they know that activity is slowing down. And so they’re trying to kind of pick a path between that where they raise rates as much as they have to to try and get inflation to keep falling. But, you know, not to be so aggressive that they nuke the economy. 

Marc Filippino
Yeah, but they’ve got to do something, right? I mean, because while inflation is improving, it’s still really, really high. 

Katie Martin
No, exactly. I mean, inflation in the UK, the sort of headline rate is still standing at 7.9 per cent in the latest reading from June. That’s a lot. But it’s way above the Bank of England’s 2 per cent target. But this kind of very nuanced statement that the Bank of England made, the fact that it went for a quarter percentage point rather than repeating its half percentage point move that it did in the previous time around has given investors just that tiny bit of hope that, OK, the UK is an outlier, but maybe it’s not that far behind the others. In the short term, the markets honestly have not done much with this, with this new information from the Bank of England. The pound is still hovering around $1.27. Bond yields haven’t really gone anywhere because the market had thought maybe they will do half percentage point this week, and they’ve ended up going for less than that. So it’s all about kind of what the bank does relative to what the expectations were. So this looks like markets are reasonably confident that maybe the worst is behind us. 

Marc Filippino
So, Katie, I want to get into US Treasuries because some weird stuff happened after Fitch, the rating agency, downgraded the US credit rating from triple A to double A plus, earlier this week. What was the reaction to that? And does it have to do with the yield rising that we saw, you know, throughout the rest of the week? 

Katie Martin
Yes, weirdness, lots of it. One of the main bits of weirdness about the downgrades, the rating from Fitch, is the timing. You know, investors and analysts and economists are kind of looking around the room saying, what just happened? There’s no new development on the US fiscal front. Not that much new bad information about what’s going on on the economic front. So why is there a downgrade now? So there was a little bit of a pullback in stocks, for example, but it was almost like the bond market didn’t really know what to do with it. If the market was seriously worried about the downgrade in US debt, then you know what they would do? They would buy US debt. And I know it sounds stupid and it is stupid, but people buy the really safe stuff when the brown stuff hits the fan. And so the clear judgment here is that the brown stuff has not hit the fan. And, you know, don’t take my word for it, right? So Warren Buffett is, there’s various stories out online in the past couple of days where he’s been saying there are some things people should not worry about. This is one. So, you know, I’m not gonna argue with Warren. 

Marc Filippino
Katie Martin is the FT’s markets editor. Thank you, Katie. 

Katie Martin
Pleasure. 

[MUSIC PLAYING]

Marc Filippino
Ukraine appears to be stepping up its drone attacks against Moscow. There have been six since May. Two of them hit the capital city earlier this week. A video posted online shows a drone swooping between skyscrapers in Moscow’s business district before slamming into a glass tower. 

[SOUND OF PEOPLE SHOUTING AND EXPLOSION]

Here to talk more about this is the FT’s Ukraine correspondent, Christopher Miller. He joins us now from Kyiv. Hi, Chris. 

Christopher Miller
Hi, Marc. 

Marc Filippino
So, Chris, we should say that Ukraine has not taken explicit responsibility for the attacks, but they do suggest that they’re behind them. So going off that, what’s the strategy here? 

Christopher Miller
I don’t know necessarily that this is going to be something that has a great military impact. These attacks have been relatively small. They haven’t caused significant damage to government infrastructure or military infrastructure in Russia. But if you look at it as a three-pronged strategy, one of those prongs is, you know, Ukraine does hope that Russia will reallocate some of its air defence forces to Moscow to better defend the capital. Another one is to distract the Kremlin to anger and frustrate Vladimir Putin and his generals. And the third prong, of course, is to sow chaos and bring the war back to Russians so that they have a sense of what the war that their government and military is waging on Ukraine feels like. 

Marc Filippino
And how has Russia responded to these attacks on their own soil? 

Christopher Miller
Interestingly, they’ve actually been relatively quiet. The Kremlin and Vladimir Putin have not said very much. They’re really trying to play it down because, again, this really is embarrassing for Russia. What is supposed to be the second-strongest or most powerful military in the world is allowing these domestically produced cheap drones in Ukraine to penetrate the heart of its capital. 

Marc Filippino
Mm-hmm. And how are people in Russia reacting to the attacks? 

Christopher Miller
The Kommersant newspaper and several employees that we spoke with inside of this IQ tower, which is one of the buildings that was struck by a Ukrainian drone, have now moved their employees to working remotely. And several people we spoke to are now, you know, thinking more cautiously about where they go in the city, what time of day they’re moving around, how late they stay at work, and whether or not they want to stay in this section of the city that continues to be hit by Ukrainian drones. And so it is impacting, to some extent, the daily lives of Russians in a similar way as Ukrainian lives have been disrupted amid the numerous missile and drone attacks on the capital here in Kyiv and other cities. 

Marc Filippino
So, Chris, what do these attacks on Moscow mean in the larger context of the war? 

Christopher Miller
So Ukraine has been pushing ahead with this counteroffensive now for just about two months, right? And it’s not going as well as Kyiv had hoped. It’s sort of inching along down in the south and a little bit in the east near the city of Bakhmut. And so these attacks are another way for Ukraine to essentially shake up its counteroffensive and to put pressure on Russia on another front. Bringing the war a little bit closer to home certainly is going to have some impact on Russia’s military strategy and force them to think about how to better defend Moscow and Russian territory. So really, Ukraine, with this stepped up assault in the air, is trying to stretch the Russian lines thin. And you can view this, I think, as another form of the counteroffensive. 

Marc Filippino
Chris Miller is a Ukraine correspondent for the FT. He’s in Kyiv. Thanks, Chris. 

Christopher Miller
Thanks, Marc. 

[MUSIC PLAYING]

Marc Filippino
All right. Before we go, our FT Weekend Festival is back on Saturday, September 2nd, in London. Speakers include Michael Gove, Jesse Armstrong, Rachel Reeves and many others. As a Briefing listener, you can claim a special discount. We’ve got that promo code in our show notes. 

[MUSIC PLAYING]

You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. 

[MUSIC PLAYING]

The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our engineer is Monica Lopez. We had help this week from Sam Giovinco, Josh Gabert-Doyon, Monique Mulima, David da Silva, Michael Lello, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.