UK 10-year bonds face biggest monthly fall since 1986 as Sunak warns markets could lose faith – business live

The surge in British house prices is expected to end in 2023 as rising interest rates, and the squeeze on housholds, hits the property market.

A Reuters’ poll of 21 property market experts found that home prices are expected to rise 7.0% this year, but only 1% next year before picking up to 3.0% in 2024.

Aneisha Beveridge at estate agency Hamptons explains:

“Spiralling inflation is leading to a cost of living crunch which in turn has led to a new era of rising interest rates.

“As a result, we expect house price growth to steadily slow during the remainder of the year and into 2023 when the real impact on households is likely to be felt as interest rates peak.”

Lender Nationwide will release its August house price index tomorrow morning. July’s data showed UK house prices jumped 11% in the last year, and 0.1% in the month, but rival Halifax reported a small drop in July alone…

Confidence among British businesses has sunk to its lowest since March 2021 the cost of living crisis hits businesses.

Lloyds Bank’s monthly business barometer dropped to 16% in August from 25% in July, with many companies alarmed by soaring prices for energy and raw materials.

The survey found that:

1. Overall business confidence fell nine points to 16%

2. 70% of businesses are most concerned about inflation, particularly related to raw materials and energy costs

3. 38% of businesses expect to increase their headcount in the year ahead as demand for staff continues

4. However, salary increase expectations stabilise

5. Trading prospects see the largest decline (11 points) since March 2022

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said.

“Business confidence declined for a third consecutive month as firms continue to face economic challenges in the period ahead and as inflation concerns intensify,”

Some small businesses have reported that big energy firms are refusing to supply them with electricity and gas, on concerns that they could collapse:

UK food price inflation hits highest level since global financial crash

Sarah Butler

The strain on UK households has intensified, with UK food price inflation hitting its highest level since global financial crash.

Prices in shops rose by 5.1% in August, year-on-year, up from 4.4% in July, the highest since 2008.

The rapidly rising price of food including milk, margarine and crisps drove up shop price inflation, as farmers were hit by soaring prices due to the war in Ukraine.

Helen Dickinson, the chief executive of the British Retail Consortium, which collects the data, says:

“The situation is bleak for both consumers and retailers, but retail businesses will remain committed to supporting their customers through offering discounts to vulnerable groups, expanding value ranges, fixing prices of essentials and raising staff pay.

Here’s the full story:

Rishi Sunak gave a clear warning that the UK couldn’t risk losing the confidence of the markets, at a time when borrowing costs are under such pressures.

The Financial Times explains:

Big investors are betting on a fresh surge in UK borrowing costs because of fears that spiralling energy costs will force the BoE to sharply increase interest rates. The two-year gilt yield, which reflects market expectations for BoE policy, touched 3 per cent on Tuesday for the first time in 14 years.

“We have more inflation-linked debt by a margin than any other G7 economy — basically more than double,” Sunak said. “Because of the structure of QE [quantitative easing], we’re also particularly much more sensitive to an upward rate cycle than we have been.”

“My general view in life, you can’t take anything for granted,” he said.

He said that for a prime minister and chancellor it would be “complacent and irresponsible not to be thinking about the risks to the public finances”.

But the FT adds that Sunak, who has previously accused Truss of planning to borrow £50bn to fund her programme, toned down his criticism of his rival in the interview.

“Ultimately, you have to decide whether you think sustainable rates of borrowing are important or not,” he said. “I think they are.”

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

British government bonds are on track for their worst month in over 35 years, as the financial markets brace for UK inflation to be driven higher by the energy crisis.

10-year UK gilts, the benchmark British government debt, have had a rough few weeks, heading for their biggest monthly rise since September 1986.

The yield (or interest rate) on 10-year gilts has risen to 2.747%, up from 1.84% at the end of July, as investors demanded a higher rate of return for holding UK debt.

Longer-dated debt has also come under pressure this month, with 20-year and 30-year gilt yields both hitting the highest level since 2014 on Tuesday. Yields rise when bond prices fall.

Shorter-dated two-year UK gilts touched the highest since October 2008, when the financial crisis erupted.

Gilts have come under pressure as UK inflation surged ahead of forecasts, hitting 10.1% in July. The cost of living crisis is set to worsen dramatically this winter, with Goldman Sachs warning yesterday that inflation could hit 22% if gas prices remained at extremely high levels.

Investors have swiftly priced in faster rate hikes from the Bank of England; Bank Rate is seen hitting 4% by next May, up from 1.75% at present.

Other government bonds have also weakened this month – with German bond yields set to end August with their biggest monthly surge in decades. Federal Reserve chief Jerome Powell added to the pressures, declaring on Friday that the US central bank would not let up in the battle to curb inflation.

But even so, the rise in UK borrowing costs is a concern. And Rishi Sunak, the underdog in the race to succeed Boris Johnson, has warned that it would be “complacent and irresponsible” to ignore the risk of markets losing confidence in the British economy

Sunak has told the Financial Times, that rival Liz Truss had made unfunded spending commitments that he fears could force up inflation and interest rates, and increase UK borrowing costs.

The former chancellor said he “struggled to see” how Truss’s promises of sweeping tax cuts and help for families struggling with soaring energy costs “add up”.

Also coming up

The latest eurozone inflation figures will show how the energy crisis drove the cost of living higher this month. Economists predict eurozone CPI rose by 9% in the year, up from 8.9% in July, which would be a new record.

India and Canada are reporting GDP data for the second quarter of the year.

The FTSE 100 quarterly reshuffle will be announced after the market closes for the day (so sometime after 4.30pm).

Generic medicines maker Hikma Pharmaceuticals, asset managment firm Abrdn and kitchen supplier Howdens were at most risk of dropping out of the blue-chip index into the smaller FTSE 250, with investment trust F&C, medical wound care group Convatec and North Sea oil producer Harbour Energy in pole position to replace them….

The agenda

• 7.45am BST: French inflation report for August

• 8.55am BST: German unemployment report for August

• 10am BST: Eurozone flash estimate of inflation in August

• 1pm BST: India’s Q2 GDP report

• 1.30pm BST: Canada’s Q2 GDP report