Markets swing on UK rate decision, Next

Bank of England interest rate decision

Rising inflation, an economy ticking along and strong jobs market may have got the interest rate hawks squawking, but it will be months before they get their way.

Higher borrowing costs are inevitable, and this week's inflation data was certainly a surprise to currency markets, but interest rates were never going to increase this month.

At best, there would be no more than three votes for a hike at today's Monetary Policy Committee meeting. Anything more would have been a complete shock and put a rocket under sterling.

It will require another fall in the pound and far bigger overshoot on inflation to make the doves switch sides. Don't expect a sufficient conversion until well into 2018.

As it turned out, the MPC voted 7-2 in favour of keeping the Bank Rate at 0.25%. But comments around the potential pace of rate increases and withdrawal of monetary stimulus did get currency markets excited, and the pound surged over a cent against the dollar.

A stronger pound is no good for the FTSE 100's army of overseas earners, and the blue-chip index gave up over 60 points within 25 minutes of the announcement.

"Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2% target over the next three years," said rate-setters Thursday.

If inflation continues this path "all" MPC members believe rates "could need to be tightened by a somewhat greater extent over the forecast period than current market expectations".

A "majority" of policymakers also thought "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target," if costs keep rising and there is any further erosion of slack in the economy.

Next

Next's half-year results still look pretty grim, with high street profit down 33%, but that only tells the story of the last six months. In these results, there are signs that the struggling retailer is on the mend.

It had already told us last month about a surge at the online business and better performance on the high street during the second quarter. Now, it's clear that fixing the website and improving a neglected product range is feeding through to the numbers.

Sterling has also had less of an impact on prices than originally feared, and prospects "appear somewhat less challenging than they did six months ago".

An improvement in full-year sales guidance to -2% to +1.5% from -3% to +0.5% drops through to a £7 million improvement in profit estimates, although annual profit will still be lower than last year, even in the best-case scenario.

It's had help from the weather, and last year's weak corresponding figures had not set the bar very high, but the outlook has undoubtedly improved and Next has fixed problems of its own making. It shouldn't be too hard beating last year's awful third-quarter numbers either.

Next shares had struggled to trade above £45 consistently since the January profits warning, but they smashed through that on these results.

The share price is now up as much as 36% in just nine weeks to an eight-month high, but Next is generating oodles of cash and, after profit upgrades, the shares are still not expensive and trade at a discount to the sector.

UBS analysts now think the shares are worth £50.

Morrisons

In the six months to 30 July, Morrisons grew like-for-like sales excluding fuel by 3%, turnover by 4.8% and underlying pre-tax profit by 12.7%.

These are decent results overall, and the positive like-for-like sales growth stretches to a seventh quarter. However, a 2.6% increase in the second-quarter missed forecasts, and a lot is already baked into Morrisons share price. Discounters Lidl and Aldi also continue to pose a very real threat.

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