Skip to main contentSkip to navigationSkip to key eventsSkip to navigation

Bulb’s takeover by Octopus ‘faces fresh delay’; Bank of England blindsided by ‘extraordinary’ mini-budget – as it happened

This article is more than 1 year old

Bank of England governor Andrew Bailey is facing the House of Lords economic affairs committee

 Updated 
Tue 29 Nov 2022 11.20 ESTFirst published on Tue 29 Nov 2022 02.54 EST
An estate agents in Royal Tunbridge Wells.
An estate agents in Royal Tunbridge Wells. Photograph: Maureen McLean/REX/Shutterstock
An estate agents in Royal Tunbridge Wells. Photograph: Maureen McLean/REX/Shutterstock

Live feed

From

Sale of Bulb to Octopus Energy faces further delays - Bloomberg

The sale of energy supplier Bulb to Octopus is facing further delays as rivals plan to challenge the UK government’s decision in court, Bloomberg reports.

We had been expecting a City court to approve the sale today. But lawyers for the bust supplier’s administrators say rival suppliers are pushing for a judicial review.

Bloomberg have the details:

Iberdrola’s Scottish Power, EON, and Centrica Plc’s British Gas are planning to take the deal to Judicial Review, a court process that looks at the legality of a government decision, Teneo Inc.’s lawyers said at a hearing in London on Tuesday.

“It is worth observing at the outset that the intervening energy companies each had an opportunity to participate in the sales process,” Richard Fisher, a lawyer representing Teneo who are overseeing the sale, said in court documents.

“All could have sought meetings with the administrators or government had they wished to investigate different funding options.

The sale of Bulb to Octopus Energy faces further delays as rivals plan to challenge the government’s decision in court https://t.co/jiy881MCBB

— Bloomberg UK (@BloombergUK) November 29, 2022

Bulb was the largest energy supplier to collapse as energy prices soared in 2021, and was too big to be rescued by a rival.

Instead, it entered a special administration overseen by the UK government and run by the restructuring firm Teneo.

The cost of bailing out Bulb, which has around 1.4m customers, has hit £6.5bn, according to the Office for Budget Responsibility. The cost escalated after the Ukraine war drove gas prices even higher this year.

Octopus sealed a deal to take on Bulb at the end of October. But, as we reported earlier this month, the UK’s spending watchdog is to examine the deal.

According to Bloomberg, Scottish Power objects to the deal struck as it may involve a “dowry” being paid to Octopus of at least £1bn to cover buying energy to supply customers with, its lawyers said in court documents.

More here.

Key events

Summary

Time to wrap up – here’s our main stories so far:

Bailey: Bank of England didn't oust Liz Truss

Q: Did the Bank of England oust Liz Truss, as Narayana Kocherlakota, the former Federal Reserve Bank of Minneapolis claimed last month?

Kocherlakota argued that the Bank’s decision not to extend its support for the bond market contributed to Truss’s political demise.

Governor Andrew Bailey insists that Kocherlakota’s case is built on a ‘false premise’, for three reasons.

First, Bailey says the Bank’s pledge to buy UK government bonds created a “serious moral hazard problem”.

Unless the Bank could credibly end the programme quickly, it would have been stuck buying gilts for a long time, he says.

Second, the Bank was confident the problems in the gilt market would be resolved by its deadline.

Thirdly, the Bank couldn’t credibly be buying huge amounts of government debt at a time when it was trying to unwind its massive stock of bonds bought under QE.

Speaking with some passion (for a central banker, anyway), Bailey insists:

We did not bring the government down, we did a limited operation for financial stability purposes and we did exactly the right thing and ended it promptly.

Andrew Bailey is also quizzed about the near-collapse of Britain’s pensions sector, when the slump in bond prices threatened to create a ‘doom loop’.

Bailey says the scale of movement of gilt yields was “extraordinary” (it forced pension funds who used LDI schemes to sell UK government debt to cover losses).

And it uncovered the structural problem of how funds rebalance in a period of stress, he adds (which forced the BoE to launch a huge rescue package).

Q: What was the biggest surprise – the measures in the mini-budget, or the market response?

Bailey mulls this question over like a fine malt….

…before saying the many investors were concerned that the government disregarded the OBR’s forecasts, meaning they were ‘flying blind’.

He also cites the abolition of the top-rate of tax, saying the Bank had no idea /that/ was coming at this time.

As a results, investors took a ‘very negative’ judgement on the direction of UK economic and fiscal policy-making.

Andrew Bailey is making it clear that the lack of clarity over the mini-budget was most unusual, and quite astonishing.

Former governor Mervyn King points out that the Bank’s monetary policy committee got a briefing from the Treasury the day before the mini-budget (!), when they met to set interest rates.

Quite extraordinary exchange between Bailey and former BOE governor Mervyn King, who asks if the MPC meeting the *day before* the mini budget had a Treasury official briefing them on Kwarteng's plan:

"I don't think Treasury officials were clear what was going to be in it"

— Richard Partington (@RJPartington) November 29, 2022
Share
Updated at 

Bailey: Mini-budget was a most extraordinary process

The committee turn to the wild 44-days of Liz Truss’s premiership,

Q: Why wasn’t there more co-ordination betwen the Bank and the Treasury before the mini-budget, to prevent the need for a massive intervention to calm the markets afterwards?

At the risk of stating the obvious, “this was a quite extraordinary time”, Andrew Bailey replies.

He’s certain that Treasury officials didn’t hold back any information from their counterparts at the Bank.

But…. there were two problems.

First, officials didn’t know what was going to be in the mini-budget, Bailey says. He cites subsequent commentary from Kwasi Kwarteng and Truss which shows even they had a “lack of clarity” over the fiscal plan.

Secondly, Kwarteng’s failure to involve the Office for Budget Responsibility removed much of the ‘substance’ which the Bank relies on – such as forecasts, and the likely impact of measures.

Bailey adds:

This was a most extraordinary process.

Q: Are you saying you had no advance warning of the £46bn of unfunded tax cuts?

Bailey insist the Bank did not know the contents of the mini-budget, although it had some warning, given Liz Truss’s comments during the Conservative leadership campaign. Plus, some elements had been leaked.

But he reiterates there was “no formal communication” between the Treasury and the Bank.

Andrew Bailey suggests the Bank of England was blindsided by the Liz Truss/Kwasi Kwarteng mini budget.

He tells a Lords committee: "I’m afraid there was parts of it we had no idea what was in it"

— Richard Partington (@RJPartington) November 29, 2022

The Bank's governor says some bits had been leaked. But there was "no formal communication of the sort we normally have. It was a quite extraordinary process in that sense."

— Richard Partington (@RJPartington) November 29, 2022

Q: How is your new quantitative tightening programme going?

Governor Andrew Bailey says the Bank has cut its gilt portfolio by around £41bn. Mostly through ‘run-off’ (where you don’t buy new bonds when they mature), plus about £4.5bn of active gilt sales.

There’s no reason to think the Bank won’t hit its target of reducing its QE portfolio by £80bn of gilts in the first year, he says.

But it’s not clear how much QT will be needed to reach the equilibrium level of reserves – the point where the banking system can meet its needs.

He cautiously flags that the gilt market is ‘not back to normal’, following the turmoil after the mini-budget.

Andrew Bailey is then asked about the £133bn bill which the Treasury faces as the Bank unwinds its QE programme, which will more than wipe out its £120bn profits.

Bailey points out that QE was never meant to make money for the government, and the question of funding the stimulus programme was settled a decade ago (when governor-turned-Lord Mervyn King was at the helm).

Q: What about the interest payments being paid to commercial banks on the money they received from QE, which goes up as interest rates rise?

Bailey denies that this is free money for the banks, pointing out that higher Bank Rate pushes up their funding costs too.

He doesn’t favour changing reserve remuneration, and suggests it’s actually a fiscal decision.

[Another option, which Huw Pill has floated, would be to simply tax the banks more].

Lord King challenges Bailey over pandemic QE

Andrew Bailey also denies that QE has blurred the difference between fiscal policy (government tax and spending) and monetary policy.

The BoE governor says fiscal and monetary policy pulled together through the pandemic crisis.

Now, the Bank is selling its stock of assets bought through QE – through Quantitative Tightening. Bailey says there’s not been any discussion with the government over the pace or timing of that.

Lord King (formerly Mervyn King – the BoE governor who started its quantitative easing in 2009 after the financial crisis) picks up the ball, and bowls Bailey a nasty bouncer:

Q: If the weakening of the economy in 2020 was due to supply side issues, not demand, shouldn’t you have tightened monetary policy, not eased it?

[King’s point is that the Bank shouldn’t have done hundreds of billions of pounds more of QE, and cut interest rates to record lows]

Bailey says he’d normally agree with this view, but points out that the tightening of the supply-side of the economy was mainly due to the government temporarily shutting the economy through lockdowns.

The Bank had to judge what the supply-side of the economy would look like once lockdowns, and the furlough scheme, were over.

And he admits that the supply side of the economy, particularly the labour market, has been ‘much more constained’ than the Bank expected, and worse than other countries.

BoE governor Andrew Bailey defends QE to Lords

The House of Lords economic affairs committee start their session with Andrew Bailey by looking at the long era of cheap money and ultra-low interest rates, which is now ending.

Q: Did the Bank properly understand the impact of QE, given its scale and duration?

[Quantitative Easing (QE) is the scheme under which the Bank buys government bonds from commercial banks with new electronic money].

Bailey insists the Bank was “very clear” about why it was doing QE. In March 2020, there was a major dislocation in financial markets, and a downturn in the economy, so the Bank needed to act – for reasons of financial stability, and also monetary policy (controlling inflation)

The BoE governor says the Bank has learned that QE “works most effectively in a crisis” – by lowering long-term rates, it can helps households and businesses.

Q: But your chief economist, Huw Pill, has suggested it may have been a mistake to keep QE running through the pandemic….

Bailey refuses to engage with hingsight-based questions – as the Bank makes policy based on what it knows at the time.

It’s hardly radical to suggests monetary policy would be different if we knew then what we know now, Bailey adds.

Share
Updated at 

Bank of England governor Andrew Bailey is testifying to the House of Lords economic affairs committee shortly – it’s being streamed live here.

📢Join us on Tuesday 29 Nov at 3pm to hear evidence from Andrew Bailey, Governor of @bankofengland🏦. Topics include: #inflation, #LDIs, #quantitativeeasing, investment & growth, #laboursupply and more!

Tune in live➡️https://t.co/4Rnr7lIvHl

— Lords Economic Affairs Committee (@LordsEconCom) November 28, 2022
Share
Updated at 

Credit Suisse shares hit record low

In the banking sector, meanwhile, shares in Credit Suisse have dropped to a new alltime low.

They’re down 4%, below 3 Swiss francs, as investors sell the rights to subscribe to new shares in a cash call meant to strengthen its finances.

Credit Suisse has lost two-thirds of its value this year, as the cost of insuring its debt against default hit record levels.

It’s been caught up in a series of scandals, including the collapse of the lender Greensill Capital and the US hedge fund Archegos Capital in 2021. It has also been fined over £350m for its role in the Mozambique “tuna bonds” loan scandal.

The bank is cutting 9,000 jobs, as well as looking to raise billions from investors, including through its new rights issue (which gives existing shareholders the option of buying more stock).

Last week, it said a “challenging” economic and market environment had hurt client activity, as it warned shareholders to expect a pretax loss of up to 1.5 billion Swiss francs this quarter.

Share
Updated at 

Elsewhere in the energy market, Ofgem has ordered energy supplier Delta to pay £57,000 immediately after it failed to meet its renewables obligations and provide information for the regulator’s Supplier of Last Resort scheme.

Delta, which serves 1,690 business customers in the UK, failed to meet the standards set for them as a supplier, the regulator said.

Ofgem has issued two ‘Provisional Orders’ after Delta failed to pay into the Feed-in Tariff (FIT) scheme, a programme which supports investment in and uptake of renewable electricity generation and failed to provide information requested by the regulator for its Supplier of Last Resort (SoLR) scheme.

Earlier this month, Delta was warned about its finances after failing to prove it was financially resilient in the current volatile energy market.

We've issued a provisional order against Delta Gas and Power Ltd with regard to issues concerning financial resilience.

We expect Delta Gas and Power Ltd to address our concerns quickly and fully.

More on the provisional order here⬇️https://t.co/c30YhYGI68

— Ofgem (@ofgem) November 9, 2022

Sale of Bulb to Octopus Energy faces further delays - Bloomberg

The sale of energy supplier Bulb to Octopus is facing further delays as rivals plan to challenge the UK government’s decision in court, Bloomberg reports.

We had been expecting a City court to approve the sale today. But lawyers for the bust supplier’s administrators say rival suppliers are pushing for a judicial review.

Bloomberg have the details:

Iberdrola’s Scottish Power, EON, and Centrica Plc’s British Gas are planning to take the deal to Judicial Review, a court process that looks at the legality of a government decision, Teneo Inc.’s lawyers said at a hearing in London on Tuesday.

“It is worth observing at the outset that the intervening energy companies each had an opportunity to participate in the sales process,” Richard Fisher, a lawyer representing Teneo who are overseeing the sale, said in court documents.

“All could have sought meetings with the administrators or government had they wished to investigate different funding options.

The sale of Bulb to Octopus Energy faces further delays as rivals plan to challenge the government’s decision in court https://t.co/jiy881MCBB

— Bloomberg UK (@BloombergUK) November 29, 2022

Bulb was the largest energy supplier to collapse as energy prices soared in 2021, and was too big to be rescued by a rival.

Instead, it entered a special administration overseen by the UK government and run by the restructuring firm Teneo.

The cost of bailing out Bulb, which has around 1.4m customers, has hit £6.5bn, according to the Office for Budget Responsibility. The cost escalated after the Ukraine war drove gas prices even higher this year.

Octopus sealed a deal to take on Bulb at the end of October. But, as we reported earlier this month, the UK’s spending watchdog is to examine the deal.

According to Bloomberg, Scottish Power objects to the deal struck as it may involve a “dowry” being paid to Octopus of at least £1bn to cover buying energy to supply customers with, its lawyers said in court documents.

More here.

Most UK business leaders say 'Brexit freedoms' not a priority

Richard Partington
Richard Partington

Most UK businesses have no interest in or understanding of the government’s flagship “Brexit freedoms” plan to scrap EU regulations, according to a survey of bosses.

The British Chambers of Commerce (BCC) said almost three-quarters of company directors were either unaware of the government plans or did not know the details.

Across all business areas, about half in the survey of almost 1,000 firms said deregulation was either a low priority or not a priority at all.

William Bain, the head of trade policy at the BCC, which represents thousands of firms of all sizes across the country, said:

“Businesses did not ask for this bill, and as our survey highlights, they are not clamouring for a bonfire of regulations for the sake of it.

“They don’t want to see divergence from EU regulations which makes it more difficult, costly or impossible to export their goods and services.”

Share
Updated at 

Bank of England's Mann: We could pull back on rates once inflation tamed

Richard Partington
Richard Partington

Just in: Bank of England policymaker Catherine Mann has suggested the Bank could cut interest rates from the middle of next year

Mann has said that financial market pricing suggesting cuts in interest rates were “an accurate assessment of what the prospects for Bank rate are”

Asked on an online conference hosted by the Conference Board what the determinants would be for considering rate cuts, she said:

“One of the things about market assumption was that it did contain some drift down from the peak. A humped profile. I think that is an accurate assessment of what the prospects for Bank rate are.

That there will be a peak that will serve to temper medium-term inflation expectations, and at that point, we have the opportunity to pull back from that peak.

So we’re really managing in my view, it’s critical to manage inflation expectations, and in order to do that you might have to be a bit more aggressive in the near term so that you can then pull back once you have tempered those medium term inflation expectations.”

Mann also flagged that inflation is ‘increasingly embedded’ in UK firms, something which will concern the BoE.

BoE's Mann:
- Inflation is increasingly embedded in UK firms
-This is a dramatic change in underlying inflation
-Inflation expectations are drifting towards 4% in firms

— DailyFX Team Live (@DailyFXTeam) November 29, 2022

The financial markets are currently pricing Bank rate hitting at least 4.5% by next summer, up from 3% at present, before then easing back.

Last week, deputy governor Sir Dave Ramsden suggested he could vote to cut interest rates if cost of living pressures eased faster than expected.

Inflationary pressures in Germany have eased, in a sign that the cost of living crunch might be easing.

Consumer prices in Europe’s largest economy rose by 10% in the year to November, down from 10.4% a month earlier. During the month, prices fell by 0.5%.

Energy and food prices were the biggest factors pushing up the cost of living.

Statistics body Destatis says:

In November 2022, food prices showed above-average growth (+21%) compared with the same month of the previous year. In contrast, energy prices have eased slightly but are still 38.4% higher than in the same month a year earlier.

On an EU-harmonised basis, Germany’s inflation rate dipped to 11.3% from 11.6%.

Although double-digit inflation is clearly Still Too High, it may indicate that the worst of Europe’s inflationary surge is over….

Softer German CPI has bonds bid everywhere. While the ECB would be delighted, the three previous 'head-fakes' might keep them from turning dovish immediately. pic.twitter.com/6oLsq2Q0zo

— Rishi Mishra (@aRishisays) November 29, 2022

Most viewed

Most viewed