BUSINESS LIVE: GDP grows 0.4%; Ofwat outlines spending package; Heathrow passenger fare cap

According to Huw Pill, chief economist at the Bank of England, it is a question of ‘when’ the rate will be cut, not if the bank will do so. However, he also said it was still an ‘open question’ whether the bank should take action now.

Pill said in London yesterday that underlying signs of inflationary pressures were showing “uncomfortable strength” despite inflation falling to the 2 percent target.

In a separate speech, Catherine Mann, co-rate setter at the Bank, also stressed the strength of price pressures in the economy.

Aarin Chiekrie, Equity Analyst, Hargreaves Lansdown:

‘Like a sports team drafting a new player, the water regulator (Ofwat) has selected how much water companies will be allowed to increase consumers’ water bills between 2025 and 2030. Ofwat has proposed an average annual increase of £19 per year for the next five years, a third less than the approximately £29 per year that water companies have requested. These bill increases are needed to pay for infrastructure upgrades, repairs to burst pipes and to give investors a return on their investment in the company. The backlash over bill increases is a major blow to water companies and means they will need to invest their money very efficiently if they are to have any chance of meeting the regulator’s demands.

‘Cash returns for investors are essential to attracting new money into the sector. But this is a contentious issue. Companies like Thames Water and South East Water have been guilty of paying dividends, not investing enough in their leaky infrastructure and at the same time building up a mountain of debt.

‘Thames Water is still afloat, but only has enough funding to keep operations running until the end of May 2025. The group has asked Ofwat for permission to increase its bills by £191, but the regulator has rejected its ambitious requests and proposed a much more modest price increase of just £99 until 2030.

‘Thames’ investors have waited until today’s draft ruling to inject new funds into the group. It is unclear whether today’s figures will be enough to convince investors to provide new funding to the company or let it sink and be bailed out by the government. But Thames CEO Chris Weston said the group had “done informal polls which have shown there is interest in the market”.

‘The new Labour government wants to avoid nationalisation but will have to intervene as it is such a crucial part of the country’s infrastructure. It is likely that contingency plans will be drawn up to set up a special government department to run the business while the financial pug is taken out.’

James Smith, developed markets economist, UK, at ING:

‘GDP in the second quarter is expected to rise by 0.5-0.6%, after growth of 0.7% in the first quarter.

‘We are skeptical whether these kinds of growth figures can be sustained in the second half of the year, but we do expect growth to remain reasonable.

‘A key factor is that the effects of previous interest rate hikes have largely worn off; we estimate that 80% of the mortgage shortage is behind us.

‘Does this change the story for the Bank of England? Probably not.

‘Policymakers are still focusing almost exclusively on inflation in the services sector. The only remaining release of this data will determine whether the Bank can cut rates in August.

‘BoE Chief Economist Huw Pill, perhaps unsurprisingly, declined to elaborate on what he thought in his remarks yesterday. But barring any major surprises in those inflation numbers, we think the Bank’s preference will be to cut interest rates and we expect a total of three cuts this year.’

Labour ministers are holding emergency talks with water companies today, in preparation for a regulatory decision on their finances.

Executives from Thames Water, South East Water and Severn Trent are among those summoned to meet Environment Secretary Steve Reed.

It comes as regulator Ofwat prepares to issue a review of how much debt-ridden companies will be allowed to increase their bills over the next five years.

Luke Bartholomew, Deputy Chief Economist at Abrdn:

‘While it is important to emphasise that monthly GDP series are highly volatile, the strength of today’s report is consistent with the broader evidence that the UK is continuing its solid recovery after a long period of stagnation.

‘With the Bank of England’s chief economist, Huw Pill, sounding somewhat cautious about the outlook for inflation, the fact that the economy now appears to be growing faster than the Bank’s forecasts may also make investors a little more nervous about the prospect of a rate cut in August. But as long as the inflation data cooperate, we still expect the first cut next month.’

The UK’s Civil Aviation Authority has reduced the maximum passenger fares charged by Heathrow Airport after opposition from the Competition and Markets Authority.

The regulator had originally decided to set the cap at £25.24 per passenger in 2025 and £25.28 per passenger in 2026.

These amounts will fall by around 6 per cent or £1.52 in 2025 and £1.57 in 2026. The price per passenger will be capped at an estimated £23.73 in 2025 and £23.71 in 2026.

According to the CAA, the change reflects “a smaller reduction in Heathrow’s over-collection of revenue costs in 2020 and 2021”.

It also reflects the ‘elimination of the premium allowed on index-linked debt in calculating Heathrow’s cost of capital’, and ensures that ‘Heathrow’s costs reflect the costs of repairing pension deficits and corporate taxes’.

Household water bills in England and Wales will rise by an average of £19 a year over the next five years, a third less than the increase requested by businesses, according to draft proposals from Ofwat.

The regulator said water companies were proposing increases of an average of £144 over five years.

For example, Thames Water’s proposed increase of £191 by 2030 has been reduced to £99, while Severn Trent’s proposed increase of £144 has been reduced to £93.

Ofwat chief executive David Black said: ‘Customers want to see a radical change in the way water companies look after the environment. Our draft business plan decisions approve a three-fold increase in investment to deliver lasting improvements to customer service and the environment at a fair price for customers.

‘These proposals are aimed at a 44% reduction in storm flood leakage, compared to 2021 levels. We expect all businesses to embrace innovation and go further and faster to reduce leakage where possible.’

Recent data from the Office for National Statistics shows that the UK economy grew by 0.4 percent in May, beating the 0.2 percent growth forecast. The growth was driven by an increase in house building.