Big businesses are struggling – will the Bank of England help out with a cut in interest rates?

Question: what do Motorpoint, JD Sports, Burberry, Watches of Switzerland, Dr Martens, Kingfisher, Superdry, and Ashtead have in common? The answer is that they’re among a small army of big companies to have issued recent profit warnings.

For those who may be wondering what that means, a profit warning is when a firm has to tell the stock market that its earnings are going to be materially below expectations. This they find painful not least because the next step is usually a sharp and painful downward move in their shares as their investors rush for the exit.

The reason why we’re into these weeds today is because EY Parthenon, the consulting arm of the professional services and accountancy giant, has just released its regular profit warning monitor which tracks these announcements. What it found is striking: nearly one in five (18 per cent) of UK-listed companies issued a profit alert in 2023. This exceeds the level recorded during the financial crisis of 2008.

A third of the warnings issued in the last three months of the year were, it said, from “large listed businesses”, double the average rate. Consumer-facing retailers were among the worst hit. This is notable on the day that Superdry, the fashion brand, confirmed the reports of trouble that were swirling over the weekend.

The company said it was “working with advisers to explore the feasibility of various material cost-saving options” in its “response to press speculation”. That is a bland way of saying “radical restructuring” amid reports that store closures and job cuts are coming in response to the company’s slumping sales.

George Mills, partner at accountancy giants EY, also pointed to a “rising number of warnings from sectors at the foundation of supply chains, like chemicals, and those reliant on business confidence, such as recruitment”. The next labour market update from the Office for National Statistics may make for uncomfortable reading.

Where this gets really interesting is when we turn to the cause of these alerts, with 19 per cent of those identified by EY citing higher interest rates. The clamour for the Bank of England’s rate setting Monetary Policy Committee (MPC) to throw caution to the wind and opt for an early cut is growing ever louder. This will only add to the noise.

Nor is the pressure on the MPC coming from the corporate sector. It is increasingly political too. While the government continues to express its support and chancellor Jeremy Hunt regularly cites the importance of “sticking to the plan” that is by no means true of Tory back benchers. They know they’re in a tough spot. The poll ratings are dreadful. An improving economic outlook might help with that. But it isn’t going to happen unless the MPC takes its foot off the pedal.

The problem with all the excited talk about an early rate cut in the City and elsewhere is that we have so far seen little enough sign that the MPC is minded to change its hardline stance. Remember, three of its members actually voted for a rate rise at the last meeting barely six weeks ago. Even Swati Dhingra, the most dovish of the nine-strong committee, wasn’t moved to vote for a cut.

That might change this time around. But inflation remains uncomfortably high and actually rose in December to 4 per cent from 3.9 per cent. The finger of blame was pointed at an increase in tobacco duty. But the hard truth is that core inflation, a measure which excludes the more volatile components such as tobacco, food and fuel, remained stubbornly high at 5.1 per cent, unchanged when compared to November. Service price inflation, which the MPC also pays close attention to given the importance of the service sector to the UK economy, was higher still.

True the rate of inflation has fallen sharply and the UK is no longer so much of an outlier when compared to its peers. The headline rate, while still relatively high, is actually now just below that of France (4.1 per cent). However, there are still plenty of what the Bank likes to refer to as “upside risks” out there. Rising tensions in the Middle East are heating up the oil price, for example, and if that is sustained it will feed through to businesses’ costs and have an impact on the prices they charge. Needless to say, cost pressures were cited by roughly a fifth of those businesses issuing profit warnings.

The MPC will have taken note. Remember, its remit is to maintain price stability and the rate of inflation is still double its 2 per cent target. There will doubtless be a rash of excited commentary if the hawkish external members who voted for a rate rise last time switch to voting no change and/or if Dhingra calls for an early cut. But keep an eye on phrases such as “risks to the upside” and any concerns voiced about inflationary pressures building back up in the minutes.

The economy is clearly struggling as a result of the MPC’s past actions. The GDP figures show it. EY’s profit warning monitor shows it, the howls of anguish from smaller firms, for whom the impact of higher rates is an even bigger problem, show it.

But I suspect the view of the majority of the committee remains no pain, no gain. It will take more than a few profit warnings for the Bank to shift its stance and to start talking about cuts before the third quarter of this year.