It's all downhill from here

0:00Wake Up To Money from BBC 5 Live. Hello, morning. Welcome to Wake Up To Money. The Bank of England Governor Andrew Bailey had some decent news for us yesterday. Recent developments provide more confidence that inflation is on track to return to the target soon. But not quite good enough news for interest rates to come down. Not yet, anyway. Our Friday panel are here to break all of that down for us today. Also today, we'll look at a bumpy week for big tech shares as investors seem to get the jitters of the scale of spending on AI. and we're off to the Peasts of Italy.

0:40One of the best theme tunes going, isn't it? Yeah, the 2026 Winter Olympics kick-off in Milan, Cortina today. We're going to be hearing from the opening ceremony's director and British businesses hoping the Games can boost winter sports spending here in the UK. Wake Up To Money with Will Bane. Morning, welcome to Wake Up To Money on Friday 6th February. just gone five o 'clock in the morning. We're with you this morning. Great to have your company. Yes, the Winter Olympics get underway. We are going to be hearing from some British businesses, a snow domes business among others in the second half of the programme about whether it translates across winter sports being on our screens for the next couple of weeks as they will be here on the BBC and of course here on Five Live as well.

1:20We'll be chatting that in the second half of the programme in a little bit of a different look for a Friday. But what will stay the same on this Friday is that we will break down the big economic and business stories of the week with our panel and there's plenty for them to get to isn't there from everything that's been going on with big tech to that news around interest rates from the bank of england yesterday so without further ado let's introduce them for this morning and to me darmini sharma is back with us chief executive and co-founder of the om group the consultancy and training provider for the construction industry darmini morning great to have you back on the program hi good morning will it's great to be back how are you yeah i'm really well thank you i'm looking forward to watching the winter olympics you yes yes it's very interesting to watch the winter olympics especially a bit different yeah it is it's very very different i love um i love how focused everybody is and uh how much um how much effort goes into everything looks like it's been snowing pretty hard too so it's going to be a good tv spectacle as well how's business going at the moment um actually really good will um we've had a we've had a bit of a um pivot in what we do um and um it's um it's going really well so what's that pivot look like so we've um we've expanded our leadership management offering and we've also launched our ai development arm for business interesting well hold that thought or put a pin in it as they say in the uh in the cliches on ai because we'll come to that be interested to know what you've done and and why and how you're using that when we come to that in a moment, because it's been one of the big topics of the week, hasn't it?

2:55But spending around all of that as well. But alongside Darmini for the next hour is Mary Therese Barton. Mary Therese is an equity partner and chief investment officer of fixed income at Pictay, the asset manager. And she joins us here in the studio for a wake up to money debut. Morning. Great to have you on the programme. Morning, Will. Pleasure to be here. Thanks for braving the rain and coming in bright and early in the morning. wobbly week in stocks and shares land, but you're very much focused on the bond market. Yes, but you couldn't ignore that move in stocks and the AI story this week.

3:26It's been big news, big news. Yeah, we will be talking about that, as I say, in just a moment. The final member of our panel this morning is Linda Yu, economist at Oxford University in the London Business School. Linda, great to have you back on the programme. Welcome back. Thank you very much. Great to be here, Will. What kind of caught your eye? Were you with Mary-Cherese there as well, that you just couldn't ignore what was going on in stocks or the Bank of England what kind of was your sort of big takeaway from the week well actually both of those things so I think our topics are spot on yeah well convenient isn't it then good I'm glad we've got it right for once if you want to join the conversation over the next half hour or so as well on those two topics we'd love to know your thoughts particularly if you're impacted by what's going on with interest rates potentially perhaps you're looking to get on the housing ladder this year or move house that house this year as well or your business, of course, that borrows.

4:15Love to know your thoughts. 85058, the text number's open, ready to go. 0808599693 is the WhatsApp if you prefer to get in touch that way. Let's kick off then hearing again from the Bank of England Governor Andrew Bailing. Disinflation is on track and looks to be ahead of the schedule that we expected in November. CPI inflation has fallen from 3.8 % in September to 3.4 % in December, which is a little lower than we expected back in November. And we expect inflation to decline further to about 3 % in January, February and March, before reaching a level close to the 2 % target from April. And we think then staying there.

4:56Well, despite that more upbeat message about the direction of where inflation was going, interest rates were nonetheless held at 3.75%. It was, though, a closer vote than many expected, with the Monetary Policy Committee who do the voting, voting 5-4 in favour of that hold. So pretty tight. And with the economy on target for something like 2 % inflation by the spring, it looks likely the next time the committee meets to decide there could well be that cut, as Andrew Bailey was talking about. This is a bit more of the Governor speaking to our Deputy Economics Editor, Darshini David. That rate will not be back to zero because having rates at pretty much zero for so long was a product of exceptional things going on, starting with the financial crisis.

5:39So that is not, in a sense, the neutral rate. The neutral rate is higher than that. So, yes, we must be, in a sense, now, you know, approaching it. Mary-Therese, your takeaway then from what you heard from Andrew Bailey, first of all. Yeah, a few things, first of all, is inflation is coming down towards target. Let's take the good news. On the other side there, it's quite right. We're in a different regime now. Things are different and we're not going back to zero interest rates. so you know I think this is something which is an adjustment for everybody to be thinking about and thinking more broadly it's going to be what we're seeing across other economies globally is we're going to be in an environment of higher interest rates going forward and as we speak in the bond world is there's a lot more risk premier going forward as well given all the political volatility and of course that's been in the headlines this week particularly in the UK.

6:29Yes, absolutely. And plenty more of that in the news bulletins, I'm sure, on Five Live as we go through the morning as well. Linda, what was your kind of top line takeaway? It's quite significant, I think, that the governor said that there should be scope for further easing because although he did clearly say they don't really know where they're going to head. So given how close the vote was, five to four is expected to be seven to two. I think the fact he was signaling that no, rates are not going to go back to what they were, rock bottom. But one of the big uncertainties is if rates continue to decline, what is the terminal rate?

7:07What is the neutral rate for the economy? He's kind of signaling, I think his actual quote was, for every cut, how much further to go becomes a closer call. So if rates come down in March to three and a half Some estimates suggest it may not actually fall further below that. And that's obviously quite a strong signal from the governor. Could go down a bit more, of course. Let me be very clear, because the other bit that came out with the Bank of England are its new growth forecasts. And they actually cut its growth forecast for the next two years. Unemployment outlook has been increased. And as you said, Will, inflation is expected to not just fall to the 2 % target in the spring, but actually stay within that range until 2029.

7:54So that means if growth is weaker, unemployment is up, inflation is at target at 2%, they could actually cut rates below the neutral rate to stimulate the economy. That, I think, is why he gave such a strong signal. Interesting. And let's pick through those other sort of fundamentals of the economy that he was talking about in a moment. But perhaps you first, Linda, and then Mary Therese again as well. Just explain for listeners that sort of that higher for longer, We're not going back to zero interest rate period again. What do you think that kind of means in broad terms for, I guess, our listeners, the wider economy?

8:27I think you're trying to set expectations that that period was not normal. Interest rates before the financial crisis averaged 5%. But because interest rates were pretty much zero for the last 15 years, well, 10 years before the cost of living crisis hit after the pandemic, I think he's trying to reset expectations. So economists don't think, and probably most people don't think, bond markets, businesses, at 0 % nominal rate, when you take into account inflation is actually negative. That is unusual, abnormal. So this, a lot of inflation is about inflation expectations and that relationship to rates.

9:14So if you think rates, not normal, can't be zero, probably won't be a 5%, you start to adjust and you think, well, maybe rates will be around, well, you know, said a moment ago, maybe just over 3 % or so. It just helps businesses think about when to invest. It helps people think about inflation stabilizing at 3%, how they should act with their mortgages when rates are around 3%. So it's really around expectation setting. So in other words, it's not been normal. Last few years was not normal because inflation was so high. But maybe, just maybe, we might be heading into a period where it feels a little bit more normal and not trying to jinx it.

9:55Fully agree with Linda. I think expectation management is really the buzz phrase here. You know, while we saw growth and inflation being revised down and we do think there's going to be further easing and interest rates being cut by the Bank of England, as you say, we know we're not going back to the period we were before and I fully agree, probably a terminal rate around 3%. And that's setting the expectations here. You know, there's a big narrative around sticky wages, etc. And that feeding through to inflation. And there is a broader discussion of whether in the big cycle we are with AI and all the investment and all the relationship to commodity prices and precious metals is we just could be in a higher inflationary environment in the future as well.

10:42interesting so kind of really kind of signaling the way a little bit here and sending out signals to anybody who kind of does stuff off that interest rate mortgages being an obvious one but obviously commercial loans car loans all that kind of stuff as well so they can set a kind of long-term stable price for some of those things so those don't go up and down so much as well for our listeners anybody kind of consuming one of those products yeah and no absolutely and i think this this ability to be able to plan for the long term is absolutely key to be able to be investing to be able to invest with confidence by companies and also for individuals when they're thinking about their loans and their mortgages and I think that's one of the concern about all the political volatility we've seen in the UK recently because when we're thinking about interest rates you think about the what we call the front end which is being driven by what the central bank is doing and then we talk about the long end when we're as bond investors and lending the UK government money for 10 years or 30 years and now given the fiscal spending and given the concern about the political trajectory, the investors are demanding a higher interest rate and that's more volatile, what we say on the long end of the curve.

11:48And that makes it harder to make long-term plans and makes it harder to be investing for the long term. Interesting. So these signals kind of sort of trying to cut through a bit of that and stabilise around that. No section of the economy perhaps more impacted often by this, Dharmini, than construction. What was the kind of takeaway? And that idea of sort of longer term stability, does that work? Is that useful, do you think? Oh, absolutely. Well, I think that's what the construction industry and businesses across all industries are really looking for. As Mary, Trace and Linda were saying, is that stability, that certainty.

12:26So we can actually start to predict and start to think about what the year looks like. What are the costs of financing? Because often projects are financed. what are the risks associated with it what's the cost certainty i think it's going to give a bit more confidence um for new projects i think um we'll have some understanding that aspiring costs stop rising will there's more projects that are likely to start um hopefully this means that we're exiting the market's tailspin um looking i am very much looking forward and hopefully the industry is looking forward towards um you know a return to growth in 2026 um there's been a lot of things that have maybe stopped projects from starting, not just interest rates and cost of borrowing and things like that.

13:13There's been a lot of regulatory changes in recent years and a lot of red tape that developers have had to get their head around with the introduction of the Building Safety Act. But I think this will give lenders' confidence, businesses' confidence and clients who are funding these projects' confidence that actually we've got a little bit of a stable period coming up and we can start to plan a bit more effectively. That's a really interesting thought, though, isn't it? Because presumably that could have an enormous, the guys you work with, Darmini, an enormous impact on their overall budget, right?

13:44Even 0.25 of a percent, right? So you're sort of waiting. If you think it might move in two, three months, presumably you're waiting to do some of that borrowing to that point. Because at the scale that some of these companies are borrowing at, that's a heck of a lot of money, bluntly. Yeah, absolutely. Absolutely. And this is why periods of instability and kind of what we've seen over the last two years have been so difficult for the industry. It's been an absolute kind of complete mix of, well, a complete perfect storm for the industry in the sense where there's been so many things that have impacted how quickly projects can start, how much confidence people have in being able to borrow, like you said, draw down the funds and actually deliver on the projects.

14:25And the cost of that delivery has fluctuated so much as well. So it's not just the cost of borrowing, it's actually been the cost of materials, the cost of labour, the cost of the consultants that go around all of this. And that uncertainty and that instability has other knock-on effects. There's been a lot of administrations in construction recently. We talk about this quite often in the industry. And I talk about this quite often with our clients and some of the lenders and developers that we work with as well. and hopefully with this hold of the interest rates and perhaps this prediction that the interest rates are going to lower over the course of 2026, that might help to reduce the risk of insolvency across the industry as well.

15:09And Linda, that leads us exactly to the point you were making about what the Bank of England was warning about, about what else they were seeing in their kind of forecast for what's going on in the economy, particularly around those two things Darmini was talking about, growth, but as a result of that, employment. Yeah, very much so. And I think if you look at the relationship between the two, it's often the case that the Bank of England explicitly targets inflation. So in other words, they don't actually target unemployment, which is one of the differences with the Federal Reserve, which actually has a dual mandate.

15:44But we know that when you do have rising unemployment and unemployment looks like it's an issue, it's one of the drags on economic activity. So if you look at the last few years, the context was, you know, sticky wages because the cost of living crisis was making it more likely that wages needed to keep up with inflation while the economy is weak. And I think that's one of the hesitations that cause rateholders to actually hold, because it looks like cost of living pressures will begin to come down as of April because of the changes from the November budget, where green levies was going to be taken off of energy bills for households, railfares would be frozen for the first time in 30 years.

16:33And that both are expected to exert, you know, it's going to reduce April's inflation numbers. And so that could give the bank more leeway to cut rates. And keeping in mind, of course, that what the two key indicators they look for are wage growth and services sector growth, which is the biggest part of the economy, which really does reflect wage growth. And in bond world then, Mary Teresa, take away from all of that? Well, in the bond world, it means investors will probably want to be owning the UK government bonds if they think there's going to be further interest rate cuts. If the further interest rate cuts, if yields move lower, bond prices move up.

17:17And explain that all the way through about what that then means for what the government can do. Well, that should mean it's in broadly if investors are buying, that means more financing and hopefully cheaper financing as interest rates come down. but as I mentioned earlier it also matters what the long end of the bond curve is doing as well because as we're financing long-term projects we need to be borrowing money over the longer term so yes you've got the front end where those interest rates are coming down because of what Andrew Bailey has been saying and about the inflation and the growth narrative but actually at the long end when we're more concerned about the level of government spending the market is demanding a higher interest rate so what we're being given with one hand from a market perspective has been taken away on the other.

17:59Well, I was going to take us to the weather, but given we've gone to it, I mean, Linda, is that the wild card out there now? Out of nowhere, this storm around the Prime Minister because of Peter Mandelson's exposure to Jeffrey Epstein and the Epstein files and what people in government didn't know before he was made ambassador to the United States. Is that now a new political wild card that potentially could impact economics for exactly the reasons Mary Therese is talking about? The people that the market thinks Perhaps we could have a different prime minister, a different cabinet with different spending and tax priorities, that kind of thing.

18:33I think there is a sense that bond markets, investors, so creditors, those who lend to the UK, have underpriced political risk in the sense of does this pose a challenge to the prime minister and then implicitly his chancellor. So looking at 10-year gilt yield, so that's the cost of borrowing for a benchmark measure. You can see that had ticked up, and that means that prices for bonds had actually declined because yields are inversely related to the price. So if you think back to, there was last year when the Chancellor, she cried in Parliament. There was, I think, some speculation that she may actually have to go.

19:24Bond markets reacted similarly because they were concerned that a new chancellor, or in this case, you know, challenge to the prime minister, could change the way that fiscal policy, this real focus on current spending being balanced by tax receipts, that that could start to fall away. and that adds to political nervousness and that's why you saw bond markets and guilds react the way they did to quite a lot of revelations this week about the vetting of Lord Mandelson. And Dhamini, just from a business leader's perspective, how much of a headache is that? We talked about stability, Andrew Bailey talking about stability, but the potential for chopping and changing in policy again.

20:15oh honestly will i'm so torn um and i think most business leaders are torn as well this labor government has been um completely ineffective for business uh as a whole so on one hand me personally and a lot of my peers um business leaders are you know thinking hey would it be great if we had a new labor government or a new uh leadership team at the top and what does that look like but then at the same time as you said will it leads to another period of instability so we're almost damned if we do and damned if we don't um it's really difficult to to kind of you know think hey is this going to be something that that we want or is it something that we don't want a wry smile from mary therese in the studio here and i could kind of almost hear the right smile from linda down the line there as well does sound like once again kind of political volatility can be something i'm going to talk about on a business and economics program which i know can be a bit of a headache for some of our listeners sometimes just before we jump into big tech thanks so much for your text on 85058 this morning one anonymous here do if you can even just stick your first name and whereabouts in the country you are always helpful to us it's good news for savers this texter says maybe we older people will start spending because the interest rate will be stable um a question here from davy in derbyshire mary terese think your best uh place perhaps to answer this one or linda uh morning or what exactly is the neutral rate that mr bailey talked of so the neutral rate it's the rate that keeps the economy at full employment and stable inflation so it's not stimulating it growth and it's not restraining growth so it's really where we feel there's a balance steady as she goes and chris in sussex also been in touch works in kind of darmini's world chris saying morning team i have a smaller scale construction company and whatever the size we faced a major slowdown since the interest rate went up our company borrowing fees shot up and the customers we rely on both private and commercial all batten down the hatches and have been riding out the financial storm we were lucky to be able to focus on the emergency structural restoration side of our business for which customers have to find the money regardless of all the costs the interest rate is the biggest hold up for our country's success and the sooner it comes down the better i mean is that a view kind of shared across construction do you think a bit or a fear it is yes will and i think um i think it's absolutely perfectly justified and well founded in terms of um how it's been expressed by that listener and it's so so true particularly across the smaller firms in construction uh we've seen it with family businesses and firms that have been very profitable over the last um two or three decades that have actually now gone into administration because of this perfect storm that's been created with interest rates being a big part of that.

23:03Really interesting. Well, if you would like to join the conversation this morning, 85058 is the way to do so, or 08085 909693 is WhatsApp if perhaps you've got a question or a comment for our panel as well. Well, let's turn to tech then, because US software stocks are regaining a little bit of ground after a market sell-off prompted by Anthropix announcement of a new tool that automates legal services called Claude. There were further shocks following some adverse US job figures as well. Software as a service companies were particularly hit as well as financial services and asset management stocks as well.

23:37This was what Ruth Fox Blader was telling Sean about this a little bit earlier in the week. She's the founder of investor Fox Capital. I think what's very clear is that these are revolutionary technologies and that there will be winners and losers and we're in very very early innings of this game so understanding who those winners and losers are is something that is kind of happening in real time and so there will continue to be these market shifts as we anticipate market structure changing for specific companies but you know we're in a period of profound change and I think we have to anticipate that.

24:14Well, Nigel Vaz is in one of those industries that Ruth Foxblader was talking about. He's the chief exec of the global digital consultancy Publicist Sapient, whose parent company was hit in the stock route. Anthropic to us as a partner on the Sapient side, we leverage a lot of their tools, including cloud code in our enterprise AI platforms to accelerate the development of software and technology. So from our perspective, actually, revenues were up, margins are up and the opportunity for AI to act as an accelerant is more what we've actually observed. Linda, what did you make of what we saw this week?

24:54Well, pretty eye-watering drops yesterday in terms of stock prices, as you say. We'll see what happens this morning when stocks open, but Amazon fell, I think, 11 % after the market. And the worst, I think, was Microsoft, which dropped about 18%. The calls was similar, but slight differences. So, I mean, the similarity is that they're both spending significantly more on AI, specifically on data centers. And I think in Microsoft's case, it was also because for their very first time, and they showed that OpenAI accounted for 45 % of its$625 billion book of future cloud contracts. That's a lot of reliance on one customer.

25:45A lot of businesses would be a bit nervous if one customer, say, for instance, accounted for over 10 % of its revenues. But I suppose what's underpinning all of this is a nervousness of a couple of things based on those interviews that we've already heard, is that the spending on AI is predicated on mass adoption of generative AI. It produces a lot of data, unstructured data, which has exponentially grown. And so data centers are essentially an adjacent spend depending on that trend. It's a call. It's probably right. But how are they financing the spending on data centers? So in other words, a technology could both be transformative and also generate a bubble if there's leverage.

26:33And I think that's one bit of nervousness. The other bit of nervousness is around, you know, what happens to jobs? Could this wide use of AI cloud, for instance, that you mentioned by Anthropic, it's embedded as a platform within things like chatbots in business enterprises. They've really grown extremely quickly. But the implication of that is another bit of research from Morgan Stanley this week, which showed the UK in particular, even though we're talking about US companies, you already see jobs declining more than actually other economies. I think Darceme was around 8 % or so because AI is automating.

27:18Now, is AI augmenting? Is it replacing jobs? Again, both of those things could be true. It's just which jobs and over which time horizon. And as we were speaking earlier, with unemployment, you know, a bit on the rise, the US also has some weaker jobs data that begins to cast some doubt about, well, the impact of the entire sector. And Mary Therese, the scale of which they want to do this by selling off their own bonds, 220 billion Amazon saying they're going to spend in this space. I mean, kind of crazy numbers. It's extraordinary. It's such large numbers. I mean, that number is a third higher more than forecast.

27:52And if you take the four largest US tech companies, they're going to be spending around 650 billion on this build out. And if you go back in history, you don't see that type of capital outlay ever before. Well, in our memory, at least, and actually probably have to go back to the investments in the US railroads. And, you know, if you put that all against the context of, you know, huge optimism in the markets and the transformation, I think we're now just taking stock. are these investments going to come good? And could it, we were just chit-chatting about this, weren't we, before we went on air, could it have an impact on government borrowing, the fact that these companies now are selling their own bonds?

28:29And I read an interesting piece in the FT a few weeks back where there was this question kind of being posed, you know, what is safer, a US government bond or a bond in, I don't know, the biggest companies in the world, Alphabet, Meta, whatever? You're absolutely right. It's a big question in the markets right now is, who would you prefer to be lending money to? A government with runaway fiscal deficits and not able to get spending under control and to undertake welfare reform and demographic change or one of these big blue chip, what's seen as a safe company. And for example, in France, you've got eight big names like L 'Oreal, LVMH as an example, that actually have a lower yield than the government bonds in France.

29:08And this could be more of a trend going forward because now, in the past, when interest rates were so low, governments could print loads of debt at really low interest rates. And they can't now. And that just makes our government's job a lot more difficult. Yeah, it goes back to what you were saying about what that is used for a little bit earlier on in the program as well. Dominique, how are you using it in the business? AI, that is? Yeah, well, to be honest, we're actually doing a major AI project at the moment and migrating over to Microsoft Dynamics. We've got an AI roadmap where, and this is aside from our AI growth business, or AI development business rather, We are introducing a level of productivity measures for AI and putting an AI roadmap in place to implement AI across the business, but not to lose jobs or reduce the number of jobs that we have, but actually to make people more effective, to help them do the jobs that they like and that they love and that they're interested in so that they can really, really enjoy their job day to day.

30:06I spend around£350 a month on AI tools personally myself, so I'm very much embedded in this AR space. You're balancing the other side of the balance sheet by the sound of things as well. Literally, and it's made us so much more effective as well. It's taken away the churn that we just didn't need to do, the stuff that is really, really soul-destroying, time-consuming, repetitive work. Still those question marks remain, as Linda said, between the balance between that, how it's making companies like D 'Armini's more efficient to what it means for jobs long-term. It's going to be something where it's one of the great kind of topics of business topics of our time, really, without being too kind of pompous about it all, isn't it?

30:47It's going to be one of the challenges I'm sure we're going to talk about many, many times here on Wake Up To Money going forward. Big thanks to Dhamini and Linda this morning, who are going to leave us at this point as well. Dhamini Sharma, the chief exec and co-founder of the OM Group, and Linda Yu from Oxford University in the London Business School. Mary-Therese staying with me here in the studio where we're going to talk Winter Olympics, something a bit different. What are the opportunities for British businesses with the games kicking off in Milan and Cortina later on tonight? Well, some of the events have started already, but the opening ceremony tonight isn't as well.