The eurozone’s financial system is facing “severe risks” from the chaos gripping global markets, the European Central Bank said in an unprecedented warning as Germany unveiled a €200bn (£177bn) borrowing binge.
The institution told the region’s banks to prepare for financial turmoil caused by huge falls in investments and potential disaster in the house market.
A fresh wave of selling hit stocks across the world today as central bank officials continued to fuel expectations of aggressive interest rate increases to cool red-hot inflation, with US stocks dropping 2.7pc to their lowest level since November 2020.
However, the pound bounced back above $1.10 versus the dollar for the first time since Kwasi Kwarteng rattled markets with his mini-Budget and UK borrowing costs eased off their highs.
The latest swings on markets came as Germany took a swipe at Britain’s plan for debt-funded tax cuts as it sought to prevent market turmoil spreading in response to its energy bills support.
Christian Lindner, finance minister, attempted to distance his €200bn “defensive shield” for German households from the UK’s mini-Budget.
He said Germany would not follow the UK’s radical new economic policy of unfunded tax cuts, even as Olaf Scholz’s government announced it will ramp up borrowing to finance a relief package that will cap gas prices.
In a sign of growing nerves in Europe over market turbulence, Mr Lindner sought to differentiate Germany’s temporary energy support from the UK’s package, which will permanently increase the deficit unless offset by future spending cuts or rapid growth.
He said: “We want to clearly separate crisis expenditure from our regular budget management, we want to send a very clear signal to the capital markets.”
Meanwhile, Spain’s socialist-led government agreed a temporary wealth tax to fund its efforts to fight the crisis. People with a fortune of more than €3m would be taxed at 1.7pc, rising to a rate of 3.5pc for those with more than €10m.
The European Systemic Risk Board – a part of the ECB led by the bank’s president Christine Lagarde – added to concerns about growing market turbulence after a sharp sell-off in stocks and bonds in recent weeks.
European stocks tumbled a further 1.7pc to slip to their lowest level since late 2020 as government borrowing costs marched higher. Shares in the region have slumped 22pc this year.
The FTSE 100 suffered a fall of 1.8pc, while the more domestically focused FTSE 250 dropped 3.1pc.
It said the darkening economic outlook and the sliding value of investments are the major threats to the eurozone financial system.
The board said: “Risks to financial stability stemming from a sharp fall in asset prices remain severe. This has the potential to trigger large mark-to-market losses, which may amplify market volatility and cause liquidity strains.”
The regulator also sounded the alarm on rising mortgage rates threatening the housing market and the growing threat of cyber attacks on banks in the wake of Russia’s invasion of Ukraine.
It said: “Rising geopolitical tensions have led to an increase in energy prices, causing financial distress to businesses and households that are still recovering from the adverse economic consequences of the Covid-19 pandemic. In addition, higher-than-expected inflation is tightening financial conditions.”
The board’s meeting was held a week earlier, before Mr Kwarteng’s mini-Budget rattled financial markets. However, regulators are also said to be concerned about risks from the UK chaos after European bonds were hit by a spillover of the sell-off in Britain.
Bond yields across the world have been rising rapidly as the ECB, Federal Reserve and Bank of England promise aggressive action to tackle inflation. UK bond yields have risen much faster than in Europe but borrowing costs in the likes of Germany and France are also climbing uncomfortably quickly to hit their highest levels in a decade.
Tightening financial conditions and expectations for rapid interest rate rises in the next 12 months have prompted concerns that some households and businesses will struggle to pay their debts.
That's all from us, thank you for following! Before you go, check out the latest stories from our reporters:
Erdogan says pound is ‘blowing up’
Meanwhile, it is not just Germany which is lashing out at Liz Truss over her tax-cutting strategy.
As Joe Barnes and James Crisp report, Turkish president Recep Tayyip Erdogan has claimed the pound is “blowing up” as European diplomats accused Liz Truss of “gaslighting” the British public.
The Turkish leader, who has overseen a 50pc slump in the lira in the past year, said today: “They were bragging about the pound on how valuable they are against this and that, but we got the news today that they blew up.”
Sterling dropped to an all-time low against the dollar at the start of the week after the fiscal package announced by Chancellor Kwasi Kwarteng spooked international investors.
The package has sparked a renewed wave of criticism of Britain from officials in Washington, Brussels and Berlin.
Moody's to assess UK credit rating on October 21
Moody's has said it will issue an update on the UK's credit rating on October 21, days after it raised the spectre of a potential downgrade.
The UK is expected to receive credit ratings from both Moody's and S&P on the same day next month, coming in the wake of criticism over Kwasi Kwarteng and Liz Truss's spending plans.
Moody's chief EMEA credit officer Colin Ellis told Reuters: "The decision that we will have to take and the discussion we will have... is whether these actions are negative enough to warrant a rating action. And what form, if any, that rating action should take."
Earlier this week, Moody's joined the IMF in warning over the Chancellor's plans, branding the mini-Budget "credit negative".
It said the unfunded tax cuts would lead to "structurally higher deficits".
The credit ratings agency said: "A sustained confidence shock arising from market concerns over the credibility of the government's fiscal strategy...could permanently weaken the UK's debt affordability."
Bank of England warned of pension funds crisis five years ago by Next
The Bank of England was warned about a looming disaster in the pensions sector by Next five years before it was forced into an intervention to prevent a market meltdown, write Oliver Gill, Laura Onita and Simon Foy.
Lord Simon Wolfson, the retailer’s chief executive, said that his treasurer had written to the Bank when it was governed by Mark Carney in 2017 about so-called “liability-driven strategies” (LDIs).
Lord Wolfson said that the FTSE 100 company rejected advice to invest in LDIs and warned the Bank of a looming “time bomb”.
He said: “We don’t have LDIs. We not only said we wouldn’t do LDIs when we were being sold them by everyone who thought they were a brilliant scheme, we also - our treasurer - wrote to the Bank of England to say that we felt it was destabilising.”
Housebuilders hardest hit amid market rout
Among those nursing heavy losses this week on the London Stock Exchange have been housebuilders, amid concerns turmoil in the mortgage sector will hit appetite for purchases.
Barratt Development was the largest faller on the FTSE 100 on Thursday, down 13pc on the day. It has fallen more than 17pc this week.
Taylor Wimpey ended the day 6.5pc lower, while Rightmove was down 7.7pc.
UK-specific element to recent financial volatility, Huw Pill says
The chief economist at the Bank of England said there is "undoubtedly a UK-specific component" to the recent financial volatility.
In a speech today, Huw Pill said there had been "significant repricing of financial assets" in the past week, part of which reflectes "broader global developments" and "the ongoing normalisation of macroeconomic policy after the pandemic-induced episode of exceptional ease".
However, he said there was some element of it driven specifically by UK-specific issues.
It comes after government officials attempted to frame the recent chaos in the financial markets as an international problem.
Joules 'eyes CVA to stave off collapse'
Joules is reportedly considering pushing the button on a rescue plan after talks with Next failed to result in a funding deal.
Exclusive: Joules, the struggling fashion retailer, is working with advisers on an insolvency mechanism called a CVA as the prospects for a rescue rights issue fade, weeks after Next pulled out of talks about an equity investment in the business. https://t.co/SsZb4FQuux
— Mark Kleinman (@MarkKleinmanSky) September 29, 2022
According to Sky News, Joules has begun working with Interpath Advisory on a company voluntary arrangement, although has not yet decided whether to go ahead.
The CVA would allow Joules to cut back on its rent payments or close stores. It comes weeks after the company said it was continuing to "assess its ongoing financing requirements".
Joules revealed that talks with Next had ended, and said it was "considering alternative options, including a possible equity raise, to allow the company to strengthen its balance sheet".
LME considers consultation into banning Russian metals
The London Metal Exchange is weighing up whether to start a consultation on whether to ban Russian metals.
The LME said no decision had been made yet on whether to ask for views on the topic, which would centre around whether new deliveries of Russian metals should be allowed to its warehouses, in light of the war in Ukraine.
Chief executive Matthew Chamberlain said "a discussion paper could also lay out potential options which could be pursued on the basis of market feedback gathered, including the option to take no action".
There are currently no restrictions on buying Russian metal, but there are a swathe of other sanctions on Russia.
Further disruption for one of Britain's biggest ports as another strike planned
Almost 600 workers at one of Britain's biggest ports - Liverpool - are set to stage another walkout next month, threatening more disruption at the border.
The union Unite said a further strike was due to take place between October 11 and October 17 by workers at the Mersey Docks and Harbour Company.
Port operatives and engineers are already in the middle of a two-week walkout which began on September 19. The next strike will also include control room operators.
More than 70 million tonnes of cargo pass through the port, according to owner Peel Ports.
Treasury Select Committee chair says Bank of England should have OBR forecast before decision on interest rates
Mel Stride said the "critical point is that the Bank of England MPC (Monetary Policy Committee) meets on 3rd Nov to decide on next moves in base rate which will impact millions".
— Mel Stride (@MelJStride) September 29, 2022
OBR forecast and Chancellor statement 'must be brought forward to end of October or earlier'
Mel Stride MP, the chair of the Treasury select committee, has said it is "critical" that the OBR forecast and Chancellor's statement are brought forward to the end of October or earlier, after revealing the first iteration of the fiscal forecast will be with Kwasi Kwarteng next Friday.
.@OBR_UK has just confirmed to me they’ll shortly publish timetable for producing full fiscal forecast - first iteration with @KwasiKwarteng Fri 7th Oct. Now clear from my correspondence with @OBR_UK that FULL forecast can be provided by end Oct rather than waiting til 23rd Nov.
— Mel Stride (@MelJStride) September 29, 2022
That's all from me from today – thanks for following! Hannah Boland will take things from here.
EU warns on financial stability risks
It's not just the Bank of England that's warning about financial stability – the EU has just done the same.
The European System Risk Board took the unusual step this afternoon, warning "sharp falls in asset prices... has the potential to trigger large mark-to-market losses, which in turn may cause liquidity strains."
🧵We’ve issued a warning about risks to EU financial stability and called for resilience in the financial sector to be preserved or enhanced.
— European Systemic Risk Board (@ESRBofficial) September 29, 2022
Bank of England buys £1.4bn of gilts
The Bank of England said it accepted offers for £1.4bn of gilts in its emergency bond-buying programme.
That's higher than yesterday, but below the maximum £5bn it said it was prepared to purchase.
In total, the Bank is preparing to spend as much as £65bn to calm jitters in the market.
Record gap between petrol and diesel prices
The gap between petrol and diesel prices has hit a record high due to Putin's gas supply cuts.
Analysis of official figures by PA and the RAC Foundation found the average price of a litre of diesel is nearly 17p more expensive than petrol.
Steve Gooding, director of the RAC Foundation, said the difference was mainly due to an increase in the amount of diesel being used for heating and power generation in continental Europe because Russia has cut gas exports.
Figures from the Department for Business, Energy and Industrial Strategy show average pump prices for a litre of fuel on Monday were 180.3p for diesel and 163.8p for petrol.
This means filling a typical 55-litre family diesel car is around £9 more expensive than for petrol models.
The price difference is the largest in records dating back to June 2003.
Gilts climb again despite Bank intervention as Liz Truss defends Budget
Government borrowing costs have begun to climb again less than a day after the Bank of England’s £65bn intervention to calm “dysfunction” in the gilt market.
Eir Nolsoe has more:
Liz Truss failed to soothe unease among investors after she spoke publicly for the first time since last Friday's mini-Budget, which sent borrowing costs soaring and the pound plunging.
“I have to do what I believe is right for the country and what is going to help move our country forward,” she told BBC local radio on Thursday.
Gilt yields rose by 0.2 percentage points for five and ten year government bonds in the wake of the comments. The rise reversed some of Wednesday’s drop of respectively 0.4 to 0.5 points, after the Bank launched a multi-billion bailout to prevent a Northern Rock-like run on pension funds.
Renewed upward pressure on yields suggests the Bank of England's intervention will provide only temporary relief.
Germany suffers another 'inflation shocker'
German inflation has surged to its highest level in a quarter of a century as it continues to feel the pain from the escalating energy crisis.
ING economist Carsten Brzeski said it was another “inflation shocker” for Germany, warning that pieces are “red hot”.
He said: “Looking ahead, the only way for German inflation is up. With high wholesale gas prices now reaching people’s homes and pockets as well as more inflationary pressure in the industrial pipeline – with producer price inflation at 45pc year-on-year – inflation will test even higher levels.”
Eurozone confidence at lowest since 2020
Eurozone economic confidence slumped to its lowest since the pandemic this month as record inflation and the prospect of a winter energy crisis cast a shadow over the region.
A measure of sentiment compiled by the European Commission fell to 93.7 in September – the lowest since November 2020. That marks the seventh consecutive monthly decline.
All gauges in the index from services to industry deteriorated, with consumer sentiment falling the most. Uncertainty among households is at an all-time high.
The figures highlight the impact of a shutdown of Russian gas via the Nord Stream pipeline earlier this month, as well as the economic damage from half a year of war in Ukraine.
H&M to cut costs by £160m amid inflation and Russia hit
Fashion giant H&M has revealed plans to cut costs by £160m as it blamed its exit from Russia and soaring inflation for plunging profits.
The Swedish fashion and homewares chain plans to implement a cost-saving programme from the second half of 2023 worth around 2bn Swedish krona (£160m).
The company posted pre-tax profits of 689m krona for the third quarter, plummeting from the 6.1 bn krona reported in the same period last year.
Exiting Russia explains half of this decline in profits, while "many other external challenges also made their mark on the quarter", bosses said.
This includes higher raw materials and freight prices, supply delays and a stronger US dollar resulting in cost increases for buying American goods.
It also took a hit from higher energy prices and increased costs from customer deliveries.
H&M paused all sales in Russia soon after the war in Ukraine commenced in March, before selling off the last of its stock in July in order to fully wind down the business.
US Treasuries tumble again despite BoE rescue
US Treasuries slumped today, reversing some of yesterday's gains as investors refocused on interest rates following the Bank of England's intervention in bond markets.
The yield on 10-year Treasury notes jumped 11 basis points to 3.83pc, with German gilts posting a similar move following new inflation data.
Treasuries suffered their biggest fall since the Covid crash on Monday, only to rebound just as quickly yesterday when the BoE announced plans to buy bonds.
Wall Street poised for drop a recession fears weigh
Wall Street looks set to drop at the open as investors fretted about the risk of an economic downturn and weighed the risk of turmoil in UK markets.
US stocks closed higher yesterday as the Bank of England's intervention calmed markets. But turmoil has returned today with the UK bond rout spreading overseas.
Tech stocks including Amazon, Apple, Microsoft, Meta and Tesla all dropped in pre-market trading.
Futures tracking the S&P 500 and Dow Jones were both down 0.8pc, while the tech-heavy Nasdaq lost 1pc.
Porsche surges in huge German listing
Porsche has pulled off Germany's biggest new public listing in 22 years despite market turmoil, writes Howard Mustoe.
Shares in a newly independent Porsche rose on their first day of trading, as owner Volkswagen raised €9.4bn after selling a 12.5pc stake.
The shares were placed at the top end of Volkswagen’s desired price range, at €82.50 apiece.
Arno Antlitz, VW chief financial officer, said: “The high level of demand demonstrates investors' confidence in Porsche's future."
The shares were up 1.8pc in early trading in Frankfurt.
The offering is the biggest by the amount raised since Deutsche Post DHL listed in 2000 and it is the biggest by market value in Europe since French phone operator Orange listed in 2001.
Co-op profits tumble as energy and labour costs soar
Co-op has revealed a sharp slide in profits over the last six months in the face of surging energy and labour costs.
The supermarket and funeral care group said its pre-tax profits slumped from £44m to just £7m in the six months to the beginning of July.
It came as food profits tumbled by £27m due to rising costs, with energy bills rising from £41m to £59m.
Co-op also revealed plans to invest £37m in a shake-up of its food strategy, which will include price reduction across 120 popular own-brand products and renewed focus on convenience stores.
Shirine Khoury-Haq, who took over as Co-op boss earlier this year, said:
Against a highly challenging economic backdrop, we have made significant progress in strengthening our balance sheet, whilst continuing to support the needs of our colleagues, members, customers and the communities in which we operate.
Our clear focus on developing our businesses, whilst controlling costs, improving our cash position and reducing debt is paying dividends.
Looking ahead, while we are mindful of the continued economic challenges, we have great confidence in the underlying strength of the Co-op and all our businesses.
Ditch HS2 to rescue public finances, says Lord Wolfson
HS2 should be ditched to ease the pressure on public finances, the Conservative peer Lord Wolfson has said.
Laura Onita reports:
The chief executive of Next said the Government must “identify and cut projects that deliver little value”.
He argued this would cut borrowing and “release desperately needed goods and services back into the economy” and help ease inflation.
Lord Wolfson said that "without prejudging it, HS2 would be top of our list for review."
The Tory donor added: “‘Borrow and spend’ remedies can ultimately only treat the symptoms of inflation; they are not the cure. “And there is a balance here, as we are already seeing, when a government borrows too much their currency will devalue, and stoke inflation next year.”
BoE must raise rates by 1pp to win back confidence, says Credit Suisse
The Bank of England must raise interest rates by a full percentage point in November to win back the confidence of the markets, or risk exacerbating the sterling crisis.
That's according to Credit Suisse, which said the Bank had not yet responded sufficiently to the Government's huge fiscal package, contributing to the decline in credibility of UK institutions.
Analyst Imran Javaid said the Bank needed to restore credibility by raising rates by at least 100 basis points at its next meeting, followed by at least 75 basis points in December and a commitment to keep hiking after that.
If this succeeds in restoring confidence, the central bank could slow down monetary tightening next year and pause rates at a peak of 4.5pc.
"However, a failure by the BoE to respond aggressively to the fiscal package in November is likely to worsen the confidence problem that the UK is facing and risk further sterling weakness, continued rates volatility, and higher risk premiums," he said.
"A dovish reaction would make markets price in much higher inflation and expectations that the BoE would have to hike to higher terminal rates, which can in turn worsen the severity of the recession, and weigh significantly on the housing market."
Fourth leak found in Nord Stream pipeline
Sweden said it discovered a fourth gas leak on the damaged Nord Stream pipelines earlier this week after ruptures sent gas spewing into the Baltic Sea.
The EU suspects sabotage was behind the leaks on the subsea Russian pipelines to Europe, and has promised a "robust" response to any intentional disruption of its energy infrastructure.
The leak reported today is the second one found in Swedish waters, while two others were discovered in Danish waters.
While neither pipeline was in use at the time of the suspected blasts, they were filled with gas that has been spewing out and bubbling to the surface of the Baltic Sea since Monday.
Danish authorities have also reported one hole in each of the two pipeline sections in their exclusive economic zone.
UK close to losing stock market crown
The UK is close to losing its position as Europe's biggest stock market as a flurry of acquisitions and slump in listings spark fears over its future.
UK companies worth more than £41bn have been acquired so far this year, while new businesses have managed to raise just £574m in the last nine months, according to Dealogic data seen by the Financial Times.
The last time initial public offerings were this week was in 2009, when just £1bn was raised over the full year.
The decline means the UK is at risk of losing its title as Europe's biggest stock market to France.
Since the Brexit referendum in 2016, the spread in total market value between the two countries has narrowed from $1.5 trillion to about $133bn, according to Bloomberg data.
City watchdog tells insurers to protect consumers from crisis
The City watchdog has told insurers to help customers amid concerns they could cut back on cover due to the cost-of-living crisis.
The Financial Conduct Authority said it was investigating banks that are failing to do enough to help struggling consumers and businesses and would intervene if need be.
It said firms must continue to provide clear information when customers renew their policy to help them decide whether they want to go ahead or shop around for a better deal.
The FCA has also told banks to improve the way they treat struggling small business owners when collecting and recovering debts and warned firms about unsuitable credit promotions.
Sheldon Mills at the FCA told a conference: "We’ve told lenders that we expect them to support struggling customers, particularly as they have the data to spot the warning signs first.
"We have identified 30 firms that need to do more to help struggling customers and will investigate the activities of 40 more."
Bonds extend slide as Truss defends tax cuts
UK bonds have extended their losses after Prime Minister Liz Truss defended her huge package of unfunded tax cuts, which have tipped markets into chaos.
The yield on the 10-year gilt rose as much as 21 basis points to 4.22pc after she started speaking to local BBC radio stations this morning.
The move undid part of a massive rally triggered yesterday, when the Bank of England announced it would start buying long-dated government bonds and delay reducing its gilts portfolio to help stabilise the market.
Germany facing 'permanent loss of prosperity' amid energy crisis
Away from our domestic crisis, the outlook is equally bleak in Europe's largest economy.
Germany is facing a "permanent loss of prosperity" as gas prices remain elevated even after the current energy crisis starts to ease, the country's top research institute has warned.
It came as the Joint Economic Forecast Project Group slashed its forecasts for Germany's economy, saying it's likely to contract by 0.4pc next year due to the energy crunch.
German output will be €160bn (£143bn) lower this year and next than predicted five months ago, the researchers said. The 0.4pc contraction in 2023 is down from previous estimates of a 3.1pc expansion.
Spokesman Torsten Schmidt said: "The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump in the German economy."
Truss: More details on business energy support in two months
Liz Truss has said there'll be more details on energy support for businesses when the Government outlines its full Budget in November.
It came as the Prime Minister stuck by her fiscal policy, insisting lower taxes would help to grow the economy while higher taxes were likely to lead to a recession.
FTSE risers and fallers
The FTSE 100 has plummeted in early trading as markets digest the Bank of England's £65bn intervention to prop up bond markets.
The blue-chip index crashed 2pc with losses across the board.
Next was the biggest faller, tumbling almost 10pc after it cut its sales and profit forecasts and warned the slump in the pound would fuel a second cost-of-living crisis.
Rate-sensitive stocks including HSBC, Lloyds and Barclays fell into the red, while oil and mining stocks were a major drag on the index.
Just a handful of stocks managed to notch up any gains.
The domestically-focused FTSE 250 also dropped 2pc. Chemicals firm Synthomer crashed more than 2pc after it warned on profits.
I'm prepared to take controversial decisions, says Liz Truss
Liz Truss has doubled down on her package of tax cuts that have sent markets into meltdown, insisting economies and currencies around the world were facing pressures.
Breaking her silence on the crisis in an interview local BBC radio stations, the Prime Minister said:
We're facing very, very difficult economic times, we're facing that on a global level.
We had to take urgent action to get our economy growing and that means taking controversial and difficult decisions.
But I'm prepared to do that as Prime Minister because what's important to me is that we get our economy moving.
Tax cuts only help the rich, admits Treasury chief
Chris Philp, the Chief Secretary to the Treasury, has defended the Government's decision to scrap the 45p top rate of income tax even as he admitted it only benefitted the wealthy.
Asked why it was necessary to make the move now, he told Sky News: "The top rate of now 40pc, reducing from 45, makes us internationally competitive, it puts us on a par with a number of other economies."
Told that the 45pc decision only benefits the wealthy, he conceded that is the case: "Well, that is true, it benefits people who earn more than £150,000 but very often those are people who are internationally mobile, they can choose where to locate.
"I talk to people who have got a choice about whether they work and live in London or Edinburgh or Birmingham or whether they go and live in Singapore or New York or somewhere. We want those people to locate here in the UK.
"One other point, in terms of the size of that measure, it amounted to less than 1/20th, less than 5pc of the total fiscal measures. It was a very small part of the package."
Ken Clarke: No other Tory government would have made mini-Budget mistake
Former Chancellor Ken Clarke has taken aim at Kwasi Kwarteng's mini-Budget, saying no other Tory Government would have made such a "mistake".
Lord Clarke, who was chancellor from 1993 until 1997, suggested Liz Truss and her new Government had put at risk the Tories’ reputation for “good housekeeping”.
He told Times Radio:
I still hope in two years' time, they might look like a normal, competent, Conservative government because no Conservative government in my lifetime would ever have made a mistake of this kind.
Fiscal discipline or good housekeeping, as Margaret always used to say, was one of the very strong cards that the government had because it was regarded as good at running the economy by the public.
FTSE 100 drops at the open
It's a bad start to the day for the FTSE 100, which has dropped sharply at the opening bell.
The blue-chip index tumbled 1pc to 6,933 points.
BoE's bond buying doesn't solve problems, says StanChart
The Bank of England's intervention in the bond market helps to keep markets "orderly" but doesn't solve problems around funding and inflation, Standard Chartered has warned.
Analysts Mayank Mishra wrote: "[The] BoE may have to hike rates to offer more sustained support to the currency."
Mr Mishra added that the market would be watching for certainty that the new bond purchases were indeed temporary, warning that it could weigh down the pound further if it turned into another fully-fledged quantitative easing programme.
Next warns of 'two cost-of-living crises' as pound slumps
Next has warned Britain is facing two cost-of-living crises as the crash in the pound compounds sky-high inflation and soaring energy bills.
The high street retailer said the decline in the pound looked set to prolong inflation, even once producer prices start to come down.
It added: "It looks like we may be set to have two cost-of-living crises: this year, a supply side led squeeze, next year a currency led price hike as devaluation takes effect."
The warning came as Next cut its profit and sales targets for the year following weak trading in August.
It said the squeeze on customer budgets was likely to worsen in the coming months, ahead of the key Christmas period.
Next forecast profits of £840m for the current financial year, down from a previous projection of £860m.
Pound falls 1pc as jitters resurface
Sterling has suffered another sharp fall against the dollar this morning as jitters about Kwasi Kwarteng's tax cuts resurfaced.
The pound rallied 1.5pc yesterday after the BoE said it would step in to buy bonds.
But it was on the back foot again in Asia trading, tumbling as much as 1.2pc to $1.0763.
Brian Hilliard at Societe Generale said: "The ultimate resolution of the crisis requires fiscal, not monetary, policy action.
"Whilst the immediate firefighting is being done by the Bank, we must not forget that the crisis has been caused by the market's deep concerns about both the substance and the presentation of the new Government's fiscal policy."
How chaos in pension funds forced Bailey to step in
The Bank of England's £65bn intervention in the bond market yesterday followed warnings of cash calls in the pensions market that could trigger an imminent crisis, potentially even sparking mass insolvencies.
The Bank said the move was designed to shore up what it called "dysfunctional" markets – but what does it mean for pension funds?
World Bank warns of recession in Europe
The president of the World Bank has this morning warned of recession in Europe as the pound and euro again fell against the dollar overnight.
Following Wednesday’s rally, the pound was down again to below $1.08 in early trading, while the euro was also down against the dollar this morning.
In a speech at Stanford University in California, David Malpass warned the West that it could take years for global energy production to recover from the supply crisis triggered by Russia’s invasion of Ukraine.
Mr Malpass added that the energy crisis would prolong the risk of a period of low growth and high inflation, or stagflation.
Porsche comes to market in one of Germany’s biggest ever IPOs
Luxury sports carmaker Porsche will debut on the Frankfurt stock exchange on Thursday in one of Europe's biggest listings in years, hoping its brand power can attract investors despite market turbulence.
The IPO has generated buzz in Porsche's home market of Germany, where tabloid Bild described it as "crazy, cool, fast-paced".
"On Thursday, sports car icon Porsche goes full throttle and races onto the stock market," read a column in the paper.
Parent company Volkswagen is set to raise 9.4 billion euros (£8.4 billion) from the listing.
Porsche's shares will each be issued at 82.50 euros - the top end of an initial range - which gives the carmaker a valuation of 75 billion euros.
Airlines braced for chaos over Hurricane Ian
Airlines cancelled almost 2,000 flights on Thursday after Hurricane Ian hit Florida's Gulf Coast with catastrophic force in one of the most powerful US storms in recent years.
The hurricane is causing significant disruptions to American air travel, especially in the southeast United States. Since Tuesday, airlines have cancelled more than 5,000 flights with severe disruption expected to last beyond Friday.
A number of Florida airports temporarily halted operations, including Tampa and Orlando.
Truss and Kwarteng were warned pound could nosedive
The message from Kwasi Kwarteng was one of reassurance, write Ben Riley-Smith, Nick Gutteridge and Tony Diver.
Speaking to around 90 Tory MPs in a conference call on Tuesday night, the Chancellor attempted to calm his colleagues.
Yes, there had been “volatility” on the markets – a mild phrase for the pound crashing to an all-time low against the dollar in the wake of his tax-shredding mini-Budget on Friday.
But things were now “settling down”, he told colleagues – a comment that was passed to The Telegraph by an MP who made notes and was not disputed by Treasury sources.
Those same Conservatives tuning into the news on Wednesday could be forgiven for spitting out their mid-morning cups of tea.
Amazon agrees to raise pay for frontline workers
Amazon said on Wednesday night it will raise the average pay for frontline workers in a bid to attract more staff before the busy US holiday period.
The tech giant said that starting next month it will boost pay from $18 to $19 (£16.60 to £17.60) per hour, while transportation workers would earn between $16 and $26 an hour.
The minimum wage at the company, which employs roughly 1.5 million frontline workers, will remain $15 an hour.
The company is also offering the pay bump amid a growing unionisation movement inside its warehouses, driven by worker complaints over pay and working conditions.
Pension funds crisis forces £65bn bailout by Bank
Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout.
The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets.
Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis.
Read the full story by Tim Wallace and Ben Riley-Smith here
Sterling falls again overnight
Sterling has retreated again today after a sharp bounce against the dollar on Wednesday.
The pound jumped the most since mid-June on Wednesday, pulling the euro with it, after the Bank of England conducted the first of its emergency bond-buyback operations, worth more than £1 billion.
This morning, sterling was 0.9pc lower at $1.0789 by mid-session in Asia, losing some of the previous day's rally. The euro also weakened to $0.969, following Wednesday's 1.5pc surge, the biggest since early March.
Sterling had fallen to a record low of $1.0327 on Friday as investors delivered a scathing verdict on Kwasi Kwarteng's plan for record tax cuts funded by a massive increase in borrowing.
The euro had plunged to a new two-decade low of $0.9528.
5 things to start your day
1) Pension funds crisis forces £65bn bailout by Bank The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts
2) Yellen reassures on health of global economy after IMF stokes fears of UK contagion The US Treasury Secretary insisted that financial markets are “functioning well” as stocks in Europe and on Wall Street bounced back.
3) UK trade and travel at risk of 'rapid' decline if Brussels refuses to soften looming border checks Biometric controls are due to be introduced next May, replacing the “wet stamping” of passports.
4) EDF exploring keeping UK nuclear power plants open for longer to boost energy supplies The French state-owned company said it will review its current plans to close Hartlepool and Heysham 1 in March 2024.
4) Russia forced to use own jet technology to supply fleets The country is attempting to revive its accident-prone Cold War-era aviation industry after being pummelled by Western sanctions
What happened overnight
Asian share markets rose on Thursday after the Bank of England launched an emergency bond buying programme. The move buoyed sterling and offered some comfort to a fractious mood in markets, but by mid-morning in Tokyo the pound was already struggling for support and down 0.6pc to $1.0818. MSCI's broadest index of Asia-Pacific shares outside Japan was up 1.5pc and eyeing its best session in a month. Japan's Nikkei rose 0.9pc, while the Hang Seng was up 2pc.
Coming up today
Economics: Consumer credit (UK), mortgage approvals (UK), gross domestic product (US), initial jobless claims (US), consumer confidence (EU), economic sentiment indicator (EU)
Corporate: Mcbride (final results), Next, Synairgen, Novacyt (interims), Mitchells & Butlers (trading update)