Last night, the US Federal Reserve, the most powerful central bank in the world, kept interest rates near zero. But he indicated that the rate hikes could come sooner than previously suggested, and warned that Covid’s economic recovery was slowing.
Today, all eyes are on the Bank of England, which will release its latest news at 12 noon.
Will the Bank of England’s Monetary Policy Committee raise interest rates today?
No. It would be a serious shock to the markets if it did. But in the City and far beyond, there is serious interest and concern about what he’s saying about inflation, quantitative easing and when he might change rates, if not now. .
The Bank, like the Federal Reserve, faces several big issues mainly related to Covid: the extraordinary QE (bond purchase), necessary to support the economy during the pandemic, the increase in public debt and the fact that inflation continues to exceed its best. guesses.
From Martin Wolf in Wednesday’s FT: “Why do central banks find their job so difficult to do? A common opinion is that it is because they are fools.
Mr Wolf doesn’t actually think they are, but he thinks the era of Covid QE should be over. “We have more than enough money today and bond yields should rise a bit. When the facts change, central banks should change their minds. That time is now, ”he wrote.
Is the Bank afraid of energy prices?
Probably, but he’ll try not to say it. Tom Pugh, UK economist at RSM, said: “The MPC will continue to largely ignore movements in volatile energy commodities and focus on the outlook for the underlying economy. Financial markets are ahead of the game expecting the MPC to hike rates early next year. Instead, the first rate hike will likely come late in the second half of 2022. “
AJ Bell financial analyst Danni Hewson said: “One price hike that has not declined well in the UK is for gas and there are great concerns that the energy sector will will look at the end of winter with two small businesses already calling time. Can those left standing pick up the slack or will additional clients make their sums untenable? Centrica shareholders seem to sense the opportunity and the course of its stock is up more than 5% since the weekend and although SSE fell today, it is still up slightly from Friday’s close. Competition is supposed to be better for the consumer, but many of the newcomers simply cannot make the current numbers work.
Inflation climbed to 3.2% in August from 2% in July, the largest increase on record.
Ryan Myerberg, Global Sustainable Fixed Income team at Brown Advisory, said:
“The market has started to factor in an increase in the discount rate throughout the next year given the recent rise in inflation and the possibility that it will remain elevated in the near term, particularly given the the next increase in regulated energy prices. That said, the economic situation is more than sufficiently uncertain to allow the MPC to remain in valuation mode without having to report any details to the market regarding the timing. They will be very firmly suspended this week, and it will probably be one of those meetings where they try to say and report as little as possible and move on to November. “
What’s so bad about a little inflation?
In manageable doses, nothing. This shows that the economy is growing and reducing the value of debt. One effect, however, is to increase the amount the government has to pay in interest charges to service its own loans. Yesterday it emerged that the government’s net borrowing stood at £ 20.5bn in August, around £ 5bn more than expected. Interest payments on this debt amounted to £ 6.3 billion. Let’s be clear: this is a lot and it seems likely that it will only increase.
The OECD says inflation will continue to rise over the next two years. Dealing with this will be a “very difficult balancing act,” he says.
Should the Bank raise rates now to curb inflation?
The purpose of increasing rates is generally to reduce demand. The problem the economy is currently facing is not demand, it is supply.
A crate of goods from China – if it does – costs more now than it did just a few weeks ago.
How does the Bank of England raise rates to make this fund cheaper? It is difficult to see how this is going.
We like to talk about the Bank in very powerful terms, like if it was just to make things right, our problems would be over.
Less comfortable to recognize is that he has limited powers, especially when the stakes are global.
Lately we are running out of food, gas and CO2, among other products.