ALEX BRUMMER: Time to pause rate rises
Now that the Senate has signed off on the US’s new debt ceiling and a government default has been averted, a huge uncertainty has been removed from global markets.
In the US, debate is shifting from budgets back to the core obsession of what the Federal Reserve will do when the American central bank next meets on June 13-14.
US labour market data showing wage growth in May moderating, as an unexpectedly large 339,000 jobs were added to the workforce, will be a key indicator for rate-setters. Fears about US core inflation, at 5.5 per cent (lower than Britain at 6.8 per cent), have led to indications from the Fed that there may not be any pause on interest rate hikes.
But views among members of the Fed’s open market committee, which makes rate decisions, are shifting. The president of the Philadelphia Fed, Patrick Harker, suggests the rush to higher rates should be cooled.
Here, the Bank of England has been given carte blanche by Chancellor Jeremy Hunt to raise interest rates even if it plunges the UK into a recession.
Food for thought: Bank of England boss Andrew Bailey has been given carte blanche by Chancellor Jeremy Hunt to raise interest rates even if it plunges the UK into a recession
That may let Governor Andrew Bailey and the nodding dogs on the interest rate-setting monetary policy committee off the hook about the next decision.
If Bailey really believes that excessive growth in the money supply has not been a factor in the UK’s stubborn cost of living crisis, it makes little sense to keep raising borrowing costs. The upward shift in market interest rates, together with the rise since the last official inflation data, is already having a nefarious impact.
Favourable fixed-rate mortgage deals have come off the table. The Nationwide garnered attention after it reported that house prices are 3.4 per cent lower than in May 2022.
Its data has to be carefully interpreted, as the index is based only on its own customers and excludes buy-to-let.
In any case, it shouldn’t be a cause for panic. If prices are coming down, that could put housing in better reach of those excluded from home ownership.
It is hard to imagine why the Chancellor should think a UK recession is acceptable.
Less than two weeks ago, he stood next to the International Monetary Fund’s managing director Kristalina Georgieva celebrating the fact that the UK’s output projection for this year had been upgraded.
A possible explanation is concern among officials that prices are not coming down fast enough to meet Rishi Sunak’s target of halving inflation this year.
Moreover, he doesn’t want his Treasury to be tarnished by the same kind of gilts market tantrum faced by Liz Truss.
Monetary policy works slowly.
One cannot underestimate the impact of the rise in the bank rate from 0.1 per cent to 4.5 per cent on every aspect of the economy, from ordinary households to debt-laden businesses and the residential and real estate.
The fear must be that central banks, having misjudged prices on the way up, are now missing the time lags in the system.
The Office for National Statistics reports that the average gas price is 48 per cent lower this week than the same week last year and 87 per cent off the peak of August 2022.
The UN says global food prices are 22 per cent below the peak of March 2022.
Bailey and the Bank need to wake up, smell the coffee and hit the pause button on interest rates.
The private equity assault on London-listed companies shows no sign of abating in spite of the surging cost of debt.
The future of veterinary vaccines group Dechra is in danger after it agreed to a discounted £4.5billion buyout by Swedish predator EQT.
Instead of standing up for the independence of life sciences, chairman Alison Platt put down the welcome mat, declaring it ‘a compelling opportunity for shareholders’.
Selling an animal vaccine group, when pet suppliers and veterinary practices are booming, is absurd.
Under private equity control, jobs are axed behind closed doors, research budgets slashed and, as Asda and Morrisons have learned, servicing debt can become a burden which stymies investment.
Incentives for executives to sell are immense, with chief executive Ian Page set to fill his boots.
The Dechra deal flies in the face of the public interest, with command and control over Britain’s sciences industries denuded and the corporation tax base diluted.
This is no more than a shabby betrayal of UK plc.
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