ALEX BRUMMER: Why higher rates are futile

Mansion House warnings from Governor Andrew Bailey and Chancellor Jeremy Hunt about surging wage settlements were no accident. 

Data showing regular weekly pay up 7.3 per cent in the three months to May demonstrates how embedded inflation has become.

Earlier this year, pay data was largely interpreted as a blow to real incomes, spending power and the resilience of the economy. Not any longer.

There is a big debate about whether inflation is supplier driven, the result of firms increasing profit margins, or wages chasing prices. 

The UK seems affected by both. Even if headline consumer prices come down with a bump as falling energy prices finally make a difference, core inflation – minus fuel and food – could remain sticky.

Inflation fight: The Bank of England’s monetary policy committee has made 13 consecutive hikes to the base rate since March 2020 with it now sitting at 5%

Is the correct response for markets to keep pushing up bond yields and the Bank of England to go gung-ho on higher rates?

There are compelling reasons not to overdo the inner Paul Volcker. Current circumstances are very different to those in the US in 1979 when Volcker took the reins at the Federal Reserve. 

The tool that brought the US economy to a sprawling halt and ushered in recession was a surcharge on credit cards that had such a dramatic impact that it had to be abandoned.

Credit card interest rates in Britain are so high (18.9 per cent on a Halifax Mastercard) that raising official rates has little impact on spending patterns. 

Indeed, in spite of the outcry over the 6.66 per cent two-year fixed-rate mortgage – described as the ‘number of the Devil’ by one leading broker – no one should be overexcited. 

Some 700,000 households will see their fix end in 2023, but it is entirely possible, if headline prices tumble, that market rates will follow.

As one senior high street banker reminded me yesterday, arguments about the two-year fix are not very compelling given so many people are on longer fixes. 

Post-Covid savings balances are not shrinking very fast and there’s still a strong inclination to spend and visit airports or the local eatery.

Two dissident members of the Bank of England’s Monetary Policy Committee, LSE professors Silvana Tenreyro (who has now left) and Swati Dhingra, who voted against the increase in rates to 5 per cent, argued that monetary policy needs time to work.

Pushing the UK into a needless recession, when support for growth is what is needed, is unnecessary punishment.

Natural order

At a time of geo-political turmoil, the clash between Britain’s energy security requirements and the ambitions of the climate-change lobby are illustrated by Centrica’s new US gas supply deal.

When Labour, the SNP and Just Stop Oil are in full cry, the British Gas owner is recognising that additional liquefied natural gas (LNG) supplies will ensure British pensioners do not freeze in their homes as the UK races towards a carbon-free economy.

Under a deal signed with US producer Delfin Midstream, the UK will have access to one million tons of LNG annually for 15 years, transported from a terminal in Louisiana. 

Among the consequences of taxing North Sea oil producers until the pips squeak, supported by Labour, and blocking future exploration licences in the North Sea is that LNG will be shipped across the Atlantic with a big carbon footprint.

Centrica’s new £6.2billion contract is among a number of initiatives being taken by chief executive Chris O’Shea to secure supplies as it pushes full steam ahead on greener technologies, from the installation of heat pumps and hydrogen production.

The notion that the UK can simply switch off natural gas supplies, responsible for some 50 per cent of UK needs, is naive. 

There is also a trading opportunity for Centrica with the possibility of switching any excess LNG supply to the Continent should there be UK surpluses.

Russia’s war in Ukraine and the price shock that followed illustrate not just the need for energy security but potential harm to consumers and the economy.

Arms race

What a dilemma for the do-gooder environmental, social and governance (ESG) investors who eschew defence shares.

Britain’s prime contractor, BAE Systems, is ramping up munitions production with a potential £400million investment as Ukraine defends itself against Putin’s evil empire with its cavalier approach to civilian life.

Better Nato howitzer shells and the cause of freedom than Kremlin aerial bombardment and Joe Biden’s cluster bombs.