Banking

ALEX BRUMMER: Bank Governor Bailey worried by inflation bogey

ALEX BRUMMER: Bank is holding back on raising borrowing costs, but Andrew Bailey won’t want to be seen as the Governor responsible for unleashing an inflation bogey


The Bank of England rarely acts before the Budget when it has a more precise fix on the fiscal, output and jobs outlook. The judgment at the September Monetary Policy Committee session was difficult as it comes before the furlough scheme is fully unwound, in the midst of an energy emergency. 

This time around the Bank is one step ahead of the Federal Reserve by suggesting that price pressures may be moving out of the transitory stage and becoming more ‘persistent’. 

It has raised its inflation forecast for the year to just above 4 per cent. Two members of the committee, outsider Michael Saunders and perhaps more significantly insider Dave Ramsden, a former Treasury mandarin, have underlined concerns by voting against more bond buying. That is technically insignificant because the Bank’s quantitative easing is all but over. 

Decision time: Andrew Bailey won’t want to be seen as the Governor responsible for unleashing an inflation bogey 

It is hard not to fear inflation, given what is happening in the economy. The lack of HGV drivers is pushing up food costs. It could be argued that the takeover battle for Morrisons is a significant event because the private equity buyers have spotted that the fight of the UK supermarkets with the German discounters, which led to a never-ending price war, may be ending. 

The real story is energy costs. If wholesale gas prices are high in September, when demand for power in northern Europe is relatively modest, imagine what tariffs are going to look like as we move into winter. 

History shows energy costs feed into the sinews of an economy and that is being seen in steel prices, which feed into everything from cars to construction. All industrial production will feel pain. As prices rise the UK could experience the wage-price spiral that stymied governments in the past. 

All of this poses a terrible dilemma for policymakers. The last thing the economy needs at present is tighter money and raising interest rates from the current low of 0.1 per cent. Western nations have done a great job of shielding citizens and enterprises from Covid and have learned the lessons of previous economic shocks by dishing out fiscal and monetary largesse. 

They don’t want to stymie the recovery by pressing hard on the brakes. A readjustment is under way. The decision to raise national insurance contributions on employers, employees and pensioners in work amounts to a mini-budget and is a big strain on family incomes and business.

Interest rate-setters are doing their best not to upset the apple cart by raising borrowing costs. The US Federal Reserve has moved the goalposts by signalling a rise in the federal funds rate in 2022. 

The Bank is holding back. But if the energy scare carries on and average wage costs continue to soar it may have no other choice. Andrew Bailey won’t want to be seen as the Governor responsible for unleashing an inflation bogey.

Bid gridlock 

After a 99.8 per cent shareholder vote in favour of the £6.3billion offer for aerospace engineer Meggitt, ‘Sir Sell-Off’ Nigel Rudd looked home and dry. 

This was no Melrose-GKN battle where the buyer scraped through on a narrow majority. Meggitt buyer Parker Hannifin could also point out that it is no stranger to UK aerospace and already is a trusted supplier to Rolls-Royce. 

Be that as it may, the approach of Boris Johnson’s government to overseas takeovers of UK prize assets is very different to that of predecessors. 

No longer can predators, private equity or trade buyers, regard scrutiny by Government and regulators as routine. 

At present the Government is seeking to secure undertakings from Parker Hannifin on the future of Meggitt tech. That won’t be enough and this deal is heading to the Competition and Markets Authority. 

Rudd, colleagues and investors may face a long wait for their payday.

Wheel of fortune 

Amid all the excitement about the £14billion value placed on Entain it is easy to overlook where the code and technology for online gambling came from. 

London-quoted Playtech played a key role in Ladbrokes’ transformation and currently is working alongside Parx Casino in Michigan, Bet365 and Entain partner Bet MGM in New Jersey. 

Profits jumped more than 1,000 per cent in the past six months and even after a rise in the shares it is still worth just £1.4billion. Curious! 

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