One quarter of one percent isn’t really that much, is it? Not when you compare yesterday’s Bank of England rate cut to the more aggressive measures taken by our cousins at the US Federal Reserve in recent months.
That seems to be the view of many this morning. Why didn’t the Bank’s Monetary Policy Committee (MPC) go further?
Those who hoped they would had their woes compounded yesterday. Signs are that the cut, already small, won’t be much felt by consumers. Nationwide, Royal Bank of Scotland, Alliance and Leicester and Britannia actually raised their rates yesterday.
So, in light of the fact that appears to have achieved little, was yesterday’s decision the right one? Should the MPC have gone further? Or (controversial), should it have stuck to its inflation-fighting mandate and left rates on hold? After all, the Consumer Price Index (CPI), the measure of inflation against which the MPC is judged, rose by 2.5% in February. That’s half a percentage point above the MPC’s inflation target of 2%.
I think the MPC fudged it. It made a decision based on fighting recession, not inflation. But it couched that decision in language that makes a weak attempt to tie it to inflationary concerns.
"Credit conditions have tightened and the availability of credit appears to be worsening," said an MPC statement yesterday. The MPC also added that the slowdown in the economy will create spare capacity and ease inflationary pressures.
Of course, it’s easy to sit on the sidelines and carp. The MPC had a very tricky call to make yesterday. But by straying from its core objective, it has ensured its credibility has taken a hit. That’s likely to mean even trickier decisions in the months ahead.
Retail market "ugly", Sir Philip Green says
One person not impressed by the MPC’s move is fashion magnate Sir Philip Green. The Kate Moss groupie gave a profit warning for his BHS chain yesterday, and predicts a shake-out in the retail market, which he describes as "ugly."
The whole sector worries Green, and he sees little chance that yesterday's rate cut would revive demand and predicted that the "very challenging" conditions would sort out good retailers from bad.
Green stopped short of calling time on any of his retail rivals, though.
"There is no one major who is in a sea of debt," he said.
But he did note that "there are a lot of smaller people around the edges that are not well capitalised and might fall over."
If there’s one thing the market can’t stand, it’s profit warnings. To us, the domestic retail sector looks as ugly as Green says.
The US has plenty of money — but not enough to buy with it...
"Give someone an opportunity to print money," says Bill Bonner, "and you can be sure that sooner or later, come what may, he’ll take it."
Bill tells me that the US money supply is way ahead of output growth. According to the experts, M3, one of the broadest measures of new money, is increasing by more than 15% each year.
"Now let’s compare that to the growth in the supply of goods and services," he says. You’re probably ahead of me here.
Yes, the supply of goods and services in America is not growing at 15%. It’s barely growing at all. In fact, if suspicions that America is currently in recession prove to be correct, that supply is actually shrinking right now.
The net result? You guessed it — inflation. With all this inflation pouring out of the States, expect central banks worldwide to have a tough time dealing with it. Many, including our beloved Bank of England, would probably love to bring interest rates down this year. But more inflation could scupper those dreams.
But inflation can be good — if you’re a commodities investor
One upshot of all the extra dollars flying around is they give commodity prices a boost. And that’s good news for Garry White, eagerly perched on his swivel-chair behind the Fleet Street commodities desk.
"The gold price is gonna move next week," he tells me. "On Monday we’ll get the US retail sales data... Tuesday producer prices... Wednesday consumer prices and the Fed’s beige book, which will shed more light on what’s happening in the economy... and then on Thursday it’s employment, leading indicators and the Philadelphia Fed survey."
A big week, then. And, as Garry says, one which should see the price of gold and other commodities making significant moves.
The Russians are coming... and so are the Qataris
"What’s up, Manraaj?" I asked as I poked my head into the emerging markets cubbyhole, where Manraaj Singh was feverishly typing away.
"Today," he announced, "belongs to the Russians." It was a somewhat mysterious comment, so I asked Manraaj to elaborate.
"Russia now owns 10% of America’s steel-making capacity," he said. But Russia’s not getting things all its own way. Qatar is going head-to-head with Russia in the battle for the European gas market.
Until tomorrow
Ben Traynor
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