ALEX BRUMMER: Putting the inflation genie back in the bottle

Oh what a coincidence! The world’s top central banks – our own Bank of England, the Federal Reserve in the US and the European Central Bank – all chose to deliver the same pre-Christmas present of a half-a-percentage point rise in interest rates.

Putting the inflation genie back in the bottle is proving a tough ask with consumer prices in Britain rising at a 10.7 per cent clip, which is more than five times the 2 per cent Treasury target.

Since Governor Andrew Bailey and the Bank of England set the UK on the course of higher interest rates a year ago, it has lifted rates nine times and, at 3.5 per cent, UK rates are at their highest level in a decade.

Rate hikes: Since the Bank of England set the UK on the course of higher interest rates a year ago, it has lifted rates nine times and at 3.5%, they now stand at their highest level in a decade

It has been the most speedy jump in rates since 1989 when then Chancellor Nigel Lawson was at the start of a losing battle to maintain the value of the pound against the Deutsche Mark which eventually led to Britain’s humiliating withdrawal from the ERM, precursor of the eurozone, in 1992.

Even though American and British interest rates have in recent months risen in lockstep, it is unlikely to remain thus.

The Fed and the Old Lady are both fighting a common enemy but the sources are different. In the United States, Jay Powell and the Fed are mainly seeking to control demand-led inflation.

A combination of feckless money printing by the Fed and fiscal laxity by the Trump and Joe Biden administrations triggered an unsustainable consumer boom which has ratcheted up prices and wages.

Taming US retail sales is proving more difficult than expected and analysts argue that the US economy is heading into the next year with more momentum than predicted, which may mean that the current US higher interest rate cycle has some distance to run.

In Britain, inflation is largely driven by the supply side of the economy with the Ukraine war, energy costs and the leftovers from Covid driving policy. 

The Bank also has concerns about the labour market. Private sector wage deals came in at 6.9 per cent annually in November, well below inflation.

Many of the claimants in the current series of strikes are seeking full or near-cost of living increases. As many of the striking workers are in the public or near-public sector it is possible that they could be absorbed without direct inflationary consequences.

The six members of the Bank’s interest rate-setting Monetary Policy Committee who voted for a half-point rise in rates fear secondary consequences.

Cost of living wage deals could infect negotiations in the private sector, leading to wage-price spiral, add to bulging Government borrowing and impact the nation’s long-term creditworthiness by raising the cost to taxpayers of unfunded defined benefit pensions plans.

There are glimmers of light from the Bank of England after its doomster prophesies a month ago. The economy is proving less weak than forecast.

Supply chain disruptions are easing, the oil price is down and a near-3pc rise in sterling ought to relieve domestic price pressures.

Anyone considering refinancing a fixed rate mortgage now might be advised to hold off as long-term interest rates flatten or fall. But no one should kid themselves that the great days of super-low tracker home loans or competitive fixed rates are coming back.

There are some signs that smaller players in the savings market are finally recognising the hit which loyal depositors have been taking from the higher cost of living.

It is time for the Big Four high street banks to step up to the plate and end their version of greedflation – raising margins at the expense of customers.

Washed away

The numbers from Britain’s top electrical goods chain Currys are a mixed bag.

There is a whopping pre-tax loss of £548million, largely driven by a big writedown of goodwill caused by the Liz Truss gilts market mayhem. 

The real business of selling electronic goods was badly hit by price competition in Scandinavia where 40 per cent or so of revenues are earned.

The first half was saved by a strong performance in the UK where demand for electronic goods and more energy-efficient washers and dryers has been firm.

An huge hit to Currys’ share price was halved by the close of play.

Chief executive Alex Baldock looks to have convinced doubters that it will all be all right on the night.

This post first appeared on Dailymail.co.uk