Interest rates: MPC is still miles behind the curve

Next month the Bank of England’s Monetary Policy Committee is widely expected to raise the Bank rate again, possibly to the dizzy heights of 0.5 per cent. Students of such things will be interested to see how many members vote against this move, still in denial that inflation is serious and might have something to do with interest rates. The rest of us will continue to marvel at how cloth-eared the MPC has been.

Its previous comments on the subject of rising prices now look laughably naive, when it suggested that an inflationary surge would pass swiftly through the economy, rather as if Covid was a wave that we could “look through” to a tranquil, disease-free future. The difference is that we had an antidote to Covid which has been widely applied. The antidote to inflation is dearer money, but the MPC stubbornly refused to administer it.

The pain is now becoming apparent. The Bank’s forecasts for inflation are being left behind, and forecasts of 7 per cent (rather more on the old-fashioned Retail Prices Index) are increasingly common. The inevitable jump in domestic gas prices in April – even if the UK government wakes up in time to mitigate it – and the rising cost of fuel from a rampant oil price make such forecasts credible.

The knock-on effects here will be severe, as the rises will coincide with the 2.5 per cent jump in National Insurance contributions (aka the second income tax). Direct taxes do not impact the inflation index, but raise the temperature for pay rises, which quickly come through to prices. Squeezed employees will demand pay rises, or look towards the long list of job vacancies.

The MPC seems to believe that inflation will somehow magically fall back into its target range simply by raising Bank Rate from negligible to very low. But nobody who lived through the last bout of severe inflation 30 years ago would underestimate the task of bringing it back down. A long, financially hot summer is in prospect.

I Fink, therefore I am

Larry Fink doesn’t do jokes. At least, not ones which are easily accessible to his readers. Maybe the whole of his latest annual letter to CEOs is meant to be humorous, although the plodding prose suggests that he would do better to stick to fund management, where he is shockingly successful. Blackrock, the business he runs, has $10 trillion in his company’s care.

This barely imaginable sum, $10,000,000,000,000, is equivalent to around 7 per cent of the market value of every listed company on the planet, which means that when he writes a letter to the world’s CEOs, they read it. The rest of us just try and parse it for deeper meaning. Here’s one puzzler: “Delivering on the competing interests of a company’s many divergent stakeholders is not easy. As a CEO, I know this firsthand. In this polarized world, CEOs will invariably have one set of stakeholders demanding that we do one thing, while another set of stakeholders demand that we do just the opposite.”

Well, up to a point, Larry. The giveaway here is that weasel word “stakeholders”, an infinitely elastic term that starts with shareholders, moves to employees, customers and suppliers, and on to governments, activists, extremists and those who want the business to stop doing business. Mr Fink is anxious not to paint Blackrock too woke, perhaps, a comment that Bloomberg’s Matt Levine interprets as “we would still like to manage money for Republicans too.”

With its 7 per cent of every company, Blackrock wields obvious clout, and Mr Fink muses that allowing the owners of that capital the chance to vote on company resolutions might be a good thing. There is no immediate danger of happening, of course, and it would be a strange sort of shareholder democracy. For a start, much of the $10 trillion under management is not managed at all in the conventional sense, but is allocated passively by tracker funds in proportions to reflect the market value of the underlying shares.

In one sense, Mr Fink has no interest in whether those shares do well or badly. If they do well, Blackrock buys more of them to reflect the bigger index weighting. If they do badly, it sells down. As long as the fund matches the performance of the chosen index (less Blackrock’s fee, of course) the only thing that matters is the enthusiasm of investors to buy more Blackrock funds.

So who are they, these investors? They are lots of individuals, but the vast bulk of the money comes from banks, pension and insurance funds, which have decided that stock-picking is too hard, and have invested their clients’ money in tracker funds (for a fee, of course). This is cheaper for the clients than paying higher fees for some fund manager who claims to beat the performance of passive funds by active stock picking, but frequently fails.

Which brings us back to the officially non-woke Blackrock. Mr Fink’s alternative vision is for what he calls capitalism. “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.” Ah yes, long-term value. Like motherhood, we can all agree that it’s a thoroughly good thing, but as a cynic once observed, the long term is just a succession of short terms, and as he might have added, today’s CEO has little interest in anything much beyond the short term performance of the share price.

So as our beleaguered CEO reads his letter and wonders what on earth he is expected to do, he can draw comfort from his wonderfully generous contract, look forward (but not very far) and be grateful he’s not running an oil company.

Jonathan Ford and I host a podcast, published every Friday morning, called A Long Time in Finance, available on Spotify and Apple. At 20 minutes, it’s also not a long time in finance.