Let’s hope Bailey’s right this time
The Bank of England has finally caught up with the curve of rising interest rates. Amid headlines of the biggest monthly rise in 30 years, Bank Rate has been raised to the dizzy heights of 3 per cent. By any standard other than the weird, zero-interest world since the banking crisis, this would have been seen as the bottom of the interest rate cycle. As it is, the calls to protect borrowers from rising mortgage rates started almost immediately, while Andrew Bailey and his Monetary Policy Committee signalled that the market expectation of a peak of 5.25 per cent was too high.
The MPC acknowledged the possibility of that rate, but sketched an alternative where inflation peaked at a curiously-precise 10.9 per cent, before subsiding to 5.6 per cent by the end of next year, and miraculously fitting inside its 2 per cent target range thereafter, even with no further rises in Bank Rate.
Given the Bank’s record in forecasting, this looks more like wishful thinking than robust analysis. It completely failed to see the tsunami that overwhelmed its expectations – a year ago it forecast peak inflation at 5 per cent – so it was hardly surprising that the remarks did nothing to boost confidence among the investors on whom the UK is relying to fund our chronic deficit. The pound fell and government stocks suffered their worst day since Kwasi Kwarteng’s Budget that never was, all of a month ago.
Politicians may rant at the country being at the mercy of the markets, but chronic borrowers must take whatever terms they can get. The deficit problem for the UK is compounded by the need to start selling the vast pile of government debt the Bank bought during the balmy days of Quantitative Easing. Buying in stock from sellers in a rising market is easy when you have decided not to bother too much about the price. Selling stock back to buyers in an oversupplied market where prices are falling is altogether harder. As pension funds mature, there are fewer natural buyers for government stocks than there used to be, so whistling cheerfully about a coming dramatic fall in inflation may not be enough to bring them in.
Inflation is probably at or close to its peak now. The combination of falling gas prices and “demand destruction” as producers and consumers learn to do more with less is a powerful one, but history shows that getting it back down to 2 per cent, the level at which we don’t really notice it, is another matter.
So we stagger on to the next moment of drama, the proper Budget a fortnight hence. We have been prepped for truly grim news, so the reality may not be quite so bad. The sums depend uncomfortably on the estimated costs of raising the necessary debt, or the Office for Budget Responsibility’s estimate of them. The adverse reaction in the markets yesterday was hardly an encouraging sign.
Your Ocado order is delayed (again)
It would be fair to say that Clive Black is not a fan of Ocado. The Shore Capital analyst is one of the best in the business, and has always been baffled by the City’s love affair with this jam-tomorrow business. This week Ocado pulled another ripe avocado from its delivery van, with a deal to link up with a South Korean retailer called Lotte. This agreement to provide retail technology apparently added “significant long term value to the business”, and the shares jumped up. The next day they jumped halfway back down.
Perhaps the traders had read Mr Black’s verdict overnight. “Shore Capital Markets does not attempt to forecast Ocado Group earnings due to a chronic lack of visibility that has been evident since IPO 12 years ago”. It gets worse. “The business is chronically capital intensive, displays virtually no positive operational gearing, has made very negative capital returns…and despite all the technobabble, it just does not make any money.”
None of this is exactly new, and Mr Black is nothing if not consistent. But he’s not the only one who is baffled by the stock’s popularity. The price multiplied by 30 times from its post-flotation low until February last year, despite the company’s insatiable need for more cash. Having gone up like a November 5 rocket this week, it has since come down like the stick. Ocado does have some clever technology, but bigger and uglier competitors are learning how to do home delivery of groceries, with or without the company’s help. The shares may be worth more than a burnt-out firework, but the prospects for actual pre-tax profits, not to mention an actual dividend, seem as far away as they did a dozen years ago.
Warning: weather ahead
The Met Office has a powerful computer, and it seems to have helped improve short-term weather forecasting in the UK. We get fewer surprises than we used to. The picture for longer-term forecasting is less helpful. This week the office published its three-month outlook. After much nurdling around with the prospects of high pressure lurking near the UK and stopping all those windmills turning, it sees a 25 per cent chance of a colder winter, a 15 per cent chance of a warmer one, and a 60 per cent chance it will be average. Amazing what you can do with computers, isn’t it?
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