ALEX BRUMMER: The BoE’s nasty projections for our economic future

ALEX BRUMMER: The BoE’s nasty projections for our economic future have been made on a path of elevated rates reaching 5.25%

The future direction of interest rates may be looking a great deal better than seemed the case only a few weeks ago. 

The Bank of England, as is normal, has taken its forecast cue from market rates as it is the only solid indicator it has to hand. 

All of its nasty projections for our economic future – from a prolonged recession to an unemployment rate of 6.5 per cent against the current 3.5 per cent – have been made on a path of elevated rates reaching 5.25 per cent next year. 

‘The Bank of England, as is normal, has taken its forecast cue from market rates as it is the only solid indicator it has to hand’

As good a barometer as the markets may be, they are still feeling some of the aftershocks of Truss/Kwarteng interlude, even though many of the proposed tax cutting and energy subsidies beyond April next year have been eliminated. 

What is more fascinating is the central projection from the interest rate setting Monetary Policy Committee (MPC) showing inflation will fall away from early next year and that consumer prices could tumble ‘some way below’ the 2 per cent target by November 2024. 

If this proves to be the case, then much of what it has to say about the prospects for output and jobs could be put to one side. An alternate assumption of interest rates staying constant at 3 per cent (the current bank rate after the latest three-quarters of a percentage point rise) would mean far stronger economic activity. 

It is likely that there are more interest rate hikes to come and the highest point will be somewhere above 4 per cent. After the slow climb, the UK is now in sight of peak rates. But it begs the question as to why the Bank would build its main forecast around market rates it doesn’t really believe in. 

Two dissenting outside members of the MPC, Silvana Tenreyro and Swati Dhingra, who voted for smaller increases, may be showing prescience. 

German lessons 

Listen to the rhetoric from Britain’s political classes and you think everyone in the energy supply chain is coining it at the expense of consumers. 

The Left points to France’s EDF, recently taken fully back into public ownership, as an exemplar of what the UK would do. Labour wants to create a new force in the power market called the Great British Energy Company. 

It should be careful what it wishes for. Harbour Energy, the biggest oil and gas producer in the North Sea, won’t be rushing to win new operating licenses should ‘windfall taxes’ be extended. The company makes it clear that a £350m levy on its operations will affect investment plans. 

Harbour Energy, the biggest oil and gas producer in the North Sea, won't be rushing to win new operating licenses should 'windfall taxes' be extended

Harbour Energy, the biggest oil and gas producer in the North Sea, won’t be rushing to win new operating licenses should ‘windfall taxes’ be extended

The impact on big power companies of the war in Ukraine is proving every bit as costly as the banking crisis of 2008. German energy group Uniper has just revealed that it made a £35bn loss in the first nine months of the year. 

That is the biggest deficit ever reported by a German company and larger than the £24bn of red ink at the Royal Bank of Scotland (now NatWest) after Fred Goodwin’s car crash leadership. Most of Uniper’s losses are down to its efforts to secure gas supplies to power German homes and factories as a result of the shutdown of Russian supplies. It has been on a mad dash to secure energy reserves to keep the lights on. 

The company’s survival is only possible because of a pledged £25bn bail-out from Berlin. There is no room for any schadenfreude in Britain given that Uniper operates seven power stations, a fast-cycle gas storage facility and two high pressure gas pipelines in the UK. 

How all of that will be impacted by Uniper’s travails and bailout is anyone’s guess. What it does show is the idea that windfall taxes alone can fix the travails of the UK’s energy market is fake news. Britain doesn’t need a state-owned energy company where the losses, as in Germany, fall on the taxpayer. 

Eating better 

Sainsbury’s finds itself in a tricky position, caught between suppliers who insist on maintaining profit margins and competitors engaged in price cutting. 

It has chosen to sacrifice margins to compete, with same store sales up 3.7 per cent, helped by lower priced own-label ranges. Moreover, despite the squeeze on real incomes, Argos – the Sainsbury’s-owned catalogue retailer – is picking up some momentum going into the holidays. Some seasonal cheer for investors. 

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