Interest rate cut is not far off – but there are complicating factors
How soon is too soon?
That’s the question exercising members of the Bank of England‘s monetary policy committee (MPC) at the moment. All nine members know that interest rates, currently at 5.25%, will have to be cut in the coming months.
After all, high interest rates represent a brake on the economy and it’s becoming clear that keeping the brake pedal down is causing economic pain.
Money latest: Reaction as Bank of England holds off on rate cut
Unemployment is beginning to rise; the strength of consumer demand is dropping and, most of all, inflation is coming down too.
For Bank insiders, the fact that the rate at which the consumer price index is rising each year is about (at least according to their forecasts) to hit 2% is a mark of success.
Not long ago, as prices rose at the fastest rate in decades, many in the City wondered whether the Bank might have lost control of inflation – which it is supposed to keep as close as possible to 2%.
While the indicator’s fall is partly down to the volatility of energy prices (having been the main force lifting prices in recent years, they are now the main force depressing them), what gives the Bank’s policymakers hope is that while CPI inflation is expected to bounce back slightly in the coming months, their forecast suggests it will not exceed 3%.
The upshot is that inside the Bank there are some who are now whispering quietly that they might have succeeded – inflation might have been tamed.
But that brings us back to that question: if inflation is tamed then there’s no need to have interest rates so high, so how soon should they be cut?
Complicating factors is what’s happening on the other side of the Atlantic, where the Federal Reserve, America’s central bank, has committed something of a U-turn.
Higher US rates would tend to weigh on the pound, making imports bought in dollars more expensive. Pic: Reuters
Having guided investors and economists a few years ago that an interest rate cut was coming soon, the Fed chair, Jerome Powell, has more lately hinted that no cut was coming anytime soon.
And since America usually leads the way on interest rates, that raises an unnerving question: can the UK really begin cutting rates so long before the Federal Reserve?
The Bank’s internal assessment is quite simply that the British economy is in a very different place to America. The US is growing very strongly indeed, partly thanks to large federal spending programmes pumping cash into green tech and semiconductor manufacturing.
There is nothing analogous in the UK, whose economy is expected to grow by 0.9% over the next 12 months or so.
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That’s an upgrade on the previous 0.6% forecast, but is only a fraction of the 2%+ growth enjoyed in the US.
In the coming weeks, we’re expecting an unusually important set of economic numbers. Inflation data for April is expected to show a big fall, down to 2%. There are some jobs data and, of course, tomorrow we learn whether the UK has bounced out of its current recession (it almost certainly has).
In the end, this data is what will determine whether the MPC is bold enough to cut rates in June or in August (or, if the data shows an unexpected increase in inflation, to put those cuts off for longer).
So it’s a waiting game. But it looks like there’s not that much longer to wait.
Business
Vivergo: How US-UK trade deal could bring about collapse of huge renewable energy plant in Hull
The smell of yeast still hangs in the air at the Vivergo plant in Hull but the machines have fallen quiet.
More than 100 lorries usually pass through here each day, carrying 3,000 tonnes of wheat. It is milled, fermented and distilled. The final product is bioethanol, a renewable fuel that is then blended into E10 petrol.
This is a vast operation. It took several years to build, with considerable investment, but it is on the verge of closing down. Management and staff are holding out for a last-minute reprieve from the government but time is running out.
It’s been a turbulent journey. The plant was already being annihilated by US rivals, losing about £3m a month. Vivergo and Ensus, based in Teesside, blamed regulations that enable US companies to earn double subsidies.
They were pushing for regulatory change but then a killer blow: The US-UK trade deal, which allows 1.4 billion litres of American ethanol into the UK tariff-free (down from 19%).
“We’ve effectively given the whole of the UK market to the US producers,” said Ben Hackett, managing director at Vivergo.
“If we were to have the same support that the US industry has, if we could use genetically modified crops, we wouldn’t need that tariff. We would be able to compete. If we had the same energy costs. We wouldn’t need those tariffs.”
The government has the weekend to come up with a plan that could keep the business running. If it fails, Vivergo will begin issuing redundancy notices to its 160 staff.
Ben Hackett
It’s a devastating prospect for workers, many of them live in Hull and are nervous about alternative opportunities in the area.
Mike Walsh, a logistics manager who has been working at the plant for 14 years, said: “It’s not a great place to be at the moment. It’s a very well paid, very high-skilled role and they’ve (Vivergo) given everybody an opportunity in an area that doesn’t pay that well…. The jobs market isn’t as good as what people would like. So it does impact the local economy.”
He called on the government to “help us, save us, give this industry a future”.
His colleague Claire Wood, lead productions engineer, said: “I moved here after a career in oil and gas for 10 years, partly because I want to be part of the transition to renewable fuels. I can see so much potential here and it’s absolutely devastating to know that this place might be closed very, very shortly and that all that potential just goes away.”
Thousands more could be affected. Haulage companies may have to lay off truck drivers and farmers could also suffer a blow.
Vivergo makes bioethanol using wheat. That wheat is bought from farms from Yorkshire and Lincolnshire.
Claire Wood
The National Farmers Union has sounded the alarm, saying: “Biofuels are extremely important for the crops sector, and their domestic demand of up to two million tonnes can be very important to balance supply and demand and to produce up to one million tonnes of animal feed as a by-product.”
Another bioproduct is carbon dioxide. The gas can be captured and used to put the fizz in drinks or injected into packaging to preserve food.
If Vivergo and Ensus were to go, Britain would lose as much as 80% of its output of carbon dioxide. Supplies are already tight across Europe, meaning this decision could compound shortages across a range of sectors, from meat-packing to healthcare.
The industry is calling on the government to help. Vivergo says it needs temporary financial support but that the government must create a regulatory and commercial environment in which it can thrive.
It says rules that award double subsidies to companies that use waste product in their bioethanol must be changed. At present, these rules are being used by US companies that make ethanol from Uldr – a by-product of processing corn. They argue this is not a genuine waste product.
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Another option is to grow the market. Industry leaders are calling on ministers to increase the mandated renewable fuel content in petrol from 10% to 15% and for an expansion into aviation fuels. That would allow British companies to carve out a space.
The government has been locked in talks with the company since June.
It said: “We will continue to take proactive steps to address the long-standing challenges it faces and remain committed to a way forward that protects supply chains, jobs and livelihoods.”
However, the time for talking is almost over.
Mr Hackett said he had no idea how the government would respond but he was firm with his stance, saying: “In times of global uncertainty, losing that energy certainty and supply from the UK is a problem.
“I think what they’re missing out on is the future growth agenda. We’re the foundation on which the green industrial strategy can be built. We make bioethanol that today decarbonises transport. Tomorrow it will decarbonise marine. It will decarbonise aviation.”
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