Banking

ALEX BRUMMER: Is the Bank going to be a leader or a follower on rates?

ALEX BRUMMER: Will the Bank of England be a leader or a follower on interest rates?


When the Bank of England was granted independence in 1997, the architects of the move in Gordon Brown’s team nursed an ambition for it to become as well-regarded as Germany’s Bundesbank, which stood rock-like in defence against higher prices.

As deputy governor, Mervyn King, who moved on to the top job, largely was responsible for delivering the mandate.

There now looks to be a role reversal. When rate setting moved from one building in Frankfurt to another after the creation of the eurozone, power still rested with the Bundesbank whose monetary zeal populated the European Central Bank.

First move? The question dominating debt markets this week is whether the Bank of England could be the first major central bank to raise rate from an historically low 0.1 per cent

As the eurozone grew bigger to encompass 19 nations, each with a vote on the ECB council, the inflation-fighting priorities of Europe’s central bank were diluted in favour of supporting output and employment.

A consequence is that Germany’s inflation rate zipped up to 4.1 per cent last month. This is a figure which would have shocked generations of German central bankers, hard-wired by the history of Weimar-style inflation. 

Under the watchful eye of Christine Lagarde, the eurozone has become more relaxed about prices and expectations of an interest rate rise have receded to the autumn of 2022. 

This almost certainly was a factor in the resignation of Jens Weidmann as president of the Bundesbank for ‘personal’ reasons. He left with a warning about the dangers of the ECB stance.

The question dominating debt markets this week is whether the Bank of England, more of a follower than a leader on rates, could be the first major central bank to abandon super-loose monetary policy and raise bank rate from an historically low 0.1pc as soon as next month.

Traders in short-term UK government securities took a lead from governor Andrew Bailey who was quoted as saying the Bank ‘will have to act’ to tame inflation. Bailey also repeated his belief that higher inflation is temporary.

There are early signs of this with timber and iron ore prices almost halving since the spring. But the cost of energy is the great unknown. 

As oil refiners among others ramp up production, there is a possibility that the kinks in this market could also dissipate.

Bank rate is likely to rise by the first quarter of next year. The interest-rate-setting Monetary Policy Committee might first want to see if there is any easing in the labour market following the end of furlough as well as the degree of fiscal rectitude in next week’s Budget.

It would be unusual for the Old Lady to be first mover and a long shot in spite of exuberance in gilt yields.

Fashion accessory

The world of Birkin bags and £2,290 trench coats is removed from most people’s lives.

Yet there is no escaping the fact that Burberry, maker of the trench coats and much else, is a luxury fashion phenomenon that sources vital product in the UK and has conquered the gold-spattered streets of Asia. 

The importance of bringing in a superstar chief executive is symbolised by the fall in the Burberry share price since Marco Gobbetti’s announced departure. 

His British replacement, Jonathan Akeroyd, touches the right buttons having engineered a turnaround at Alexander McQueen and headed Milan’s Gianni Versace.

Bringing Akeroyd to London doesn’t come cheaply. In its own fashion realm it is a bit like Chelsea repatriating Romelu Lukaku from Inter Milan. 

There is an upfront transfer fee of £6million and the potential for Akeroyd to earn £11million if bonus targets are met.

None of this looks terrific after the torrid experience of Covid-19 and a more robust attitude towards governance by big battalion investors. 

Burberry will only get away with it if Akeroyd delivers. That could be hard should China’s slowdown persist.

Power cut

A week can be a lifetime on financial markets. 

In the few short days since shares in Matt Moulding’s The Hut Group went into free fall, the board has been stiffened, the golden share vanquished and a personal loan agreement between founder Moulding and Barclays unwound.

Similar governance shadows hang over Deliveroo where founder chief executive Will Shu’s wielding of unfettered power is unsettling for investors in spite of a 58 per cent year-on-year jump in third-quarter sales.

Shu shouldn’t underestimate the confidence which comes with doing the right thing.

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