The energy crisis of the 1970s caused the British economy to sufferQualcommThe terrible consequences of bloated growth. Will this wave of international energy price hikes sweeping the world bring back the haze of stagflation in the UK?
Recently, as energy prices continue to rise, the British bond market expects inflation indicators to rise. As a measure of future inflation expectations, the 10-year breakeven inflation rate in the UK climbed 10 basis points to 4.08%, a record high since the 2008 financial crisis.Earlier this week, the UK one-year inflation swapinterest rateIt rose to 6.27%, higher than last week’s 5.77%, and the highest level since 2005.
At the same time, the corporate end is also feeling inflationary pressures. According to a recent survey by the British Chamber of Commerce (BCC), 62% of industrial companies expect to increase commodity prices in the next three months due to soaring fuel and energy costs, and inflation expectations have risen to the highest level since the late 1980s.
Yang Chengyu, an associate researcher of the Institute of European Studies of the Chinese Academy of Social Sciences, said in an interview with a reporter from China Business News that the high inflation expectations in the UK are mainly due to the sharp increase in British consumer demand after the release, but the production and supply side is insufficient. “Inflation may continue for a long time in the future, because international commodity prices fluctuate and supply chains are blocked and will not change in the short term.”
Senior of Jiasheng GroupAnalystFiona Cincotta said in an interview with CBN reporters that the Bank of England’scurrencyPolicy will depend on inflation expectations and labor market conditions. The Bank of England is expected to raise interest rates in February next year. However, given the recent increased uncertainty facing the UK economy, it cannot be ruled out that the Bank of England will postpone the first interest rate hike until later next year.
Energy crisis triggers inflation worries
Yang Chengyu believes that the high inflation expectations in the UK are firstly due to the country’s heavy dependence on foreign imports for energy. When international energy prices rise, price pressures continue to spread downward, and domestic prices in the UK rise accordingly.
Data from the Department of Business, Energy and Industrial Strategy of the United Kingdom show that in 2020, nearly 50% of the UK’s natural gas supply will come from Norway, the Netherlands, Belgium and other European countries.AmericaIntercontinental Exchange(ICE) data on the 8th showed that the TTF benchmark Dutch natural gas futures price, one of the European natural gas pricing benchmarks, was quoted at 96.584 euros per megawatt hour (MWH). Although the price has given up its four-day increase, European natural gas prices have increased by nearly 600% in the past year.
Not only that, the rising prices of natural gas and other energy sources are also being transmitted through the downstream, having an impact on the prices of a wide range of daily necessities. According to surveys, more than half of companies said their cash flow has deteriorated or stagnated. Most of the manufacturers surveyed said that the rising cost of raw materials such as energy is the main reason for their expected increase in commodity prices. If the cost pressure is not transmitted downwards, its operations will face difficulties.
Yang Chengyu also said that another reason for the high inflation expectations in the UK is the long-term “de-industrialization” of the UK, which has caused the UK to rely too heavily on industrial intermediate products and manufactured products. At present, many countries around the world are facing international logistics bottlenecks, supply chain bottlenecks and energy dilemmas, and the supply of its own production capacity in the UK is difficult to meet domestic demand.
British media surveys show that the current container freight rate on an Asian-to-UK route has risen to US$18,000, and the average transit time has risen from 35 to 70 days. This has led to increased costs for British companies in terms of money and time.
Cre8tive Brand Ideas is a distributor of promotional items such as clothing, pens, and computer accessories. It is headquartered in England. The company relies on 80% of its products sourced from Asia. The company said that since the beginning of this year, rising freight rates and supply chain bottlenecks have pushed up its costs and led to longer delivery times to customers. As power shortages drag down production, the company expects these pressures to intensify.
Nomura Securities said in a recent report that the global market will feel the pressure from the shortage of textiles, toys and machine parts, and the global power cuts will be superimposed. The resulting supply shocks will likely further push up the development of developed markets. Inflation.
The Bank of England’s interest rate hike is “the arrow is on the line”?
Regarding the current British inflation situation and future trends, Huw Pill, the new chief economist of the Bank of England, recently warned that the upward momentum of inflation is longer than previously expected. The risks facing the economy are far more bidirectional than they have been for some time, so policy decisions will become more balanced. The Bank of England predicts that the country’s inflation rate will rise to 4% by the end of this year.
Due to rising inflation expectations, many investors are betting that the Bank of England is expected to tighten monetary policy, which will make it the most hawkish member of the major developed market central banks.
Xinkota told CBN reporters that under normal circumstances, rising inflation will prompt the central bank to raise interest rates. In September this year, the Governor of the Bank of England Bailey also stated that the minimum conditions for raising interest rates have been reached, and the above-mentioned factors will make the Bank of England’s interest rate hike expectations continue to increase.
“However, the central bank’s monetary policy not only focuses on inflation, but also the trend of the labor market is also a key indicator of its concern.” Xinkota said, “At present, the UK is also facing potential wage increases.ChangheThe status of job vacancies. Against this background, it is unlikely to raise interest rates in the fourth quarter. The Bank of England is expected to raise interest rates by 15 basis points in February 2022, as the labor market will withstand the test of the recent rise in unemployment. “
The British financial institution Ebury also believes that since the UK has now lifted almost all anti-epidemic restrictions, this will make the UK economy perform better this year than most major developed countries.Therefore, the Bank of England may be better thanMidlandThe Reserve Bank or the European Central Bank will normalize policies earlier, and it is expected that the Bank of England may raise interest rates by 15 basis points for the first time around May or August next year.
Sinkota believes that if the Bank of England adopts an interest rate hike policy, it will benefit the pound. “The current epidemic has little impact on the British economy, and the labor market is expected to pick up next year. However, when the Bank of England will raise interest rates in the future, which in turn will affect the trend of the pound, it depends on the interaction of various factors in the coming months. “
Ebury believes that, compared to the Bank of England, the U.S. Federal Open Market Committee will take a very cautious approach in raising interest rates due to the considerable political pressure of the United States opposed to tightening policies.MidlandChu Chu will not start raising interest rates until the end of 2022 at the earliest.
“In terms of raising interest rates, the Bank of England may be moreMidlandReserve one step ahead. Under these conditions, the pound to dollar exchange rate should be able to achieve a reasonable appreciation next year. It is estimated that by the end of 2022, 1 pound will be exchanged for 1.45 US dollars. “Ebury predicts.
(Source: China Business News)