Well it’s BOE and ECB rate day today and much of the betting is focused on the possibility of a cut in both Sterling and the Euro.
Whilst the temperature appears to have gone up a bit in recent days with big rallies in the FTSE 100 and Dax 30 it is really rather early to be calling for an end to the fears over growth and both the MPC and the ECB will be sorely tempted to make some reaction to the increased prospects for a slowdown and damn the inflation bogeyman.
Presumably they will be damned if they do and damned if they don’t by one faction or the other but the weight of probability has fallen decisively (in recent days) into the probability that both will cut by one quarter of a percent. In the current rather fevered situation it must be correct to take a more pragmatic approach than the rather blinkered ‘inflation watch’ stance.
Since the turn of the century events have conspired to keep inflation low even in booming economies no matter what the central banks were doing. The euro zone has had a wildly divergent growth pattern with Ireland and Spain roaring away whilst France and Italy have struggled but the inflation rates in all the various countries has remained very much on an even keel. Whilst Central Bankers have patted themselves on the back for ‘keeping the inflation genie’ in his bottle it is difficult to get away from the feeling that he would have remained firmly stopped up even if rates had been at much lower levels.
Now, of course, the boot is very much on the other foot with events beyond the control of those same central bankers forcing inflation ever higher. Pushing up (or keeping high) interest rates is hardly going to make much impact on the price of Crude Oil, Wheat or Rice. These (and others) are globally competed for commodities and are going to the highest bidder. At the moment the ‘highest bidder’ seems desperate to ensure supply in a suddenly much wealthier world economy (at least in the Far East) where increased expectations combined with bigger wallets drive the price ever higher.
Unless supply of virtually everything suddenly increases we can see an environment of ever increasing average annual prices for core staples. This does not mean that we are not likely to have sudden falls in prices (this is still ‘the market’ after all) but the ‘short era’ of widespread cheap consumables may be over.
With the massive transference of wealth from the ‘Atlantic’ economies to individual states amongst the emerging economies it is easy to envisage a time of increased global tension as countries greedily eye the resources of their neighbours. The US may get tired of maintaining its role as global peacekeeper or they may just plain run out of the surplus resources to keep such huge military reserves going. If anyone thought, as many did, that the US had invaded Iraq to secure cheap Oil supply the events of the past few years must have proved something of a reality check. The consequences of disrupted supply can be seen plainly in the recent movements on the Crude Oil markets. A small reduction in Nigerian, Russian and Iraqi supply has had a 25% effect on the price of Crude. A cyclone across Myanmar (in world economic terms a small country) has forced up Rice prices to all time highs.
And let us be quite clear this is in an environment of reasonable stability across the globe. If this changes rulers whose populations are rioting for lack of a staple diet may not make the most sensible of decisions.
Reading back through this comment makes me feel very much like walking down the street with a placard saying “the end is nigh”! Of course the current situation is not as bad as I have intimated but the potential is now there. When it wasn’t before.
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'Interest Rates and Commodities Spread Betting' edited by SD, updated 08-May-08
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