Back in February, many investors were betting that the massing of Russian troops on the Ukrainian border was nothing more than an elaborate hoax.
The Russian and Ukrainian currencies rose in value as hedge funds and private equity firms, signaling their belief in some form of emerging peace agreement, and they confidently bought the Ukrainian ruble and hryvnia.
Today there is an ongoing war that has effectively locked up raw materials and foodstuffs that would normally be exported by both countries, and no one knows when the conflict will end.
illustrated by The collapse in global stock markets And the Slippage of cryptocurrency values Investors are terrified of uncertainty. Stocks in the US, where the S&P 500 index has fallen by nearly a quarter since January, suffered their worst start to a year in 60 years.
We’ve seen panic before, particularly after the crash of 2008. Investment firms, despite their reputations as the savvy custodians of pension fund money, always hit the sell button at the first sign of trouble. Collectively, it leads to defeat.
Seasoned policy makers know how to act in such turbulent times, and this is to do whatever it takes to reassure investors that their money is safe. Western governments dumped their reserves, and when that cash ran out, they borrowed heavily to maintain a stable outlook for their economies. Vital support has arrived in the form of cheap central bank borrowing. With low interest rates behaving like the cavalry in a John Wayne movie, everyone could rest assured that the panic would be short-lived.
Not anymore. This time there is a real war, not just a financial war, and no one knows exactly what to do. The major powers cannot agree on how to fight it and policymakers cannot agree on how to deal with the fallout, especially the shortages of raw materials and food from Ukraine and Russia. Pushing inflation to 10% and beyond.
In particular, central banks have lost their nerve. Rather than being reassuring, they add to the sense of panic by increasing the cost of borrowing. As one analyst said about the US central bank’s decision Raising interest rates by 0.75 percentage points Last week: “The Fed will raise interest rates until policy makers break inflation, but the danger is that they also break the economy.”
On Thursday, the Bank of England Pay the prime rate to 1.25% After a period of more than a decade during which it has never risen above 0.75%. Some analysts believe the base rate will rise to 3% by the end of next year after Threadneedle Street put tackling inflation above sustainable growth.
We know that increasing the cost of borrowing in the UK, the Eurozone and the US, which we are seeing right now, will do nothing to bring prices down.
Inflation is a scourge caused by Russia’s invasion of Ukraine and, to a lesser but significant degree, by China’s difficulties with Covid after its failures to develop a vaccine, which caused frequent shutdowns and disruptions at ports. In the UK, Brexit adds another big development as it has hurt trade and reduced the number of workers available.
The justification for higher interest rates, then, must lie elsewhere, and central banks, to justify their cramping at work, argue the need to move forward to avoid a wage spiral — in which wages exceed inflation.
In Britain, this argument assumes that, to prevent a decline in personal living standards, the average worker will be able to negotiate a wage deal that beats the BoE’s latest forecast of a peak in inflation later this year at 11%.
When the government is expected to limit public sector salary increases to between 0% and 3% this year, this means that increases in the private sector will have to be even higher – around 12% or 13% on average. These levels of high wages fiction. The power of workers, with the exception of a few separate enclaves in the labor market, is a mirage.
With that said, it seems likely that the bank will move forward anyway, leaving anyone looking for reasons to remain confident about switching to Rishi Sunak.
The advisor has made it clear that he values financial integrity above all open commitments “whatever it takes” to bolster confidence. He has warm words to investors about lower business taxes, special visas for foreign businessmen and a reheated Thatcher plan to increase the number of workers by forcing more of those who receive benefits to look for work.
This is a weak set of small policies that will do little to improve the mood for companies looking to invest in the UK. No wonder the pound has fallen. Few investors want to buy Brits right now, and who can blame them?