The Bank of England is in a supply chain quandary says Oliver Chapman, CEO of supply chain specialists and the UK’s No1. fastest growing company – OCI.
The Bank of England has hiked interest rates by 0.75 percentage points, the biggest increase in 33 years, “but to an extent, says Oliver Chapman, “the bank’s hand is being forced by the aggressive stance taken by the US Federal Reserve.”
Oliver Chapman says:
“There is every reason to expect global inflation to fall sharply next year regardless of recent rate hikes announced by central banks from around the world.
“Consider the recent contraction in US money supply, for example. Or consider recent falls in used car prices. The Lumber price and the Baltic Dry Index.
“But these are just examples, commodity prices are falling pretty much across the board – and whilst the strong dollar may partially explain these falls, on its own this is not sufficient to explain all.
“Truth is, the supply chain is adjusting, as it always does.
“Meanwhile increased rates will push indebted consumers and house prices under pressure, leading to much weaker demand just at that moment when lower commodity prices begin to show up as a downward force in the inflation data.”
“But, there is another story, and that is the story of the US dollar.
“The exceptionally aggressive stance taken by the FED has helped push up on the dollar. And since commodity prices are typically measured in dollars, not all the benefits of the supply chain adjustment are benefiting the UK and euro area to the extent they could.
“The high level of interest rates in the US will create an unnecessarily deep recession and force other central banks to follow suit to stop their respective currencies from falling further. In the UK, by the Bank of England’s own admission, we risk seeing the longest recession ever recorded.
“This is not just a problem for the Bank of England, but the weakness in sterling is forcing its hand.
“Because of supply chain adjustment, inflation was likely to fall towards the end of next year anyway. Higher interest rates will exacerbate the problem making the recession deeper than it needs to be.
“But the Bank of England had no choice; if it had failed to match yesterdays’s rate hike from the FED, the pound would have fallen sharply perhaps to an all time low, creating a new set of supply chain costs on UK business.”
