Stubborn Persistence of Powell on Interest Rates Could Lead to Unnecessary Recession, According to ALEX BRUMMER
The recent maintenance of interest rates by the Federal Reserve shouldn't come as a shock.
Jay Powell, the Fed chair, is focused on preserving the US central bank's independence, with domestic prices, Trump's tariffs, and American pressure on Iran looming.
Energy shocks, like the one caused by Russia's war on Ukraine, have proven to fuel inflation in the past. But, if it weren't for these factors, central banks like the Fed and the Bank of England should have already reduced borrowing costs.
David Malpass, the former World Bank boss, criticizes the Fed, arguing that they're behind in cutting rates as the US economy weakens. He points to the loss of 700,000 jobs, financial strain among small businesses, and the high prime borrowing rate of 7.5% and credit card costs at 20%.
But, the Middle East remains a volatile region. The Ukrainian war serves as a reminder that geopolitics can quickly plunge into an economic and fiscal crisis.
Despite the risk, Western democracies are still burdened with unacceptable debt levels. These high debt levels stem from unmet energy costs and subsidies that arose when energy prices surged.
Unlike in 1973—when an Arab oil embargo led to economic disaster, inflation, high interest rates, recession, and a need for an IMF bailout—2025 is a different story.
BP argues that the current oil turmoil is nothing compared to the Arabian Gulf energy taps being turned off. Saudi Arabia has increased production, Guyana has become an oil gusher, and Brazil and Canada are significant drillers. US production even hit a record 13.5m barrels in March.
There's still concern that central banks will make the same mistake they did during inflation's decline, thinking the decline is temporary. By holding rates too high, they potentially punish businesses, consumers, and homebuyers and risk an avoidable downturn.
Should the Middle East conflict resolve, interest rate-setters must stay vigilant and consider rate cuts.
A rise in Brent crude prices, following Israel's attack on Iran, offers some relief to BP. As the company pivots back to oil and gas, a higher oil price strengthens its cash flow. Moreover, BP's volatile oil price offers an opportunity to ramp up trading, a key revenue generator.
Despite criticism from green campaigners, it's essential to acknowledge the contribution BP makes to the British economy. BP analysis shows that the oil giant made a £7.4 billion contribution to UK plc last year, paying £1.2 billion in corporation tax and adding another £2.2 billion to the exchequer indirectly in excise duties, employees' income tax, National Insurance, and VAT.
Speculation surrounds a weakened BP being absorbed by a rival like London-listed Shell or US majors like Chevron or Exxon. A stronger, independent BP broadens the UK's reach into markets like India and Indonesia.
The government would be wise to end the ban on new North Sea oil licences. This move would benefit drillers and the Aberdeen-based engineering services sector.
Ocado's topsy-turvy share price (24% down this year) reflects difficulties in being viewed as the Amazon of global grocery. Despite these struggles, it's encouraging to observe that Bon Preu, Ocado's first international customer in 2017, is investing in more of Ocado's robotic systems for a new warehouse in Barcelona.
[1] "Inflation: What affects it and how is it measured?" BBC News, 15 February 2020, https://www.bbc.com/news/business-35767360
[3] "Have oil prices hit a plateau? Here's why they might not stay down forever," CNN, 24 September 2019, https://edition.cnn.com/2019/09/24/business/oil-price-odyssey/index.html
[5] "Bank of England interest rates: When will the Bank cut interest rates following the Brexit vote?" The Telegraph, 5 November 2019, https://www.telegraph.co.uk/business/2016/11/05/bank-england-interest-rates-when-will-bank-cut-interest-rates/
- In the context of potential geopolitical uncertainties, investing in stocks, such as those from energy companies, could present risks but also opportunities for profit, especially if central banks, like the Federal Reserve and the Bank of England, consider rate cuts to stimulate the economy.
- For small businesses and homebuyers, high interest rates pose a significant challenge, but a reduction in mortgage rates could provide relief and contribute to the growth of businesses within the economy.
- To fully finance their operations and compensate for the high debt levels, government entities might consider diversifying their investments, such as investing in the stock market or insurance industry, in addition to traditional sources like fossil fuels or subsidies.
