ALEX BRUMMER: Get set for an interest rate shock

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ALEX BRUMMER: Get set for an interest rate shock – mortgage borrowers and those living on credit should prepare for the worst

  • Hints from chief economist and others that more fortitude may be necessary
  • Federal Reserve looks certain to lift interest rates again at next meeting 
  • Europe exposed to impact of Ukraine war on energy supplies and set for slump 
  • Prospect of higher prices will cause anxiety in Germany, home of sound money

The US Federal Reserve looks certain to lift interest rates again when its policy-setting committee meets on July 26 and 27. Until the release of the latest inflation data, the assumption was it would hike the key Fed funds rate by 0.75 of a percentage point from the current 1.5 per cent to 1.75 per cent range. But with consumer prices ‘red-hot’ and surging to 9.1 per cent year-on-year in June – the highest level in four decades – the speculation of a full-point rise is building. 

If the Bank of Canada is any guide, then stamping down hard on excessive borrowing and consumption could be on the cards – it lifted rates by a full point to 2.5 per cent, the highest level since 1998. 

It is taking a leaf out of the book of legendary Federal Reserve chairman Paul Volcker who didn’t believe in half-measures. 

Credit crunch: Mortgage borrowers and those living on credit should prepare for the worst

The biggest contributor to US inflation is still energy, up 7.5 per cent on the month and 41.6 per cent year-on-year. 

But producers and refiners are ramping up output so wholesale prices are now dropping dramatically. Unlike the other advanced economies the US is self-sufficient in energy and enjoys some immunity from global prices.

The latest inflation data had economists scrambling, with the odds on the US falling into recession this year. There is a view that a short sharp recession, if that can be engineered, could ensure higher prices are squeezed out of the system. 

Monetarists argue that the Fed’s money printing in the pandemic means that a lengthier adjustment will be required. 

The North American experience will be troubling for European Central Bank (ECB) president Christine Lagarde. 

The ECB was last of the central banks to lower rates in the great financial crisis and is the laggard in raising them now.

It has a real policy dilemma. Europe is enormously exposed to the impact of the Ukraine war on energy supplies and is looking a slump in the face. It also is being embarrassed by the weakness of the euro, which completed its move to below parity with the dollar in latest trading. 

ECB officials argue that they don’t target the euro. But the downward pressure on the single currency adds to the inflation threat, as fuels are priced in dollars. 

The euro has tumbled more than 11 per cent against the dollar so far this year. The rule of thumb is that a 1 per cent depreciation of the euro adds 0.1 per cent to prices over a year and 0.25 per cent over three years. The prospect of years of higher prices will cause huge anxiety in Germany, the home of sound money. 

The Bank of England does have freedom to act and has opted for gradualism. 

There have been hints from chief economist Huw Pill and others that more fortitude may be necessary. It has been given some licence by the firmer than expected growth and trade data for May showing the economy better able to resist punishment. 

Mortgage borrowers and those living on credit should prepare for the worst.

Football focus 

The world of sport generally has managed to keep business regulators at arm’s-length. 

Now the Competition & Markets Authority is starting to wave the yellow card. Its latest target are the broadcasters BT, ITV, Sky and IMG Media, the sports agency-turned-producer and franchise owner. 

At stake is the allegation that the companies have fixed the production market by using the same flat rate to pay the freelance camera operators, sound engineers and technicians who bring pictures and voices to our screens.

This has kept costs low and has prevented a free market in these professional creative services from developing. 

All of those fans faced with paying exorbitant prices for replica kit will be encouraged by the probes launched into JD Sports, Elite Sports and Rangers Football Club over alleged fixing of prices. 

Similarly, JD Sports also faces a preliminary probe over Leicester City kit. With due respect to former JD Sports boss Peter Cowgill, one cannot but think that similar arrangements might exist between other retailers and sports franchises. 

Major sport increasingly is falling under the spell of financial players. Barcelona has been bailed out by selling 10 per cent of its TV rights to private equity group Sixth Street for €207.5m (£175m) for the next 25 years. 

How long before such privileged deals attract the attention of the highly effective European competition regulators? Get ready for a series of penalty shootouts.

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