Sterling takes the strain
THE sharp fall in the pound could not come at a worse moment for people going on their summer holidays. Since Boris Johnson arrived in Downing Street a week ago sterling has plunged 2.4pc and is now heading for its worst monthly performance since October 2016.
Former permanent secretary to the Treasury Sir Nick Macpherson warns the decline carries serious risks. He dismisses the claim that a lower pound assists exports and argues that the burden falls on households through higher prices.
There may be some truth. However, the weaker pound is contributing to all our savings because it has bolstered a sagging FTSE100 where many of the firms, such as BP and Reckitt Benckiser (RB) which have just reported, earn most of their profits overseas. What the tumble in the pound does demonstrate is the short-term naivety of currency traders. The prospect of a Boris Johnson government has been around for months and only now are they taking out positions on a No Deal Brexit.
The jury is out on the export advantages of devaluation although one suspects in
highly competitive global markets it ought to be helpful. What is often neglected in the analysis is how fortunate Britain is to have its own currency and able to set its own interest rates.
Were the UK part of eurozone the pound would not be there to take the strain.
Among the reasons why Greece’s economy is now 25pc smaller than at the time of the euro crisis is that the only way it could adjust to adverse circumstances was through internal devaluation.
That has meant shrinking the labour force and wages causing irreparable damage to a generation of young people.
How then should the Bank of England respond to the current downward pressure on sterling when the Monetary Policy Committee sets interest rates tomorrow? A falling pound will impact on the Bank’s core mission of meeting the inflation target of two per cent.
That would normally point to an increase in interest rates. But that would be to swim against the tide at a time when both the European Central Bank and the Federal Reserve are moving towards monetary easing in the face of weaker output.
Raising rates would mark a change of direction for the Old Lady. Over the last three years, as the pound has bounced around on Brexit events, the Bank has chosen to ignore the inflationary impact of a lower pound which forces up the price of imported goods. There is a view in the Bank that this time it is different because the UK has near full employment so there must be more risk of a wage-price spiral.
The Bank should hold its nerve and regard sterling’s travails as transient.
Gas guzzler
THE appointment of a new chairman in a sub-performing company almost always presages the departure of the chief executive. So it has proved at Centrica where the arrival of Charles Berry from the Weir Group earlier this year has been followed by Iain Conn’s decision to step down. The former BP executive has had a rough time since arriving on the scene with a pledge to become more consumer friendly.
That journey is still underway and Conn is as enthusiastic now as when he arrived about achieving that goal and turning British Gas engineers into full service providers offering everything from greener boilers to charging points for electric cars.
Unfortunately, it has been tricky and investors not surprisingly became restless. Refinitiv data (in the spotlight because of the proposed takeover by the London Stock Exchange) shows investors who bought into the FTSE100 when Conn arrived, would have achieved a 40pc return.
Anyone buying into Centrica at the same time would be down 60pc and having to weather a sharp dividend cut.
That said and done Conn was dealt a bad hand. Centrica’s operations in the US have been a disaster although the consumer enterprise is looking healthier. Oil and gas exploration has been too capital hungry. The nuclear stake has been victim of an ageing fleet.
Most of all he has been undone by a changing energy market. British Gas was a victim of switching because of an inflexible tariff structure. As it adjusted to new circumstances along came Theresa May with her price fix doing permanent damage to the free markets.
Heigh-ho.