Red Sea crisis poses risk of higher rates, warns Bailey

Bank of England Governor says diverting ships from Suez Canal over attacks by rebels could push up costs

A SURGE in shipping prices triggered by chaos in the Red Sea poses a threat to interest rates, the Governor of the Bank of England has warned.

Andrew Bailey said the impact from ships having to reroute from the Suez Canal around South Africa was likely to become an issue for monetary policy.

Iran-backed Houthi rebels have been attacking ships in the Bab el-mandeb strait, off the coast of Yemen, which leads to the Suez Canal, in retaliation to Israel’s war in Gaza.

Speaking in front of the Treasury select committee yesterday, Mr Bailey said: “As best we can tell from the monitoring, shipping traffic is being affected and has been rerouted and that will increase shipping prices and shipping costs.

“I think initially that will be an issue in the monetary policy world.”

The chief executive of Sainsbury’s said yesterday it was in regular contact with Downing Street amid concerns over disruption to supplies which could push up prices.

Simon Roberts said: “It’s an issue for many commercial businesses, and therefore an important issue that the Government would want to be involved with. We’re on regular calls there to make sure that the latest intel and understanding is understood.”

If inflation stays higher for longer, it will make it harder for the Bank of England to cut interest rates.

Since December 2021, the Bank has raised interest rates from a record low of 0.1pc to a 15-year high of 5.25pc to try to tame runaway inflation.

The outlook has been improving rapidly. The consumer prices index (CPI) has now cooled from a peak of 11.1pc to 3.9pc in November.

The Suez Canal is also a vital route for transporting energy supplies, with a tenth of the world’s crude oil and petroleum products and 8pc of liquefied natural gas (LNG) travelling through the narrow shipping channel. So far the impact of the attacks on oil prices has been limited. However, Mr Bailey told MPS that an energy price shock triggered by the conflict in the Middle East posed the biggest potential threat to financial stability this year.

Mr Bailey said: “Quite a bit of the shipping traffic that goes through those straits and through the Suez Canal is oil and LNG, so we have to watch it [prices] very carefully. The global potential for further global shocks is clearly there.

“The events in the Middle East are tragic from an individual point of view, but interesting from an economic point of view. Take the oil price, which is the obvious place to look. It hasn’t actually gone up as I feared it might but obviously it remains a very uncertain place.”

When the Houthi attacks ramped up in mid-december, the price of Brent crude initially jumped from $73 (£57) per barrel to above $80. Since then, the price has dropped back to just below $77 per barrel, far less than in September, when prices exceeded $90.

But the risks to financial stability if

‘There is a total crunch for companies trying to move goods around the world now’

the situation escalates will be a key point of discussion for G7 world leaders this year, Mr Bailey said.

Meanwhile, Maersk, the shipping giant, told customers yesterday that goods that had previously travelled through the Panama Canal, another of the world’s biggest shipping choke points, would now be transported between the Atlantic and Pacific via an 80km “land bridge” of railway lines.

Water shortages have reduced traffic through the canal, which relies on freshwater locks, and accounts for a further 5pc of global maritime trade.

Speaking at the launch of the World Economic Forum’s (WEF) global risks report ahead of next week’s annual meeting in Davos, business leaders warned that the Red Sea attacks were acting like sanctions on Europe.

Carolina Klint, Marsh Mclennan’s chief commercial officer for Europe, said: “There is a total crunch for companies trying to move goods around the world now.”