UK finance expert questions 'strange mantra' that rate rises can kill inflation
With inflation still stubbornly high, finance expert Justin Urquhart Stewart has warned CGTN that the "strange mantra" from central banks – that inflation can be quelled by raising interest rates – could lead to people "getting burnt."
Although inflation in the eurozone has been revised slightly downwards, it's still running at well over the European Central Bank (ECB) target – August's headline rate of 5.2 percent more than double the ECB's target of 2 percent. Meanwhile, core inflation – omitting volatile influences like energy and food costs – was at 6.2 percent in August.
And there's concern about the impact of rising energy costs on the cost of living as oil prices hit a 10-month high: the benchmark crude price reached nearly $95 a barrel on Tuesday, while market watchers predict tighter supplies in coming months.
Last week, the ECB raised its key interest rates for a 10th consecutive time, with similar announcements expected by the U.S. Federal Bank on Wednesday and the UK's Bank of England later in the week. However, investment manager and business commentator Urquhart Stewart said rate rises were a "strange tool" for central banks to use.
"The concern is that they're raising interest rates, but those interest rates won't really affect inflation because this is not a consumer boom which you normally control with interest rates," he explained. "This is a supply issue – get the supply chains working effectively and a lot of those inflationary pressures will go away.
"But in the meantime, I'm afraid we are going to see more inflation come through, with a very good chance you're going to see $100 a barrel for oil."
Urquhart Stewart says oil prices reaching that psychological benchmark could have "a huge impact – prices go up like a rocket, but come down like a feather. The question is 'Can they control this with interest rates alone?' – and the answer's 'No.'"
Urquhart Stewart insists that interest rate rises – the simplest lever to pull for authorities seeking financial stability via monetary policy – are far from a panacea.
"There appears to be some strange mantra about the central bankers – all they have to do is put up interest rates and it'll all be fine. But that's not the case: [raising] interest rates may well actually put many economies much closer to recession.
"It's all about that vital word which keeps any economy going: Confidence. And how do you do that? By making sure that you're making supply chains easier and smoother. You don't have to have government money poured into it, you just need your businesses getting more confidence that they can actually grow and there will be demand.
"The other issue with a higher oil price, it ripples through the entire supply chain. And I'm afraid any plans anyone has to see recession halved, as we've seen from various leaders around the world, are going to look a bit silly in the next few months."
'We've done enough'
Urquhart Stewart says that the talk in the UK financial industry is no longer unified behind the idea of rate changes.
"Suddenly the mutter from the gutter – where I'm normally to be found – is that it's probably going to be a split vote" at the Bank of England, he says. "There are quite a few now actually saying 'We've done enough, don't press it any further.'
"Interest rates are a very strange tool to use and do not have an immediate effect on something like inflation – it will take 18 months to run its way through. But as ever, the central bank overdo it – it gets too hot, throw another log on the fire – you make it go too hot, to the extent people start getting burnt."
Even so, Urquhart Stewart expects another rate rise – but perhaps not with such unanimous approval
"We will see, I suspect, rates going up – but there is much more division in terms of people saying 'That's enough.'"