Jump to content
House Price Crash Forum
Sign in to follow this  
munimula

Could Bernanke Raise Us Rates By Half A Point?

Recommended Posts

It is worth noting that MoneyWeek were almost unique in predicting the BoE IR hike last week. There isn't a lot that they get wrong. OK, they've been predicting a house price crash in the UK for the last two years...but just because it hasn't happened - doesn't mean it won't.

Usually when the price of a commodity rises, it‘s good news for the producers of that commodity.

However, both oil and metal prices soared yesterday - and yet the oil and mining sectors were hammered, dragging the FTSE 100 down 60 points to close at 5,828.

Why? Well, let’s take a look at the reasons behind the gains...

The oil price surged above $77 a barrel in New York yesterday, climbing as high as $77.30. Brent crude futures hit record levels, surging to $78.64 a barrel.

The leap came as oil heavyweight BP was forced to shut down its giant Alaskan oilfield, Prudhoe Bay, after discovering severe corrosion on a pipeline. The field is the largest in the US, accounting for a full 8% of US daily production.

“BP has tripped in the US yet again,” said Fiona Maharg-Bravo and Cyrus Sanati on Breakingviews.com. The company “is starting to look accident-prone” after a series of unfortunate incidents in the US, which included the explosion at its Texas City refinery last year, and accusations of “cornering the $30bn a year US propane market.”

The loss of production in itself would only cut earnings by 2%, if the field is closed until the end of the year, says Citigroup. But the problem is that most of BP’s West Coast oil refineries run on oil from the Alaskan field. If it’s forced to buy oil on the open market, that will hurt profit margins at the refining unit. Also, the erosion means more spending on maintenance will be necessary - BP already has $7bn set aside for improving US oil field safety.

The oil sector wasn’t the only one facing problems. Miners were hammered too, despite a surge in the price of copper. The supply disruption in this case was caused by 2,700 miners at the Escondida copper mine in Chile downing tools. Miners want a 13% pay hike - but BHP Billiton, which controls the mine, is offering 3%. Shares in the group fell 3% to £10.05, while Rio Tinto, which has a 30% stake in the mine was also hit.

It’s understandable that the companies involved in these incidents would suffer. BP faces a serious hit to its reputation and to its profits. And BHP and Rio Tinto may well have to pay higher wages, as well as suffering from the fall in production.

But even companies not directly affected by these problems were hit. In the oil sector, both Shell and BG Group were lower, while miners such as Xstrata and Vedanta Resources were also lower.

The underlying reason for the across-the-board falls is fear that soaring commodity and oil prices will mean even greater inflationary pressures. For example, the fall in Alaskan oil production means a spike in Californian petrol prices is likely. Gasoline prices across the US are already near record highs at around $3.036 a gallon, not far off the $3.057 seen in the wake of Hurricane Katrina.

Coming just ahead of the Federal Reserve’s interest rate decision - due later tonight, UK time - the fear is that spiking resource prices will force the Fed to raise rates, partly to shore up new governor Ben Bernanke‘s inflation-fighting credentials.

The markets worry that in the longer run, rising interest rates will derail the US economy, sending it into recession. This would very likely lead to a global slowdown, which would in turn drive commodity and oil prices lower - which would of course be bad news for miners and oil companies.

Indeed, there is an outside chance that Mr Bernanke will use the surge in inflation as an excuse to put rates up by 0.5%. This would be a radical move, but it has some distinct advantages. A half-point hike has in the past served as a signal to markets that rate rises are over. So not only would he prove his inflation-fighting steel, he would also remove the uncertainty that has been hanging over markets since he took the chairman’s role earlier this year.

However, a half-point hike just now would also make it much harder for him to raise rates again if necessary. With the hurricane season just beginning, he may be keen to save some ammunition for later in the year if oil prices spike even higher - which currently seems very likely.

Even if he opts for a pause, it seems unlikely that rates will not rise again later in the year. As our own Bank of England knows only too well, it’s easy to jump the gun in calling an end to a rate-hiking cycle.

We’ll cover the decision and what it means for markets in tomorrow’s Money Morning.

Share this post


Link to post
Share on other sites

It is worth noting that MoneyWeek were almost unique in predicting the BoE IR hike last week. There isn't a lot that they get wrong. OK, they've been predicting a house price crash in the UK for the last two years...but just because it hasn't happened - doesn't mean it won't.

half a percentage point? That really would set the cat among the pigeons...

Share this post


Link to post
Share on other sites

half a percentage point? That really would set the cat among the pigeons...

Yes, but how long until they'd pass that onto us savers? Long time me finks. When my totalitarian common sense party get elected to govern Jimothyland, I'll bring in a law stating that banks have to pass on the interest rate to both borrowers and savers at the same time.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.