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ALEX BRUMMER: Failure over rates holes central banks’ credibility

Central banks need to show their independence on interest rates as past reluctance to act has holed their credibility, says ALEX BRUMMER

  • Fed’s Jay Powell has no choice but to come down hard with big increase in rates
  • Andrew Bailey at the Bank of England will be watching closely 
  • City economists are rapidly raising their predictions for UK inflation 
  • Bank’s Monetary Policy Committee about to make another decision on rates 

How quickly hopes can be dashed. Expectations that US inflation peaked in April, and is on the way down, have been dashed. 

One has to go back four decades to 1981 when Paul Volcker was installed at the Federal Reserve, and Ronald Reagan had just taken over from Jimmy Carter at the White House, to match the 8.6 per cent rise in US consumer prices in May. 

If history is a guide, the current incumbent at the Fed, Jay Powell, has no choice but to come down hard with a three-quarter of a point jump in rates when the Fed’s interest rate setting committee meets next week. After the years of super-low rates, an increase on that scale would likely scare US consumers witless. 

Pushing the button: City economists are rapidly raising their predictions for UK inflation, with Bank of America projecting a peak of 10.3 per cent in the autumn

Andrew Bailey at the Bank of England will be watching closely. 

City economists are rapidly raising their predictions for UK inflation, with Bank of America projecting a peak of 10.3 per cent in the autumn. The question for the Bank’s Monetary Policy Committee is whether it needs to be more aggressive and go for just a quarter of a percentage point or more next week. 

The cost-of-living developments have been appalling in the last few days with the emergence of the £8-a-pint beer and the £100 petrol fill-up for the car. The US motorist, so used to cheap fuel, is looking down the barrel of $5-a-US gallon of gasoline. Strong domestic production has failed to save US drivers from the worst of world price hikes because of a dire shortage of refining capacity. 

Western central banks need to show their independence by tightening. Past reluctance to act, for fear of damaging output and jobs, has holed their credibility

Breathing easier 

The steadiness of Emma Walmsley in the line of fire from activist Elliott is paying off. GSK is out of the traps first in the long search for a jab against respiratory disease. Interim data shows its vaccine works in a study of older adults. There is often a long journey from positive trial results to commercialisation. But as was demonstrated in the pandemic, with willpower long lead times can be cut. 

Indeed, with the right approach at UK drugs regulator, the MHRA, there is the opportunity for GSK to be first-to-market in a battle to combat respiratory syncytial virus (RSV). 

GSK is up against Pfizer, Sanofi, Johnson & Johnson and AstraZeneca. 

AZ chief executive Pascal Soriot argues that there is a real post-Brexit opportunity for UK drugs discovery if the MHRA were more fleet of foot than the European Medicines Agency and the increasingly politicised US Food & Drugs Administration. 

One breakthrough does not make for a strong pharma company and GSK is playing catch-up in oncology cures. 

But the encouraging RSV data is a useful bridge as GSK rushes towards the finish line for the demerger of its Advil to Sensodyne health care arm, Haleon. 

Broker Jefferies reckons that RSV, dealing with killer chest disorders in elderly patients, could be a blockbuster with revenues of $2.5billion a year putting it up there with GSK’s groundbreaking Shingles vaccine Shingrix. 

The rise in GSK’s stock following the interim RSV findings should shore up Walmsley’s goal to remain in charge of GSK when the Haleon split is out of the way. Speculation about the independent future of Haleon is rife with the market putting a £42billion valuation on the enterprise including debt. Almost all the other health products and fast-moving consumer goods firms are seen as potential buyers. 

It could, for instance, be a great partner for Johnson & Johnson which is spinning off its own healthcare brands. 

European suitors including Reckitt and Nestle are also mentioned. 

Unilever is reckoned to be out of the game after the revolt led by fund manager Terry Smith against its impromptu £50billion offer for Haleon. Maybe activist board member Nelson Peltz could find a transforming deal irresistible.

Taking a byte 

Britain’s banks could be in for an awakening. They are betting the shop that online banking will render branches obsolete, cutting 5,000 outlets since 2015.

It was inevitable that ubiquitous big tech, with its advanced coding skills, would seek to colonise their territory. 

Ever ambitious Apple is out of the traps with a buy-now-pay-later (BNPL) option, moving on from a previous alliance with Goldman Sachs. 

Prepare for combat. 

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