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Mark Carney hasn’t yet had to write to the chancellor to explain why the Bank of England has missed its 2% inflation target by more than a percentage point, but he will know the form. The governor must say why inflation has moved so far from the target and state what action, if any, the monetary policy committee intends to take.
Inflation, on the CPI measure, fell to 1.2% in September, so a letter is a real possibility if current trends persist. It would be easy for Carney to describe the causes of low inflation. The price of oil has fallen 25% in a matter of months, affecting everything from the price of airline tickets to consumers’ energy prices. The beleaguered supermarkets are doing their bit to cap the price of food. And the pound has been strong.
But what could Carney say about the policy response? We know what the rate-hike lobby would like to hear: never mind today’s low inflation, keep your eyes on the two-year horizon, where the greater danger to the recovery is upwards pressure on prices. Two members of the MPC – Ian McCafferty and Martin Weale – have voted for a hike in recent months, arguing that a modest rise now would help to ensure the eventual rise in rates is gradual.
It’s a respectable argument. And one can find many instances of the Bank taking a medium-term view and lifting the cost of borrowing in face of sub-2% inflation. There were five quarter-point rates hikes between November 2003 to August 2004, taking Bank rate from 3.5% to 4.75%, even though CPI was below 2% the whole time.
But those pre-crisis days were very different: the global economy was strong, the eurozone was not in crisis and the price of oil was climbing. None of those factors apply now.
Human nature says the MPC, in aggregate, will delay any rate rise until the possibility of sub-1% inflation is firmly in the rear-view mirror. Letter-writing is a lot easier that way. The market’s bet is that the first hike will come after next May’s election – that seems correct.
Afren chief should go
Cynics may say investors who back Nigerian-focused oil producers and explorers should expect surprises. But Afren is also a FTSE 250 company worth £1bn that has been listed in London for almost a decade. Surprises are not meant to look like this: after an independent report from legal firm Willkie Farr & Gallagher, Afren says $400m-worth of loans to Oriental Energy Resources, a private Nigerian producer that was Afren’s local partner, were not disclosed to the market as they should have been. This funding arrangement was then used to make “unauthorised payments” to Afren executives.
Oriental paid $45m as a facilitation fee into a special purpose vehicle registered in the British Virgin Islands controlled or owned by Afren chief executive Osman Shahenshah and chief operating Shahid Ullah.
Via a linked Bermuda entity, the funds were used “to pay extraordinary bonuses to themselves ($17.1m in total was paid to Shahenshah and Ullah), and to other selected employees of Afren,” says the report. The board was never told of the arrangements.
Shahenshah and Ullah have been fired for gross misconduct. Two associate directors, Iain Wright and Galib Virani, who received payments, have also had their employment terminated. Disciplinary action has started against seven other employees.
That response, plus an effort to retrieve the payments, is exactly what one would expect. Yet there was something feeble about the company’s explanation of its governance calamity: “While the company has in place appropriate controls and procedures, certain members of senior executive management elected to not comply with them.”
Come on, the point about “appropriate controls” is that they are meant to work regardless. New directors are said to be on the way. When they arrive, Afren chairman and co-founder Egbert Imomoh should depart.
Supermarket loyalties
Fiddling with reward points on loyalty points can be dangerous. Just ask Tesco: it halved Clubcard points in 2011 as part of its Big Price Drop campaign, which was a big flop. The reason for the failure, perhaps, was customers’ perception that Tesco was giving with one hand and taking with the other.
Now Sainsbury’s is having a go. From next April Nectar points will be halved. The chain, one assumes, thinks it has learned from Tesco’s mistakes. Maybe. Yet the really brave move would be to ditch loyalty points and accept customers have worked out there’s no such thing as free money or free points.
