Thursday will be an historic day for the Bank of England whether it raises interest rates or not. A hike will be the first in a decade; another month of stalemate will damage the credibility of both the central bank and Mark Carney as governor.
An overshoot on inflation is almost entirely down to the weak pound, but unemployment at a 42-year low and a slew of improving data reflect an economy more than capable of coping in a higher interest rate world.
A 25 basis-point increase that reverses Carney’s kneejerk reaction to Brexit is nailed on. Where Carney will earn his keep is ensuring the hawks don’t take over the Bank, kicking away a fragile prop underpinning UK consumer confidence.
The timing isn’t great for families struggling with the lag in wages growth to inflation, and who are now beginning to plan their Christmas budgets. Brexit is already causing many to rethink their spending, so rate-setters must tread carefully to avoid a policy mistake further down the line.
A quarter-point hike gets us off the bottom rung of the ladder, but the likelihood of further raises in 2018 will remain the subject of hot debate.
More important for equity markets is who Donald Trump picks as Fed chair. Janet Yellen is almost certainly gone after next February. Jerome Powell is the status quo option, and the most likely outcome according to bookies, which will keep markets happy.
The oil price at a two-year high and heavy cutbacks both in terms of assets and spending are paying off at Shell (RDSB). A 47% increase in third-quarter CCS profit to $4.1 billion is much better than we expected, and UK investors continue to enjoy the obvious benefit of receiving a generous dividend paid in dollars, made more generous by the weak pound.
Oil looks comfortable at $60 for now, although Shell’s cash generation and obvious determination never to cut the dividend mean it will keep paying out even if oil prices come off the boil. Shell’s share price may have just made a three-year high, but they’re still not expensive versus peers – BP trades at a premium to Shell for a similar dividend yield. Ben van Beurden’s talk of “growing momentum” should be further comfort to shareholders.
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