Mervyn King the Governor the Bank of England has already made clear where he thinks
Mervyn King, the Governor the Bank of England, has already made clear where he thinks the priority lies Other MPC members seem largely to share his view. Alongside concern about the risk to growth runs a determination to keep inflation well within its box. You might have thought the fall in the FTSE 100 yesterday bad enough, but it wasn’t nearly as bad as the plunge in the mid-caps index, which has been trading at close to its all-time high The MPC minutes did not make for encouraging reading. To respond to a deflationary influence by jacking up rates might seem perverse, yet experience shows that failure to do so can result in an inflationary spiral.All this damages the outlook for corporate profits, the ultimate determinant of stock-market valuation. It now appears that the effect may be rather more significant than generally thought.Rising oil prices are both deflationary and inflationary at the same time – deflationary because they take money out of people’s pockets that would otherwise be available for spending on other things, and inflationary because they drive up costs and therefore prices all round.
Even our own Monetary Policy Committee seems now to be showing a surprising degree of unanimity in resisting calls for further rate cuts to deal with slowing growth.
According to minutes of the last meeting, released yesterday, members agreed that a tighter policy might become necessary if there was any sign of the present surge in energy prices feeding through to second-round effects in the shape of rising inflationary expectations and higher wage demands. To date, equity markets have been able to take the surging oil price largely in their stride. This is particularly the case in the US, where interest rate rises in each of the next three months look inevitable as the Federal Reserve finally moves to get a grip on inflation. Indeed in the US and the eurozone, central bankers are making it plain as a pike staff that they will raise rates regardless of the economic costs if the present oil-inspired surge in prices persists. For stock markets, October has always been the cruellest month. Some of the stock market’s worst crashes have occurred in October, from the great crash of 1929 to the final sell-off in the bear market of 1974, the crash of 1987 and the mini crash of 1998.
With corporate profits apparently booming, what’s spooked the markets this time around? The curse of October may for the superstitious seem explanation enough, yet it’s plainly not the whole story. No, the real explanation is the re-emergence of inflation, which is limiting the ability of policymakers to tackle a pronounced slowdown in growth with lower interest rates. The present correction in equity markets hardly bears comparison with any of these near apocalyptic events, yet it is quite unsettling enough for those of us who thought equities set fair again in a prolonged bull market. Paul Walsh, its chief executive, said: “We have examined the opportunities that the Montana business presents and have concluded that it does not fit our investment criteria and have decided not to proceed.”Chief among Diageo’s concerns was Montana’s potential for export-led growth, margin improvement from “premiumisation” – otherwise known as moving the brand up-market – and innovation.Mr Walsh has in the past been outspoken about his determination not to overpay for wine assets. Before its takeover by Pernod, Allied was one of the most active buyers of wine businesses on the back of a boom in consumption in countries such as the UK and US.”We recognise that wine is a growing category and that our scale can deliver top and bottom line synergy benefits for wine acquisitions,” Mr Walsh said..
Allied bought Montana in 2001 after a fierce bid battle with Lion Nathan, the Australian brewer.
Diageo has decided not to proceed with the deal after due diligence. Most of International Power’s assets are overseas, but it owns the Rugeley coal-fired station in the West Midlands.. Pernod Ricard will have to find a new buyer for its Montana wine business after Diageo, the world’s biggest drinks company, pulled out of a deal to buy the New Zealand wine maker last night. Analysts had assumed Diageo would exercise an option to buy Montana for £320m, granted to it by Pernod in June after the French group’s takeover of Allied Domecq.
