The Houthis Hit Saudi Oil Hard

Our first story this week is picking up on something recurring Macrodos star and Governor of the Bank of England, Andrew Bailey, mentioned in a grilling by the House of Commons Treasury Select Committee.

Here's the Financial Times write-up.

Andrew Bailey told MPs on Tuesday that the near closure of the Strait of Hormuz, coupled with the pressures on refining capacity, could lead to yet higher energy prices, fuelling volatility in global markets.

Drought in the UK and and El Nino conditions around the world could also force the central bank to revisit its forecasts, he said, end quote.

Now, I don't think Bailey has taken to listening to Macrodos, but if he had, he could have picked up on El Nino and climate change three years ago, back in May 2023, when we first flagged the risk for inflation here and suggested that, I quote, "...at the very least, central banks across the world should now be trying to factor weather forecasting and, over the longer term, climate forecasts into their own interest rate decisions." And to be fair to the Bank of England, they are starting to do one half of that.

The bank has a blog called Bank Underground, where its staff are allowed to let their hair down and kick about some crazy ideas that, as the blog's little intro says, challenge or support prevailing orthodoxies.

One recent publication under the title, Has UK Food Inflation Been Under the Weather?, finds that yes, it has.

Using a clever measure of weather shocks across the world, the authors reckon that weather added 0.8 percentage points to food inflation at its last peak in March 2025, or in other words, about a fifth of all food inflation.

This is well below the bigger estimates the Environment and Climate Information Unit, ECIU, have presented of around £300 being added to a typical household's food costs over the last few years.

But they're capturing different things.

The bank paper is going specifically for a measure of the isolated impact of extreme weather, whilst ECIU is trying to look at the compounding impacts of climate change and extreme weather over time.

In any case, some recognition in the bank that climate change now has real-world consequences that bear very directly on its own activities is very welcome.

And if it's feeding into what Bailey will say when interrogated in Parliament, this is all to the good.

But critically, this then needs to feed back into the bank's actual behaviour.

Will an understanding of inflation as driven by huge external shocks like the Iran war and El Nino lead to it acting any differently? The signs are not good.

The last rate-setting meeting found three members of the Monetary Policy Committee voting to actually increase interest rates, whilst financial markets are currently pricing in a series of pretty rapid rate increases over the end of this year and into the next.

In other words, whatever Bailey may say over here, and whatever its own researchers start to dig up, has little impact on bank behaviour.

That's not entirely the Bank of England's fault.

It's constrained by conditions it was granted under supposed independence by then-Chancellor Gordon Brown almost 30 years ago.

The Charter governing the relationship between the Bank and the Treasury has scarcely altered since, giving the Bank a mission to keep inflation at 2% and expecting it to use interest rates to do so.

But inflation has been above 2% for 15 months, and interest rates, as Bailey is nodding towards, are unlikely to do much to change that.

New Chancellor John Healey has the option to rewrite this document to make the bank's behaviour more appropriate for a world of repeated, overlapping emergencies where fiddling about with an interest rate will make little or no difference to price rises.

But Continuity John has apparently ruled out any changes to the bank's mandate.

The Guardian reporting that he had told Cabinet colleagues that it wouldn't be appropriate for the government to interfere in this specific case to stop the bank costing the government a fortune thanks to its mishandled unwinding of the quantitative easing programme.

It seems likely, then, that the charade may continue for some time, that all sides will recognise the Bank of England can't actually change the weather with an interest rate, but that no one will actually change anything serious about its behaviour.