The price of printing money: Quantitative easing saved Britain from disaster… but it went on for too long, says ALEX BRUMMER

There are many reasons why current consumer price data is so important.

The cost of living really hits the less well off households. But it is the impact on the UK government stock market, interest rates and general government finances that will make a crucial difference to the growth of the economy.

The current tantrum among the gilts is proving to be just as difficult to calm down as the one caused by last fall’s Kwarteng-Truss mini-Budget.

Bond yields in the UK are higher than elsewhere in the G7. The yield on the ten-year bond is 4.4 percent, compared to 3.8 percent in the US and 2.5 percent in Germany.

Italy’s 10-year bond yields 4.1 percent, despite the country’s debt-to-output ratio of 142 percent and a prime minister, Giorgia Meloni, whose Brothers of Italy party is a direct descendant of Mussolini.

On the shorter side, the two-year British Treasury yields 5.08 percent against Germany’s 3.02 percent, even though Frankfurt’s battle against inflation is far from over.

Much of the commentary on rising market interest rates in Britain has focused on homebuyers, particularly the 800,000 with a two-year loan due for renewal.

The reality is that Britain’s switch to fixed rate mortgages in recent decades means millions are shielded from the immediate effect of skyrocketing interest rates.

A bigger concern is how Britain’s once-prudent financing of national debt has changed. The choice to finance almost a quarter of the national debt with bonds linked to the consumer price index has turned out to be disastrous.

The fact that the Bank of England has so far failed to reduce headline inflation means that the cost of servicing that debt has skyrocketed.

Rampant inflation eroded the national debt, making it less of an issue. Britain was able to cope with periods of higher prices because maturities averaged seven years in 2008.

Quantitative easing (QE) saved Britain from implosion in the wake of the bank collapse and at the onset of the pandemic. However, it took too long, was little understood and left scars.

The chairman of the Office for Budget Responsibility, Richard Hughes, notes that the maturity of Britain’s debt has been reduced to just two years, meaning that higher interest rates feed through to the cost of the country’s borrowing costs much more quickly.

Under QE, longer-term government bonds were effectively displaced by short-term bank reserves. Proponents of printing money never explained this at the time.

The combination of near-double-digit inflation and a 100 percent debt-to-GDP ratio has greatly changed the pointer of public finances.

Failure rate

Rising interest rates around the world not only affect households and governments, but also businesses.

It’s not just Thames Water, with its £14bn mountain of debt and unscrupulous sewage system, that is struggling.

The number of bankruptcies is increasing. In the period from April to June, 6,403 companies were hit by insolvencies, an increase of 16 percent and the largest quarterly increase since the financial crisis.

Higher rates and an economy struggling to grow are hurting. Kitchen table companies, formed during the pandemic, are disappearing.

Across the world, the long-feared corporate debt crisis is accelerating, with French retailer Casino and British Cineworld among the victims.

Corporate bond maturities are shortening and interest rates are rising. S&P expects defaults, especially in US and European junk bonds.

So far a torrent has been avoided. If inflation is beaten quickly and interest rates fall, an implosion can be avoided.

Virtual power

A much better day for Darktrace and its CEO Poppy Gustafsson.

The Cambridge-based cybersecurity firm has come through the malware of an attack by activist Quintessential Capital and more or less intact on the other side.

An EY review found that the reported financial results required no adjustment. Regular accountant Grant Thornton also received a clean bill of health from his regulator.

This should be a plus if the UK really wants to be the next Silicon Valley, with customers lining up for Darktrace protection and AI amid rampant security threats to corporate and public sector systems. It’s a great opportunity for a British pioneer.

If the shadow of former Autonomy chief Mike Lynch’s 10 percent stake, accused of fraud in the US, could be lifted, there could be further momentum. Time for action.