Interest rates rise again as economic outlook gets gloomier

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6th May 2022

Bite-sized business news from the UK and beyond
Good morning Yesterday, in the latest chapter of the ‘Elon Musk buys Twitter’ saga, the billionaire unveiled an all-star line up of 18 investors who are collectively stumping up $7bn to fund the $44bn takeover of the social media platform. Musk also announced plans to serve as the temporary CEO of Twitter, in addition to his other day jobs as chief of Tesla and SpaceX.
Today's stories
  • Interest rates rise again as economic outlook gets gloomier
  • Channel 4 fights back against privatisation plans
Interest rates rise again as economic outlook gets gloomier

What happened
Yesterday the Bank of England announced a 0.25% increase in the base rate to 1% - the highest rate since 2009 - as it tries to keep a lid on ballooning inflation. The central bank also warned that the outlook for the UK economy is even worse than it previously thought with the chance of a recession this year rising as energy prices continue to push inflation into double digits.

Some background
Under ‘normal’ circumstances – whatever they are – interest rate increases are usually positive economic signals as they suggest that employment is high, growth is good and inflation is increasing as a result of those positive macroeconomic factors. 

This time around however, the – now persistent – inflation problem we are facing is driven by a global economy coming out of lockdown leading to supply chain issues and rocketing demand for energy, not to mention the geopolitical uncertainty caused by the war in Ukraine. 

The dreaded ‘stagflation’ is looking more likely
Stagflation – when inflation is high and growth stagnates –  could be a reality this year. 

It's problematic because raising interest rates is used to tackle rising inflation but this makes borrowing more expensive which doesn’t help economic growth. 

Consistent with this, the Bank commentary around the latest rise was really rather pessimistic: 
  • 10.25% inflation expected by the end of the year –  the highest since the early 1980s and nearly double the previous forecast of 5.75% 
  • Increasing signs that the squeeze on incomes is starting to weigh on households  
  • Consumer confidence is as low as it has been since 2008   
Unfortunately persistently high inflation and concerns over economic growth is a global problem
Central banks across the world are walking a tightrope between controlling prices and supporting fragile, post lockdown economies. This week alone central banks in the US, Australia and India have raised their interest rates. 

Is there any good news?
Rising interest rates are generally bad for anyone with debt but can be beneficial for savers who have endured years of rock bottom saving rates.
Other stories to keep you in the loop
  • Shell profits soar to $9.1bn amid calls for windfall tax
  • Ocado investors rebel over £20m-a-year bonus plan for CEO
  • Thousands of jobs at risk as convenience store giant McColl's teeters on brink of collapse
  • Wealthy Russians flee to Dubai to avoid sanctions
  • Hope on the high street as Next and Sports Direct back stores
  • Turkey's cost of living soars nearly 70%
Channel 4 fights back against privatisation plans

What happened
A month after the government announced Channel 4 would be going up for sale, the broadcaster has published an alternative plan – titled 4: The Next Episode - to secure its future.

Channel 4 has been publicly owned since launching in 1982. Unlike the BBC it does not receive funding from the TV licence, instead it generates revenue through advertising with any profits made going back into the business. The government believes that the channel would be better funded and would be able to better compete with streaming platforms if it was in the private sector.

The plan to sell Channel 4 has been controversial
There has been criticism from politicians, TV presenters and the broadcaster itself. 96% of responses from the public consultation on the plan were against it. Critics argue that Channel 4 will lose its cultural edge and reputation for covering stories from under-represented groups in the new owner’s pursuit of profit. Analysts estimate that a privatised Channel 4 would face 40% to 50% cuts to its £660m programming budget.

Channel 4 is full of ideas to avoid a future in private hands including:
  • Selling its London headquarters and doubling the number of staff working outside the capital to become northern-based.
  • Creating up to 250,000 training and development opportunities for young people who might not otherwise have a career in the media.
  • Forming a joint venture with an external investor to spend £200m a year on new content and increase its total programming budget from £700m to £1bn a year by 2030.
Channel 4 said its plan would add around £11bn to the UK economy every year and create 13,000 jobs, arguing that those numbers would be lower under privatisation, at around £8-10bn and 9,000-11,500 jobs.

What does the government think?
Channel 4’s alternative plan looks unlikely to change the government’s mind. The government said Channel 4’s plan is based on flawed assumptions and that privatisation is still the best way forward.
Stat of the day

The World Health Organisation says the world’s true pandemic death toll is nearly 15 million, 3 times more than countries official numbers
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