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Comment: Bank faces Catch 22, with little idea what to do

Terry Murden

Terry Murden

  • by TERRY MURDEN
 

Inflation was expected to fall last month and provide some hope that it could be kept in check. Instead it remained at 2.7 per cent, its highest level since May, and it looks like the only way is up.

Policymakers are all over the place on what to do next. With forecasters expecting the consumer prices index to hit 3.5 per cent next year, there is a danger that inflation will stunt any chance of a sustained recovery.

There are questions over the quantitative easing programme, which is designed to bring down long-term borrowing costs but fuels inflation.

Should interest rates go up to keep inflation under control? Or would that simply make matters worse, as Bank of England chief economist Spencer Dale warned last week? His admission that the Bank’s monetary policy committee (MPC) is unable to do more to help with the recovery will force some to ask what it is for.

The MPC has failed to keep inflation to the prescribed 2 per cent target for so long – since December 2009 – that there is little wonder that incoming governor Mark Carney has challenged the very idea of having one.

Perhaps more worrying is the suggestion by some commentators that the Bank’s remit should be extended to include growth targets. There is a danger here, as City financier Terry Smith argues, that this would take the central bank into political territory and would create some conflict over policy.

For the time being, the MPC is nominally responsible for sticking as close as possible to that 2 per cent figure, though outgoing governor Sir Mervyn King will not see it again.

Analysts say Aggreko’s fall is a chance to buy

ouch! That star Scottish performer Aggreko saw its shares walloped on Monday by investors who seemed surprised that 2013 will not produce the sort of opportunities that have driven its shares to phenomenal heights.

The temporary power provider’s warning prompted a series of broker downgrades and saw shareholders run for cover as £1.2 billion was wiped off its value.

It should not have been such a shock as the company had indicated previously that 2013 would not be a vintage year for the sort of events that provide it with important revenue streams, namely big sporting occasions. The benefit of the Olympic Games appears to have been removed by the absence of anything on that scale next year.

Of greater concern is a weakening in emerging markets and the reduction of military operations in Afghanistan, which will erode earnings further out.

This was also the second profits warning in three months after the company said it would be taking a higher provision for bad debts and adverse currency movements.

Investors are clearly shaken. However, there was a rebound yesterday and this ought to be seen as a setback rather than a crisis. The long-term prospects for Aggreko remain solid. Emerging markets may have slowed but continue to grow at a robust rate.

The figures certainly point in the right direction. In line with previous guidance, group revenues for the year are expected to be in the region of £1.6bn – up 13 per cent – and profit before tax and amortisation should come in 12 per cent higher at £365 million. Earnings per share look likely to grow by at least 15 per cent.

Seymour Pierce reminds investors of the firm’s track record and recommends they take advantage of the current weakness in the price.

 

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