Oil corners three central banks

The pound has spent this week slipping against the US dollar and going nowhere against the euro. It is at its weakest against the dollar since the middle of August. Neither move has a great deal to do with Britain or with Europe. The story is in the Gulf, again.

American forces struck Iranian targets around the Strait of Hormuz on Tuesday, the first attacks in about a month, and Iran answered with drones and missiles aimed at US bases in Jordan, Kuwait, Bahrain, Iraq and the United Arab Emirates. Oil has climbed for three sessions running. Tankers are still getting through the strait, but the flow is well down on where it was before the war, and Brent is back near $95 a barrel.

Oil at that level does not stay in the oil market. It turns up in diesel, in shipping rates and in the cost of moving anything from a factory to a shelf. Inflation across the eurozone jumped to 3.3% last month and almost every bit of that was energy. In Britain the same pressure is arriving through the cost of borrowing, with the government’s long-term borrowing costs at their highest since 1998 and the rates behind fixed mortgage deals the dearest in nearly three years.

All of which has put three central banks in the same corner inside eight days. The European Central Bank meets on 10 September and is now widely expected to raise rates. The Federal Reserve follows on 16 September, where a rise is seen as more likely than not. The Bank of England decides the day after, and a fortnight ago almost nobody thought that meeting was in play. Higher interest rates cannot reopen a shipping lane. They are the only tool any of the three has.

Britain has an extra complication, which is why the pound is the weaker of the two European currencies this week. Chancellor John Healey’s first Budget arrives on 28 October and economists reckon the room he has to spend has roughly halved since the spring, simply because the government’s debt costs more to service than it did. Prime Minister Andy Burnham told MPs on Tuesday that fiscal responsibility would be his government’s bedrock. The bond market has spent the rest of the week asking what that means in practice.

That leaves this afternoon’s survey of American service firms carrying more weight than it usually would. The headline number will get the attention. The line to read is the one on what companies are paying their suppliers, because that is where an oil shock shows up long before it reaches an official inflation figure. If those costs are still climbing when tomorrow’s American jobs report lands, there will not be much of an argument left about the middle of September.