Gordon Brown: Red Sea attacks 'puncture' idea of lower interest rates

The Bank of England will have a tougher time getting inflation down now that conflict has broken out in the Middle East, former prime minister and chancellor Gordon Brown told ITV News Business Editor Joel Hills in Davos, Switzerland

Gordon Brown says the escalation of the conflict in the Middle East has “punctured” the assumption that central banks will soon cut interest rates.

The broad assumption recently has been that advanced economies were heading for soft-landings and that inflation would continue to fade, allowing central banks to respond by lowering the cost of borrowing. 

In an interview with ITV News, the former British chancellor and prime minster said the disruption to supply chains caused by attacks on shipping in the Red Sea will make the Bank of England’s task of getting inflation back to 2% in the UK “incredibly difficult”.

I think the markets are predicting large interest rate cuts over the next year, both in America and in the United Kingdom and Europe. And I think it's going to be slower and it's going to be smaller,” Brown told me at the World Economic Forum in Davos.

“Given the supply side constraints, you're actually not sure you're going to get the goods on time, you're not sure you're going to get them at the right price.”

According to the Office for National Statistics, pay growth in the UK slowed to 6.5% in the three months to November, in a sign that inflationary pressures have weakened by more than the Bank of England was expecting.

“The problem here is the last mile or the last two or three miles,” says Brown, who thinks the Bank will need to decide whether to go for its 2% target “in which case there’ll not be cuts for a long time” or to “allow inflation to be a bit higher so that the economy doesn’t move into recession”.

Former prime minister and chancellor Gordon Brown (right) speaks to ITV News Business Editor Joel Hills in Davos, Switzerland. Credit: ITV News

As it stands, investors think Brown is wrong.

The markets are betting the bank will begin cutting in the summer and that the bank rate, currently 5.25%, will have fallen below 4% by the end of 2024.

Brown thinks cuts will be delayed until the autumn and he thinks Trump’s landslide victory in Iowa yesterday may point to trouble ahead.

Brown views the prospect of another Trump presidency as a threat to the global economy.

“[A second presidency] will mean less growth, less prosperity, more job losses,” says Brown.

Donald Trump has talked about imposing 10% tariffs on imports, quitting the IMF and the World Bank and immediately ending the war in Ukraine.

“You’d have trade wars, technology wars, industrial subsidy wars, and you would be in for an era of protectionism, mercantilism and probably xenophobic nationalism,” says Brown.

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