9 March 2023: Dhingra warns about further hikes

Monetary Policy Committee member, Swati Dhingra, nailed her colours firmly to the dovish mast, yesterday as she called for an immediate end to rate increases.

She believes that any further hikes present a material risk to the economy in the medium term. In her opinion, interest rate increases take about a year to see their full effect on inflation, and with rates having risen by 390 basis points over the last fifteen months, there should be a pause to fully evaluate their effect.

She voted against hikes at both the December and February meetings. Which leads to a conclusion that she feels that the rise in interest rates should have been halted at 3%, instead further increases have seen the base rate rise by another 100 points.

She doesn’t feel that there is sufficient evidence to hand that inflation is becoming embedded in either wages or margins.

Dhingra believes that consumption remains weak even without the full effect of a significant tightening of monetary policy being seen.

Her major concern is that the economy remains weak, and rate increases are placing further strain, and will lead to further falls in output.

An alternative vision was presented by her colleague on the MPC, Catherine Mann, recently. Mann believes that rate increases are yet to reach a pivot point, at which rates are neither supportive nor restrictive.

The effect of years of loose monetary policy being mopped up means that, in her view, rates will need to reach at least 5% before they have the desired effect.

The three independent members of the MPC have definite views on what should happen to monetary policy, which appear to be born from the pages of economics textbooks and run the risk of having little to do with reality.

Two further dangers are about to become reality for small business owners in addition to those mentioned yesterday. The rise in corporation tax will come into force next month, and that will coincide with a cut in support for energy bills.

The Federation of Small Businesses said yesterday that its members will need help in the Budget, which takes place next week, if the country is not going to witness the demise of thousands of FSB members.

Sterling traded in a narrow range yesterday, striving to regain some of its losses from the previous day. It rose to a high of 1.1954 and closed at 1.1849 versus the dollar.

Against the single currency, it gained a little relief from significant falls so far this week. It clambered to a high of 1.1241, closing at 1.1233. It is unlikely to make significant gains while both the ECB and Federal Reserve remain more hawkish in their outlook than the Bank of England.

In part two of his testimony to Congress which he delivered yesterday, this time to the Senate, Jerome Powell remained unapologetically hawkish about the path for short-term interest rates.

He made very little variation to his remarks the previous day, which saw the financial markets left in very little doubt about his determination to finish the job he started almost a year ago.

It seems that the fact that he, and a number of his colleagues on the FOMC, were outvoted by a more dovish view of the economy has galvanized his view.

He left Congress in little doubt that he believes that certain areas of the economy, in particular employment, remain red-hot and further hikes in rates will be needed. It is odd that the FOMC would make the decision to cut the size of the rise in rates without being aware of the strength of the January employment report.

It was clearly felt that the uneven performance of the economy regionally drove the committee to feel that a twenty-five point hike would be sufficient. With the February report due to be published tomorrow, all options for the size of the increase, as well as its likely impact on the next FOMC meeting, remain on the table.

The futility of the lottery that has become the monthly headline new jobs figure has a more significant pace in economist’s view of how the economy is performing.

Over the past decade, notwithstanding the effects of the Pandemic, and some of President Trump’s more unusual policy decisions, analysts and commentators have been able to take a decent stab at the number and be within the ballpark.

That ability has been taken away since the beginning of Q4 ‘22, and it is now accepted that no one could have foreseen that 500k+ ew jobs could have been added in January.

The week’s delay in publishing the February report will hopefully iron out the number of guesstimates that often find their way into the data. Furthermore, the fact that the FOMC doesn’t meet for its six-weekly meeting until March 22nd, should allow committee members to fully digest not just the headline but also the underlying detail.

The dollar index didn’t see much follow through from its rally on Tuesday. It rose to a high of 105.88 yesterday, closing at 105.69.

The Governor of the Bank of Italy. Ignazio Visco clearly feels that he is playing ball with the ECB, having tempered his recent comments regarding the rises in interest rates that have been sanctioned by his colleagues on the Governing Council.

Unfortunately, he believes that his calls for any further rises to be both considered and justifiable have not been heeded, and he has abandoned his conciliatory stance.

In an interview published in the Financial Times yesterday, Visco alluded to a growing rift that is opening up between Rome and Frankfurt, the home of the ECB.

He commented that Rome doesn’t appreciate comments from his colleagues at the European Central Bank about how high interest rates could eventually reach and the possibility of larger increments being necessary to accelerate the rate at which inflation is falling.

He feels that unwarranted comments from rate-setters increase tension and place undue pressure on the Central Banks of heavily indebted Eurozone members.

Furthermore, he finds the virtual confirmation that rates will be increased by fifty basis points at the next meeting to be the Italian equivalent of putting the cart before the horse.

Visco takes issue with Robert Holzmann, the Head of the Austrian Central Bank, about his comments regarding further rate increases that are couched in such a way that they are being considered as policy statements rather than simply his opinions.

While there is a sufficient majority to comfortably pass a fifty point hike in a couple of weeks time, the rift that is developing could easily lead to a significant redesign of the Central Bank’s mandate once inflation has been brought back under control.

Overall, taking the entire picture of the economy into account as reported in recent data, it could easily be argued that the Eurozone is stagnating.

It seems there is very little being done at the grassroots level to ensure that consistent growth is being seen across the entire region.

Raising interest rates is hardly conducive with delivering even a level of growth that can be easily maintained. The ECB appears to feel that growth and inflation are two targets that have to be handled separately.

The euro recovered its poise yesterday as the dollar index ran out of steam. It was virtually unchanged, closing just three points lower on the day at 1.0547.

Have a great day!