22 December 2023: The MPC facing severe pressure to reform

The UK is continuing to make progress in the advancement of post-Brexit trade deals on several fronts.

It was announced that a deal with Switzerland over cooperation in the financial services sector has been agreed. The treaty will make deals in the areas of wealth management and corporate finance simpler and means that the two countries will mutually recognize each other’s domestic laws and regulations.

Chancellor of the Exchequer, Jeremy Hunt, hailed the agreement as a global first that will allow frictionless cross-border provision of world-class financial services.

The deal will provide a blueprint for such agreements to be advanced with important financial services providers.

The UK also announced a significant advance in a deal to delay post-Brexit tariffs on the sale of electric vehicles that had been threatened by Brussels.

The agreement, which was welcomed by the Prime Minister, means that the ten per cent tariff proposed by the EU won’t now come into force until the end of 2026.

As inflation continues to fall, reaching 3.9% in November, an inquest is beginning into the role that the Bank of England played in the cost-of-living crisis that engulfed the nation over the past eighteen months or so.

The considerable rise in the wholesale of gas was a significant contributor, as well as the disruption to supply chains created by the ongoing war in Ukraine.

However, it is felt by the Treasury that the timid response to the crisis from the Bank of England, even though it was the first G7 Central Bank to begin to hike rates, exacerbated the situation.

Should the Labour Party win the General Election that is due to take place next year, it is likely to review the makeup and functionality of the Monetary policy committee, adding a permanent member from the Treasury to represent the Government’s position but also create a majority of independent members.

An analysis of voting patterns shows a virtual disregard for the views of independent members, which renders their appointment pointless.

The pound continues to react to the inflation data, which brings the likelihood of interest rate cuts to the fore.

Yesterday, Sterling recovered most of the ground that was lost on Wednesday but is still unable to break away from the downward channel that began when it reached close to 1.28 recently.

It reached a high of 1.2696 yesterday and closed at 1.2687.

A Democrat Congress is unable to recognize the incredible feats performed by Jerome Powell and his colleagues on the FOMC.

As Wall Street celebrates a year-end that has all but confirmed a soft landing for the economy that has been engineered by lifelong Republican Powell, the response from Washington has been lukewarm, calling the Fed Chairman “incredibly lucky”.

This attitude is not shared by the Administration, with both President Biden and Treasury Secretary Yellen acknowledging the work of the Central Bank recently. However, the President, being a lifelong politician, couldn’t resist praising the effect of his programme of support commonly called “Bidenomics”.

Patrick Harker, the President of the Federal Reserve of Philadelphia, joined the dovish tendency that has characterized comments from members of the FOMC since the latest meeting of the Committee ended.

In a speech yesterday, Harker agreed that the Fed should lower rates in 2024, but not imminently.

He agreed with Powell that it is no longer necessary to consider hiking rates but said that he is in the camp that believes that rates should be held where they are for a while.

The overriding view that has been expressed by FOMC members in recent days is that there appears to be the beginning of what famous Fed Chairman Alan Greenspan called an “irrational exuberance” beginning to engulf markets that have seen the Dow Jones Index make several all-time highs recently.

Harker is coming to the end of his term as a voting member of the FOMC, he faces mandatory retirement in 2025. Nonetheless, he will remain an important commentator on the economy.

He also confirmed that he believes that a soft landing for the economy is still eminently possible.

The dollar index was unable to build on its recent progress and has had a mixed week as the market squares positions ahead of the Holidays.

It fell to a low of 101.73 yesterday and closed just one pip higher, in what was its lowest closing level since the end of July.

The ECB cannot shake off its morbid fascination with inflation, even though price rises have fallen to their lowest level in 22 months.

Philip Lane, the Central Bank’s Chief Economist and a member of its Executive Committee spoke yesterday of his expectation that wage growth will drive higher consumption and thereby push inflation back to levels that the Bank is uncomfortable with.

There is currently a great deal of momentum in wage negotiations across Europe which, he warned, would prolong the second-round effect on inflation even though energy and food prices are falling.

For this reason, it is still far too soon to declare a victory over inflation, which he expects to rise, temporarily, this month. When asked about his comment recently that the economy can still achieve a soft landing, Lane became coy, falling back on the “Central Banker’s stock answer” that it depends on the data.

Lane disputes the market’s belief that the ECB will begin to cut rates in March. The Governing Council agrees that a review will be made at the April meeting to decide when rate cuts are both possible and called for.

There are too many uncertainties ahead about the path of inflation for any assumptions to be made. Furthermore, the removal of cost of living supports over the first quarter of the new year may also see inflation rise again.

It was interesting to note that Lane is still besotted by inflation and barely mentioned the economy that is considered by some to be close to being in freefall.

Italian Prime Minister, Giorgia Meloni, has rejected an opposition move to approve the reform of the Eurozone’s bailout fund.

Members of The Government will likely agree to the proposals with some conditions attached. Italy is the only Eurozone member that has not agreed to the European Stability Mechanism, which increases the ECB’s powers to oversee countries that it considers to be in difficulty.

The euro tested the 1.10 level but was unable to push through selling pressure. The hawkish comments from ECB members will only provide support for so long, and the dollar will likely reassert its dominance once the holiday period is over.

The single currency made a high of 1.1003 and closed at 1.1002. In early Asian trade, it failed to consolidate the break of 1.10, trading just below that level.

Have a great day!