3 January 2024: The MPC is under pressure to admit a member from the Treasury

Andrew Bailey, the Governor of the Bank of England, jealously protects the Central Bank’s independence. Over the past two years, the performance of the Monetary Policy Committee has drawn criticism from the financial markets and MPs alike.

There is no question that the market expects the Central Bank to “jog along” during periods such as have been seen over the previous eight or so years where intervention is kept to a minimum due to a period of tame inflation, but be prepared to perform heroics when called upon as it has been over the past two or three years.

The question of the makeup of the Committee is now being openly questioned.

There appears to be no benefit to having five permanent members and four independents, when the permanent members vote “en bloc,” leaving the four independents “toothless.”

It is expected that whoever wins the forthcoming General Election there will be changes to the makeup of the MPC. Some have suggested that in line with levelling up commitments, regional representation would be beneficial. In contrast, others favour a member to be appointed from the Treasury to represent the Government’s view.

No one is suggesting any move away from the Bank’s complete autonomy, but, equally, a deeper understanding of the Government’s objectives may make monetary policy more seamless.

Of the current permanent members, only the Governor and his Deputy for Financial Markets and Banking would seem to be necessary as well as the Bank’s Chief Economist. The Deputy Governors for Financial Stability and Monetary Policy would appear to be superfluous to the decision-making process, despite their clear role in the Bank’s Governance.

The election is going to be fought on familiar “battlegrounds” such as the economy, NHS waiting lists, transport infrastructure and levelling up, but in the longer term, the provision of a monetary policy that not only dovetails with Government Policy but protects both jobs and the cost of living is vital and will certainly be worthy of serious consideration.

As the market begins to reconsider its drivers, the first day of the new year saw the dollar begin to re-establish its dominance. The pound slipped to a low of 1.2610 and closed at 1.2617 as traders’ thoughts turned to when G7 Central Banks will start to loosen monetary policy.

The Bank of England will face a challenging task as inflation remains sticky despite its recent falls, but the economy is sliding inexorably towards a recession.

The Bank’s situation is like that of the ECB, while in the U.S. a soft landing for the economy will allow the Fed to change policy with a degree of comfort that will not be afforded to other G7 Central Banks.

It is nothing new for the U.S. to be seeing extremely elevated levels of debt whether that be personal, corporate or Government. Indeed 2023 was often characterised by wrangling over the size of the Federal Budget.

However, with the “man in the street” having built up over a trillion dollars of credit card debt, the timing of any interest rate cuts will be critical to consumer confidence which will be one of the major components of the soft landing.

2024 is likely to be, particularly in its first six months, a year of transition. The Fed will make decisions about when the time is right for interest rates to be cut but will expect to have the “luxury” of being able to do so according to its agenda.

While the cuts will be universally welcomed, Jerome Powell will want to be certain that the FOMC is not about to re-ignite inflation. The global situation with wars still raging in Ukraine and Gaza will merit consideration while the ongoing issues in and off the coast of Yemen are beginning to threaten the stability of trade routes.

Ten percent of all global trade flows through the Gulf of Aden, so any disruption is to be taken seriously.

The period of transition will also be contributed to by the upcoming Presidential Election. Although the vote itself is not until November with the new Presidential term not starting until January, there is “a lot of water to flow under the bridge” before that.

While the Democrat candidate is confirmed with President Biden seeking a second term, the Republicans have a difficult choice to make. In Donald Trump, they are faced with a case of “damned if they do, and damned if they don’t.”

With the former President still facing criminal charges and already banned from the ballot in two states, his selection is fraught with risk, but he is still the candidate with the biggest chance of defeating Biden.

With the Global situation “incendiary,” Donald Trump is unlikely to be welcomed by global leaders given his propensity to speak “from the hip.”

The economy has returned to the forefront of traders’ minds with the employment data for December being published. Job openings remained stable in December only rising marginally. Today sees the release of private sector job creation and with a high degree of expectation around tomorrow’s non-farm payrolls, some volatility may be expected.

The publication of the minutes from the latest FOMC meeting took place yesterday. They reaffirmed the newly dovish outlook for the Fed with three rate cuts expected in 2024. The dollar index has not reacted as it had already lost ground following the original comments following the meeting.

The index rose to a high of 102.25 yesterday and closed at 102.22.

The euro has marked its twenty-fifth birthday this week, and while there were no celebrations, neither was there any lament. The single currency remains the cornerstone of the monetary union and is still a work in progress.

There is little more that can be done to embellish its image given the shocks that were delivered to some of the more dovish members of the Eurozone last year as interest rates were raised at, for some, at an alarming rate, and then promised to be kept high until inflation was defeated.

While some nations like Germany and Austria took the rate hikes “on the chin” other nations like Italy in particular, railed against every decision of the ECB and, as much as it could, went its own way, while being careful not to threaten “Italexit.”

The euro remains fragile but retains the support of every member of the Eurozone, mainly due to a fear of the unknown.

While the UK has survived Brexit reasonably well and the doom-mongers have so far been thwarted, it did not have to face the readoption of its currency into global markets which any Eurozone member would have to face.

The biggest problem facing the Eurozone in the long term is how to deal with the need for fiscal union. The benefit construed from interest rate increases has been watered down, mostly in the countries that needed inflation controlled, by tax cuts and higher public spending.

Individual decisions on fiscal policy have also had a significant effect on the single market, with workers moving to countries with more generous social programmes which they qualify for as soon as they arrive, allowing them the benefit of “taking a chance” over employment possibilities.

Employment has been the one area where the eurozone is doing well despite the rise in inflation. Although some of the data may be considered “unreliable” at best, there is no doubt that the downturn in economic activity has not resulted in wholesale job losses.

Data published this week showed that PMI surveys for both manufacturing and services fell for the eighteenth month in a row and this remains the most telling statistic in favour of a loosening of monetary policy.

The ECB is unlikely to have the luxury that is being afforded to the FOMC of making cuts to interest rates “at its leisure” if the trend towards weaker output and economic activity continues.

The Euro as predicted fell below the 1.10 level versus the dollar yesterday. It reached a low of 1.0940 and closed at 1.0943.

Have a great day!