12 August 2024: BoE needs to make “bigger ripples”

To play its part in recovering the economy under the new government, the Bank of England will need to be far more “visible”. That is according to the economists at Deutsche Bank, who believe that the Central Bank may be able to cut interest rates up to nine times in the next two years.

Since there are many moving parts to the economy, this scenario is far from certain to play out, but with inflation expected to continue to fall over the same period, cuts of between 275 and 325 basis points are believed to be reasonable.

As always, a lot will depend on the path of U.S. monetary policy since, as Andrew Bailey has said many times, the Bank does not exist in a vacuum.

If the past eight years, since the Brexit referendum, have taught us anything, it is that it is impossible to make fixed plans for the economy and stick to them. Rachel Reeves is currently a lot like the independent members of the Monetary Policy Committee, in that she is treating being the Chancellor of the Exchequer as a theoretical exercise, in which each decision she makes on spending, taxation, or investment slots neatly into place and is not subject to any outside influence.

Unfortunately, real life is seldom like that, and she will need to learn how to compromise and do so quickly if she is to even come close to achieving her lofty plans for growth, output and productivity during this Parliament.

Mortgage lenders have already begun to slash interest rates on their products, with the assumption that the market will receive a double boost in the coming months.

First from the loosening of monetary policy, and then from the Government’s clear desire to see a significant increase in activity, which includes an overhaul of the planning regulation and the return of house-building targets of local councils.

This week will see the publication of the July employment figures. The headline unemployment rate is expected to pick up slightly from 4.4% to 4.5%, but it is wages numbers that are of most interest to the Bank of England as it looks to cut interest rates further.

Average earnings, excluding bonuses, are expected to have fallen to 4.6% in the three months to June. This is a significant fall from the 5.7% rise seen last month.

Last week, Sterling was in reactive mode as the market continued to be driven by concerns that the U.S. economy may be slowing down, which may force the FOMC to begin a cycle of interest rate cuts, although Fed Chairman, Jerome Powell managed to reassure investors that this was an overreaction to the lower than expected employment data.

The pound lost ground overall last week. It fell to a low of 1.2665 but recovered strongly to close at 1.2762.

When Donald Trump was elected President in 2017, he acted decisively and replaced Janet Yellen as Chair of the Federal Reserve and replaced him with Jerome Powell.

Powell had no background in economics, having made a career in law. However, it was not only one of his first policy decisions, but it was also probably one of his most successful.

Although he has faced almost constant criticism from Democrat members of Congress over the past four years due to his Republican affiliations. Powell has brought a “lawyer’s eye” to the Fed, which has made its decision-making processes more considered.

He doesn’t possess the flamboyance of Ben Bernanke or the close relationship with Wall Street of Alan Greenspan he is often at odds with the “movers and shakers” of the financial district of New York, but he has gradually earned their respect for his straight talking and perfect judgement of how much advance guidance to offer.

His only gaffe, which only now is he being allowed to forget, was labelling rising inflation as “transitory” in November 2021. Only now two and a half years later, has the Fed got price increases back sufficiently under control that it can consider loosening monetary policy.

Whoever is elected President in November, it is almost certain that Powell will be asked to continue as Fed Chairman.

Trump may meddle in policy, but in the end recognizes that Powell is “the best man for the job”, particularly now that he has the experience that comes from almost two terms in office.

There had been concerns voiced by economists following the departure of Joe Biden from the race, that Harris may bend to the opinions of some senior Democrats and replace Powell with a more “pliant” candidate but last week she confirmed that the makeup of the Fed and its independence will remain unchanged.

Inflation data is due for publication on Wednesday, with the headline rate expected to have fallen to 2.9% in July, down from 3% in June. The inflation rate is still not falling as fast as members of the FOMC would expect, given that the Fed Funds Rate has remained at 5.25% for more than a year, but at least it is falling.

The dollar recovered its composure last week following the furore created by the fall in job creation in July.

The index rose to a high of 103.54 but settled back to close at 103.15 as traders remained wary of establishing long dollar positions ahead of the next FOMC meeting.

If Donald Trump is elected President in November, there will be several changes to the way the U.S. view the world and the way it is viewed by outsiders.

One such change will be the introduction of tariffs on the import of goods from China to encourage the return of some manufacturing capability to America.

One by-product of this policy, designed to slow dependence on Chinese goods, will be the addition of tariffs to imports from the Eurozone. The relationship between the U.S. and the European Union will likely become a little less cordial than it has been under President Biden as “America First” makes a return.

Eurogroup chief Paschal Donohoe said the prospect of a second Donald Trump presidency is an impetus for the European Union to prepare itself by making its economy less dependent on the US.

Speaking in an interview with Bloomberg, the Irish Minister for Public Expenditure said that while it’s up to the American people to choose their next leader, the region should be ready for any eventuality.

Donald Trump has outlined a very different agenda concerning tariff levels and trade.

The EU needs to continue to deepen its economic autonomy, to deepen the performance of its economy and the strength of its economy at home, so that it is in a stronger position to deal with the kind of changes that may come out of America.

Christine Lagarde said earlier this year that the region should brace for “harsh decisions” in the event of Trump getting another White House stint. She has pushed for the Capital Market Union as a way of shoring up Europe in advance of that.

In a move that surprised investors and political observers alike, Italy’s far-right government led by Prime Minister Meloni announced plans late Monday to slap a 40 per cent one-off windfall tax on bank profits.

Italian lenders have been raking in huge benefits from higher interest rates on their loans at a time when ordinary people are struggling with the cost of living.

Meloni has spent the entire time she has been in office trying to persuade its partners in the European Union that a far-right government can be pragmatic and remain within the mainstream of “Europeanism”.

Taking her lead from the mess that Emmanuel Macrons found himself in recently, Meloni “reverted to type” as she encouraged Italian MEPs to vote against Ursula von der Leyen’s re-election as President of the European Commission.

While this was a largely symbolic move, it has re-established Meloni’s credentials as a “Eurosceptic”.

The Euro has continued to struggle to make any ground back towards the 1.10 level that it flirted with in the wake of the U.S. employment numbers.

Last week, it lost ground every day, falling to a low of 1.0881 but recovered to close at 1.0916.

Have a great day!