12 September 2024: Bailey’s optimism should lead to another cut

Andrew Bailey has spoken of his confidence that interest rates will be cut more rapidly than expected, as both the core and headline inflation rates have reached the target of 2%.

During the period when inflation appeared to be out of control, Bailey was criticised for not raising rates more quickly, even though the Bank of England was the first G7 Central Bank to recognize the inflationary effect of the fiscal support that was pouring into the economy post-pandemic.

The Monetary Policy Committee “stuck to its guns” over the last year when expectations grew that the pause in rate increases would be immediately followed by the first rate cut.

It took until last month for dovish members of the Committee to muster sufficient votes, including that of the Governor, to agree to begin to loosen monetary policy.

In typical fashion, market practitioners are demanding to be better informed on the MPC’s intentions for the rest of the year.

After next week’s meeting, there will be just two meetings left this year, on November 7th and December 17th.

Suppose rates were cut in total four times this year. In that case, there is a concern that although such action would provide welcome relief for beleaguered mortgage payers, there is a concern that inflation which has already risen recently may begin to climb.

The economy failed to grow for the second consecutive month in July, prompting concerns that the growth level that had been expected may not now be reached.

Although services output grew as the hospitality sector was driven by the Summer’s sporting events, manufacturing and, more concerningly, construction contracted.

There are still protests being made about the Government’s decision to withdraw the Pensioner’s Winter Fuel Payment but given that the Keir Starmer can rely upon a substantial majority to pass unpopular policies and the Conservative Party is in disarray and going through a generational crisis Starmer and his Chancellor will be virtually unchallenged until next May, when the local council elections will provide a more reliable gauge of the public’s feelings.

The lack of growth will concern Rachel Reeves as she begins to put pen to paper for her Autumn Budget.

She was likely to be relying on a continuation of the level of growth that was seen earlier in the year to allow her to reduce the tax increases she was planning.

The pound tested support at 1.30 against the dollar yesterday, as a rate cut is now being considered virtually certain. It bounced off the major support level and closed at 1.3034.

A cut in rates at next week’s meeting of the FOMC is now certain, as inflation fell to a three-year low last month.

Headline inflation fell to 2.5% following July’s rate of 2.9%. The fall was greater than the market had been expecting. Core inflation, with volatile items stripped out, was unchanged at 3.2%.

Another Wall Street Bank spoke yesterday of its fears for the economy. Morgan Stanley’s economists believe that the economy could fall into recession in the second quarter of next year, prompting the Fed to cut interest rates more quickly than it wants to.

Similarly to the Bank of England, which is one cut ahead of the Fed, rates are now expected to be cut at each of the FOMC’s remaining meetings this year.

Morgan Stanley has called for a fifty-point rate cut to be agreed upon at next Wednesday’s meeting, particularly since they believe that an opportunity was missed at the earlier meeting.

Jerome Powell is unlikely to support the FOMC playing catch up, particularly when job creation and GDP growth are still positive.

A recession is unlikely, considered less than a 30% possibility since Powell retains sufficient ammunition to stave off any serious slowdown.

The Presidential Debate which took place on Tuesday evening had both candidates claiming victory, although early opinion polls showed that the Democrat Candidate, Kamala Harris, was the victor.

She immediately called for another debate early next month, prompting Donald Trump to claim victory, since he believed that if Harris had won, she would want to “rest on her laurels” rather than go again with nothing to prove.

The election due to take place on November 5th has so far been devoid of any serious policy undertakings from either candidate, particularly about the economy.

This may be seen as more of a negative for Harris than Trump since the former President is known for “making policy up on the go”, while Harris wants to be considered a more considered President.

The dollar gained yesterday, despite the fall in inflation which set a rate cut in stone. The index reached a high of 101.82 and closed at 101.74.

It appears that the hard right’s strong showing at last week’s regional elections has had a significant effect on the ruling coalition, leading it to toughen up control of its borders.

German Chancellor Olaf Scholz defended his government’s migration policy in remarks to parliament on Wednesday, even though he is personally against it, but emphasized the country’s need to attract skilled foreigners.

“There is no country in the world with a shrinking working population that has economic growth. That is the truth we are confronted with,” Scholz said in the Bundestag, as Germany’s parliament is known.

However, his remarks come amid tense, acrimonious debate in Berlin over migration and asylum policy. On Tuesday evening, cross-party talks between Scholz’s coalition and the centre-right opposition collapsed with bitter criticism.

Despite Scholz’s comments, civil war has broken out in Europe over Germany’s new plans to introduce strict border controls – with populist leaders giving their support for similar measures.

Both Geert Wilders in The Netherlands and Viktor Orbán in Hungary have praised Germany’s move towards better control of illegal immigration, with Wilders calling for his country to be granted an opt-out of EU immigration policies similar to those negotiated by Denmark.

Orbán meanwhile welcomed Germany to the “anti-immigration club”.

The result of today’s meeting of the ECB’s rate-setting Governing Council is not expected to be as straightforward as previously thought.

Although the Eurozone economy is crying out for the stimulus that a rate cut would bring, the more hawkish elements among the Committee are concerned that inflation rose last month, and a series of rate cuts may not allow it to fall to its 2% target at all.

This has been a prerequisite condition of the agreement to ease monetary policy.

The Euro tested the 1.10 level versus the dollar yesterday but managed to remain above it, although the reprieve may be short-lived. The single currency fell to 1.1002 and closed at 1.1020.

Have a great day!