4 October 2024: Bailey believes that rate cuts could become more aggressive

Bank of England Governor, Andrew Bailey does not give many interviews and is less “media friendly” than his predecessors in the role, so when he speaks the market tends to take notice.

Speaking yesterday, he sparked a one per cent fall in the value of Sterling against both the U.S. Dollar and the Euro by telling reporters that the cycle of rate cuts that the Bank has begun recently could soon become more “aggressive”.

The comments mark a departure from his previous approach when he said rates would only be lowered gradually.

The Bank cut rates from 5 per cent to 5.25 in August, the first reduction since March 2020, after inflation returned to the 2 per cent target. Although the figure has since risen back up to 2.2 per cent, experts have been forecasting another interest rate reduction before the end of the year.

In light of Bailey’s comments. The financial markets are pricing in a 61% chance of a cut next month.

Bailey also said that the Bank is monitoring developments in the Middle East “extremely closely” amid steep rises in the cost of oil, which surged this week after the Israeli invasion of southern Lebanon and Iran’s missile attack on Israel.

The Bank’s Financial Policy Committee reported on 2nd October that global financial markets are vulnerable to shocks following a “spike in volatility” over the summer amid uncertainty over the geopolitical situation worldwide.

Governor Andrew Bailey also addressed criticisms from former Prime Minister Liz Truss, who accused him of undermining her economic policies. Bailey defended the Bank’s interventions during the pension crisis, prompted by Truss’s unfunded tax cuts. He remarked, “We came in and used our intervention tools to deal with the financial stability issue.”

Looking ahead, Bailey highlighted Chancellor Rachel Reeves’ efforts to bolster capital investment as a positive step towards addressing climate change and improving productivity. These strategies are deemed crucial as the government prepares for its upcoming Budget, facing challenges with stagnant productivity growth.

Reeves has stoked fears among investors recently, who are waiting to see what her Budget contains, particularly regarding tax increases, before committing to any significant investments in the UK.

The pound is expected to experience a higher level of volatility as it is exposed to a “perfect storm” of drivers this month, The budget, geopolitical factors and monetary policy will all play a part in driving sterling.

Versus the dollar, It fell to a low of 1.3092 and closed at 1.3124, while against the single currency, it fell to 1.1855 and closed at 1.1898.

The threatened increase in industrial action by port workers caused many small and medium businesses to send a letter to President Biden to urge him to intervene in the developing crisis. This comes as a timely reminder of the President’s duties at home as the country grapples with a significant escalation in the fighting between Iran and Israel that is being staged in Lebanon.

Biden and his administration are being urged to use their authorities to end the strike, which has shut down all East Coast and Gulf Coast container ports. The letter iterates the dire situation and massive negative ramifications for many industries and the economy.

It is more critical than ever for President Biden to intervene and invoke the Taft-Hartley Act, which would compel ports to resume essential operations while negotiations between port operators and Longshore workers continue, the letter said.

Each day that container ports on the East and Gulf coasts remain closed costs the U.S. economy billions of dollars, with severe repercussions for sectors of industry, and American consumers

The Federal Reserve kicked off its rate-cutting cycle aggressively last month.

However, the latest data and signs from Fed speakers suggest it will ease off the throttle when it comes to its next monetary policy decision.

Jerome Powell has dampened hopes for a second consecutive jumbo rate cut this week, commenting that the economy looks strong overall. With inflation falling close to the Fed’s target and a strong labour market, the economy is still on course for a soft landing, even though no one appears prepared to make the call.

Powell commented earlier in the week that “our decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 per cent”.

The acid test for the labour market will come later today when the US Department for Labour Statistics publishes the September employment report. While the data is close to impossible to predict, several economists still believe that theirs is the “magic algorithm”.

The average of their predictions is for 140k new jobs to have been created last month. This is a similar figure to last month but is not expected to drive the Fed into another fifty-point rate cut without further evidence of a more general slowdown in the economy.

Fed Governor Michelle Bowman has kept up her hawkish rhetoric, commenting “We have not yet achieved our inflation goal”. “I believe that moving at a measured pace toward a more neutral policy stance will ensure further progress in bringing inflation down to our 2% target. This approach would also avoid unnecessarily stoking demand.”

The dollar index saw a far quieter session yesterday as traders positioned themselves ahead of today’s data. It did however break its short-term level of resistance, climbing to a high of 102.10 and closing at 191.96.

Damned if they do and damned if they don’t. That is the conundrum facing the ECB’s Governing Council as it prepares again to be the “first batter up to the plate” in the next round of G7 Central Bank monetary policy decisions.

Its next meeting, which is due to take place on October 17, hosted by the Central Bank of Slovenia, will take place against a backdrop of a significant escalation of hostilities in the Middle East which has already seen the oil price rise by five per cent in a single day.

Any direct retaliation by Israel towards Iran, particularly if it is backed by the U.S., could lead to the closing of the Straits of Hormuz, through which approximately twenty-five per cent of the world oil supply is shipped.

This could see inflation rise significantly globally and cause the ECB to taper its plans to cut interest rates.

If it continues to cut rates, it may face the possibility later in the year of hawkish members of the Committee demanding rates rise again to curb rising prices.

ECB Executive Committee member Isabel Schnabel is one of those hawks, but she has recently performed her own pivot by changing the emphasis of her comments to maintaining growth rather than curbing inflation.

Schnabel acknowledged in a speech recently that the “headwinds to growth,” point to weakening labour demand and progress in disinflation.

She noted that a “sustainable fall of inflation back to our 2% target promptly is becoming more likely,” despite persistent inflation in services and strong wage growth.

It will be interesting to note if she acknowledges the risks to geopolitical stability that may cause her to temper her comments.

While no turnaround is expected in the immediate future, there are some green shoots visible for industry across the entire Eurozone in 2025. However, structural factors are weighing on the manufacturing sector, which will limit the scope of any rebound.

There is no sugar-coating it. European industry is going through a deep correction, and it does not look like the end is here yet. Since mid-2022, industrial production has been in steady decline.

This represents the strongest downturn in production in more than 30 years without the eurozone economy entering a recession. A strong service sector is keeping the economy afloat, while the manufacturing sector is shrinking. While other G7 economies and some individual Eurozone states have embraced a move towards more services-based economies, no matter the views of U.S. Presidential hopeful Donald Trump, the cool reception that has greeted Mario Draghi’s extensive report on the state of Eurozone manufacturing has been telling.

The euro regained some of its lost ground against the pound following Andrew Bailey’s comments, although versus the dollar it continued its recent fall.

Against the Greenback, it fell to a low of 1.1008 and closed at 1.1033. It remains to be seen if there will be any support at 1.10, but a lot will depend on the outcome of the September Employment report later.

Have a great day!