15 November 2024: Bailey calls for closer ties with the EU

Bank of England Governor Andrew Bailey delivered his Mansion House Speech last evening and, rather surprisingly, called for the UK to rebuild ties with the European Union.

In the past, Bailey has studiously avoided commenting on what he considered to be political decisions since his remit is to create monetary policy based on the political and social environment created by Parliament and voters.

Breaking with that “tradition”, he said The UK must “rebuild relations” with the EU “while respecting the decision of the British people” who voted to leave in 2016. He believes that rebuilding ties will resolve the trade weaknesses that have developed since the vote.

“The Changing trading relationship with the EU has weighed on the level of potential supply and has likely caused inflation to rise. The impact is being seen more in goods than services, which is not particularly surprising.

However, it underlines why we must be alert and welcome opportunities to rebuild relations while respecting the decision made by the people of the UK.”

The problems of trade may be the focus, but the focus should be on the overall effect of Brexit and the general fragmentation of the global economy.

The Office for Budget Responsibility believes that the UK is 4% smaller than it would have been had Brexit not taken place, although in Bailey’s opinion, the “damage” began in the years leading up to the split.

The government is still opposed to rejoining the EU, but Prime Minister Keir Starmer and some EU politicians have said there could be a better relationship.

Bailey may have made his comments due to the election of Donald Trump as US president.

Trump made a repeated campaign promise to levy a 20% tax on all imports of goods into the US, and a 60% tariff on Chinese imports.

If that were to happen, it is quite questionable whether the UK could have a special relationship with the US when it still trades quite substantially with Europe.

Chancellor Rachel Reeves, in her first Mansion House Speech, identified Brexit as a key cause of the “structural challenges” facing Britain’s economy as she sets her sights on strengthening ties with the US ahead of Donald Trump’s return to the White House.

Despite reiterating Sir Keir Starmer’s position that the UK would not look to rejoin the EU, the Chancellor appeared to concede Brexit has had a detrimental impact on Britain’s economy.

She said: “There are other countries who are looking for the very same economic opportunities as we are. And we face structural challenges too, including those which have come from Brexit.

In a speech yesterday, independent MPC member Catherine Mann tried to debunk the theory that she will never vote for interest rates to be cut.

Although she believes that rates may need to still be on hold for a “considerable time”, there will come a time when loosening monetary policy becomes possible.

The pound fell to its lowest level since June yesterday, reaching a low of 1.2630, although it recovered somewhat to close at 1.2691.

There have been several speeches and sound bites provided by members of the FOMC this week. While they stay independent, primarily concentrating on the economy in their particular area of the country, they have had a remarkably similar message.

One difference between the comments is over the triggers for a further loosing on monetary policy. Thomas Barkin from Richmond, Virginia, believes that employment is still the biggest risk to growth.

He believes that the biggest risk to growth is probably the unemployment rate, a cycle of lay-offs would dampen spending.

A significant market correction could also cause families with more net worth to slow consumption.

It is hard to assess the impact of tariffs, but there will be some cost pressure, and some movement of jobs, depending on what is implemented.

John Williams from New York sees no issue with the significant fall in job creation in October but does believe that his colleagues will see an opportunity to continue the cycle of rate cuts into the New Year.

Fed Chair Jerome Powell capped a busy week for FOMC members, speaking last evening and commenting that the Fed will be slow and steady in cutting rates over the next few months, in part because inflation has shown signs of persistence and the Fed’s officials want to see where it heads next.

The data that has been published this week has been encouraging. It was always likely that headline CPI would pick up slightly, but personal consumption expenditures, which are a wide measure of inflation and include rents, remain steady.

Powell, in prepared remarks for a speech in Dallas, said that inflation is edging closer to the Fed’s 2% target, “but it is not there yet.”

At the same time, he said, the economy is strong, and the Fed’s policymakers can take time to monitor the path of inflation.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” the Fed chair said. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

Economists expect the Fed to announce another quarter-point rate cut in December, after a quarter-point reduction last week and a half-point cut in September.

The dollar continued its rally yesterday, reaching a high of 107.07 and closing at 106.86. In early trade in Asia, the Greenback has fallen marginally, and this may be the start of a mild correction.

ECB Board and Governing Council Member Isabel Schnabel retains her perspective on the European Union and monetary policy for the entire region, despite the situation developing in her home country.

Yesterday, she discussed the effect of the significant cut in the size of the ECB’s balance sheet as she switched her focus to fiscal policy.

“The steady reduction of the Bank’s balance sheet is starting to have a measurable impact on some financial markets, easing stress in some areas and rekindling activity elsewhere.”

The reduced footprint in the market, along with large debt issuance by Eurozone countries, has eased the scarcity of collateral needed by financial market players, allowing for a gradual normalization of repo market rates from extreme conditions, Schnabel told a conference.

“As excess liquidity has declined, we have seen a notable pick-up in market-based funding activity, which has also contributed to reserves circulating from banks with abundant liquidity to those with less liquidity,” Schnabel added.

The European Statistics Office (Eurostat) announced on Thursday that the GDP rose by 0.4 per cent in the Eurozone and by 0.3 per cent in the EU in the third quarter of 2024, compared to the previous quarter.

The report also highlighted employment growth in the Eurozone and EU, noting that the number of people in employment increased by 0.2 per cent in the Eurozone and by 0.1 per cent in the EU in the third quarter of 2024, compared to the previous quarter.

The EU’s two largest economies in Eastern Europe have stumbled as the German economy has faltered.

Poland’s gross domestic product unexpectedly contracted by 0.2% in the third quarter compared to the previous period, after economists had forecast a 0.3% expansion.

In Romania, growth stagnated as weak consumption sapped a raft of government spending on infrastructure and social benefits. However, Slovakia’s economy expanded by 0.3% in the last quarter.

Eastern European economies have relied on domestic consumption as a lifeline to stay afloat as Germany, the region’s main trading partner, is struggling to avoid recession.

The prognosis could worsen if US President-elect Donald Trump follows through on pledges to raise tariffs.

European Central Bank policymakers were divided at their last meeting in October about the risks of inflation coming in too low over a sustained period, according to minutes released yesterday.

The ECB lowered rates in October after also cutting the previous month, its first back-to-back reductions in the current easing cycle, as eurozone growth worries increasingly outweigh inflation concerns.

The Euro continues to suffer, although its rate of fall has slowed this week. It fell to a low of 1.0496 yesterday and closed at 1.0520.

Have a great day!