9 December 2024: Four cuts in ‘25 may not be enough

Last week, Andrew Bailey said that the Bank of England’s Monetary Policy Committee will agree to cut interest rates four times during 2025. Market analysts believe this may not be enough to drive growth and improve output in the economy, since interest rates will still be restrictive for a year.

Swati Dhingra, the most dovish of the Committee’s independent members, spoke over the weekend of her view that the Bank of England needs to cut interest rates more quickly as its policy stance is still very restrictive and is hurting living standards, business investment and potentially longer-term productivity.

“A combination of several factors, weak consumption, weak investment and possible damage to supply capacity, is what I would worry about. And that’s why I think we should be easing policy more,” she told Bloomberg.

Dhingra has been a member of the MPC since August 2022 and has been a constant voice for lower interest rates, either wanting to slow the tightening of monetary policy or voting for regular cuts as inflation has fallen,

She first voted for a rate cut in February, six months before most committee members agreed with her.

Outside of emergencies like the COVID-19 pandemic, she backed a “gradual” approach to changing rates, a sentiment she shares with Bailey. The next meeting of the MPC is on December 19th.

The market does not believe that Dhingra will see sufficient support for a rate cut since inflation, particularly in the services sector, remains “sticky”.

She also feels that the UK has an opportunity to work closely with the new U.S. President, despite Donald Trump’s threat to impose tariffs. She believes that the products and expertise that the UK exports to the U.S. are more essential than “nice to haves” and often cannot be replicated by U.S. factories and laboratories.

MPC member Megan Greene said on Thursday that Britain might have to choose between closer ties with the European Union and the United States.

She also pointed to a weak supply side of the UK economy and high services inflation, which is still “stubbornly” elevated, largely driven by wage growth. Greene expressed concern that wage growth has not fallen as quickly as she hoped, adding to inflationary pressures.

Some economists have said that Britain might enjoy cheaper imports and lower inflation if U.S. tariffs lead to Chinese exports being diverted to Britain.

Dhingra said that in the longer term, she feared any benefit from this would be outweighed by damage to economic productivity caused by disrupted supply chains and pressure on some British businesses to avoid Chinese suppliers.

This week, the NIESR will publish its report on the level of growth in November. It is expected to be unchanged from the October report, which showed that GDP only grew by 0.1% last month.

The pound saw a level of volatility that is uncommon for this time of the year, as market activity generally slows in December as traders protect the profits they have made in the year,

It traded between 1.2811 and 1.2613 closing a little higher on the week at 1.2739.

Following last week’s plethora of speeches and comments from FOMC members, this week their voices will fall silent as the “blackout” on Committee members speaking about their voting intentions ten days prior to a meeting will begin.

U.S. hiring bounced back in November, with employers adding 227,000 jobs as the adverse toll on payrolls from two Southeast hurricanes and worker strikes largely reversed.

Despite this, the unemployment rate rose from 4.1% to 4.2%, the Labor Department said Friday.

The market’s prediction was, for once, quite close, as observers and economists estimated that 215k new jobs would be created.

Job gains for September and October were revised up by a total of 56k. September’s tally was upgraded from 223k to 255k and October’s, from 12k to 36k. The changes paint a modestly brighter picture of the job market in late summer and early Autumn than previously believed.

The market’s fear of an imminent and continuous fall in job creation will have been assuaged by the data. While the number of jobs created in November was encouraging, the reason for the poor number in October has been accepted by the market.

Strikes at Boeing and smaller plane makers reduced October employment by 38,000 and the return of those workers should have boosted last month’s payrolls by a similar number, according to market analysts.

The question is still, “How will this affect the voting intentions of FOMC members who will meet to decide the path for interest rates into the New Year” on December 18th.

If the NFP data is going to be the definitive gauge, particularly since Jerome Powell has said many times that while job creation remains “healthy” the Committee needs to be in no hurry to loosen monetary policy further, the odds are now against a rate cut this time.

By the time of the next meeting, Donald Trump will have been installed in the White House, with all the added burdens on the Federal Reserve that will bring.

Powell told investors recently that the U.S. federal budget is on an unsustainable path. Debt is not at an unsustainable level, but the path is unsustainable, and we know that we must change that,”

He warned the nation is running “very large budget deficits at a time of near full employment and robust growth. We don’t need to pay the debt down. We don’t need to balance the budget. We just need the economy to grow faster than the debt. And that’s not happening,” Powell said.

Powell, a lifelong Republican first appointed to lead the Central Bank by President-elect Trump and reappointed by President Biden, has repeatedly warned the U.S. is on an unsustainable fiscal path.

There is no tier-one data due for release this week, in what is likely to be the last full week of trading for the year.

Last week, the dollar index rallied, closing a little higher at 105.98 following its significant fall in the previous week.

While consumer confidence is still extremely weak, consumer spending has at last begun to pick up as inflation has fallen over the past three months.

A rate cut at the next meeting of the ECB’s Governing Council, which takes place later this week, is considered certain, although the size of the cut is still open to discussion.

Traditional hawks like Isabel Schnabel and Robert Holzman have already said they favour a twenty-five-point rate cut. However, it is not just the more dovish members of the committee who favour a fifty-point cut, but several of the “moderates” also believe the time has come to accelerate the pace at which monetary policy is loosened.

The fall of the Assad Regime in Syria may see the pressure on migration created by the surge in migrants crossing into Europe via Turkey reduced considerably, although the level of concern over the stability of the region may reduce the amount of support that the Euro has gleaned from the risk on / risk off attitude of the market.

Russia and Iran are the big losers from the regime change in Syria, and how they both react will be keenly observed by traders and investors.

The economic outlook has darkened considerably over the past two weeks as political turmoil has erupted in the Eurozone’s two largest economies.

The expected cut in rates will be the third at successive meetings. The ECB is increasingly focused on spurring lending to boost consumer spending and business investment in the 20 countries that use the euro.

This will be the fourth cut in the current cycle and will take the key deposit rate to 3% or possibly 2.75% if the doves have their way.

Closer relations between the UK and the EU will boost economic growth, Chancellor Rachel Reeves will tell European finance leaders later today.

In the first address by a British chancellor to the Eurogroup since Brexit, Reeves will say resetting relations means “breaking down trade barriers” as well as helping “businesses sell in each other’s markets”.

While Labour has ruled out rejoining the bloc, it has repeatedly said it wants the UK to “deepen ties” with the EU.

At the Eurogroup finance ministers meeting in Brussels, Reeves will propose building a “mature, business-like relationship” between Britain and the EU.

“We know that the last few years have been fractious,” she will tell her European counterparts. “Division and chaos defined the last government’s approach to Europe. It will not define ours.”

She will say: “I believe that a closer economic relationship between the UK and the EU is not a zero-sum game. It’s about improving both our growth prospects.”

The Euro retreated again last week as the U.S. employment report saw the expected divergence in monetary policy between the U.S. and the Eurozone widen.

The euro fell to a low of 1.0460 but recovered to close at 1.0563.

Have a great day!