11 December 2024: Inflation is still a high priority for the Bank of England

Bank of England Governor Andrew Bailey still sees inflation as the prime driver of monetary policy for the MPC. There has been a marked contrast in growth figures over the second half of the year compared to the first, but inflation, particularly in the services sector, is still a concern.

Bank of England economists see headline inflation peaking at 2.75% in 2025 before falling back in line with the 2% Bank’s target.

The rise in Employers’ National Insurance contributions will see prices rise again as businesses try to recoup their additional costs.

“The economy is doing better than expected, but inflation is still too high, and we’ve got to deal with it”, Bailey said in a statement yesterday. The Bank of England faces several challenges, both domestically and within the global economy.

Bailey cited the two most significant of those challenges as the prospect of the new U.S. Administration adding tariffs on imports of finished goods and the effect of November’s Budget.

Rachel Reeves has charged the Civil Service with finding 5% in efficiency savings from within their existing budgets. She told each ministry yesterday that the savings should not come in the form of spending cuts, and any money saved will be retained by the individual departments.

Her comments came after Prime Minister Keir Starmer launched a review of public spending, with findings due in June, as the Labour government faces tough financial decisions to meet economic growth ambitions.

“I have no doubt that we can find efficiency savings within government spending of 5%, and I’m determined to do so,” Reeves said during a visit to a hospital. She said, “Every single pound the government spends will be subjected to a line-by-line review.”

Government budgets are set to be examined by a team of external experts and could bring “difficult decisions” if spending does not meet the government’s priority areas, the Treasury said in a statement Tuesday.

UK public sector workers face fresh pay restraint next year after the Treasury said it would not raise taxes to fund more generous awards, The Financial Times reported yesterday.

The education and health departments said in evidence to independent pay review bodies that anything beyond a 2.8 per cent increase in pay for teachers, NHS staff and doctors would be unaffordable in 2025-26, in the absence of big cuts to other spending. Similar wage guidance will cover prison and police officers, members of the armed forces and senior civil servants.

Unions have been pushing for public sector pay to be brought more in line with the private sector, and they reacted angrily to yesterday’s announcement.

Having complied with the findings of the pay review body when they first came to power, it is now considered highly unlikely that the Cabinet would disregard their latest recommendations.

Sterling saw a moderate rise in a quiet day’s trading yesterday. It reached a high of 1.2778 and closed at 1.2771.

The latest data for Consumer Price Inflation is due to be published later today. It is predicted that headline inflation will have risen to 2.7% year-on-year in November from 2.6% in October. Core inflation, which was at 3.3% in October, is expected to be unchanged.

Outgoing Treasury Secretary, Janet Yellen, said yesterday that she believes that the introduction of tariffs by the Trump Administration could derail the Fed’s ability to bring inflation down to its target of 2% in the medium term.

Her comments at the Wall Street Journal’s CEO Council Summit come as Trump has vowed broad tariffs of at least 10% on all imports, and higher rates on goods from China, Canada and Mexico.

Imposing broad-based tariffs could “raise prices significantly for American consumers and create cost pressures on firms which rely on imported goods”, Yellen said when asked about Trump’s plans.

She also expressed regret that the United States has not made more progress on the country’s deficit, saying she believes it “needs to be brought down, especially now that we’re in an environment of higher interest rates.” The inability to control the deficit, which has ballooned since the Pandemic, has ironically been a major criticism of Yellen’s time as Treasury Secretary.

She joined Jerome Powell in stressing the importance of an independent Federal Reserve too, saying that countries perform better economically when central banks are allowed to exercise their best judgment without political influence.

President-Elect Donald Trump is on record as saying that he would “like at least a say” in the Fed’s decision-making process. It was understood that the incoming Treasury Secretary, Scott Bessent, wanted to create a “Shadow” Monetary Policy Committee, but he appears to have tempered his views recently.

If today’s inflation data comes in as predicted, next week’s FOMC meeting will be expected to leave interest rates unchanged. This is despite a significant increase in the number of Wall Street Banks’ economics teams, who are leaning towards a twenty-five-point cut.

The dollar index is struggling to break the 107 barrier as traders set sell orders at or just below a plethora of commercial sell orders around the 106.80 level.

Yesterday, the index reached a high of 106.64 but drifted back to close at 106.41. Only a significant “miss” to the upside by today’s data will influence the market to rekindle buying interest.

ECB Governing Council Members are becoming increasingly concerned about the Trump Administration’s intentions to introduce tariffs on finished goods imported from the EU.

The Eurozone is preparing for potential U.S. tariffs during Trump’s second term, which could hit key industries in Germany, France, and Italy.

The Institute of International Finance (IIF) estimates that these tariffs may reduce Eurozone GDP by 0.4%. This comes as many European countries are still recovering from the pandemic and facing growing competition from China.

According to the IIF, the economic impact could be “substantial,” particularly for nations heavily reliant on transatlantic trade.

Although Europe is not the major focus of the policy, Trump has given specific reasons why he is targeting China, Mexico and Canada, the imposition of a 10% levy on imports from the region could have a significant effect on its economy.

Germany, the U.S.’s largest exporter in the Euro Area, is facing zero economic growth for the second consecutive year.

The country’s machinery and industrial goods exports could be significantly affected. Italy’s exports in similar sectors are also vulnerable. France, meanwhile, risks a 4% decline in exports from key industries such as aerospace and luxury goods over Trump’s term.

Tomorrow’s meeting of the ECB’s Governing Council is considered 90% certain to cut its key deposit rate to 3% in its third consecutive cut and the fourth overall in the current cycle.

ECB President Christine Lagarde has “got away” with saying as little as possible when reporters have tried to quiz her over the political drama that is playing out in her home country.

France faces months of economic inactivity as Parliament enacts an emergency bill for the 2024 budget to remain in place until either a Prime Minister capable of brokering a deal acceptable to all sides is in place, or elections can be held,

Even when elections are held, there is still a risk that the party with the largest number of seats may not hold a majority. If that were to happen, the entire process would begin again.

Data for French and Spanish inflation is due for publication on Friday. Consumer prices in France have been running below the ECB’s 2% for a couple of months, while in Spain inflation has been around 2.5% as the economy has seen one of the strongest levels of growth in the entire region.

The Euro is unlikely to see much additional volatility if the ECB cuts by twenty-five basis points tomorrow, even as the divergence of monetary policy between Europe and America widens. It will only lose a significant amount of ground if there is a fifty-point cut.

Yesterday, the single currency fell to a low of 1.0498 and closed at 1.0526 as buy orders below 1.05 were triggered.

Have a great day!