10 September 2024: Unions call for a U-turn over winter fuel payment

Senior members of the Cabinet face a tough time trying to “sell” the cut in the Winter Fuel Allowance for Pensioners to both their Backbench colleagues and the Trade Unions.

Chancellor, Rachel Reeves faced an angry meeting with MPs last evening, many of whom are dissatisfied that they are having to convince their constituents of why a Socialist Government, which is historically dedicated to supporting the less able in society, is “picking the pockets” of a sector that is the least able to defend itself.

Keir Starmer spoke over the weekend about having to make tough choices due to the parlous state of the country’s finances he inherited.

However, he made many speeches during the election campaign, promising to support the vulnerable if he was elected Prime Minister.

Yesterday, the Leader of the country’s largest trade union and one of the Party’s biggest benefactors, Unite, told the reporters the government should “do a U-turn”. In contrast, the Head of the PCS union said it was a “misstep” which needed to be “put right”.

Employment data will be published today. It is expected that the claimant count will have seen a significant fall, while average earnings have continued to moderate.

Members of the Monetary Policy Committee will be concerned that a fall from 5.4% to 5.1% in average earnings is sufficient to ward off the threat of secondary inflation down the line.

With the latest inflation data due for publication the day before the next MPC meeting, an interest rate cut still hangs in the balance. Headline inflation rose by 0.2% to 2.2% in July. A similar increase for last month may convince any “waverers” to delay a further cut for a month, particularly as seasonality becomes a factor.

The pound fell to a low of 1.3068 and closed at 1.3074 yesterday, as the U.S. employment data lowered market expectations of a fifty-point cut in the Fed Funds Rate next week.

It fell below its short-term support level, and it may well test its medium-term support, between 1.3010 and 1.3030, should the data point to a further loosening of monetary policy.

With a cut in interest rates almost certainly to be delivered by the FOMC at its meeting next week, and the size of the cut now likely to be twenty-five basis points after the reasonably positive August Employment Report, investors will be turning their attention to what will happen to monetary policy over the rest of the year.

The Fed will break from tradition next week by cutting rates even though the economy is performing well. The level of interest rates has so far moderated rises in GDP.

Jerome Powell will be concerned that a series of interest rate cuts between next week and the end of the year could reignite inflation, over which he would have little or no control.

Powell may also be concerned about the effect of the Presidential Election, which is now just over six weeks away.

Although he has been strenuous in his comments that the FOMC will remain apolitical during the campaign, the FOMC meeting after next week will be held on the day following the vote.

Members of the FOMC, now in the blackout period before the next meeting, have been making realistic comments about monetary policy, realizing that their mandate now should make them perform a pivot away from price stability that has been, more or less, achieved and concentrate on job growth which is beginning to falter.

The beginning of any pivot in monetary policy is difficult since it often involves a judgment call about whether the previous cycle has both run its course and had the necessary effect.

The level of interest rates that has remained unchanged since July 2023 has driven inflation down while only recently affecting job creation.

Two further twenty-five basis point cuts, at the final two meetings of the year, will see interest rates and the year at 4.5%. This would be above earlier market expectations, but at a level which is considered correct for the current economic environment.

The dollar index saw a positive reaction to the August Employment Report. It rallied to a high of 101.70 and closed at 101.64.

Although an interest rate cut at this week’s meeting of the ECB’s Governing Council remains in the balance, the meeting is being considered by the market to be little more than a warm-up act for next week’s FOMC meeting which is expected to have a far greater impact on the global economy.

The market is becoming immune to the machinations of the Hawks, who will only agree to a loosening of monetary policy if they are 100% convinced that it won’t lead to a rise in inflation.

Even the normally pragmatic ECB Chief Economist, Philip Lane, is in two minds, recently arguing for another rate cut to allow the Eurozone economy to receive some stimulus, while also saying that the two per cent target may never be met.

As already mentioned, a change in the focus of monetary policy is always difficult, but this is doubly so in the case of the ECB due to its overly cautious attitude to inflation.

Even Germany, which is almost certainly in recession already, is far from certain to vote for a rate cut later this week. It does appear, however, that the “man in the street” is becoming more conscious of the country’s recently acquired label of the “sick man of Europe” and, despite trying to shift the blame elsewhere, wants to see the economy flourish again.

Several members of the Governing Council believe that they were “railroaded” into agreeing to a rate cut in June and are determined to let that happen again.

The data points to the need for a rate cut, but there are still those willing to ignore that and concentrate on their theoretical views that a rate cut could reignite inflation and lead to inflation never reaching its target.

Ex-ECB President Mario Draghi officially presented his report on the state of the Eurozone Economy yesterday. In it, he called for eight hundred billion to fund what he called “radical and rapid reform” to stop the region from falling behind the other two industrial behemoths, China and the U.S.

“Never in the past has the scale of our countries appeared so small and inadequate relative to the size of the challenges,” Draghi wrote in the report for European Commission president Ursula von der Leyen.

He spoke of the need for unity within the region to show that the entire purpose of the Eurozone was to move forward with one voice, facing challenges as they present themselves.

The Euro slipped yesterday, falling to a low of 1.1033, although it is still attracting some buying interest as it approached the watershed level of 1.10. It closed at 1.1034 with traders taking a neutral view ahead of this week’s monetary policy decision.

Have a great day!