13 January 2023: Bailey decries BoE role in climate

The Bank of England, its hands full dealing with rising prices while trying to stave off the worst effects of the coming recession, is not in a position nor does it have the mandate to create any policies that are specifically designed to create greener financial markets.

Andrew Bailey is in accord with the Chairman of the Financial Reserve in believing that Central Banks are not arbiters of their own destiny, despite their desire to be given the independence and autonomy to work within broad guidelines.

The Managing Director of the IMF, Kristalina Georgieva welcomed the plans put in place by Chancellor Jeremy Hunt having been greatly concerned by the approach of his predecessor Kwasi Kwarteng.

However, Ms Georgieva believes that the UK is going to face a sobering 2023 as it faces potential crises on several fronts.

In a statement that was delivered by the Parliamentary Treasury Select Committee, she told MPs that she believes that the fiscal plan is adequate to deal with the effects of battling inflation while protecting household incomes during a recession that in the main has been created by the energy crisis that is ongoing.

The Chairman of the Committee expressed her displeasure that IMF officials had declined to testify before MPs. She comments that it was unsatisfactory that the IMF offers commentary to journalists, but is not prepared to follow up with appearances before elected officials.

The relationship between the Government and the IMF is a little strained given the ongoing criticism of the decision to leave the European Union. It said at the time that in a global economy in which partnerships and cooperation are vital, it is not the time for a major contributor to that economy to choose to go it alone.

Next week, traders will finally receive some tier one data to enable them to understand what is happening to the economy. On Tuesday, the January employment report will be published. That is expected to show a rise in the claimant count, while on Wednesday inflation data will be released.

Having already seen food inflation rise to record levels, the MPC will be bracing itself for more pressure to continue to tighten monetary policy.

Wednesday will also see the release of retail sales data, which will provide an early barometer of the state of the economy.

The pound is likely to remain in its current range today, with no fresh drivers until the release of the data next week.

Yesterday, it rose a little versus the dollar, reaching 1.2246 and closing at 1.2214.

The December inflation report was released yesterday. It was in line with expectations in that both core and headline inflation fell, but the fall was unlikely to be sufficiently significant to satisfy an FOMC that remains hawkish and cautious.

The fall in headline inflation to 6.5% from 7.1% may be temporary, since the oil price has begun to creep up again as inventories are being built and the markets are considering a rebound in the Chinese economy following its dropping of Coronavirus restrictions.

The wholesale price of gas also appears to have bottomed out, although the relatively mild winter that has been seen so far in Europe may dampen demand.

Core inflation continues to fall, but again it’s pace won’t generate too much excitement at the Federal Reserve. With short term interest rates having been considered restrictive for at least a couple of months, the Central Bank is fully entitled to expect to see a great fall in the level of core inflation.

A rise of fifty basis points in the fed funds rate is now pretty much baked in, although there may be some members of the FOMC who see another jumbo hike of seventy-five basis points as necessary since the fall in inflation is not happening quickly enough.

While Jerome Powell remains cautious regarding the rate of the fall, he must also be mindful of the view that several economists still hold that there is a significant risk of the Fed tipping the economy into recession.

Having been immensely critical of President Trump when classified papers were found at his home, President Biden appears to have committed the same crime.

While full details are yet to emerge, if they are found to be true, it will be immensely embarrassing for the incumbent President.

The dollar index is still mired at the lower end of its recent range.

Yesterday, it made a new low of 102.07 and closed at 102.25 as traders remain unsure about when the Fed will begin to taper interest rate increases.

There has been plenty of positivity lately surrounding the merits of monetary union, with the IMF at the forefront of congratulating Brussels for welcoming Croatia into the fold.

However, the Union still has the propensity to stumble from crisis to crisis. While the gap between crises appears to be widening, the fact that Ursula von der Leyen and her colleagues seems more willing to breathe a sigh of relief rather than put steps in place to ensure that the issue doesn’t raise again is slightly worrying.

Until there is a fiscal union, there will continue to be spats between members of the Governing Council regarding monetary policy. The primary causes of the disagreements between members are the rate of inflation that is used to determine short term rate increases and the level of debt that has been taken on to support individual economies recover from the ravages of Coronavirus or to simply improve social welfare.

It is just as well that The President of the European Central Bank, Christine Lagarde, is a seasoned politician, since she is likely to require all her undoubted experience to deal with individual views on monetary policy.

The Governors of the Central Banks of Spain and Portugal are in total opposition regarding interest rates increases. Pablo Hernández de Cos the Head of the Banca de Espana believes that short-term interest rates still have a long way to travel, while the Head of the Banco do Portugal, Mario Centeno commented yesterday that he believes that rate increases are coming to an end.

Naturally, both Governors are speaking from the point of view of their own economies, but such concussion does not generate confidence in the entire Union.

The big hitters of Germany, France, and Italy appear to have the greatest say in overall monetary policy, but there is a lack of cohesion there too.

France appears to be on the fence, while Italy accepts that rates will continue to rise, but their Government rails against the policy.

The euro is gaining more respect since the belief is growing that the EU as a whole will manage to avoid a recession this year.

The single currency rose to a high of 1.0867 yesterday and closed at 1.0852 and is looking far less vulnerable.

Have a great day!