Economy reached pre-Covid in February

The Bank of England’s Monetary Policy Committee meets this week, and rather unsurprisingly, the meeting has, yet again, been labelled as crucial.

Ask just about any market commentator, and you will receive a different answer about what the Central Bank needs to do this week. On the face of it, there are just two options; hike or pause. That is obvious, but behind the decision is the MPC member’s views on what is important to a ensure that the Committee adheres to its goal to support price stability, while boosting growth

If the vote is for another hike this week, it will go some way towards presenting a tough stance on rising inflation but will dent the prospect of GDP recovering and reaching its expected level in 2022.

If the MPC decides to pause, having hiked at the last two meetings, the economy will receive a boost, but inflation will be in danger of getting out of control.

As far as inflation goes, the bank could allow price rises to continue while their source remains on the supply side of the economy. It will only be when a wages/prices spiral begins.

The MPC’s decision is further complicated by the Chancellor’s Spring Budget that will be presented on March 23rd and the twin headwinds of the increase in the energy cap and the rise in National Insurance contributions

It had been expected that the end of Coronavirus restrictions would have led to a rebound for the economy, but the conflict in Ukraine has thrown all planning into turmoil.

When he presents his Spring Budget, Rishi Sunak would have been expected to begin to tighten the country’s purse strings, but with no end in sight to the rise in energy prices, he may be forced to delay or at least postpone some of his measures.

The Bank of England Governor, Andrew Bailey, will have been in close consultation with Sunak, but the fact that there are independent members of the MPC means that their compliance cannot be guaranteed.

Last week, the market was highly volatile with the conflict dominating risk appetite, with the knock-on effect on currencies.

The pound traded between 1.3246 and 1.3027, closing at 1.3035.

The data highlight of this week will be tomorrow’s release of employment data for February.

Recent results have been positive, but that is expected to end after the latest figures. The Claimant count is expected to have fallen by around 30k, while average earning should remain around 4%.

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Will the Fed’s switch come too late?

This week, the Federal Reserve will confirm its move from provider of economic support to inflation fighter.

It is expected that the Central Bank will hike rates by twenty-five basis points.

While there remain FOMC members who favour front loading rate hikes by beginning with fifty basis points, it is expected that the conflict in Ukraine will drive an element of caution.

Having announced a raft of sanctions, including an immediate ban on imports of Russian oil, the U.S. economy won’t be as badly hit as that of the Eurozone or the UK.

The latest figures show that U.S. imports of Russian oil amount to around 8% of the total, so that won’t have such a significant effect. However, the rising global oil price has seen a significant increase in forecourt petrol prices. This has led to expectations that inflation could rise above 10% in the coming months.

This could lead to a change in attitude from the Central Bank, although the Fed Chairman, Jerome Powell, has said recently that he favours twenty-five basis points while cautioning that there may be a need to be more aggressive down the road.

The rising fuel price is hitting growth in the economy in several ways. Airlines are scaling back on flights, trucking firms are adding fuel surcharges, while less considered service businesses are also suffering.

It is fair to say that the current level of inflation is leaving the Fed with no good choices this week.

It will hike by twenty-five basis points, but inflation will continue to rise. The past two or three employment reports have been extremely positive for the economy, but the next one to be released on April 1st will be closely watched for rising earnings.

The year-on-year on year number rose above 5% in February and that is likely to have risen further this month.

Last week, the dollar index resumed its seemingly unstoppable rally towards 100.

It hit a high of 99.41, but drifted back to close at 99.11

Lagarde may have to work hard to save the single currency

The flames of concern about the long-term viability of the single currency are again being fanned, this time by the varying concerns driven by the conflict raging in Ukraine.

The eastern states are most heavily concerned about their security, while the more stable and established economies like Germany, France and The Netherlands are most worried about their growth prospects for 2022/23.

The Pandemic is now on the back burner, despite continued concerns about pockets of new infections while energy prices occupy most Government’s minds.

The inability of the European Union to speak with one voice, weakens it considerably, particularly in the eyes of Vladimir Putin.

Last week, The Russian President received a joint call from Olaf Scholz and Emmanuel Macron, but the outcome was disappointing. It is unclear if Germany and France are representing their own people, or whether they have a mandate to speak for the entire EU.

The ECB meeting last week turned out to have a more hawkish outcome than had been expected.

The scaling back of official support will begin sooner than had been expected, although Christine Lagarde refused to be drawn on when the first interest rate hike would take place.

There were echoes of Lagarde’s predecessor, Mario Draghi, at Lagarde’s press conference. She came close to repeating Draghi’s words, in pledging to do everything in her power to ensure the survival of the euro

European Union President Ursula von der Leyen has again been conspicuous by her absence since the conflict has raged virtually on her doorstep.

Lagarde repeated her determination that scaling back of support will take place gradually, and in an oblique reference to fuel prices told reporters that the ECB cannot fill the pipelines with gas.

Last week, the euro traded in a wide range, but ended up close to unchanged. Having fallen to a level close to its medium term target the previous week, the single currency recovered to reach a high of 1.1121, the fading hopes of a negotiated settlement in Ukraine saw it fall back to close at 1.0910, seeing it continue four consecutive weeks of lower closes.