14 November 2024: Mann repeats her rate rhetoric

In a speech earlier this week, Huw Pill, the Bank of England’s Chief Economist, made an interesting point about a matter that has been exercising his colleagues for decades.

The UK has a history of needing higher interest rates than its G7 partners to tame inflation and even now, that phenomenon is seen as the MPC grapples with wage levels that are still above the inflation rate.

Pill’s colleague on the MPC, Catherine Mann, has for some considerable time voted against cutting interest rates until it is clear that inflation is no longer a factor in the economy.

She has often coined the phrase “secondary inflation” to express her concerns. Secondary inflation refers to the second-round effects of inflation, which occur when the effects are passed on to wage and price setting. This can lead to a wage-price spiral.

While the threat of a wage-price spiral no longer appears to be a threat, the pace of disinflation has slowed as wages have exceeded inflation and the pace of price increases has fallen.

Mann cast the lone vote against cutting borrowing costs at a meeting of the BoE’s Monetary Policy Committee last week which decided by an 8-1 margin to lower the Bank Rate to 4.75% from 5%, she also opposed an initial rate cut in August.

Her reasons for dissenting make perfect sense, but they contrast with those of her independent MPC colleague Swati Dhingra.

Dhingra began voting for rate cuts almost as soon as inflation began to fall. Her reasoning also appears to be sound. She recently said that the Base Rate needed to become less restrictive now to enable a smooth and gradual transition in the policy stance and to account for lags in transmission.

CPI inflation had been on a firm downward trajectory for some time. Data developments remained consistent with CPI inflation staying sustainably at target, given the further easing in the labour market, continued falls in inflation expectations and forward-looking indicators of pass-through, and the subdued outlook for demand,”

Neither Mann nor Dhingra subscribes to the notion of being data-driven. Both look at future trends in growth and inflation and are prepared to make judgements based on what they consider to be sound economic theory.

Both make their opinions seem like facts. Mann commented yesterday that we have an upside bias to inflation, which tends to enable inflation to become embedded, and in that environment, it’s important to hold (interest rates) for longer.”

Given the pace that inflation has fallen from double figures just a few months ago, to close to the Bank’s two per cent target now makes it hard to agree that it is embedded, but no one publicly challenges such comments, which makes them become even more accepted.

The pound lost ground again yesterday as the dollar continued its post-election rally.

It fell to a low of 1.2696 and closed at 1.2704. The Euro is suffering even more than the pound. Consequently, the pound has made advances versus the single currency, yesterday reaching a high of 1.2027 and closing at 1.2028.

Several FOMC members have emerged for the enforced news blackout which is mandatory ten days before its rate-setting meeting to caution about rising inflation.

CPI data published yesterday showed that the headline rate of inflation rose to 2.6% in October from 2.3% in September. There was better news for the core rate, which remained unchanged at 3.3%.

Dallas Fed President Lori Logan said yesterday that it’s “best to proceed with caution,” noting that “if we cut too far, past neutral, inflation could return and the FOMC could need to reverse direction.”

Kansas City Fed President Jeffrey Schmid, speaking at the same conference, said, “It remains to be seen how much further interest rates will decline or where they might eventually settle.”

Logan went on to say the Fed Funds rate is now “right at the top” of the estimated range of the neutral rate of interest where the cost of money acts neither as a headwind nor a tailwind for economic growth.

Neel Kashkari, the President of the Minneapolis Fed, is one of the few FOMC members who are prepared to stand out and give his opinion on the changing outlook for the economy based on both the data and his interpretation of it. Kashkari is not a voting member of the FOMC this year.

He said yesterday that he is confident inflation is headed down, noting that data released minutes earlier ‘confirms’ that downward path.

He does not think inflation is stuck above 2%, pointing to the decline in goods inflation, the slowdown in wage growth, and the expected but slow-moving decline in housing-related inflation as new and lower leases get folded into the data.

There has not been a Fed President or Governor who has expressed concern over the significant fall in job creation that occurred in October.

The Fed is expected to cut interest rates in December and continue this recent trend into the New Year with four additional cuts. This isn’t a guarantee, however, according to Kashkari.

The rise in CPI in October was in line with analyst’s forecasts. It had already risen in September when the FOMC ushered in a “jumbo” fifty basis point rate cut.

Although Kashkari is confident of another rate cut in December, it may become a more difficult “sell” should inflation rise again this month.

The dollar index is now well above its high for the year and is beginning to look ripe for a correction as traders look to take profit on long positions. Yesterday, it rose to a high of 106.77 and closed at 106.74.

Olaf Scholz, the embattled German Chancellor, has been told by several of his closest advisers that he needs to cut the official prediction for growth in the economy for 2025. It may well lead to an admission that the country will fall into recession.

Germany is expected to be particularly hard hit should President-elect Trump follow through on his threat to introduce tariffs on finished goods imported into the U.S.

Gross domestic product is set to increase by just 0.4% at most in 2025, the Council of Economic Experts predicted in a twice-yearly report published on Wednesday in Berlin. While other forecasters have also scaled back earlier growth projections, that’s just a fraction of the 1.1% predicted by the government a month ago.

Surveys point to poor sentiment, particularly after the election of Donald Trump in the US and the collapse of Germany’s government. Bundesbank president Joachim Nagel warned earlier that Trump’s threatened trade levies risk derailing the economy and could cost 1% of German economic output.

The weakness of industry and the duration of the weak phase suggest that the German economy is being held back by structural problems as well as cyclical ones, one member of the Council suggested.

Germany’s suffering is making other Eurozone members look good by comparison, although the next largest economy, France, is also suffering for similar but not identical reasons.

France suffered earlier in the year from political turmoil, but a disaster was averted when the centre and left joined forces to thwart Mare Le Pen’s right-wing National Rally Party.

The New French Prime Minister, Michel Barnier, is no stranger to tough negotiations since he was formerly the EU’s Chief Brexit Negotiator.

The trade accord that the European Union wants to strike with the Mercosur bloc of South American nations would be “disastrous” for French farmers, Prime Minister Michel Barnier said in Brussels on Wednesday, saying it should not be passed against his country’s will.

Barnier spoke after meeting European Commission President Ursula von der Leyen and Trade Commissioner Valdis Dombrovskis, who are pushing to wrap up a free-trade deal that has been a quarter of a century in the making and to which France is implacably opposed.

France is most concerned about the impact that this agreement would have on entire sectors, like livestock farming,” Barnier said, highlighting the concerns of French farmers over competition from what they see as cut-price and low-quality Argentinian and Brazilian beef.

Barnier’s concern is echoed by French President, Emmanuel Macron, who held up the deal in January and managed to delay any further talks until after the summer.

The Euro made a new low for the year yesterday, falling to a low of 1.0557 and closing at 1.0562 as the dollar’s surge continued.

Have a great day!