16 September 2024: The Bank of England is not certain about cutting rates this week

Despite it having become fashionable within G7 economies to loosen monetary policy, it is not certain that the Bank of England’s Monetary Policy Committee will the Bank of Canada, the ECB and the Federal Reserve by cutting interest rates.

Having cut once already, it will take a change of mind by one of the five members of the committee who voted to cut at the last meeting. With inflation having picked up recently and expected to continue to rise as Autumn turns to Winter, it is believed by the market that Andrew Bailey may be the most likely “candidate” to show a more hawkish attitude.

If he is to “practice what he preaches” and be driven by the data, Bailey may well be concerned that the “flames of inflation” will be fanned by another rate cut.

The economy is no longer the fastest growing in the G7, a fact that is not lost on opposition MPs, and although there are rumblings of an impending contraction in GDP, that could become a recession, given the expected tightening of fiscal policy in next month’s budget, the situation is not so dire as to demand an immediate rate cut.

In a joint letter to the Financial Times, eight senior economists have raised concerns that cuts to public spending expected to be announced by Rachel Reeves in her budget could damage the “foundations of the economy”.

Part of Reeves’ new regime will be a switch to a current budget rule, which targets day-to-day spending rather than government investment. She believes this would mark a break from a “short-term approach that disregards the importance of public investment”.

With the Office for National Statistics revealing last week that the economy flatlined in July for the second successive month, Reeves may be considering just how tough she can be to set the country on what she believes to be a path to solid, sustainable growth.

This Government wants to break the values that other Labour Governments have stood for in the past by partnering with the City to grow investment but appears to be abandoning its traditional voters, especially by doing away with the winter fuel allowance that the last Labour administration introduced under Tony Blair and Gordon Brown.

Last week, the pound reacted to market consideration about the changes to monetary policy by both the Federal Reserve and the Bank of England this week.

Having challenged the 1.30 level versus the dollar in the early part of the week, it rallied to close at 1.3123.

It is by no means clear that Jerome Powell agrees with several of his colleagues on the Federal Open Market Committee, that the fight with inflation has been won, and the economy needs looser monetary policy to continue to grow.

Powell’s stated objective over this year has been to see job creation moderate. He was quoted in the Spring as saying that he would not be overly concerned if the headline rate of new jobs contained in the monthly employment report turned negative.

In the run-up to his speech at the Fed’s Jackson Hole Symposium, the market began to believe that this would be a “watershed moment” as the Fed began to loosen its grip on the economy.

The minutes of the last FOMC meeting showed that a vote to cut rates was extremely close, and it may well have been only Powell’s demand that rates should remain unchanged that carried the vote for no change.

A cut at this week’s meeting is now “baked in” with even the most hawkish of Powell’s colleagues believing that cuts should begin, although it is unlikely that there will be a cut at every meeting for the rest of the year and beyond.

Since Wednesday’s announcement is considered a foregone conclusion, the market in typical fashion has already moved on to considering what will happen at subsequent meetings.

Given that most traders are judged on their performance on a year-by-year basis, they are prepared to allow next year to “look after itself “for now and concentrate on the final two meetings of this year that are scheduled for November 7th and December 18th.

The minutes of Wednesday’s meeting will be eagerly awaited to provide some sign of just how prepared the FOMC is to provide what may be an inflationary boost to the economy.

It has been made clear by at least two Wall Street Institutions, J.P. Morgan and Morgan Stanley, that they feel it is time to “let the brakes off to avoid a recession that they believe is coming in the next year to eighteen months.

Although Powell strenuously denies any political influence over his decision-making, he will undoubtedly have one eye on the Presidential election, its effect on the economy going forward, and his role in the new administration.

The dollar was buffeted by the thought of a fifty-point rate cut last week. It fell to a low of 100.89 and closed at 101.11.

Once the die has been cast by the Fed later this week, the market will begin to consider the effect of looser monetary policy on G7 economies, and the dollar may well be boosted by some strong tailwinds.

Now that it has embarked on a course of looser monetary policy, the ECB has provided anecdotal evidence that the fight with inflation has come to an end, it can now begin to focus on what other actions it needs to take to provide the economy with sufficient to avoid a recession.

It was telling to note that ECB President Christine Lagarde believes that the “Draghi Plan” which was published last week, will be left to individual Eurozone members to decide how much or how little of the plan they choose to implement.

Given that the review was “ordered” by European Commission President, Ursula von der Leyen, is it possible that the two have contrasting views of the future path for the region?

Lagarde appears to have “toughened up” her stance concerning inflation, while von der Leyen is more concerned about growth.

Having been elected to serve a second term in office earlier this year, von der Leyen is setting about the task of creating a legacy.

Although ECB President Christine Lagarde emphasized that future rate decisions will be data-driven, with no predetermined paths for cuts, analysts generally believe that interest rate cuts will continue.

“All eyes will be on the likelihood of another 25-basis point cut being announced as early as October,” said economist Antonio Villarroya at Banco Santander, Spain’s largest lender.

The risk of the economy overheating due to further rate cuts appears low, suggesting that another rate cut before the end of the year is highly likely.

Other market practitioners believe that the ECB may well cut once per quarter from now on, thus giving it time to assess the effect of earlier cuts before making any decisions.

When the ECB, The Fed and the Bank of England have begun cycles of rate changes in the past, they have been fairly predictable, hiking or cutting at regular intervals, and in similar increments, giving the market suitable advance notice,

The current situation is unclear since each of those economies is predicted to slow down and maybe even contract over the next fifteen months.

The euro has rallied following last week’s rate cut as the market sees that it is concerned about growth as well as inflation.

It reached a high of 1.1101 and closed at 1.1075.

Have a great day!