17 September 2024: Rates need to be cut but not yet and not drastically

Although he has been quite relaxed about loosening monetary policy, voting for a cut in interest rates at the last meeting of the MPC, he is still cautious regarding inflation.

He has made significant overtures about remaining data-driven, in keeping with his colleagues in Washington and Frankfurt. This could lead to interest rates remaining unchanged at this week’s meeting.

It is fitting that the Governor of the Bank of England should have the casting vote as the Bank’s bias shifts from trying to control inflation to actively promoting growth.

The pivot towards a growth-driven outlook should suit the Chancellor, who may have just been beginning to become concerned that the economy has not seen any growth over the past two months, in fact, since the Labour Party won the July 4th General Election.

The BBC is reporting this morning that Brexit red tape is causing a slump in UK-EU trade and the situation is worsening according to economists.

The Prime Minister has made overtures towards the EU, particularly Germany, and has said that the basis of Brexit will be unchanged even if several “side deals” can be negotiated.

Starmer was in Rome to meet with Giorgia Meloni, his Italian counterpart, yesterday, although they share very few political ideals on the surface.

He wanted to understand the methods Italy uses to deter illegal migration, although crossing the Mediterranean from North Africa to Italy is a totally different proposition from crossing the English Channel between France and England.

UK exports to the EU fell by 27% and imports by 32% in the past year, according to a report from the Aston University Business School in Birmingham.

As Rachel Reeves moves ever closer to presenting her first, historic, budget to Parliament, it is not the lack of growth that will be causing her the most concern, it is the lack of investment firms are making in their businesses.

Business investment has fallen this year and despite positive noises coming from the City of London about Reeves’ efforts to promote investment, very little is happening on the ground”.

The pound gained yesterday as the market came to terms with the diversity in interest rates that is expected to take place this week.

It climbed to a high of 1.3218 and closed at 1.3216.

For the first time since Joe Biden became President, Fed Chairman, Jerome Powell, is facing pressure to decide on an interest rate cut, the size of which he patently does not agree with.

There were significant “bets” placed yesterday on the FOMC voting for a fifty-basis point cut in interest rates at its meeting which begins today and concludes tomorrow.

Powell has constantly been the most hawkish member of the Committee, even though his attitude towards inflation appears to have changed since Jackson Hole.

Some of the market confidence in a “jumbo” cut being agreed upon stems from the fact that the last FOMC meeting was apparently “extremely close” to voting to cut rates and may now be playing catch up with the ECB.

A jumbo rate cut would not be a bad thing for the economy since it would show that the Fed is prepared to be dynamic in its monetary policy decisions, while even the thought of a fifty-point cut has seen the dollar lose ground, even though it would simply “level the playing field” between the U.S. and EU.

The U.S. economy is undoubtedly slowing, and several economists are predicting that over the next three or four months the economy may begin to lose jobs.

Over a similar period, the Fed is expected to cut rates three or four times before pausing to gauge the effect of the loosening of monetary policy. A lot will depend on the size of tomorrow’s rate cut.

The apparent assassination attempt on Donald Trump has not had the same effect as the previous attempt, since the would-be assassin was apparently well-known to the Secret Service, although the fact that he appears to have got close to the Presidential candidate will be a source of further embarrassment to the authorities.

Tomorrow may also mark the final opportunity for the Fed to announce that the economy has made a soft landing, following more than a year when interest rates have remained unchanged.

It has been a considerable time since a Fed Chairman has even come close to declaring a soft landing, so the parameters have become a little blurred.

The dollar lost ground yesterday, testing its recent lows, as traders speculated on the size of the rate cut that will be voted for tomorrow.

The index fell to a low of 100.58 and closed at 100.66.

It is a tough call but given the market’s propensity for selling the rumour and buying the fact, the Greenback may rally even if a fifty-point cut is agreed.

Although the Eurozone economy looks set to have a tough winter which may well see the entire region dip into recession, there is an air of confidence about the ECB since it believes it has made the right calls on monetary policy.

It is unlikely that until inflation restarts its journey towards the Central Bank’s 2% target interest rates will be cut again.

Market observers believe that just one cut per quarter will be agreed upon until inflation reaches 2%, but they do feel that the timetable for that to happen is shorter than the ECB’s.

ECB Chief Economist and one of the two members of the Executive Board that the market relies upon for accurate guidance, Philip Lane, believes that rates should be reduced gradually.

“A gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection,” Philip Lane said in a speech in Luxembourg.

He stressed policymakers should keep an open mind about “the speed of adjustment”, and it would depend on how fast inflation drops and the state of the eurozone economy.

Calls for rate cuts to be deeper and more frequent have been heard from across the entire Eurozone, but it is a testament to the more hawkish members of the Governing Council that they have seen fit to agree to the two cuts that have taken place so far given that inflation has begun to rise albeit marginally.

It is not to the Region’s benefit that the Euro is showing renewed strength despite the cuts that have taken place so far.

A weaker currency would benefit exports, which have been struggling due to the robust competition from China and other Asian countries.

Germany appears to have decided that it must “go it alone”, as far as it can within Brussels’ rules. It stands on the verge of agreeing to close to seven billion euros in deals with Kazakhstan, which span several sectors of the economy, including IT, logistics, healthcare and petrochemicals.

The euro gained yesterday as the market was in something of a turmoil about the size of the U.S. rate cut. The single currency rose to a high of 1.1137 and closed at 1.1132.

Have a great day!