19 June 2024: The base rate is currently set in stone

The Bank of England’s Monetary Policy Committee meets tomorrow, and the result of its deliberations is for the base rate to be left unchanged.

The votes for a cut in rates will come from “each side” as they did at the meeting in May. Swati Dhingra has voted for a cut at the past three meetings, while Dave Ramsden, the Bank’s Deputy Governor for Banking and Markets also voted for a cut for the first time last month.

Comments from members of the Committee since the last meeting have been few and far between, indicating that the Bank’s position on monetary policy is “set in stone”.

That attitude is unlikely to change until there is a material fall in the level of inflation or the economy takes a significant turn for the worse.

The news that the economy flatlined in April, while significant to the hopes of the Conservative Party of winning the upcoming election, won’t have any effect on the voting intentions of MPC members.

Since the publication of the Party manifestos, the entire campaign has fallen even flatter than it was already if that were possible.

Labour doesn’t dare to dream of the size of the majority if that were possible, while the Conservatives appear, in private at least, to have accepted their fate.

Even the radical intentions of Reform UK have become more staid even if they are no more believable.

The City of London still holds significant weight in the levels of growth and activity in the economy. The Financial Services Sector is functioning below its optimum level, even if the Stock Exchange has regained its position as the largest in Europe.

Mergers and acquisitions activity is not growing substantially, while banks appear content to “tread water”, a possible consequence of Brexit. In the past, they have been far more proactive in playing an active role in driving growth and activity, but that deal-making verve appears to have disappeared.

In the past, The City and Labour have had a fraught relationship, but with Rachel Reeves courting City Executives and discussing Labour’s plans with them in advance it is hoped that once the election is out of the way, the new Government will be more actively supported.

The pound is still in a narrow range and continued its rally yesterday. It climbed to a high of 1.2721 and closed at 1.2709. While it is between 1.2685 and 1.2795 it is likely to remain directionless, driven mainly by commercial flows as major investors “keep their powder dry.”

A resilient economy and too-high inflation argue for a patient approach to adjusting monetary policy, Federal Reserve Bank of Boston President Susan Collins said on Tuesday.

Collins was joined by Federal Reserve Bank of Richmond President Thomas Barkin agreed with Collins’ view. He needs to see more progress in bringing inflation sustainably down to the central bank’s 2% annual target before considering changing interest rates.

In a day of multiple FOMC members and Fed officials with speaking engagements, the message was made loud and clear; the Fed will remain patient until inflation is defeated.

It is unclear if Fed Chair, Jerome Powell, wants inflation to reach its 2% target before agreeing to a rate cut, but he is clear that he doesn’t want to risk a resurgence following a cut in the Fed Funds rate.

The third member of the hawkish “gang of three”, Neel Kashkari, The President of the Fed Reserve of Minneapolis, believes that it is “reasonable” for the economists to predict that the first cut in the Fed Funds rate won’t take place until December.

Last August, when the FOMC agreed to halt its programme of rate hikes, the odds that it would be close to eighteen months before the Fed felt the need to change monetary policy again would have been very long indeed.

While it was realistic for the market to expect inflation to begin to fall given the restrictive level of interest rates, for its fall to become a “crawl” the economy adjusted to the level of interest rates has been wholly unexpected, prompting fears that for the rate of deflation to reach the Fed’s target a further hike may become necessary.

Retail sales increased at a slower-than-expected pace in May as high interest rates and inflation continued to weigh on consumers.

Retail sales increased by 0.1%, less than the 0.3% economists had expected but higher than the 0.2% decline seen in April, according to data from the Commerce Department.

Preliminary output data from S&P, due to be released on Friday, is the only tier-one data due for release in the rest of the week.

While output is well above the watershed level of 50, it is expected that both services and manufacturing PMIs will have moderated slightly this month.

The dollar index is currently lacking drivers to push it to test its next level of resistance and has consequently drifted lower.

Yesterday, it fell to a low of 105.13 and closed at 105.27.

Both core and headline inflation were unchanged in May. Headline inflation was at 2.6% while core inflation was at 2.9%.

The comments from members of the ECB’s Governing Council that have been made since they voted for a rate cut almost predicted that the rate of deflation would slow to a standstill.

While recent activity data was supportive of the rate cut, Christine Lagarde was likely giving an honest appraisal of the economy when commenting that the next rate cut would be several meetings into the future.

It may well be that by the end of the year, all three of the Fed, ECB, and Bank of England will have cut rates only once each.

The expected path of interest rates has had a significant bearing on currency values in the first half of this year, and despite the possibility that there will be no further changes in monetary policy, save for a single cut from the Bank of England, possibly in September, it will likely remain a singular driver.

In France’s upcoming legislative elections, it faces threats to its EU membership from political extremes on both the left and right. While Emmanuel Macron has tried to forge even closer ties between Paris and Brussels in his term and a half in office, neither of the more radical wings of political aspiration share his opinion.

The left is unhappy with the treatment of French farmers whose livelihood has been threatened by the EU agreeing to increased quotas for the import of foodstuffs from outside its borders, while Marine Le Pen’s “National Rally” Party is concerned about immigration levels.

Ironically, should National Rally win the election, it may well assist the UK since a way of stopping illegal immigration via small boats has so far eluded its Government.

Should France “turn right” it would encourage that arm of politics to make further inroads, since following the EU Parliamentary elections the right has already made substantial gains. With Italy and Hungary already governed by right-wing parties, a more radical and protectionist era may be developing.

The euro made further gains yesterday, based primarily on commercial flows. The possible crisis in the French economy has not, so far, led the market to express its concerns.

The single currency rose to a high of 1.0761 and closed at 1.0740.

Have a great day!