19 September 2024: If not today, when?

The Bank of England’s Monetary Policy Committee is overwhelmingly expected to leave rates unchanged when it announces the outcome of its latest meeting at 11 am this morning.

The latest inflation data showed that while headline inflation remained at 2.2% in August, core inflation rose from 3.3% to 3.6%. This is expected to be sufficient to encourage at least one MPC member, probably the Bank’s Governor, Andrew Bailey, to change his vote from “cut to hold”.

Bailey has been absent from the “airwaves” over the past month, so it is difficult to gauge his view accurately. The last time he spoke in public was four weeks ago when he told the market that the threat of persistent inflation had eased in the wake of the decision to cut rates by twenty-five basis points.

In light of the Fed’s decision to begin loosening policy yesterday, the market may be feeling a sense of deja vu. When rates were rising following the end of the Pandemic and inflation was rising due to the level of fiscal support that was pumped into economies, the Bank of England “slipped behind the curve” by maintaining a constant stream of twenty-five-point cuts, while the Fed and ECB were far more proactive.

Research sponsored by Tesco, the supermarket that is Britain’s largest private sector employer, and conducted by the Social Market Foundation, a think tank, estimates that about 14 per cent of Britain’s working-age population is not in a job but would like to join the workforce.

According to The Times newspaper, this includes the 1.86 million who are “officially” unemployed and the almost four million who are considered “economically inactive.”

Getting a proportion of this cohort back into work would add up to 15% to the nation’s economy, a figure that is unlikely to be missed by Rachel Reeves.

Train Drivers have accepted a pay deal that will end two years of industrial action.

ASLEF, the drivers’ union, accepted an offer which will see them receive 5% backdated to 2022/23, 4.75% for 23/24 and an ongoing increase of 4.5%.

This above inflation settlement is bound to be contrasted with the withdrawal of the pensioners’ winter fuel allowance and add to the criticism that the Labour Government is still controlled to a certain extent by the Trades Union Movement.

The pound reacted to the Fed’s monetary policy decision by rallying to a high of 1.3297, but it quickly ran out of steam and closed at 1.3213.

The market will begin to assess the economic effect of a decision to leave rates unchanged as it begins to pivot from considering inflation to growth.

The FOMC showed a high degree of proactivity yesterday by voting 11-1 to cut the target for Fed Funds by fifty basis points. The only dissenting voice was that of Fed Governor Michelle Bowman.

This was notable since it was the first time in more than twenty years a member of the Board of Governors voted against a policy change.

In his press conference following the meeting, Fed Chair, Jerome Powell, commented that the US economy is in decent shape. “It’s growing at a solid pace, inflation is coming down, and the labour market is in a strong place. We want to keep it there.”

The official statement began, and recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but is still low. Inflation has made further progress toward the Committee’s 2 per cent goal but remains somewhat elevated.

It is interesting to note that despite inflation having risen marginally over the past two months, the FOMC felt comfortable in loosening policy by fifty basis points.

Powell was at pains to emphasize that this “jumbo” cut did not set a precedent, and the Committee remains committed to being data-driven.

The interest rate futures market is already discounting another fifty points in rate cuts before the end of the year, although it is likely to come in two twenty-five-point tranches.

Powell’s reference to the fact that both inflation and employment have cooled is notable since it shows that the FOMC has pivoted away from concerns about inflation and wants to see employment stabilize.

He did not refer to a soft landing for the economy, but it must be considered that if one is going to happen, it already has.

The dollar index had something of a mixed day. A knee-jerk reaction to the fifty-point cut saw it fall to 100.22, but it recovered to end the day at 100.92 just a few pips lower on the day.

The opening in Asia has been positive, with the index making a high of 101.50 before settling back to around the 101 level.

The German economy needs a “Draghiesque” injection to inspire confidence. A report published on Tuesday by the influential ZEW Institute located in Mannheim showed that the current situation in Germany weakened to -84.5 in August, down from an already weak read of -77.3 in July.

Future expectations are also weak, with sentiment falling to 3.6 from 19.2.

Sentiment is no better in the Eurozone as a whole, with sentiment falling from 17.9 to 9.3.

Meanwhile, inflation fell to a three-year low in the run-up to the ECB’s latest rate cut, which it announced last week.

Headline inflation fell to 2.2%. Although the ECB does not expect price increases to be solidly below its target rate of 2% before the end of next year, the fact that it has cut rates twice while inflation appears to have “stuck” again shows that at least some notice is being taken of the dire state of the economy.

Bundesbank President, Joachim Nagel, continues to make surprisingly hawkish overtures. In a speech yesterday, he commented that Eurozone inflation is still not as low as the European Central Bank would like, so interest rates need to remain sufficiently high to resolve price pressures.

While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5%.

A key issue is that wage growth is still rapid and could put upward pressure on private consumption, and thus prices.

Nagel’s words contrast with calls from Ministers in Giorgia Meloni’s Government for interest rates to be cut further, calling the ECN “timid”.

The European Union is still digesting the report written by former ECB President Mario Draghi on the measures he believes are necessary to revive the competitiveness of the Eurozone.

While his report holds some uncomfortable truths of the leaders of the Union, some radical steps need to be taken to drive the economy forward.

The Euro initially rallied to a high of 1.1189 on news of the rate cut in the U.S. yesterday but quickly settled back to close at 1.1118. By contrast, it has lost ground, falling to a low of 1.1068 in early Asian trading this morning.

Have a great day!