1 August 2024: Hunt accuses Labour of “betrayal”

Former Chancellor of The Exchequer, Jeremy Hunt, “did the rounds” of TV and radio current affairs programmes and his message was one of defiance.

Chastened by Rachel Reeves’s accusation that the Conservative Government knowingly left a twenty-two-billion-pound black hole in the country’s finances, Hunt “came out swinging”.

He spoke of his “disappointment” that Reeves labelled him a liar, saying that it discredits politics when people call each other liars. “I thought more highly of Rachel Reeves”, Mr Hunt added as he described feeling insulted.

Hunt expressed surprise that Reeves claimed to be unaware of the state of the country’s finances because she had access to the independent Office for Budget Responsibility’s (OBR) judgements from the time of the March Budget and was also entitled to ask questions to the Treasury’s most senior civil servant.

Those public finances were audited by the OBR just 10 weeks before the election was called.

Reeves, who also interviewed journalists yesterday, defended her decision to accept the pay review board recommendations, commenting that it would have been almost unprecedented if she had refused to do so.

The government usually accepts the recommendations (although they are not legally binding) but it is common for the government to reject some of the recommendations.

Indeed, Hunt himself rejected the board’s recommendation in 2014, that all doctors and dentists should receive a 1% pay rise. This was at the height of the austerity programme.

Reeves must have been expecting some form of response from Hunt, and he took full advantage of the opportunity to tell voters that he and his colleagues had told them that a Labour Government would begin to raise taxes at the earliest chance it got.

Reeves has pledged that income tax, National Insurance and VAT would not be increased in her first Budget that will be presented to the House of Commons in October, but she was unable to say the same about inheritance tax, capital gains tax or the pension cap.

Later this morning, the Bank of England’s Monetary Policy Committee will conclude its regular meeting, with the market far from certain about whether there will be a loosening of monetary policy.

There are signs that Britain could finally be in store for an end to the 16-year high base rate of 5.25 per cent. With inflation now at the Bank of England’s target of two per cent, economists have been clamouring for a cut to interest rates.

Sterling was subdued yesterday as the market awaited the MPC’s decision. It briefly rallied to a high of 1.2863 and closed at 1.2857.

As expected, the Fed’s rate-setting FOMC voted to leave interest rates unchanged at its meeting, which concluded last evening.

However, its chairman Jerome Powell gave the broadest indication yet that a cut will be made in September, provided things “stay as they are”.

He told reporters that policymakers are getting closer to lowering interest rates, possibly as soon as September, if conditions warrant, as policymakers ended a two-day meeting.

The decision was made after the publication of the latest data showed inflation cooling in June. Powell’s favourite inflation indicator, the headline personal consumption expenditures (PCE) price index, ticked lower to 2.5%. However, the core price index, which excludes food and energy and is the Federal Reserve’s preferred measure of inflation, remained unchanged over the month.

Despite several bumps in the rapid which encouraged Powell to comment that the fall in inflation would not be linear, the FOMC has been moving inexorably towards beginning its cycle of rate cuts since the start of the second quarter, when it became clear that inflation was declining.

Wage increases in July, which will form part of the employment report, due to be published tomorrow, are expected to have declined to 3.7% following June’s figure of 3.9%.

It has now been twelve months since the FOMC announced what was at the time labelled a pause in its cycle of rate hikes. Powell quickly informed the market that the cycle had ended, which saw the clamour for a rate cut gradually increase.

Over the ensuing twelve months, regional Fed Presidents who make up roughly half of FOMC members have reacted to data releases, occasionally flip-flopping in their degree of “dovishness” regarding an easing of monetary policy.

It seems that they now have “their ducks in a row” as Powell confirmed that if the data keeps looking good, the central bank could lower interest rates when it next meets on September 17-18. He did add one caveat that he is looking at the “totality” of the data.

The dollar index lost ground as the market showed that it is now convinced that a rate cut is approaching, it fell to a low of 103.93 and closed at 104.06.

Even when the rest of the Eurozone is performing relatively well, the German economy still casts a massive shadow over the whole of the region.

In what is likely to be the first of several such announcements, the Hungarian Finance Ministry cut its predicted growth forecast for the rest of the year yesterday, citing the “German situation”.

Following disappointing second-quarter GDP data, which showed that any momentum that had been found since the start of the year had evaporated, the s estimate for full-year growth was cut from 202% to 1.5%.

Even to reach that reduced target, the Hungarian economy will need to see a marked improvement in output and activity.

France, the second-largest economy in the Eurozone also published second-quarter growth figures yesterday. They showed that inflation-adjusted growth climbed 0.3% in the second quarter compared to the previous quarter.

The rise in domestic demand was encouraging, but the political tensions caused by the General Election and its subsequent result may make the data for the third quarter less encouraging.

Spain is currently the undoubted star of the Eurozone, having published year-on-year growth of 2.9% in the second quarter. It is closely followed by Italy and, somewhat surprisingly, Ireland as the rest of Northern Europe continues to “catch a cold from Germany’s sneezes”.

The number of jobless people in Germany was reported at over 2 million in July, amid persistently sluggish economic growth. High unemployment could hit the country’s social welfare system, affecting the country’s budget surplus. The number of unemployed last month was 192,000 higher than in July last year. Compared to June, the unemployment rate rose by 0.2 percentage points to 6%.

With the country’s summer holiday season in full swing, the data was expected to be weak given the number of temporary workers who have chosen to take their annual break now. However, the year-on-year data should take that into account, leaving the economy in need of the stimulus that a series of interest rate cuts would achieve.

The days of being concerned about inflation have now ended, and the German Finance Ministry is in desperate need of support.

The Euro rallied to a high of 1,0854 yesterday following relatively dovish remarks from the FOMC meeting. However, it ran into some selling pressure, eventually closing at 1.0827.

Have a great day!