20 December 2024: The MPC leaves rates unchanged as expected

The Bank of England’s Monetary Policy Committee voted to leave rates unchanged at its final meeting of the year, which concluded yesterday. The vote was 6-3 with the three dissenters voting for a cut. They were “perma-dove” Swati Dhingra, Dance Ramsden, the Deputy Governor for Markets and Banking, and the Committee’s newest member, Alan Taylor.

At his two earlier meetings, Taylor had voted with the majority.

In his press conference following the meeting, the Bank of England Governor, Andrew Bailey, said the central bank needed to ensure inflation returns to the target level on a “sustained basis”.

“We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year,” he said.

This sentiment is similar to that of Fed Chairman Jerome Powell the previous day.

New projections from the MPC showed that economic growth will be lower over the final three months of 2024 than it had previously predicted. It was now expecting zero gross domestic product (GDP) between October and December, weaker than the 0.3% growth it had forecast in November.

Bailey said the level of uncertainty in the economy had risen since the Budget as concerns have become greater across all sectors.

Rachel Reeves was yesterday accused of ‘outright falsehood’ over her claims about Labour’s handling of the economy.

The Chancellor was mauled by former Bank of England official Andrew Sentance over her response to figures showing inflation climbed to 2.6 per cent in November, an eight-month-high, amid increasing evidence that the party is derailing Britain’s recovery.

Elsewhere, a slump in UK manufacturing and the announcement of store closures by retailer Shoe Zone were both blamed on Ms Reeves’s Budget in October.

Ms Reeves claimed in response to the inflation figures that she had protected working people by not hiking ‘their national insurance’ – even as she staged a £25bn raid on national insurance contributions by employers.

But Sentance, a former member of the MPC, said: ‘How can the Chancellor say this with a straight face? It is an outright falsehood.

Sterling continued its fall from the previous session. Traders see the 6-3 vote as a dovish shift by the Committee, even as Bailey said that future cuts would be gradual.

It fell to a low of 1.2500 and closed at 1.2503. Versus the Euro, the pound tumbled to a low of 1.2057 and closed at 1.2059.

The U.S. economy will end the year in a much healthier state than was expected last January.

Inflation may have cost Democrats the election, but the U.S. economy has powered through 2024 with better-than-expected growth. And now President-elect Donald Trump is poised to inherit it.

GDP rose at a 3.1% annualized pace in the third quarter of the year, according to Commerce Department data released yesterday, after growing at a 3% rate in the second quarter, a rapid pace for an economy of the size of the U.S.

That growth, fed by steady consumer spending, comes alongside a still-low unemployment rate of 4.2% and much-improved inflation, which has fallen below 3%.

“I feel very good about where the economy is,” Federal Reserve Chair Jerome Powell told reporters on Wednesday. “I expect another good year next year.” 2025 will mark his final full year as Chairman of the Fed.

However, the surging economy could also make it harder for the Fed to get inflation back down to its 2% target. The healthy GDP numbers have come alongside strong productivity data, more economic activity doesn’t have to put upward pressure on prices if the economy can produce enough to keep up but also stalled progress on inflation.

Powell noted that the policymaking Federal Open Market Committee was “discussing how tariff-driven inflation can affect the economy,” offering at least a certain logic to the paradox of cutting rates while raising inflation forecasts.

He noted the economy’s resilient end-of-year strength, as well as forecasts for solid growth in 2025 and beyond, but cautioned that inflation would remain sticky, the job market would continue to cool and policies expected from President-elect Donald Trump would add uncertainty to anyone’s near-term forecasts.

In the wake of the announcement on Wednesday evening, the Dow Jones index, the widest market for equities in the U.S. fell by more than eleven hundred points as Powell signalled a more cautious approach to rate cuts next year.

The economic equivalent of the boy who cried wolf is just two days away, as Congress is yet to sanction a rise in the debt ceiling to allow the Treasury to continue to fund the budget.

This has become a regular occurrence, seen as a method of Congress pushing the Administration into reforms it wishes to see happen.

There will be talk of “eleventh-hour agreements” and “dragging the decision back from the brink”, but one day there will be a calamity which will see federal departments shut down with serious consequences for the economy.

The dollar continued its rally yesterday, although it was a little more “controlled” than the frenzied buying which took place following the FOMC announcement and statement of monetary policy.

It climbed to a high of 108.49 and closed at 108.41.

The Eurozone economy is staring into the abyss. There is hardly a measure of political or economic health that points to anything other than a slow, painful slide into stagnation.

The elections that are due to be held in France and Germany are unlikely to bring anything other than more stalemate, but the rise of the Right is concerning analysts who are concerned about the rise in “radical” politics.

In both The Netherlands and Italy, there has been a significant shift to the right, but the sky hasn’t fallen as was predicted. Giorgia Meloni the Prime Minister of Italy has led a government that has proved itself to be a “good European”, while Geert Wilders, despite his occasional “firebrand” outbursts, is considered to be doing a good job.

The German economy has shrunk by around 0.2% this year, according to a forecast from the Institute for Macroeconomics and Economic Research in Düsseldorf.

IMK estimated in its previous analysis that the German economy would end up with zero growth this year, but is now downgrading its estimate. The institute is also downgrading its forecast for next year from 0.7% growth to 0.1% growth.

A report published yesterday shows that fewer German companies are struggling to fill vacancies due to labour shortages than a year ago. It will take several months for the expected exodus of Syrian nationals who work in specific, skilled sectors to harm the labour force.

According to most Governing Council members, inflation is no longer considered a significant danger. There is a marked disagreement between the ECB’s most respected voices on the economy. Isabel Schnabel and Philip Lane agree that rates should continue to be cut, but their target is different.

Lane feels that rates should be cut to a level where they support growth, but Schnabel is concerned that cutting below what is commonly called the neutral rate, which neither stimulates nor restricts growth could see inflation rise again with the ECB powerless without raising rates, which would send the wrong signal to the market.

Having seen the final rate-setting meetings in the G7 take place over the week, the message is clear; Inflation is not dead yet, and rate cuts will proceed with greater caution. The ECB, Fed, BoJ and BoE are also concerned about the effect of the threatened tariffs on U.S. imports of finished goods.

The euro managed to stabilize a little yesterday after Wednesday’s precipitous fall. It closed at 1.0368 having fallen to 1.0347 earlier. There was some buying interest early in the day, driving the single currency to a high of 1.0422, but sellers soon emerged, pushing it back to challenge its lowest level in two years.

Have a great day!