22 July 2024: Haskel remains a hawk until the end

Jonathan Haskel has been a member of the Bank of England’s Monetary Policy Committee for six years. Before his elevation, inflation was unpredictable and continuously at its lowest level for over fifty years.

Then, as Haskel joined and Andrew Bailey succeeded Mark Carney as Governor, events took a far more significant and volatile turn.

The Pandemic saw the economy come close to collapse before massive fiscal support was agreed upon by the then Chancellor of the Exchequer, Rishi Sunak, which included the furlough scheme.

As inflation rose, the Bank was concerned that unemployment would rise, as jobs would become scarcer. In actuality, the opposite was true and the unprecedented levels of support that was provided saw demand skyrocket and the Bank was forced, in December 2021 to begin to increase interest rates in an attempt to quell price rises.

Haskel is about to leave the MPC next month and in his final speech as a member, he tried to absolve himself and his colleagues from blame for the rise in inflation to a high of 11.5% last year and the soaring cost of living that it spawned.

The first “charge” he faced was that the Bank delayed its hike in rates for too long, and this caused the spike in inflation that has taken until relatively recently to return to its target level.

Haskel told his audience that there was concern among members that unemployment would rise exponentially, and a rate hike would simply accentuate the issue. It was December 2022 before it became clear the employment levels were, if anything, recovering far more quickly than had been anticipated.

Furthermore, the Bank of England was the first G7 Central Bank to raise its base rate of interest.

It is a matter of conjecture whether the incremental rate increases should have been front-loaded to drive inflation down. Both the Federal Reserve and the ECB took this path and in both, inflation is still higher currently than it is in the UK.

Haskel maintains that the Bank was a virtual victim of circumstances, due to the massive increase in the cost of energy and basic foodstuffs that was spawned by the Russian invasion of Ukraine.

He went on to say that he will not be voting for a rate cut at the upcoming MPC meeting since he believes that there is still the potential for a surge in “secondary effects” due to the continued elevated level of wage increases.

It was rumoured over the weekend that Rachel Reeves was close to agreeing to a 5.5% wage increase for public sector workers, including teachers and NHS staff. Should this happen, it would undoubtedly see inflation rise and would also cause a significant hole in the Government’s spending plans.

Although there was no firm commitment to public sector wages in the Labour election manifesto, it had been assumed that the “offer” would be between 1.5% and 2%. A 5.5% increase would cost in the region of three billion pounds for teachers and the NHS staff alone.

The pound had a rollercoaster ride last week, rising to its highest level for a year against the dollar, and seeing a major correction.

It rallied to a high of 1.3044 and closed at 1.2913.

President Joe Biden announced yesterday that he was standing down as Democrat Party nominee to fight the election that is due to take place in November. He supported the candidacy of his Vice President, Kamala Harris, for the nomination, a move that was supported by Bill and Hillary Clinton, but curiously not by Barack Obama, the last Democrat to be elected President.

In his statement, Biden said that it had been a “great honour” to be elected President and had made the decision to stand down in the interest of the Democrat Party and the country.

The announcement draws to a close an extraordinary month in which Biden showed that he no longer had the mental acuity to continue as President given his stumbling performance in a live televised debate, saw an assassination attempt on his opponent Former President Donald Trump and culminated in Biden accepting the wishes of more than thirty Democrat members of Congress and standing down.

Despite being Vice President for three and a half years, little is known outside the U.S. about Harris. Currently, she is given little hope of defeating Trump in November but vowed to “earn and win” the Democratic nomination at the Convention in a month.

Meanwhile, Donald Trump has laid out some of his plans for the economy should he be elected, and they have caused a great deal of confusion.

For example, he plans to impose a 10% tariff on all imports and a 100% levy on all imported vehicles. Yet also plans to lower prices for consumers.

Military spending will increase while personal taxation will be lowered and the U.S. national debt, which is at record levels, will be paid down.

The dollar will be intentionally weakened, which will also increase the cost of imported goods, while also lowering living costs.

In short, he intends to build a wall around the U.S. which will not only keep illegal immigrants out but just about anything that is not marked “made in the USA”.

Output data is due for release this week, with both manufacturing and services PMIs expected to keep their recent strength, leading to a rise in the composite rate to 55.2 following a 54.8 read last month.

The dollar index saw a fall to test its medium-term support level last week but saw an aggressive bounce. It initially fell to a low of 103.65 but rallied to close at 104.34 as the market lost faith in the possibility of a rate cut happening next week.

Ireland has had far more influence over the ECB’s monetary policy decision-making process over the past few years since its former Central Bank Governor is not only the Central Bank’s Chief Economist but is also favoured to take over as the Bank’s Vice President.

The current Governor of the Irish Central Bank, Gabriel Makhlouf, spoke last week of his opinion that the ECB needs to be in no hurry to decide when the next cut in interest rates may take place.

Makhlouf believes that the level of wage increases is a significant threat to the Bank’s inflation fight.

He feels that the Bank has allowed itself to be drawn into economic concerns that will disappear as soon as a rate-cutting programme is put in place.

The economy is showing signs of a significant recovery, and unless it shows signs of a dip into recession, the ECB can delay its next cut until the Autumn.

Lane has become a major “sounding board” for the market in recent months, as his profile has risen to such an extent that commentators how to look to him, and his colleague Isabel Schnabel, for sound bites about monetary policy.

The ECB is trying hard to create a level of suspense that it is simply not capable of doing, given its overall hawkish attitude to monetary policy.

No one seriously considered a rate cut to be a possibility at last week’s Governing Council Meeting and now, as the majority of Committee members “disappear” for their annual holidays., they will have ample opportunity to contemplate Christine Lagarde’s “promise” to the markets that it will not have to wait until inflation falls to the ECB’s 2% target before cutting rates again.

Inflation has become a factor in the global economy, which means that the ECB is unlikely to be able to cut interest rates close to zero, as they were before the Pandemic, given the significant increases in output and productivity that are expected to be driven by AI.

Debt is growing into a major issue across the entire Eurozone. Although there is some capacity in the corporate market remaining, household debt is now at an uncomfortable level, while it is no secret that Brussels is “very concerned” about government debt in some of the region’s larger economies,

In recent weeks, the Euro threatened to rally above strong resistance close to the 1.10 level versus the dollar but eventually succumbed to the substantial number of sellers who placed orders around that level.

It reached a high of 1.0948 but fell away to close at 1.0883 and U.S. and Eurozone monetary policy divergence still is in place.

Have a great day!