22 September 2023: Have interest rates peaked?

At the meeting of its latest Monetary Policy Committee meeting which concluded yesterday, the Bank of England paused its cycle of rate hikes that has lasted since December 2021.

In his press conference which followed the decision, Andrew Bailey the Bank’s Governor spoke of the committee’s desire to stamp down on inflation while still being aware of the consequences for the economy of continual rate hikes.

The vote reflected the marginal nature of the decision. Jon Cunliffe, the Deputy Governor for Financial Stability broke from the “groupthink” of his colleagues and voted for a hike, but his vote was offset by independent member Swati Dhingra who voted for a pause.

The three other independent members voted for a hike.

Recent weak PMI data along with a stalling housing market are believed to sway the dovish result, as well as the fall in inflation that was reported this week.

AS with other G7 Central Bank meetings that have taken place recently, the question now is “where do we go from here?”

Given the longevity of the cycle of hikes it is now considered probable that unless there is a sustained rise in inflation that rates have now peaked. It was always believed that the final meeting of this quarter would provide a watershed moment for the committee, and so it has proved.

Having been the first to embark on the rate hike journey, the Bank of England is now expected to be the first to begin to introduce rate cuts. The market is predicting that the first cut will take place in the first quarter but will have more to do with economic weakness than continued falling inflation.

With reports suggesting that the UK will have one of the lowest growth rates in the G7 in 2024, the MPC is going to face renewed pressure to cut rates now that it has taken the first step.

Jeremy Hunt, the chancellor of the Exchequer welcomed the pause, commenting that the plan is working, although he now faces the challenging task of presenting his final Autumn Statement of this Parliament that has seen three Prime Ministers.

He is certain to be unable to deliver any tax cuts in November as both he and the Prime Minister opt to commend their economic record to voters rather than deliver any potentially vote winning strategies.

The pound reacted poorly to the MPC’s decision to pause. It initially fell to a low of 1.2235 against the dollar but recovered a little to close, still lower on the day, at 1.2297.

Jerome Powell, the Chair of the Federal Reserve clearly wanted to impress his continued hawkish view of interest rates on his audience when he delivered the news that the FOMC had voted to again pause its programme of rate hikes.

He impressed two things upon the gathering of journalists. First that the FOMC is not yet able to confirm that the programme has ended and second that he and his colleagues don’t see there being any opportunity for a cut in rates for a significant period.

Naturally, the speculation about when a hike will take place began immediately with a “significant period of time” being interpreted as some time in the third quarter of 2024, although a lot will depend on the country’s economic performance over the next six months or so.

The second pause in three meetings was predicted by Powell at previous appearances so no one should believe that the FOMC is now finished since inflation, as far as Powell is concerned, is not yet defeated.

He agreed that the Fed has come “very very far” in bringing inflation down as he reiterated that his main priority is now a soft landing for the economy. This is a notable change from his previous rhetoric in which lowering inflation was his goal.

In also “pouring cold water” on market speculation over when the first cut in rates would take place, the FOMC’s publication of its longer-term expectation for interest rates over the next three years showed that not only will the first hike not take place yet, but the pace of subsequent cuts will also be gradual.

Of course, this comes with the caveat of the economy performing as expected over the ensuing period.

The outcome of next year’s Presidential Election will clearly have some bearing on the economy.

The dollar index continued its recent rise yesterday, climbing to a high of 105.73, but it was unable to hang onto its gains and fell back to close barely changed at 105.38.

The focus will switch again to economic data releases with the September employment report not due for two weeks, the market will have plenty of time to absorb the FOMC decision and its ramifications.

The minutes of the meeting will be published on October 11th.

Now that the three major monetary policy meetings are over for another month the market, having been starved of comments from Central Bankers for a significant period, will hang on every word that is uttered to gone some insight into what will happen at the next meeting of the Governing Council and if an end to the ECB’s cycle of rate hikes is imminent.

It is believed that the hawks won’t relinquish the stranglehold on monetary policy until inflation is much closer to the target of 2%.

Bundesbank President, Joachim Nagel, who studiously avoided any reference to his voting intentions in the run-up to last week’s meeting, returned to type yesterday by calling for the ECB to do all in its power to avoid inflation becoming ingrained in the Eurozone economy.

He clearly believes that rate hikes should continue since inflation is only falling at a “moderate pace.” He also believes that the 10th consecutive rate hike won’t be the last.

Two other Central Bank heads came out and expressed their views on a range of monetary policy related topics yesterday.

Belgian Central Bank Governor Pierre Wunsch believes that there is no need to reintroduce the minimum rate on deposits by Eurozone Banks. The ECB reduced the rate that it pays on bank’s deposits with it to zero in part to recoup its losses on bond holdings that run into several hundred billion Euros.

Wunsch feel that it is not the purpose of wider monetary policy to reduce the losses of the ECB.

Wunsch’s Irish counterpart also spoke yesterday. His topic was the likelihood of further rate hikes. He believes that a further hike is already seen a “probable” at the next ECB meeting unless there is a significant drop in headline inflation, which would entail a major fall in the oil price.

Finally, Fabio Panetta, the Italian representative on the ECB’s Executive Board spoke of his view that a fiscal union is long overdue and would “level up” The Eurozone’s Defense spending which is currently handled by member nations individually.

The euro should be receiving support from the fact that the FOMC and MPC both paused their programmes of interest rate this month. The fact that it continued its recent fall yesterday, reaching 1.0617 should concern anyone still bullish about the prospects for the common currency. It did get a little relief from gains made late in the day which dragged it back to close at 1.0659.

Have a great day!