23 July 2024: Dhingra is “canvassing hard” for a cut

Former Chancellor, Jeremy Hunt, has hit back at Rachel Reeves’ comments that the economy the Labour Party inherited was at its weakest since World War Two.

Hunt believes that Brexit has not left such an “indelible mark” on growth and output that it needs to be renegotiated with Brussels. Hunt acknowledges that the Conservative Government “made mistakes” particularly in handling the Pandemic when it can be accused of indulging in “groupthink”.

When faced with a set of circumstances, Governments need to act decisively, not just considering one area of expert opinion.

Similarly, the permanent members of the Monetary Policy Committee are currently indulging in their version of Groupthink. Other than Dave Ramsden, the Deputy Governor for Markets and Banking, the other four members have voted as a group for a considerable time, particularly when interest rate hikes need to be paused or cuts need to take place.

It is the independent members of the Committee who appear to have the ability to “think outside the box”.

Nonetheless, it is difficult for commentators on the financial markets to imagine that when two experienced economists like Swati Dhingra and Jonathan Haskel are handed identical information regarding growth, output, productivity, and inflation they would come to such opposite opinions.

In the end, it presumably comes down to a subjective view of the importance of each piece of data and its consequences in the entire “picture”. However, it is a factor that members of the Committee are “naturally” Doves or Hawks about monetary policy, and their opinions are driven by that basic view.

Swati Dhingra is a “natural” dove, having been calling (and voting) for a cut in interest rates almost since the Bank of England agreed a pause almost a year ago.

Having not seen her goal achieved after a year, and the economy beginning to pick up pace as inflation has fallen, particularly since the start of the year, she would change her view, but due to her fundamental dovishness she still votes for rates to be cut.

Her colleague, Catherine Mann, holds the exact opposite view, but over the past couple of meetings, she has tempered her “hawkishness” to vote for no change in interest rates.

Next week’s meeting of the MPC is expected to keep rates unchanged. There is a growing possibility that a cut will be agreed upon, but the majority of the market believes that September’s meeting will be the one when a cut is announced.

Sterling is currently being driven by monetary policy expectations on both sides of the Atlantic. Yesterday, it rallied to a high of 1.2924, after two days of losses, closing at 1.2932.

It has become that time of year when seemingly unimportant news stories suddenly take on great importance due to the lack of genuinely market-changing data or input from Central Bankers.

Added to the general sense of tauper that is beginning to envelop the market, is the blackout that happens immediately before an FOMC meeting has begun.

In normal circumstances, the next week would be fuelled by speculation over next week’s interest rate decision, but most commentators are either on holiday or contemplating their annual break.

It is too early to begin to speculate what the economic effect of Kamala Harris winning the Presidential Election in November, other than to imagine that she will have similar policy initiatives to outgoing President Joe Biden.

It is natural to expect Former President Trump, given his radical views on most things, so there will be a “shake up” of the economy, but concerns are growing that not all his “initiatives” will be positive.

Trump says that he will end the “inflation nightmare”, but by November, most economists expect the nightmare to be over and the Federal Reserve to be “well into” a cycle of rate cuts.

Trump may “over egg the pudding”. His views on tariffs as the way of dealing with everything that ails the economy are scary, particularly for the FOMC.

When asked to comment on Trump’s plans to add at least a 10% tariff on all imports when he testified before the Senate Finance Committee last week, Fed Chairman Jerome Powell initially tried to dodge the question, saying that it is policy not to comment on election pledges.

However, when pressed, he spoke in general terms about prices rising meaning a rise in interest rates, or at the least a pause in rate cuts.

Stock analysts are trying to decide what strategies will do best under a Trump administration, driven mainly by opinion polls that predict a handsome victory for the Republican candidate, who holds a 59% versus 39% lead over his Democrat Party rival.

The dollar index will also be expected to stay in narrow ranges before next Wednesday’s rate decision. Yesterday, it reversed its slight gain from Friday, falling to a low of 104.17 and closing at 104.30.

ECB President, Christine Lagarde, has spoken since last week’s meeting of the Bank’s Governing Council about how the next meeting, due to take place on September 12th will be open to all possibilities.

By making these comments, she is also confirming her neutrality over the decision.

On the surface, she believes that the ECB will have far more data about the path of inflation by then and will be able to make a data-driven decision.

It is expected that almost the entire Governing Council will be retreating to Tuscan Villas or the Côte d’Azur in the next week, sound bites will be few, and far between for the next month.

Lagarde told reporters recently that the Council is scrutinizing three elements of the economy closely. Wage growth, corporate profitability and productivity are the three components on which a policy decision will be based.

If that data confirms the disinflationary process that is at work at the moment, it will reinforce our confidence in returning consumer-price growth to the 2 per cent goal in late 2025, as currently envisaged, Lagarde said.

Last month’s cut in interest rates is seen as “dipping a toe in the water” which has so far been little more than a “drop in the ocean”, to use another aquatic metaphor.

When rate cuts begin in earnest, most likely in September, the market is expecting at least another seventy-five basis points to be shaved off the ECB’s main refinancing rate.

Isabel Schnabel, one of the two “dependable” voices of the ECB’s Executive Board, spoke recently of her view that there won’t be a great deal of divergence in monetary policy between the Federal Reserve and ECB, which will mean that the currencies will be driven more by growth than comparative interest rates.

If that is the case, the U.S. is far further along the path than the ECB, which should favour the dollar.

Yesterday, the single currency rose in thin trading to a high of 1.0902 and closed at 1.0891.

Have a great day!