24 June 2024: The rate vote was again “finely balanced”

The Bank of England decided, in what was described as a “finely balanced decision”, to leave interest rates unchanged at the meeting of its Monetary Policy Committee last week. This was the seventh consecutive meeting at which rates remained on hold.

The decision was made despite the headline rate of inflation falling to the Bank’s target of 2% in May. Although Andrew Bailey had said previously that if inflation were shown to be “on a clear path lower”, the Committee would be able to consider cutting rates.

The fact that rates were not cut last week is a sign that the May fall may have been a one-off, with the figures for this month possibly showing that inflation has “bottomed out” and could already be beginning to rise.

The “official” reason for the decision was that the Committee is still concerned about the level of “services inflation”, a term that has not been used by Bailey before, and the data showing that wage increases are still at a level that is well above the rate of inflation.

It is possible that the Committee was concerned that the public may have considered that a cut last week would show a degree of political bias towards the Conservative Party, although given the way the polls are looking, it would take more than a rate cut to inject any positivity into Rishi Sunak’s campaign.

It is rumoured that as well as Swati Dhingra and Dave Ramsden, who voted for a cut, three others, including Deputy Governor Ben Broadbent, the decision was “balanced on a knife edge”.

This was Broadbent’s final meeting. He steps down at the end of this month to be replaced by Clare Lombardelli, who will attend her first meeting on August 1st. There has been little sign of Lombardelli’s level of “hawkishness” or otherwise in her recent comments to the media.

The economy is expected to receive a welcome boost this summer from events that are taking place. Euro 24, the Paris Olympics and the raft of Taylor Swift concerts are expected to see a boost of up to five billion pounds to GDP.

A recovery in retail sales, which saw an increase of 2.9% in May, offset a slump in April which was caused primarily by the wettest April for many years.

The only Tier One data due for release this week is the publication of the latest figures for GDP with a 0.6% rise expected QoQ leading to a 0.2% YoY increase.

With the General Election just over a week away, Labour’s lead has slipped a little as Reform UK continues to gain support, the issue of who will be the “official” opposition Party come July 5th and the size of the Labour majority is just about the only questions remaining to be answered.

The Pound is taking the likely election result in its stride. This is unusual, as a potential change in Government would normally create a period of high volatility.

Last week, Sterling fell to a low of 1.2622 against the dollar and closed at 1.2643.

The economy continues to provide a “glass half full” scenario to commentators, who cannot decide if it is about to achieve a soft landing or heading for a significant fall that will drive the Federal Reserve into a series of rate cuts despite the current level of inflation.

It appears that several economists cannot “compute” the level of job creation which flies in the face of moderate, at best, business activity even though services are continuing to lead the way.

The US economy has made significant progress, with the labour market and supply-and-demand conditions now in better balance and unemployment rising, but still low at 4 per cent. It is a tough call for Jerome Powell to be “happy” that unemployment is rising, since it means that American workers are losing their jobs.

He has previously emphasized that the market is easing a little, which means that for now those workers displaced should be able to find alternative employment, although the number of people making jobless claims is at its highest this year.

The moderation of growth from 3.4% in Q4 ’23 to 1.3% in the first quarter of this year has set alarm bells ringing, but not in the offices of several regional Fed Presidents.

Fed officials, whether current voting members of the FOMC or not, are united in their desire to leave interest rates unchanged for as long as possible to allow downward pressure to continue to be exerted on inflation.

The level of wage increases always lags inflation, particularly following a period of a raised cost of living, as negotiators try to ensure a degree of compensation for what has gone before.

Given the rise in inflation across the entire G7 due primarily to the level of support that was pumped into those economies during, and in the immediate aftermath, of the Pandemic, it is little surprise that inflation has longer to fall even as interest rates have remained elevated.

Last week, the dollar index continued to make steady progress driven primarily by the view that the first cut in interest rates won’t take place until September, at the earliest. It climbed to a high of 105.91 and closed at 105.83.

This week, Jerome Powell’s favoured indicator of inflation is due for release. Personal consumption expenditures are expected to be unchanged at 3.6%.

A further release of Q1 GDP is also due, but that is also unlikely to change from its earlier rate of 1.3%.

The housing market is seeing prices continue to moderate, with the latest “Case/Shiller” index expected to fall to 6.9% from 7.4% in April.

Inflation is still something that exercises the minds of members of the ECB’s Governing Council so much that it could be termed an infatuation.

It has become obvious that several members of the Council deeply regret having agreed to a cut in official rates at their most recent meeting. This is especially true since it is out of character for any Central Bank to cut rates when its economy is showing signs of growth while inflation appears to have bottomed and is rising again.

It may well be that the ECB needs to adopt the “methods” of the Federal Reserve where Fed Presidents, the equivalent of Eurozone members Central Bank Governors, take turns to be voting members of the Committee on a rotating basis.

Having been in force for more than twenty-five years, it is becoming time for a review of the Bank’s processes to see what is working and what isn’t.

The market has made continued misjudgements about the hawkishness of Central Banks. None can have seriously expected to have reached the halfway point of the year with just one Bank having made just one rate cut.

Although the ECB was deemed to be the most “hawkish” of the G7 Central Banks it is the only one that has cut rates, while the infinitely more proactive Federal Reserve has not only chosen to “sit on its hands” but has seemingly become more hawkish with every meeting of its FOMC.

Neither Powell nor Lagarde can be considered Bankers at heart. Powell is a Lawyer and Lagarde is a Diplomat. Neither can steer discussions in the way that Greenspan, Bernanke, or Draghi could.

No one would take Lagarde seriously if she spoke of doing “whatever it takes” to save the euro, as Draghi famously did in 2012.

Instead, both must be almost impartial umpires, guiding the decision-making process without having the knowledge or experience to have any input.

Powell is a “numbers man” happy to be guided by the data, while Lagarde is more skilled at gauging the mood in the room.

She has performed several volte’s-face during her time at the ECB, most notably when she switched from dove to hawk as inflation began to climb.

Since following the Pandemic, economic forecasts have been more than a little “shaky”; it has left both Powell and Lagarde exposed, although both have used their undoubted skills to extricate themselves from difficult encounters with the press.

The Euro continues to drift lower, with no particular interest in buying outside commercial orders. Last week, it fell to a low of 1.0672 and closed at 1.0691.

Today, both Joachim Nagel and Isabel Schnabel will be making speeches. They are likely to remain hawkish in their outlook even though both are scheduled to be discussing climate change in light of the colleague, the German Finance Minister’s recent visit to China.

Have a great day!