25 July 2024: Saunders expects taxes to rise

During his tenure as a member of the Monetary Policy Committee, Michael Saunders was its most hawkish member.

Working now as an advisor to Oxford Economics, one of the foremost global advisory firms, he believes that the Chancellor of the Exchequer, Rachel Reeves’, recent comments about the state of the country’s finances could be “cover” for a twenty-five billion pound increase in taxation, blaming the fourteen of Conservative rule as her excuse.

He sees an increase in inheritance tax and a cut in allowances for the higher paid as risk areas.

The Prime Minister has been quoted recently as saying that the crisis in the country’s finances was even more severe than he had expected.

For the economy to gather pace, the Government has targeted specific industries for additional support. It is unclear whether the extra funding was included in the Labour Party Manifesto.

Given the almost constant attacks that Reeves and her team at the Treasury have mounted on the handling of the economy since she took over, it would be naive for her not to expect that her plans are gone over with a “fine tooth comb.”

It appears that the Taylor Swift effect on inflation may have been overdone. Inflation has remained at 2% over the past two months while the American pop superstar was touring in the UK. During that time, while accommodation costs rose from 7.9% to 9%, cinema, theatre and concert costs fell by 0.25%.

There are two significant issues facing Andrew Bailey and the rest of the MPC as it prepares to meet to consider a possible cut in interest rates next week.

It had been hoped that both services inflation and wage settlements would have abated in line with goods inflation, but that hasn’t happened.

For that reason, the market is executing the MPC to follow the Fed’s lead and wait another month to begin to cut rates.

As expected, economic output rallied last month, according to preliminary Purchasing Managers Indexes for June. The numbers were in line with market expectations, so had a negligible effect on the value of Sterling.

It traded between 1.2938 and 1.2877 but closed little changed on the day at 1.2806.

The past month has seen a seismic shift in the fortunes of the Republican and Democrat Parties. July started with a stuttering performance from President Biden during his televised debate with former President Trump.

This marked the beginning of calls for Biden to stand down as the Democrat Party’s nominee to fight the election which is taking place in November. This was followed by an assassination attempt on Trump in which he suffered a minor injury but wounded the Democrat campaign far more.

Following an attempt by Biden to show his mental acuity, he made two glaring errors, first calling his Vice President, Kamala Trump and then introducing the President of Ukraine as Volodimir Putin.

This started a chain of events from which there was no coming back.

Biden announced earlier this week that he would not stand in November’s election and gave his support to Harris.

There had been concerns from senior party officials that Harris would not be able to compete with Trump, but so far it is Trump who has appeared to be on the back foot, refusing to meet her in the second televised debate.

The Trump strategy had been centred around Biden’s mental capacity, and now that he has stood down, Trump and his team seem “wrong-footed.”

As Fed Chair Jerome Powell, angry at having to constantly repeat himself, told Congress recently, neither the election nor policy announcements will have any effect on the monetary policy process.

The FOMC meets next week as it edges closer to cutting interest rates. It has been repeated several times that the Fed has never cut interest rates during a time of economic growth, but Powell’s second term in office has seen the Fed’s “playbook” coming close to being torn up so it would be no surprise to see a cut agreed next week.

However, the “smart money” is for the first rate cut to be agreed at September’s meeting, when the Fed has had access to further inflation data.

The data for new home sales which was released yesterday showed that the property market remains volatile and is of little help to the Fed in agreeing monetary policy.

New home sales fell by 0.6% after a fall of close to 15% in May.

The dollar remained in its current, narrow, range yesterday as the market prepares for the Fed meeting. The dollar index fell to a low of 104.12 but recovered to close at 104.36.

While the “heavy hitters” of the ECB’s Governing Council are sunning themselves on French, Spanish or Italian beaches, the members of the rate chatting group whose voices are heard less often are taking the opportunity to give their opinions on monetary policy.

Peter Kazimir, the Governor of the Slovak Central Bank, confirmed his agreement with comments earlier this week that he believes that the ECB will cut interest rates twice more before the end of the year.

However, Kazimir commented that his belief is based on current conditions, and they could easily change in the next few months given a range of factors, both domestic and global, that could lead to a resurgence in inflation.

He is confident that notwithstanding events in Ukraine and Gaza together with any unknown occurrences, the ECB is on a path to lower inflation and therefore a loosening of monetary policy.

ECB President Christine Lagarde appears to be having a “staycation” this year. She has decided to skip the G209 meeting that is taking place in Rio de Janeiro and also the G7 meeting immediately prior, in favour of attending the opening ceremony of the Paris Olympics.

Her absence from the G7 meeting is notable since it is expected that a report will be delivered on the progress of the fifty-billion-dollar support programme for Ukraine.

There has been no confirmation if her Vice President Luis de Guindos will attend instead.

ECB chief Economist, Philip Lane, made his second speech in as many days at an event jointly sponsored by the IMF and ECB but avoided any mention of monetary policy or his candidacy for the post of ECB Vice President.

The Euro fell close to the bottom of its recent range as the market was dominated by technical day traders. IT fell to a low of 1.0829 and closed at 1.0835.

The influential IFO group will publish with report on current and future economic conditions for Germany and the wider Eurozone later this morning.

It is expected that although current conditions will have weakened slightly, there has been a marginal improvement in future expectations.

Have a great day!