25 November 2022: BoE rejects post-Brexit plans

Bank of England Governor, Andrew Bailey, has sought urgent talks with the Chancellor and Treasury officials to discuss his concerns about new regulations that the Government is proposing that will give it veto powers over post-Brexit Financial rules proposed by independent authorities including the Central Bank.

Bailey believes that the new powers will undermine the Bank’s independence, since it will no longer be able to have the final say on several regulatory issues.

Brexit has become headline news again as the Government strives for every possible advantage in its fight against an economic slowdown.

Rumours that the Government has been considering proposing a Swiss-style arrangement with Brussels that would allow access to the EU’s single market have been roundly criticized by leave campaigners and denied by the Prime Minister.

The fact is that in modern globalized markets, countries must seek partnerships. Isolation from its largest market while it tries to forge new supplies will leave the UK years behind and open to further disadvantage.

Jeremy Hunt rejected projections from the Office for Budget Responsibility yesterday that predict that the UK economy will suffer a 4% contraction in the medium-term due to Brexit.

He believes that a number of regulations that are being introduced have the potential to boost the economy by at least a similar amount, although it may take time for the effects to be seen.

Postal workers, nurses and rail workers have all announced plans for industrial action before the end of the year as the country stands on the brink of another period of disharmony due to the significant rise in inflation that has left real wages seeing a fall.

The Bank of England will announce a further interest rate hike at its next meeting as it battles to bring rising prices under control. It is estimated that the continued tightening of monetary policy will have a negative effect on the housing market, with prices expected to fall by between 10% to 15% on a medium-term horizon.

The pound continued to make ground against the dollar yesterday, despite traders being sceptical about how much further the current rally can be extended.

It climbed to a high of 1.2153 and closed at 1,2119

Economists working at the Federal Reserve appear to be at odds with the latest meeting of the FOMC.

While Jerome Powell is prepared to be persuaded by technocrats that inflation will remain stubbornly high unless the FOMC agrees to continue to tighten policy significantly, regional Fed Presidents, who tend only to focus on the situation they see in their local markets, believe that the situation is improving.

They are likely to view the November employment report in the same manner, while Powell looks at the overall picture as well as what is happening overseas.

His relationship with the predecessor and current Treasury Secretary Janet Yellen, has become strained over the past few months as Yellen is known to be a supporter of Powell’s Deputy and likely successor Lael Brainard who is considered to be more pragmatic than Powell and driven by a more open view of current market conditions.

There is going to be a lively discussion of current conditions at the next FOMC. It is obvious that the Fed cannot claim to be driven by the data and then when the data demands a certain course of action, ignore it as it doesn’t fit with their concerns.

It has become something of a cliché that the next piece of data will be the most important yet, but that description probably does fit the November Employment report, which is due for release next Friday. The Fed Chairman will find it difficult to push through another seventy-five-point hikes if the employment data cools significantly, considering inflation data.

The dollar index has lost well in excess of five percent of its value over the past two weeks. The fall has accelerated after the publication of the minutes of the latest FOMC meeting, which were more dovish than expected.

The index fell to a low of 105.63 yesterday and closed at 105.86. The pace of the fall has slowed as it reaches close to major support at 105.20.

German member of the ECB’s Governing Council Isabel Schnabel spoke yesterday of the need for the Bank to hike short-term interest rates by seventy-five basis points at its next meeting to continue to exert pressure on rising prices.

Schnabel agrees with Robert Holzmann, the Austrian Central Bank Governor, that there is no discernible fall in price pressure across the region, although she did concede that prices have stabilized in a few areas.

The disparity in fiscal policy was highlighted yesterday by the fact that Spain agreed to apply a windfall tax on banks and energy companies to fund further spending on social programmes.

It is feared that the potential effect of their actions will see several firms relocate away from Madrid, especially banks which are already considering withdrawing behind their own national borders.

There is a further row brewing in Brussels, as several members of the EU are unhappy with the level of the first ever energy cap that has been agreed. It has been confirmed by the EU Commission that the cap is a short-term measure taken as a last resort.

A group including France and Spain have labelled the proposed cap a joke and called it workable. The price of Eur 275 that has been agreed, will come into force if the headline price exceeds that level for 14 days consecutively and the difference to liquid natural gas price exceeds Eur 58.

The headline price is already at Eur 275, and it has never remained at this point for more than a single week. The nations that are particularly unhappy point out that even at the height of Vladimir Putin’s manipulation, the price never reached Eur 275 consistently.

Although output data for the entire region shows signs of stabilizing, fears that the ECB will hike by severity-five basis points at its next two meetings to make monetary policy more restrictive, will drive the economy into recession.

The Euro continues to receive help from the dollar’s current weakness. It rose to a high of 1.0448, but lacked the momentum to test the 1.05 level and eventually fell back to close at 1.0413

Have a great day!