26 September 2024: Greene is concerned that Consumer Spending will delay the next rate cut

MPC member, Megan Greene, has called for a “steady as she goes” approach to setting monetary policy, citing her concerns about “lingering price pressures” and consumption growth.

Greene is known to be one of the more hawkish members of the Bank of England’s rate-setting committee. She believes that a proportionate response to falling inflation is appropriate. In its latest forecasts, the Bank laid out three possible scenarios for the inflation outlook, guiding its approach to monetary policy.

In the first, the global shocks that drove inflation higher continue to fade gradually, allowing inflation to fall “organically”. In contrast, in the second, a period of “sagging” economic growth sees inflation fall to reach, and maintain, the Bank’s two per cent target.

Finally, in the third scenario, the structural changes being considered by the Government to push inflation up and cause the MPC to consider delaying further cuts in rates.

Greene sees the second scenario as the most likely to evolve, which has consequently driven the Bank’s recent monetary policy decisions.

“Indicators of inflationary persistence have broadly been moving in the right direction,” Greene said, pointing out that services inflation has been “grinding” downwards while wage growth has eased.

However, Greene said she put more weight on the third case than the first, cautioning that the descent in services inflation had been driven largely by falling catering prices.

She believes that the risks to activity are currently skewed to the upside, which suggests that the “neutral rate” is higher than the market expects. Following last week’s MPC meeting, one further rate cut is priced in for this year, with a second possible but far from certain.

In an interview yesterday, the Prime Minister dismissed accusations that he is “talking down” the UK economy and this may cause potential inward investment to look elsewhere.

Business leaders and some economists have said that the Government is risking confidence by presenting a gloomy picture. In response, Sir Keir Starmer said that he is making tough decisions which are never popular but pledged to make sure his Party grows the economy and living standards sustainably and return public services, including the NHS, to what is expected by the public.

The uncertainty over monetary policy and the likely tax rises to come in the Budget took the wind out of the pound’s sails yesterday. Although it is generally well-supported, Sterling saw buying interest fade. Versus the dollar, it fell to a low of 1.3312 and closed at 1.3323, having earlier reached a high of 1.3430.

During his first Presidency, Donald Trump constantly criticized the Federal Reserve and its Chairman, Jerome Powell, demonizing him over the rate hikes that were considered necessary at the time.

In his attempt to regain the “top job,” Trump is again railing against the Central Bank, labelling last week’s cut in the Fed Funds rate as proof that the economy is in “poor shape”.

Trump has every reason to be worried about the Fed. If he follows through on his campaign promises of across-the-board tariffs and large tax cuts, the result would be upward inflation pressure that would force the Federal Reserve to set interest rates higher than they otherwise would have been.

Trump has renewed attacks on the Fed’s independence, saying that the President should have a direct say in monetary policy and have a veto on any proposed changes to interest rates.

For many Americans, particularly Trump supporters, this may sound like a perfectly logical step, but the “politicizing” of monetary policy would make it particularly difficult for the Fed to raise rates in times of rising inflation since no President would be keen on increasing mortgage costs which would be deeply unpopular.

Every few years, the Federal Reserve takes stock of its long-term strategy goals. There’s no set schedule for it, but in an August speech, Federal Reserve Chair Jerome Powell said the Fed would begin the process of reviewing its Statement on Longer-Run Goals and Monetary Policy Strategy “later this year” and “will be open to criticism and new ideas.”

The last review took place in 2020, so another may well be “past due”, considering the turbulence in the economy since then.

The recent decision by the Federal Reserve to cut interest rates by 50 basis points has generated a wave of optimism regarding the US economy’s trajectory, according to the CFO of Goldman Sachs. Denis Coleman, believes this significant reduction positions the economy well for a soft landing, despite uncertainties among market analysts about its potential effects on inflation and recession risks.

Market commentators and traders are looking for a sign of the Fed’s next rate cut and are eagerly awaiting next week’s September employment report and the Personal Consumption Expenditures data, which is due for release this Friday.

Regional Fed Presidents Williams, Collins, Kugler, Barr and Cook, as well as Fed Chair Powell, are all due to speak this week, which should shed some light on the overall attitude of the FOMC.

The dollar recovered a little yesterday, moving away from its long-term support level. It reached a high of 100.99, arising its losses for the previous session, and closed at 100.92.

Several economic indicators are pointing to the ECB cutting interest rates either more regularly than one cut per quarter or agreeing a single larger cut in November. However, members of the Bank’s Governing Council are still concerned about services inflation, even as wages in this sector are beginning to slow.

With eurozone activity indicators surprising to the downside and concerns over inflation gradually dissipating, HSBC sees the European Central Bank cutting interest rates faster than previously expected to support the region’s economy.

Data released earlier this week showed that eurozone business activity contracted sharply and unexpectedly this month, with the downturn appearing to be broad-based as Germany, Europe’s largest economy, saw its decline deepen while France, the bloc’s second economy, suffered a return to contraction.

The more dovish members of the Governing Council may consider a return to a risk-based setting of monetary policy, given that the risks in the economy are currently skewed towards a further weakening of economic activity, a further, or larger, cut may be demanded.

Additionally, disinflationary news from commodities and the euro, the favourable trajectory of wages and inflation expectations, and the fact that the eurozone’s largest economies are stuttering strengthen the case for more near-term easing, the bank added.

The market currently expects inflation to reach or even overshoot the ECB’s two per cent target in the second quarter of next year, significantly earlier than the Central Bank’s projections. Traders are expecting Christine Lagarde to refresh the Banks’ forecasts next month.

Wage pressures are easing across the eurozone, driven in great part by lower added compensation paid on top of negotiated wages, likely contributing to a further moderation of inflation, a European Central Bank (ECB) study has said.

Wage growth has been rapid for years, driven significantly by so-called “wage drift”, or actual payments made to employees on top of negotiated wages.

Wage drift has been driven by bonuses, inflation compensation payments and longer hours worked, but most recent data show a closing gap between negotiated and actual payments, a likely sign inflation pressures will ease as the ECB has long predicted.

“We are now at a point in the disinflation process where the upward pressure coming from wage drift is easing,” the ECB said in an Economic Bulletin article.

The Euro ran out of steam as the market considers a further rate cut by the ECB next month. It fell to a low of 1.1121 and closed at 1.1133. Earlier in the day, it had traded above the 1.12 level for the first time since July last year.

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