27 September 2023: No celebration over rate pause

The Bank of England sees no cause to celebrate the pause in its cycle of rate hikes that was agreed at last week’s MPC meeting because while it is considered good news for borrowers, the Bank has not completed the task of bringing inflation down close to the Government’s 2% target.

In fact, to a certain extent, the pause is counterproductive since it is likely that rates will need to be raised at least once more before the end of the year.

The market’s attention will be diverted in the coming weeks by the Government’s preparation of the Autumn statement which is due to be delivered by the Chancellor of the Exchequer, Jeremy Hunt on 22nd November.

Before that, the Prime Minister and Chancellor will doubtless prepare the country for what will be the final Autumn Statement before the election which is now looming large.

It is still impossible to see past a Labour Party victory at the election which must take place by December of next year, not simply due to the poor in which the Conservative Party has dealt with successive crises that would have tested even the most popular of Government’s, but the public is suffering from a kind of fatigue that will only be satisfied by a complete change of direction.

The Opposition will get the chance to show what could have been done differently, although it is doubtful that they would have handled the Pandemic any better than the overall outcome that was managed by the Government.

Brexit is an issue which, although it divided Parliament, neither of the main parties supported from the start although in the end it was the one area where Boris Johnson performed with anything close to the Statesman that the Prime Minister is supposed to be.

It is acutely possible that the country will still suffer a recession later in the year or early next. This may be the only way in which inflation can be truly brought under control, although Andrew Bailey would never admit to it.

The MPC was a Labour Party initiative created by Gordon Brown when he was Chancellor and overall, it has been a success to make the Central Bank independent of Government policy.

Bailey’s term in office will straddle the change in Government and while he will survive any change there may be some changes. It could be that the Treasury will have a permanent member on the Committee, with a view to ensuring that Government policy is at least considered.

Last week’s market movement which was driven by the changes in monetary policy has calmed down although the medium to long term path for Sterling has become clearer.

Yesterday, the pound continued to “head south,” as it saw its ninth fall in the past eleven sessions.

It reached a low of 1.2152 and closed at 1.2158.

The prospective candidates for the Republican nomination for the Presidential Election that is due to take place in November of next year are beginning to “set out their stalls.”

While Donald Trump and Ron de Santis are fighting a public and acrimonious battle over the right to face Joe Biden, former Vice President Mike Pence has been quietly getting on with his job.

Yesterday he spoke of the need for the Federal Reserve to “head in a different direction” which would mean the replacement of its current Chair, Jerome Powell.

Pence believes that fresh leadership is needed at the Central Bank to “truly tackle high inflation that is waging war on American families.

He does not see it as the purpose of the Fed to protect employment which he sees as part of the President’s mandate. In a very Republican comment, Pence went on to say that the primary purpose of the Fed is to protect the dollar.

The issue with this is that in keeping inflation down and protecting American jobs, the protection of the dollar should follow naturally. That is the real purpose of having an independent Central Bank.

The real meaning of Pence’s rhetoric is to ensure that decisions that will affect the population of the Administration are taken in the Oval Office.

Pence remains an outsider, although it is looking less and less likely that Donald Trump will be able to continue his fight for the nomination given the mountain of lawsuits and criminal charges that are piling up.

Yesterday, the Supreme Court sided with the Georgia Authorities in a ruling about whether Trump committed fraud by inflating his assets and net worth as he built his real estate empire.

Meanwhile, President Biden became the first standing President to stand with striking workers on a picket line. That is a very Democrat image to portray and will have earned the support of the “man in the street” for standing up to big business.

Workers are striking for higher pay and new working contracts that will bring them in line with other sectors as their jobs are threatened by the EV revolution.

The dollar is far from needing protection now as it goes from strength to strength. It seems that the only issue it faces is if the economy begins to lose traction as rates remain high.

Yesterday, the index rose to a high of 106.26 and closed at 106.17. It faces some strong long-term resistance at around 108.00 but if it can sustain the rally past that level then 110 and beyond is possible.

One of the most significant reasons for the dollar’s latest rally is the comparative performance of the U.S. and Eurozone economies. But in fact, it is more than that.

The Central Bank and the current Administration are committed to ensuring that American jobs and their way of life are protected while in the Eurozone there is no such commitment.

The Eurozone has had several opportunities to put in place measures that make it more Federal union but has so far failed, due to the “gravy train” mentality that exists in Brussels.

The European Parliament and European commission remain highly ineffective. Ursula von der Leyen is unable to galvanize any positivity towards the Eurozone economy, while, in truth, no one has heard of the President of the European Parliament, Maltese politician, Roberta Metsola.

The most notable initiative being made by the President is for Ukraine to join the EU at the earliest opportunity.

Despite the slack of leadership from Brussels, or perhaps because of it, there are a number of individual states that are beginning to thrive as their economies shake off ten last remnants of the pandemic.

Greece was considered a “basket case” a decade ago, while it is now close to being the “Jewel in the Crown of the Union.” Its government bonds have regained investment grade status while its economy is showing healthy signs of growth.

Spain is another state that is beginning to prosper. Its tourist industry is booming in the aftermath of the Pandemic, but it is in other areas of industry and the service sector that real growth is being seen.

Ireland has recovered its national identity after being swept up in the rush to borrow cheap money which brought its property market to its knees.

Germany, France, and the Benelux countries are still struggling to deal with high inflation and the ECB’s efforts to contain it.

Bundesbank President Joachim Nagel remains committed to tighter monetary policy. Higher rates are still supported by the German public since they have the highest rate of savings in the Eurozone. Inflation remains an issue, but the German people are stoic enough to understand how inflation can ravage a nation.

The euro continues to decline which adds to imported inflation. It fell to a low of 1.0562 yesterday and closed at 1.0572. There is some strong medium-term support at around 1.0520 which may hold since there are no new drivers expected to emerge for a couple of weeks and the dollar may be ready to take a breather.

Have a great day!