2 August 2024: 5-4 vote in favour of a rate cut

In the words of Bank of England Governor, Andrew Bailey, yesterday’s decision by the Monetary Policy Committee was an important “moment in time”, but no one should expect it to lead to a “cascade” of rate cuts.

Headline inflation has fallen to its target rate of 2%, but the committee remains concerned about the level of services inflation, which is still “too high”.

Inflation in the service sector, including hotels and restaurants, was 5.7% in May.

The vote by the MPC could not have been closer, at 5-4 in favour of a cut. Yesterday’s meeting was important in that it appeared to mark the end of “groupthink” among members.

Bailey, Breedon, Dhingra, Lombardelli (in her first meeting) and Ramsden voted to cut, while Greene, Haskell, Mann and Pill voted for no change.

Pill has become a “Philip Lane-like” figure who, following his gaffe late last year about what Britain should expect from its economy now, has been the most flexible member of the Committee making his “calls” based upon the situation as he sees it on a meeting-by-meeting basis, not “tethered” to any particular dogma.

In his press conference following the meeting, Andrew Bailey said that he feels the Bank will need to be cautious going forward, having cut rates for the first time since the Pandemic.

When asked about the Government’s decision to comply with the Independent Pay Review Body and give above-inflation wage increases to doctors, nurses, teachers and other public sector workers, Bailey said that the public sector was simply following the private sector which had seen wages rise at a similar level over the past eighteen months, and this should not necessarily add to inflation.

It means pressure will be eased for some homeowners who will see their mortgage costs come down, but it could prompt banks to start reducing savings rates.

Rachel Reeves welcomed the decision to cut interest rates, which she saw as a vote of confidence in the Government, but she emphasized that the Bank is independent of the Treasury and makes its calls as it sees the “overall market relative to its mandate”.

The pound tumbled as the news of the cut in rates broke. It fell to a low of 1.2727 and closed at 1.2739. Versus the Euro, it also lost ground, falling to 1,1891 and closing at 1.1804.

The Dow Jones Index fell 496 points or 1.2% yesterday as the market feared that the FOMC is not intending to keep pace with an economy that is possibly beginning to show signs of weakness.

The Dow had lost over seven hundred points at one stage but recovered as traders saw that the fall was “overdone”.

Investors have become spooked by the news that the number of weekly jobless claims has risen constantly recently, with yesterday’s release showing that new claims have now reached close to 250k.

It was interesting to note that the “challenger” job cuts data which was also released yesterday showed an improvement from almost 50k in June to 25k in June.

Today’s publication of the July employment report which includes the number of new jobs created last month now takes on a level of importance that hadn’t been expected.

Expectations for the headline number have been driven lower by traders, although there is nothing about the data that has been released so far this week that points to anything other than a non-farm figure of between 150k and 175k. Still, the data is notoriously “fickle”.

In his speech following the latest FOMC meeting, Jerome Powell became more than a little irritated by being constantly asked questions that relate to the timing of a rate cut concerning the election campaigns and whether a cut in September, followed by another around the time of the election would favour Kamala Harris.

It is well known that Powell is a Republican, but during his one-and-a-half terms as Chairman of the Federal Reserve, he has shown a non-committal attitude to politics.

Next week will see several members of the FOMC emerge from the news blackout that is a feature of the lead-up to the Committee’s meetings, which will allow the market to see how close the vote in favour of leaving rates unchanged was before the minutes are published on August 21st.

The dollar was in reactive mode as the Bank of England cut interest rates. It rallied to a high of 104.44 and closed at 104.34, erasing the majority of its losses from the day before.

The Greek Central Bank has more reason than most to be a major supporter of the ECB, given the level of support it has received from it since Greece came close to being forced out of the Eurozone as its economy came close to collapse.

Yesterday, its Governor, Yannis Stournaras spoke of his belief that the ECB will be able to cut interest rates twice more this year since a weak overall Eurozone economy could easily see inflation fall to below the ECB’s 2% Target.

The Greek economy grew by 2.1% between April and June, almost double the rate seen in Q1, so Stournaras is hardly “talking his book”.

Stournaras, who is one of the doves on the ECB’s Governing Council who favour lower rates, said growth was lower than the Central Bank expected, and so could be inflation.

Stournaras favouring more cuts in interest rates is synonymous with the gradual drifting apart from Governing Council members, who have either an ingrained fear of inflation or are “traditionally conditioned” to live with soaring prices.

He spoke following the news that inflation “ticked up” by more than economists had expected in June. However, he feels that micromanaging an economy with so many “moving parts” is impossible. The ECB should simply hold fewer meetings but be more dynamic in its decision-making.

With the holiday season now in full swing, the Euro is unlikely to see any major volatility over the next two to three weeks, although a lack of liquidity may magnify any disruption caused by geopolitical events.

ECB President, Christine Lagarde appeared on TV this week to explain the economic impact of the Paris Olympics.

She believes that the impact on the French economy will provide an antidote to the political upheaval that the country has seen recently and feels that there will be a significant “spillover” into the economies of other Eurozone nations.

The Euro lost ground yesterday as the market came to terms with the FOMC’s possible timetable for rate cuts. It seems that each of the three major G7 Central Banks will not be hurried into beginning a cycle of rate cuts, and the FOMC is still seeing significant growth which is still allowing it to take its time.

The single currency fell to a low of 1.0777 and closed at 1.0791.

Have a great day!