2 May 2024: Bailey sees inflation moving in the right direction

Andrew Bailey’s public appearances between Monetary Policy Committee meetings have become increasingly rare over the past few months. It may well be that he is bored with “trotting out” the same message “time and again” and answering the same questions constantly, particularly when there is only one question that financial journalists want answered: when will the first rate cut take place?

He cannot answer that not because he does not want to, but because he doesn’t know the answer and is not prepared to speculate since he will be held to his answer.

Bailey wants to say that he, and his colleagues, are data-driven, but that is considered too vague by the market. What date does he consider decisive? At what level of inflation will you feel a rate cut? What constitutes progress on a falling rate of headline inflation?

The Bank’s Governor does not like to deal with specifics, so he plays “cat and mouse,” which he doesn’t enjoy. He tries to get away with revealing the bare minimum and leaves the speculation to his colleagues.

The base rate of interest is currently at 5.25%. Many economists believe that it will need to be at 4.25% by the end of the year to encourage a genuine recovery in growth and output next year. However, that is unlikely to be of any concern to the current Government since a General Election, which they are almost certain to lose, will have taken place by then.

Depending on the path of inflation, a further one hundred points of cuts are pencilled in for 2025.

As the year progresses, the “space” for the “regulation” four cuts each of twenty-five basis points is shrinking.

If the Bank of England begins to cut rates at its September meeting, which is believed to be the case, they will run out of time. Meetings are scheduled for 7th November and 19th December following the September meeting.

Bailey will not want to begin with a fifty-point cut or agree to a cut “intra meeting” since that may send the wrong signal about economic health to the market.

The pound began the new month in a similar range to where April ended. It climbed to a high of 1.2550, which is well within the boundary of this week’s range and closed at 1.2526.

Whisper it softly, but the past two or three FOMC meetings have been entirely predictable. No one genuinely believed that a rate cut would be agreed upon at the meeting which ended. Jerome Powell’s message at his press conference was the same as in March, committing to leave rates unchanged until inflation was aligned with its 2% target.

That gave traders and investors something to “get their teeth into” since as long as inflation remains elevated and “sticky” a rate cut will not be seriously considered.

The current FOMC is not prone to proactivity. That may be because they see no need given the current strength of the economy. Although they are not allowed to have sight of the April employment report, which is due for publication tomorrow, they will have had models created in which various scenarios are considered.

So far this week, data for job openings and public sector job creation has been released, with both still in the same “ballpark.”

192k new private sector jobs were created in April, down from an upwardly revised figure of 209k in March.

Although the Fed has never cut interest rates when the economy is performing as well as it is currently, there are the first tentative signs that a slowdown may be happening, starting with manufacturing output, which slipped into contraction last month. It fell from 50.3 in March to 49.2 in April.

While this will be of only minor concern to the Fed, it may well be the start of a trend.

The first estimates of the non-farm payroll data that is due to be published tomorrow are for around 250k new jobs to have been created.

It is difficult to pitch where the risks lie since a 100k swing in the numbers would barely raise any eyebrows. The FOMC may be alerted to a headline figure close to 150k, but 350k would mean business as usual for the foreseeable future.

The April inflation report is due for release on May 15th, with the PCE data delayed until the last day of the month.

The dollar index barely reacted to the news that rates would remain unchanged for the seventh consecutive month. It retraced the gains it made on Tuesday, falling to a low of 105.43 but recovered to close at 105.63.

Not for the first time, the market is torn between what the ECB should do at its upcoming meeting and what will happen.

A rate cut at the meeting of the Governing Council meeting on June 6th has been on the calendar for several months, but there has been a lot of backsliding since then.

The preliminary release of inflation data for April will not have agreed to a cut in June any easier to obtain.

The headline rate of inflation fell to 2.7% from 2.9% in March. The ECB has not commented about being satisfied that disinflation is continuing to allow the rate to be cut, preferring it to reach its target of 2% before acting.

As is being seen in other G7 economies, the effect of high rates of interest is now fully absorbed, and the final seventy-five or so basis points may prove difficult to achieve.

It is still unnerving for members of the Eurozone to be “celebrating” the fact that Germany achieved growth in the first quarter, even though that growth was “only” 0.2%. Coupled with growth moving into positive territory, was the news of a worrying rise in job losses in the Eurozone’s largest economy.

Unemployment rose from 4K in March to 10K in April, although the unemployment rate remained at 5.9%. This is a trend that the ECB will consider at its next meeting.

Overall, the Eurozone economy is exiting a prolonged period of stagnation, but the catalyst for growth is to be found in Southern Europe. The Spanish Economy grew by 2.4% in Q1, up from 2% in Q4 and comfortably exceeding expectations of a 1.9% increase.

In Italy, inflation fell to 1% in April, down from 1.2% in March. Although this appears to be “topsy-turvy,” if Germany can achieve the systemic changes its economy is demanding, the future for the Eurozone may become brighter.

The Euro is still driven exclusively by the prospect of changes in monetary policy at home and in the U.S. With a cut not expected in the U.S. until November, the ECB will be brave to cut rates so much in advance of the Fed. It will see the Euro plunged close to parity, which may negate some of the benefits of the cuts and see inflation rise.

Yesterday, the Euro rose to a high of 1.0732 and closed at 1.0712.

Have a great day!