30 January 2025: Bailey says there is no trade-off between stability and growth

30 January 2025: Bailey says there is no trade-off between stability and growth

Highlights

  • Reeves announces more plans
  • The Fed leaves rates unchanged
  • Spain’s tourist boom leads it to the top of the growth charts
GBP – Market Commentary

The BoE Governor wants the Pensions Regulator to consider stability

Were she in charge of an economy that was “purring” along, creating wealth for its people and attracting international investment because it was an undeniably exciting place to own assets, Rachel Reeves’ speech yesterday, in which she announced the Government’s backing for a third runway at Heathrow Airport and several other high profile infrastructure projects, would be lauded as the advance thinking of a modern, dynamic Chancellor of the Exchequer.

But coming from a Finance Minister who is responsible for driving an economy which is unable to produce even sufficient growth to be able to keep its promises not to raise taxation, and is borrowing at near record levels just to keep the economy afloat, her plans bordered on the laughable and could become a national embarrassment.

It is entirely possible that work on the new runway may not even start during the lifetime of this Parliament, while linking Cambridge and Oxford, two cities that are seventy miles apart to create a rival to Silicon Valley is the stuff of dreams.

Michael O’Leary, the Managing Director of Ryanair, the budget airline, hit out at Reeves in a tirade as he claimed the Chancellor “hasn’t a clue” about how to generate economic growth.

As Ms Reeves set out major plans, including support for a third runway at Heathrow, he accused the Treasury of being out of touch with reality.

He said ministers should scrap air passenger duty (APD) rather than “waffle on” about Heathrow, which he described as “a dead cat” that would not happen before the 2040s at the earliest.

In her budget in October 2024, Ms Reeves announced increases in APD from the 2026/27 financial year.

Mr O’Leary dubbed her “Rachel Rubbish” and accused Treasury Minister James Murray of being a “dopey git” after he claimed the rise was just 1 per cent of the average budget airfare.

While other major firms demanded that the UK try to align itself more with Europe’s over-regulated economies, O’Leary expressed his hopes that the new U.S. Administration under Donald Trump will wake up the Liberal Governments on this side of the Atlantic.

Back in the real world, higher borrowing costs for the government may mean tax rises or spending cuts if it wants to stick to its own self-imposed rules, a leading economic think tank has warned.

According to the Resolution Foundation, a leading economic think tank, the country is paying an additional seven billion pounds in interest on its borrowings compared to the amount it was at the time of the budget in October.

Reeves didn’t elaborate on how her plans would be paid for, since she probably believes in the “magic money tree” that Theresa May used to evoke to explain the difficulty in attracting investment.

The pound was in reactive mode following Reeves’ speech as it waited for the Fed’s inevitable statement that it was leaving rates unchanged.

It fell to a low of 1.2393 during the day but recovered to close at 1.2439.

USD – Market Commentary

Trump’s policies could “upend the economy”

With the benefit of hindsight, anyone who believed that the FOMC would vote to cut interest has a false impression of Fed Chair, Jerome Powell, even after close to even years in the job.

Powell gives the air of someone who doesn’t really want the job but will do it if there is no one considered more suited.

He is not afraid to provide a “lawyer’s view” of the economy, having followed fifteen highly qualified bankers into the position.

He takes his dual role to maximize employment and stabilize prices while moderating long-term interest rates very seriously and will do what is necessary to achieve that goal and won’t let even an overbearing President get in his way.

An economy which produced more than 250k new jobs last month year, and saw inflation continue to rise, even moderately, does not need the stimulus of a rate cut. Powell believes that leaving rates unchanged will see inflation fall to meet the Fed’s 2% target “eventually”.

“The committee is very much in the mode of waiting to see what policies are enacted,” Powell told reporters following the Fed’s decision. “We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.”

The pause is likely to create tension with Trump, who frequently pressured the Fed during his first term to lower rates, and just last week said he knows more about interest rates than Powell.

That statement may well be true, but considering the overall economy, what is needed is a steady hand on the tiller. Were the Fed to accede to Trump’s demands, just about every economist, think tank, commentator and investor would be calling for rate increases to counter inflation which would rise to at least the highs it saw in 2023.

Following its first policy meeting since Trump returned to the White House a few weeks ago for a second term, Fed Chair Jerome Powell told a press conference that he wanted to see “real progress” on inflation and there was no need “to be in a hurry to make any adjustments.”

The unanimous decision came as Trump has intensified his pressure on the Fed to lower borrowing costs significantly.

Since the transfer window is still open, maybe a deal could be brokered to swap Powell for Rachel Reeves, since both appear to be in the wrong job, at least according to Reeves and Trump.

The dollar rallied immediately after the decision was announced, having drifted during the day but settled back as Powell delivered a message that the market could appreciate.

The dollar index reached a high of 108.29 and closed just four pips higher on the day at 107.95.

EUR – Market Commentary

Brussels plans a “business simplifying” course

The eurozone should look to the United States if it wants to compete more effectively for global investment, according to managing director of the International Monetary Fund (IMF) Kristalina Georgieva. This could also apply to the United Kingdom.

“The United States has a culture of confidence. Europe has a culture of modesty,” Georgieva said. “My advice to my fellow Europeans is more confidence,” although confidence, whether real or not, is not something Rachel Reeves lacks.

One area for improvement in the EU is progress on a unified market, said the IMF chief, which would make it easier to compete with the US.

Currently, fragmented pools of capital in the eurozone make it more difficult for investors to secure funding, compared to the US’ more streamlined setup.

Spain, the country with a previously faltering financial system, topped the 2024 list of Eurozone countries for the fastest economic growth last year, with a staggering 3.2% rise.

Official data published by the National Statistics Institute yesterday, January 29, confirmed the news, which will undoubtedly come as a shock to many. The country was forecasted to see a roughly 2% boost, but it smashed that figure, and many factors contributed to this.

Employment, tourism, and other industries attributed to rapid economic growth in 2024.

One of the reasons Spain has done so well in 2024 to level its finances and achieve significant prosperity is that it attended to its historically low levels of unemployment, with last year seeing a dramatic rise in labour output, and the number of those employed, as Euro News Weekly reported.

However, the Spanish economy is relatively small when compared to those of Germany and France, which are both staggering under the pressure of economic downturns and political uncertainty.

The German government on Wednesday slashed its gross domestic product forecast to just 0.3% growth in 2025.

“The diagnosis is serious,” Robert Habeck, economy and climate minister, said during a press conference. He noted that, while there are some positive developments such as rising demand for credit, “Germany is stuck in stagnation.”

This latest GDP estimate is sharply down from an October projection of 1.1% growth this year, but broadly in line with forecasts from other economic bodies. The International Monetary Fund earlier this month cut its outlook and now sees 0.3% growth for the German economy this year, while the federal Bundesbank in December said it was anticipating the GDP to increase by 0.2% over the period.

The Euro lost further ground yesterday, falling to a low of 1.0383. However, it did recover to close at 1.0410 which is its short-term support level.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
29 Jan - 30 Jan 2025

Click on a currency pair to set up a rate alert

Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.