3 October 2023: Mann does not see a return to low rates

The Monetary Policy Committee’s resident hawk, Catherine Mann spoke yesterday of her view that it is unlikely that interest rates will ever return to the levels that they were at before the Bank of England embarked on its cycle of interest rates hikes which began almost two years ago, unless there is a “perfect storm” of exceptional circumstances like happened over the past ten years to fifteen years.

The conditions that brought about the lowering of rates close to zero began with the financial crisis of 2008 and the Sovereign Debt issues of 2012. Latterly, as inflation was continuing to fall as global growth stuttered, the Pandemic and Brexit, which was unique to the UK caused rates to stay low.

Central Banks took a back seat once they had put in place conditions for recovery and monetary policy was left exceptionally loose.

In Mann’s view the Central Banks were negligent in not noticing that the amount of liquidity that was “sloshing around” in the global economy, together with issues with supply chains would lead to a significant rise in inflation.

So, it has proved and Central Bank’s, now forewarned, are unlikely to make the same mistakes again.

She sees domestic demand in the UK economy as being resilient and relatively strong which leads her to have an inflation forecast that is close to the top of estimates.

The Conservative Party Conference got under way yesterday with transport being the focus of the agenda for the first day.

HS2 remains a point of contention with a Conservative West Midlands Mayor, echoing the sentiments of the Mayor of Manchester in that it would be a huge, missed opportunity if the high-speed rail link stopped at Birmingham rather than continuing to Manchester.

Andy Street and Andy Burnham figuratively joined forces to agree with former Chancellor George Osborn and Michael Heseltine in calling the likely scrapping of the Second phase an act of “gross vandalism.”

Also, on the agenda and proving more popular was the Governments’ defence of drivers who are facing attack on several fronts including the expansion of ULEZs and twenty mile and hour speed limits.

Jeremy Hunt’s ambitious plans to make the UK into a global economic leader looks like backfiring spectacularly as experts believe that the economy will contract over the next two quarters leaving it in a technical recession.

This is likely to have a detrimental effect on the pound which tumbled to a low of 1.2086 yesterday, closing at that level.

The conditions that will lead to a soft landing for the U.S. continue to appear as both Fed Chair Jerome Powell and his FOMC colleague, Patrick Harker, the President of the Philadelphia Federal Reserve, spoke of their desire to ensure that monetary policy ensures a period of stability for the economy.

Powell, speaking at a meeting of business leaders in Pennsylvania, went on to say that in his view the effects of the Pandemic are still working their way through the economy and what happened during that time should not be underestimated.

Labour shortages, particularly in the healthcare sector are an issue that is not confined to the U.S. but is seen throughout the developed world as hospitals and other medical facilities cope with a new normal which is a further factor of globalisation that allows such viruses to spread with incredible speed.

Powell refused to speak about his expectations for monetary policy saying that it wasn’t yet time for speculation to begin since the next FOMC meeting is still many weeks away and the Fed remains data driven.

Harker, however, was a little more forthcoming, commenting that he believes that the cycle of interest rate hikes is at an end. This runs contrary to the popular view that there will be one more hike before the end of the year.

He went on to say that he doesn’t see the conditions presenting themselves that would lead to a cut in rates for some considerable time.

A week that will culminate with the publication of the September Employment report got underway yesterday with an encouraging report on manufacturing output. While activity remains in contraction it increased from 47.6 to 49 and with the services data due tomorrow the composite figure is likely to be well into positive territory.

The dollar continued to garner staunch support. The index rose to a high of 107.03 and closed at that level. Having seen a mild correction late last week, unless the NFP data is a real outlier, the index looks “set fair” to continue towards its medium-term target of 110.

A feeling is growing within the Eurozone that although several of the more dovish nations, mostly those with high budget deficits, are “squealing” at the continued hiking of interest rates, they have not yet reached a point where they are restrictive upon demand.

It is likely that the “neutral band” is wider than it is in most other developed economies since several economies’ activity is “lumped together” to produce the data.

While Italy, Portugal and possibly France are seeing a significant drop-off in demand, the Baltic States and Austria are still seeing healthy stress in their economies.

This again points to the virtual impossibility of creating monetary policy that suits twenty truly diverse economies and makes Christine Lagarde’s job virtually impossible. Not only does she have to cope with the technical demands of the policy, she also then must justify the decision of the Governing Council.

If a decision to pause were to be taken at the next monetary policy meeting several nations would still be battling inflation. If a hike were agreed, there would be an almost equal number of EU members who see a looming recession, while the entire region is staring down the barrel of a period of stagflation where that is little or no economic growth, but inflation remains stubbornly high.

Some nations point to last week’s fall in inflation as evidence that tighter monetary policy is having some effect but given the length of the current economic cycle and the effect of the slowdown in the Chinese economy that is affecting growth everywhere, it may be little more than a natural phenomenon.

Pan-Eurozone unemployment returned to its historic low of 6.4% in August which favour the belief that rates are not yet restrictive, but the nature of the Eurozone economy and the makeup of individual fiscal decisions mean that it is almost impossible to use this data as a yardstick of demand.

The euro continued its recent falls after two corrective days at the end of last week. It fell to a low of 1.0447 and closed at that level.

Retail sales data is due for release later this morning and the market is bracing itself for a fall of more than 10% which will do little for the prospects of the common currency.

Have a great day!