7 February 2024: Dhingra calls for immediate rate cuts

Swati Dhingra, by far the most dovish member of the Bank of England’s Monetary Policy Committee has reiterated her call for an immediate interest rate cut.

She warned that the Bank is seriously underplaying the risks to the UK economy by keeping rates at a sixteen-year high for longer than is necessary. Dhingra told the Financial Times that she is “not convinced that there is any kind of sharp excess demand that is coming from the consumption side”.

She went on to say that as pandemic-era savings drop and job vacancies decline, the economy may start to be affected in a profoundly negative way. She doesn’t understand why the MPC would take such a risk. As inflation falls, she is also concerned that leaving rates as they are may lead to an overtightening.

Dhingra believes that given that it takes some time for any monetary policy actions to work their way through into the mainstream economy, the risks of a cut now are negligible. She was the only member of the MPC to vote for a cut at last week’s meeting.

Andrew Bailey and Hugh Pill have made the case for their decision to vote for rates to remain unchanged since the meeting. Bailey believes that with inflation falling, it makes no sense to jeopardise the good work that has already been done but risk a flare-up now, while Pill believes that rate cuts later in the year will be a “reward” for seeing inflation return to its target level.

Dhingra’s “nemesis”, Catherine Mann, will make the alternative case tomorrow when she is scheduled to speak. Mann voted for rates to be hiked at last week’s meeting, taking a far more hawkish view of the situation regarding core inflation.

Taking a view on the economy that is straight out of the ECB’s “playbook”, Mann is concerned that until there is genuine evidence that core inflation is well on the way to 2% or is firmly anchored at that level, the Bank of England should employ a more hawkish stance.

Yesterday, The ONS revised the official unemployment rate from 4.1% to 3.9%. This, to a certain extent, supports the MPC’s decision to leave rates on hold. There will now be no rate cut before the Chancellor delivers his Spring Budget to Parliament early next month and only one more opportunity for a cut in the first quarter.

Sterling managed to arrest its recent slide against the dollar yesterday. It rallied to a high of 1.2603 and closed at 1.2600.

It has now been made abundantly clear to the market that the FOMC will not be cutting rates any time soon.

Although the January employment report was incredibly strong in its own right, the fact that the December NFP figure was revised sharply higher means that there is no real reason to either doubt January’s figures or to expect a significant revision lower in this month’s report.

Deutsche Bank gave two seemingly conflicting views of the U.S. economy recently. A week ago, it revealed that it is to cut 4% of its global workforce, amid a drop in profits, as part of an ongoing cost-cutting exercise. In a report to investors published yesterday, its economists commented that the U.S. economy is not going to experience a recession this year.

There was a blow to Donald Trump’s seemingly inevitable march towards the Republican nomination for the U.S. Presidency yesterday.

A U.S. court ruled, in one of the most important of the myriad cases Trump is facing, that the former President does not have immunity from prosecution for trying to overturn the result of the 2020 election. It was decided that since this took place after the result had been declared, Trump no longer enjoyed immunity from prosecution since he was no longer President.

Of course, should he win the nomination and go on and win the election, he could simply instruct the justice department to drop the case. A lot depends on when the Supreme Court can hear Trump’s appeal against the judgement.

Jerome Powell gave an interview to the 60-minute TV programme on Sunday evening in which he all but confirmed that there would be no first-quarter rate cut.

He had felt that the tightening of monetary policy would “cause some pain”, but so far that has not happened. The strength that the economy has exhibited over the past two quarters has given the FOMC a level of confidence that will be able to deliver rate cuts cautiously.

The dollar took a breather from its recent advances yesterday. The index corrected to a low of 104.14 and closed at 104.17 as weak longs exited positions.

The hawkish group of Eurozone Central Bank Governors who make up the majority of the Bank’s Governing Council have “closed ranks” to show their determination to defeat inflation and to ensure that it doesn’t return.

Yesterday, the Head of the Central Bank of the Eurozone’s newest member, Boris Vujcic, told reporters that the ECB does not need to rush to cut rates as such a move could potentially destroy its credibility if it backfired and inflation flared up again.

Financial Markets are still predicting as many as five rate cuts this year as inflation has “collapsed” from being close to double-digits at the end of 2022 to its current level of 2.9%, while the economy continues to stagnate.

The disinflation that has taken place so far is encouraging, but more work still needs to be done. Vujcic’s comments are as strong a push-back against marker expectations of rate cuts beginning in April that has been seen so far.

The dovish team was represented by Pablo Hernandez de Cos, the Governor of the Bank of Spain. Speaking at a conference in Nicosia, de Cos confirmed his view (and that of the doves) that the next move in rates will be cut, although he went on to say that it is unwise to be too precise on the timing.

This was a clear, if veiled, reference to the continued deterioration of the Eurozone economy.

The Governor of the Bank of Cyprus, Constantinos Herodotou, agreed with de Cos, going on to say that the cuts in interest rates don’t need to be in the hands of the hawks or the doves but must be driven by the data.

Consumer demand in the Eurozone continues to slide. Figures, published yesterday, showed that demand fell by 1.1% following two months in which retail sales stabilized.

The largest falls were seen by Slovenia (3.6%) and Luxembourg (3.1%), while Slovakia, Croatia and Portugal all saw positive growth.

The common currency experienced some buying interest yesterday as it bounced off a short-term support level.

It rose to a high of 1.0762 and closed at 1.0762 although it is still mired in an economic “black hole” that is unlikely to experience too much more buying in.

Have a great day!