8 November 2024: The Bank of England cut rates despite expectations that the Budget will raise inflation

The Monetary Policy Committee of the Bank of England voted by a majority of 8-1 in favour of a further rate cut of twenty-five basis points at its meeting which ended yesterday.

The only dissenting voice was Catherine Mann, who recently expressed her concern that secondary inflation is still lurking in the recently published data.

Governor Andrew Bailey said UK inflation falling below its 2% target meant policymakers had been able to cut rates to the lowest level since June last year. “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said.

The MPC said it considered Chancellor Rachel Reeves’s autumn budget, which she unveiled last week, particularly her decision to raise taxes on businesses.

It is estimated that the Budget will add fifty points to inflation over the medium term, and the MPC will have to calculate how much the economy may slow over the next two quarters to take that into account.

Bailey believes that there is considerable uncertainty about the jobs market as employers try to balance their books given the increase in employers’ National Insurance contributions and the minimum wage.

Both manufacturers and service providers struggle to keep their heads above water, particularly in the hospitality industry.

The MPC will continue to cut rates gradually as the economy continues to slow but is likely to still be wary of inflation even as price rises fall close to the Bank’s 2% target.

Rachel Reeves said she had “absolutely no doubt” the Government would be able to work constructively with Donald Trump, despite David Lammy’s past criticism of the president-elect.

The Government has snubbed Nigel Farage’s offer to act as an “honest broker” to improve its relationship with Donald Trump in the wake of his stunning election victory.

Shadow Chancellor, Mel Stride said that past comments have already placed Labour in a difficult position, Reeves countered that VP elect JD Vance had used some choice words to describe the new President, but Trump realizes that he has to deal with politicians who don’t share his views, but that is politics.

The pound has seen a roller coaster ride over the past week. Yesterday it recovered its fall as the U.S. election result became clear, to reach a high of 1.3009 and closed at 1.2979. Versus the Euro, Sterling has been climbing in recent sessions, reaching a high of 1.2039 and closing at 1.2023.

The die was likely cast for the latest FOMC meeting before Donald Trump claimed victory in the Presidential Election.

The paltry number of jobs that were created in October was by far the most telling reason a twenty-five-basis point cut was agreed at the meeting which ended last evening.

The timing of the meeting in relation to the employment data and the election meant that the result would be considered to be a little tentative, but since the economy is going to see growth of between 2.5% and 3% in the final quarter of the year, there is no reason, other than the President-Elect’s desire for ever stronger growth figures, for the Fed to take action which may be considered precipitate should any trade war push prices up again.

There has been plenty of discussion about the fate of Fed President Jerome Powell in the run-up to the election.

During his press conference following the FOMC meeting, Powell was asked if he would resign if Trump asked him to in the coming days/weeks.

His answer was an emphatic “no”.

Trump himself nominated Powell as Federal Reserve Chairman in 2017 in his first administration.

Powell also said that he was not legally required to leave if asked to do so, and that his staff had determined that the President lacked the capacity under the law to demote, at will, himself or any other Fed Governors.

Powell made the comments during his regularly scheduled remarks following the release of the Federal Open Market Committee’s latest statement on interest rate policy.

In his press conference following the FOMC meeting, Jerome Powell said that inflation data showed that the U.S. has made “significant progress” on bringing inflation down to the Bank’s 2% target.

However, the Fed’s preferred inflation gauge, the personal consumption expenditures, or PCE, price index, hit 2.1% in September. But the core measure, which excludes food and energy costs, remained higher at 2.7% year over year.

With the Fed’s latest rate cut, investors can expect ongoing shifts in stock and bond markets.

The increase in Treasury yields suggests a recalibration as participants digest the balance between steady economic growth and potential inflation. This environment could be ripe for strategic investments, particularly in sectors sensitive to interest rate changes.

The dollar steadied after its seismic reaction to the election result. Yesterday it fell to a low of 104.19 and closed at 104.33 significantly, above its close on November 4th.

Germany is fast becoming a basket case!

Its economy is certainly in recession in all but name and with the sacking of Christian Lindner, Chancellor Olaf Scholz has plunged the country even closer to the abyss.

Lindner is the leader of the Free Democrat Party, which formed a buffer, the amber light if you will, between the Greens and the Social Democrat Party in Germany’s “Traffic Light” coalition.

Following the sacking of Lindner, which he said was to save the country, Scholz said that a vote of confidence would be held in the Bundestag on January 15th. Both coalition parties asked a simple question. “Why”.

Scholz explained that he would meet with the leader of the opposition to agree on how to deal with the backlog of legislation that had built up recently.

Although the Greens agreed to stay as part of the coalition, which is now essentially defunct, Lindner’s Free Democrats have turned far more militant as they seek a formula to cure Germany’s economic malaise.

Completion of the banking union and completion of the capital market, but above all, the strengthening of the banking sector and the collaboration between institutions and governments, is the goal of Christine Lagarde, who believes that monetary policy can take care of itself for now, particularly as her influence has waned as the Governing Council has become influenced by data.

In the wake of the U.S. election, Central Bankers in the developed and developing world face a tricky time ahead of Inauguration Day on January 21st.

Trump is likely to impose tariffs on U.S. imports, a move which Francois Villeroy de Galhau, the Governor of the Banque de France, said would bring more protectionism and increase the chances of a rise in risks for the global economy.

Trump’s likely response is expected to be “America has bailed out the global economy for several years, without reward, and it is time countries stood on their own.

Europe is entitled to feel a little left out following the election monetary policy meetings in the U.S. and UK, both of which resulted in twenty-five basis point rate cuts.

The Euro has been in reactive mode since the last ECB meeting.

Yesterday, it rallied, following its recent fall, to a high of 1.0824 and closed at 1.0800.

Have a great day!