9 October 2024: Pill believes that the August rate cut was too early

The Bank of England’s Chief Economist, Huw Pill, is at odds with the Bank’s Governor over the rate cut that took place in August. Pill feels that the loosening of monetary policy was “premature” since the model that the Bank uses for predicting the level of inflation shows that price rises going forward will be greater than the Bank is predicting.

The decision to cut rates was by the narrowest possible margin of 5-4, with Andrew Bailey being called upon to use his casting vote.

Pill said, “There is ample reason for caution in assessing the dissipation of inflation persistence. While further cuts in base rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast. For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.”

His comments are at odds with those of Andrew Bailey, who said last week that the Bank could become more “activist” in managing monetary policy and this could lead to more aggressive interest rate cuts.

The Chancellor of the Exchequer will present her budget to Parliament in three weeks. It is believed that she is considering reducing the tax-free lump sum that people can withdraw from their private pension pot from £268k to £100k.

The move, first reported in the Telegraph, will be seen as a further example of Labour’s “war” on pensioners.

The latest consumer confidence figures were apparently far weaker than had been previously expected, due to the effect of the Government’s decision to withdraw its winter fuel allowance for pensioners.

Rachel Reeves will push ahead with plans to borrow money to invest in infrastructure, despite the rising cost of government debt.

The Chancellor will change how the Treasury accounts for capital spending to reflect investment benefits.

Labour has committed to balancing day-to-day expenditure with tax income and getting debt falling as a share of the economy by the end of this Parliament.

However, the Guardian reported that Ms Reeves is hoping to change the debt measurement to account for the value of the government’s assets, such as schools and hospitals.

In a blow to her search for investment, the Abu Dhabi Wealth Fund, ADIA, has written off its investment in Thames Water, due to the regulatory environment in the UK.

ADIA owned 9.9% of the largest of the privatized water companies.

The Chancellor wants to convince global investors that Britain is open for business despite a Budget at the end of the month that is expected to increase taxes on wealth.

Next week’s investment conference, which Prime Minister Sir Keir Starmer is expected to open, is to promote investment in the UK, including in large infrastructure projects. However, the troubles faced by Thames Water are weighing on investors, who are concerned over what they perceive as an increasingly tough regulatory regime.

The pound made up some ground yesterday as traders began to cut short positions considering the significant fall in its value following Bailey’s comments.

It climbed to a high of 1.3136 and closed at 1.3104.

It appears that the heads of G7 Central Banks may be at odds with their rate-setting committees.

Following Andrew Bailey’s overtly dovish comments on UK Monetary Policy last week and Christine Lagarde’s flip-flopping over the need for further rate cuts, Jerome Powell will try to persuade his colleagues on the FMC that there is no need for a rate cut at the Fed’s November meeting.

If the FOMC is indeed wanting to be seen as driven by the data, last week’s September Employment Report, coupled with the likely outcome of the Inflation data that is due tomorrow, may allow the Committee some breathing space.

Headline inflation is expected to have fallen back to 2.3%, the level it was at in July, while core inflation, with volatile items like food and energy stripped out, is expected to again be unchanged at 3.2%.

This latter figure will concern Powell, and he may see the November FOMC meeting as the perfect opportunity to “renew” his hawkish credentials.

Politicians on both sides of the aisle have been critical of Powell’s dominance of the FOMC, even though in reality it seems that he has been outvoted recently even though for the sake of unity he has gone along with the majority and left the hawkish intentions to his colleague, Fed Governor Michelle Bowman.

John Williams, the President of the New York Fed, and a candidate to succeed Powell in the event of Donald Trump winning next month’s election, spoke of his view that it will be appropriate again for the central bank to reduce rates ‘over time,’ after September’s big half percentage point rate cut, in an interview published by the Financial Times on Tuesday.

Trump has been a fierce critic of what he sees as Powell’s stubborn concentration on bringing inflation down at the expense of economic growth. Were Kamala Harris to be triumphant on November 5th, it is almost certain that the Treasury Secretary and Fed Chair will remain in situ.

Williams, who holds a permanent vote on the rate-setting Committee, echoed Powell’s comments, confirming that he doesn’t see the September move “as the rule of how we act in the future.”

“I personally expect that it will be appropriate again to bring interest rates down over time,” he told the FT.

“Right now, I think monetary policy is well positioned for the outlook, and if you look at the SEP [Summary of Economic Predictions] projections that capture the totality of the views, it’s a very good base case with an economy that’s continuing to grow and inflation coming back to 2 per cent.”

The dollar index has become a little overbought following its rally on the back of the September employment report. It may benefit from a period of introspection before the market gears itself up for the election and the next FOMC meeting.

The index is seeing some large sell orders around the 102.50 level, which is limiting its progress. Yesterday it read a high of 102.49 but fell back to close marginally lower at 102.46.

Later today, the minutes of the latest FOMC meeting, at which a fifty-basis point rate cut was agreed, will be published. While this is now considered to be “old news”, there may well be some interest in the overall feeling of committee members.

The Governor of the French Central Bank and one of the more influential of the Bank’s Governing Council, Francois Villeroy de Galhau, told an Italian newspaper in an interview yesterday that he believes that a further cut in interest rates will be agreed upon at next week’s rate-setting meeting.

There has been a clear shift in the opinions of prominent members of the Governing Council in recent days/weeks as its more hawkish members like Martins Kazaks and Isabel Schnabel have moderated their tone regarding inflation, while Austrian Central Bank Head and hawk in chief, Robert Holzmann, has been strangely quiet.

The ECB cut rates from record highs twice already this year and markets now expect even quicker policy easing, with moves in October and December fully priced in as inflationary pressures are easing faster than policymakers had expected.

It will be interesting to note how the ECB changes its view of economic activity next year since it will probably have cut interest rates by a full one hundred points by Christmas.

It appears that the market view that there would be a single rate cut per quarter over the next two or three quarters has already become obsolete.

Although Christine Lagarde’s “star” has been fading over most of this year, she has seen her colleagues lining up behind her as she predicted a softening of monetary policy.

Villeroy de Galhau believes that the risks to the economy have shifted from price increases to growth, as inflation has fallen more rapidly than the ECB had expected. It is interesting to note that several economists forecasted that to be the case when the ECB provided its latest forecasts before the commencement of its rate-cutting cycle.

Europe’s banks don’t fully grasp how much they could get hit by turmoil in the burgeoning market for private credit, creating the need for more stringent disclosure rules, a top European Central Bank official said this week.

“We have recently completed a deep dive on the topic and found that banks are not able to properly identify the detailed nature and levels of their full exposure to private credit funds,” ECB Supervisory Board member Elizabeth McCaul said in a speech on Tuesday.

Private credit, which generally refers to loans from non-banks, has been surging over the past few years as the asset class offers investors attractive returns. For borrowers, it’s an alternative source of funding that does away with many of the sometimes-burdensome regulatory requirements applying to bank credit.

The asset class’s success has also made it a source of concern for regulators. They worry that private credit may create a false impression that risk has been shifted out of the banking system to other parts of the financial world, and hence largely out of the purview of regulators, when in fact it hasn’t, since banks remain the arbiters of the financial markets, with Central Banks the lenders of last resort.

The Euro has formed an impressive base this week, despite the dovish view of several ECB Council members. Yesterday, it rose to a high of 1.0997 and closed at 1.0979.

Have a great day!