Beyond Currency
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The Monetary Policy Committee meets later this week to decide whether another hike in interest rate is needed, or if the fourteen that have taken place in this cycle have slowed demand sufficiently for inflation to follow. Over the past two weeks there have been a series of mixed signals, none more so than the employment report for August. Wage inflation has now exceeded consumer price increases, which points to a wage/price spiral continuing, but the unemployment rate is starting to increase which is a clear indication that interest rates are now at a level where they are restricting demand. While it is certain that the five permanent members will vote in unison, there have been some interesting comments from the independent group recently. Swati Dhingra is of the opinion that not only is a hike not justified at this time, but the cycle would have been halted before now. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
It was expected that the economy would have failed to post any growth in July as the poor weather and a series of strikes led the economy to shrink by 0.5%. Another hike in interest rates also contributed to falling demand and led to fears that the good news that has been seen recently about the UK’s prospects has ended. It had been predicted that the economy would have shrunk by 0.2%, but construction projects and retailers saw activity fall by significantly more than expected. The country has been walking a tightrope for several months teetering on the edge of a lowdown which has been averted by a series of one-offs. It is possible that the country is already experiencing a mild recession that has been masked. A recession, in which the economy contracts for two consecutive quarters cannot be ruled out as economists have already been expecting the economy to flatline between now and the end of the year. If the issues that have provided positives now turn negative, they could easily result in contraction. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
There has been a remarkable turnaround in the fortunes of the country in the past three months. The country was headed for a damaging recession as a “doom loop” of negative economic developments looked likely to engulf it. Then the IMF produced a report in which it predicted that the UK would not fall into recession this year and the ONS updated its data on the country’s post-Pandemic performance and suddenly confidence is beginning to flow again. Yesterday’s employment report for August showed that wages have finally caught up with prices and both should now begin to increase in unison. Average wages rose by 8% annually which is likely to be the highest of the three measures which determines the level of the increase in the state pension and other benefits from next April. The “Triple Lock” under which benefits increase each year by the highest of average wages, inflation and 2.5%, was introduced in 2010 by the coalition government as a method of ensuring that the state pension “kept up” with overall wage growth. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Catherine Mann is far and away the most hawkish member of the Monetary Policy Committee. She spoke yesterday of her view that interest rates should continue to rise if inflation remains above the Government's 2% target. She went on to say that in her opinion, it would be better in the long run if the Bank erred on the side of over-tightening rather than bring the cycle of hikes to an end only to be forced to begin again should inflation flare up again over the winter. Mann accepted that her opinion may be wrong but if the Bank had continued to raise rates and inflation decelerates at a faster rate than she expected she wouldn’t hesitate to introduce rate cuts sooner than expected. While her views are considered radical, she is showing the kind of proactivity that has been found wanting during Andrew Bailey’s term as Governor. Of the nine members of the MPC, five are permanent, the Governor, the deputy Governors responsible for monetary policy, financial stability, markets and banking, and the Chief Economist. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The data that is due to be published this week will go a long way towards determining the path for Sterling for the rest of the year. Tomorrow, the August employment report will be released. It is expected that the claimant count will have increased marginally while earnings have exceeded inflation, meaning that in real terms, people will begin to feel better off. Inflation is likely to have moved slightly higher since the rising cost of a barrel of oil is reflected in the forecourt price of petrol and diesel. The data will show that the inflation is well on the way to meeting Rishi Sunak’s pledge to halve the rate of inflation by the end of the year. The economy will have shrunk by up to 0.3% in August but the Q3 results due next month are expected to show marginal positive results. With inflation falling and the economy “bumping along the bottom,” the conditions that will lead to an end to interest rate hikes are slowly appearing on the horizon. Several economists believe that the next meeting of the MPC will agree to a hike of twenty-five basis points in the base rate, but that could be the last in this cycle. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Huw Pill, the Chief Economist at the Bank of England spoke yesterday of the determination of the Bank to “see through to the end” its fight against inflation. Many observers took that as a hint that there will be another twenty-five-basis point hike in interest rates when the MPC meets again in three weeks’ time. Pill went on to say he and his colleagues are aware of the unnecessary damage that could be inflicted on the economy if rates are raised too much, but the Bank feels it must concentrate primarily on tackling inflation. Interest rates are likely to stay elevated for some time. Inflation fell to 6.8% in July and while it can be considered to be moving in the right direction, the base rate needs to be at a level where it is restricting demand, but not severely affecting employment and growth unnecessarily. The most recent employment data shows that there is still capacity since the claimant count is constant, while he feels that the country can avoid a recession in the coming months. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
There continue to be more mixed signals this week for the UK economy as a measure of business optimism rose to its highest level since before the Russian invasion of Ukraine, but housing market activity was shown to be 20% lower than it was a year ago. As has been the case in most stories about the economy this year, the Bank of England is behind both headlines. The rises in interest rates that have been taking place for close to twenty months have not just had a significant effect on the headline number of home sales this year, but related trades and services have also been hit. The optimism being shown by businesses is because there is a growing feeling that although inflation remains well above the Government’s target an end to the cycle of hikes may be in sight. So far there are none of the telltale signs of an economy on the verge of a recession, like business failures or a significant drop in money supply, but despite the optimism there is also a degree of caution. A prominent economist and journalist spoke yesterday of his disappointment at the collective weakness of the Monetary Policy Committee who he likened to a flock of sheep blindly following their shepherd. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The UK continues to delay additional food safety checks on imports from the European Union since they fear that the additional delays created by performing the checks will create shortages and drive up inflation. This is yet another demonstration of the lack of foresight that accompanied the UK’s departure from the EU which has piled additional red tape and additional costs onto firms still wanting to trade with the EU or operate within its boundaries, It is estimated that Brexit has been directly responsible for around 30% of food price inflation since 2020. The necessary border checks to ensure that the origin of products have again been delayed as the Government fears such checks could choke off supplies. The EU supplies 28% of the food consumed in Britain. It is now clear that Brexit was an ill-conceived notion that gained momentum due to over-zealous jingoism Which in the cold light of day, has set the country back at least ten years and is partly responsible for it being unable to shake off high inflation. Several industry groups have welcomed the latest delays to the implementation of further checks since they are likely to make them less competitive and create further issues in supply chains. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
It is expected that inflation will have fallen again when the data for August is published. While that will be welcomed by the Bank of England, it is unlikely to encourage the Monetary Policy Committee to pause the cycle of increases in the base lending rate. Inflation remains a concern, although the focus of the City of London has switched and despite the welcome news that the IMF does not believe that the country is facing an imminent recession, the feeling “on the ground” is different. The output data that was released last week showed that the service sector is beginning to slow and can no longer be relied upon to raise the composite figure above the watershed figure of 50 which divides expansion and contraction. Ben Broadbent, a current member of the MPC and Deputy Governor for Monetary Policy, spoke last week of his expectations, which are also the views of his colleagues, that interest rates are unlikely to begin a downward trajectory for some considerable time. Naturally, Broadbent was unwilling to be any more specific, but market analysts were happy to “fill in the blanks.” Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Although some progress has been made in the fight against inflation, interest rate futures markets are still discounting two further hikes this year. There is also a long-held view amongst economists and market commentators that the base rate will top out between 5.25% and 5.75%, although it would take a significant rise in headline inflation for another fifty basis points in hikes to receive support from the MPC. This week’s output figures were “disappointing,” but do show that the Bank of England, despite the market’s opinions, is closer to stopping rate hikes than it was previously believed. There is no fixed rule or standard by which to judge when rates have become restrictive upon demand. It is a judgment call which will be made by the MPC. Again, it is unlikely that any decision will be unanimous since at least one independent member who already believes that rates are sufficiently restrictive and need to be allowed to “do their work.” The Bank of England was the first G7 Central Bank to commence rate hikes and the odds now are that it will be the last to call a halt. There is hope but truly little expectation from traders that any hint will be given at next month's rate-setting meeting that a pause will be considered, let alone an end to the cycle. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The Bank of England, in common with other global Central Banks, looks at trends in the economy and tends to consider “outliers” as just that, issues that are due to a specific event or issue. Examples of this are the boost to GDP likely to happen due to the England women’s football team reaching the World Cup final, or the opposite effect of the additional Bank Holiday that was granted to the country to celebrate the King’s Coronation. Yesterday's release of preliminary output data for this month so far is likely to be treated similarly, but it is important to be able to discern the reason that data was out of line and not the beginning of a new trend. The earlier the start of a new trend can be spotted the better for monetary policy, since it allows the Central Bank to get “ahead of the game.” Services output has virtually collapsed, falling from a relatively healthy 51.5 in July to a severe contraction to 48.7 this month. This dragged the composite figure down into contraction territory at 47.9 from 50.8 last month. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The outcome of next month’s MPC meeting, the sixth this year, is still on a knife edge. Although inflation has finally begun to see a meaningful fall, Andrew Bailey and his colleagues are “glorying” in keeping the markets guessing. While the level of any advance guidance is a balancing act between pre-empting the committee’s vote and being accused of providing mixed signals, the markets should have been provided by now with a set of parameters by which rate decisions are made. Right now, there are three outcomes of the September meeting, a fifty-point hike, a twenty-five-point hike and a pause. Considering that the Central Bank should try to avoid volatility, let alone be the cause of it, Bailey has failed comprehensively to keep the traders, investors and analysts sufficiently informed to a level at which the meeting's outcome is fairly certain barring any unforeseen occurrences. At its meetings, the Governor suggests any proposed change to policy to the committee, they discuss their own personal views and the rationale behind them before a vote is taken that will determine the level of interest rates for the next six weeks. Each members’ vote is a matter of public note but given that most of the committee report to Bailey, it feels like the independent members are little more than window-dressing. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The mid to late eighties were a time of momentous change in UK financial services. In 1986, Big Bank took place which revolutionised the way equities were traded which allowed easier access to the market to the “man in the Street.” This was also the time of privatisation, when the country's publicly owned utility companies were sold off, apparently to allow greater competition in the marketplace. However, to most of us all it meant was an opportunity to make a “quick buck” the individual companies were “attractively priced” to ensure the float would be successful. At a stroke, gas, electricity, telecoms, railways, and water providers became the largest privately owned businesses on the newly formed stock market. This was hailed at the time as Margaret Thatcher’s great masterstroke. It was designed to increase people’s choice but has ended up making the rich richer. Now, thirty-five to forty years later, it is accepted that the entire process was a massive mistake. Rather than providing greater choice, the utility companies have consolidated to form controlling interests in the hands of big business whose main driver is profit not service. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
“Twas always thus.” Despite grand plans to “level up” the country economically by trying to make investment more attractive to business, London and the South East are still propping up the rest of the country. Having shattered the “Red Wall” which divides the country when winning the 2019 election, the Conservative Party set about consolidating their position but delivering change to areas that had been socialist for decades has proven far easier on paper than in practice. Big business has invested heavily in the South East, the infrastructure is already in place, even the geography is against change, with proximity to the Channel Tunnel and another significant driving the status quo. Conservative candidates who were elected in s 2019 are beginning to see the reality of the future as “one term” MPs as two major hub projects, one in Newcastle, the other in Birmingham have been dumped, after years of postponements. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
England’s qualification for the women’s world cup final which will take place in Sydney on Sunday is expected to provide a £185 million boost to the economy. At the current time when the economy is teetering between positive and negative GDP results, such an event could further disguise the underlying weakness in the economy. To see significant growth in the coming months, the government and Bank of England will need to come together to provide the stimulus to see GDP return to trend. There are two actions which may trigger this. The first would be when Andrew Bailey announces when the MPC considers it to be time to stop the cycle of interest rate hikes. Given this week’s inflation data that may come sooner than had been expected, but there is still a hawkish undercurrent to the committee’s thinking which may see rate hikes continue until the end of the year. After the meeting which will take place on September 21st, there will be only two further meetings this year. The other action may come in the Chancellor’s autumn statement which will take place in November. Despite having constantly said that it is too soon for a reduction of taxes in the UK, it is becoming more and more likely that Jeremy Hunt will decide to use the “nuclear option” since his Party is trailing so far behind in the opinion polls that if they don’t take drastic action they will be sent into opposition sometime in the second half of next year for the first time in fourteen years. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Good news about inflation has been in short supply for quite some time, but yesterday the Government and Bank of England will have been buoyed by the news that headline price increases fell by more than one percent in July. While the data had been expected to show a significant improvement, the news was nonetheless gratefully received. Headline inflation that had been at 7.9% in June, came in at 6.8%, while the core, which has the more volatile items like food and energy stripped out, was unchanged at 6.9%. Despite inflation seeing a considerable improvement, it is still far too high for the Bank of England’s liking and a further hike in short term interest rates is expected to be agreed at the next meeting of the MPC which takes place on September 21st. The fall in inflation brought the headline to its lowest level since February 2022 and was due to falls in energy prices. The wholesale price of gas has been falling continuously since it made a record high last August, so the fall in inflation had been expected. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The publication yesterday of the July employment report focussed the market’s attention, as predicted, more on the possibility of a price/wage spiral than the number of people in work. Average earnings rose by a record 7.8% in the three months to June which will encourage the Bank of England to continue the chain of interest rate increases that began in December 2021. The largest increase in average earnings since records began means that for the first time in a year, wages grew faster than prices. One spin-off of the rise is that the Government’s triple-lock on pensions and other state benefits will be in effect for 2024 with a rise like this year’s 10% probable. The claimant count rose by 29k, up from 16.2k in June. This is an indicator that the Bank of England’s monetary policy tightening is beginning to influence employment, with jobs becoming less plentiful as the economy continues to adjust to Brexit. The level of redundancies is growing as well as the workforce looks more to job security than “job-skipping.” Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
From the mid-seventies to the mid-eighties’ redundancy became a significant factor of working life as more firms rationalized their workforce to deal with the slowing economy. It is possible that the same effect is taking place now, with the number of redundancies growing larger month-by-month as firms first reconsider their investment plans and then abandon them altogether. While it was sensible to “stockpile” workers given the cost of rehiring them if the economy rapidly recovered, given the wage demands and shortage of both skilled and unskilled workers, today’s employment report for July could deliver the first definitive evidence of the effect that the long-running cycle of rate hikes is having on the economy. The claimant count has been on an upwards trajectory over the past few months, and that is expected to continue, while wage increases may be levelling off. The data that has been released over the current quarter has not really demonstrated any significant slowdown, but the seventy-five basis points of hikes at the past two meetings of the MPC may see tighter monetary policy begin to bite. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Inflation is expected to have fallen last month by more than one per cent, which will provide some encouragement to the MPC for it to consider when to pause or halt entirely the current cycle of interest rate hikes. However, wholesale price increases already in the system may see some of that fall reversed in September. This will be a double-edged sword for one section of the community. The “triple lock” on state pensions and other benefits will be applied next April and is expected to be well above the rate of inflation at that time. At its most recent meeting, the MPC showed a three-way split, with the independent members all having differing views of what the Bank of England should do with monetary policy. Swati Dhingra voted for no change, while Megan Greene voted in line with the permanent members of the committee for the twenty-five-point hike, which was eventually agreed upon, while Catherine Man and Jonathan Haskell voted for another fifty points. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The Bank of England surprised no one with its decision to hike interest rates again yesterday, for the fourteenth consecutive time. In the end, it was something of a surprise, however, that a hike of only twenty-five basis points was agreed, considering a fifty-point hike was considered necessary at the last meeting. The Bank of England’s Governor, Andrew Bailey, commented at his press conference that the MPC expects headline inflation to fall to 5% by October. He went on to say that the reason inflation is currently higher in the UK than in the Eurozone is due to a more gradual “pass-through” of energy price falls in the UK. It is unclear at what rate energy prices will continue to fall, but he did say that he believes that the price of food and drink has peaked. This was a little odd given the effect of the withdrawal of Russia from its agreement to allow free movement of grain through Ukraine’s Black Sea Ports and changes to taxation the UK government introduced this week that will see the price of beers, wines, and spirits rise. Services inflation has risen since May, which is an unwelcome development. Pay growth in this sector has been stronger than the models that the Bank’s economists use predicted. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Since he came to power, it has been an obvious policy of Prime Minister Rishi Sunak to be seen to be “getting on with the job.” Naturally far less flamboyant than his predecessor, Boris Johnson, Sunak has not made many significant policy speeches, but that is beginning to change. His only major success has been the delivery of the Windsor Framework, which allowed Brexit to be completed. This was achieved without the bluster and threats that had accompanied the end of the UK’s relationship with the European Union, and that has become the “Sunak way.” However, over the past few weeks, the beast appears to have “awoken from his slumber”, seemingly realizing that he won’t stand a chance of winning the election by trying to appease every voter, so he has decided to try to win back voters who have voted Conservative, possibly for the first time, in 2019. He, first, risked aggravating the environmental lobby by granting licenses to drill for oil and gas in the North Sea and, just yesterday, deciding to stop treating the NHS as a “Sacred Cow” and expecting it to take the blame for lengthening waiting lists, which are due to “internal protocols” and poor management. He hopes that this new “can’t please all the people all the time attitude” will galvanize backbenchers into rallying around, particularly those who are still smarting from the way the Party and Parliament treated Johnson. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
House prices in the UK fell by almost 4% last month as interest rate increases made passing an affordability test more difficult, particularly for first-time buyers. This was the largest fall since 2009, the height of the financial crisis. The fall coincides with mortgage rates rising to their highest level in fifteen years. Currently, a two-year fixed-rate home loan costs, on average, 6.85%. The average price of a house has fallen by 13k since the peak that was reached last August. Currently, a first-time buyer who has a deposit of 20% will see that mortgage payments account for 43% of their salary. This is an increase of 10% over this time last year. The rate of inflation fell to 7.9% last month, and a survey of food production showed that food price inflation has peaked in the past couple of months as the cost of grains and vegetable oils fell significantly. However, food price inflation may be hit by Russia’s decision to pull out of the treaty it had agreed to allow the safe passage of grain carriers using Black Sea ports. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The UK yesterday challenged the accepted logic over global warming and climate change by agreeing to issue hundreds of new licenses for exploration and drilling for oil and gas in the North Sea. It had been agreed that for countries to meet zero carbon targets by their agreed time that existing supplies should be mothballed, and a greater concentration would be given to sustainable sources of power. Rishi Sunak, who had already invited the ire of the environmental lobby by pushing back against the Mayor of London’s plan to extend the ultra-low-emissions-zone around London, has been accused of a “desperate vote-winning policy” to kick-start the Government’s campaign to win the next General Election for which they are trailing far behind the Opposition the opinion polls. Data released yesterday showed that consumer lending rose to a five-year high last month. However, while this would be a sign of a growing economy in normal circumstances, it appears that rather than buying new cars or consumer goods, households are borrowing to supplement their funding of household budgets in the face of a continuing cost-of-living crisis. The continued hiking of rates by the Bank of England, coupled with continued high inflation, is seeing monthly payments on loans, overdrafts and credit cards reach their highest level in a generation. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
HSBC and Nationwide led the way last week in reducing their standard rate for floating rate mortgages as interest rates stabilized. However, the rate for a two-fixed loan was still higher than it was at the start of the month. The peak was at 6.89% earlier. The pressure on the Monetary Policy Committee is expected over the next year as inflation begins to fall, but in the short term, it is expected that there will be another seventy-five basis points of hikes before a pause is announced. During the prolonged period over which the Bank of England has continued its cycle of rate hikes, its Governor, Andrew Bailey, has faced criticism for ignoring the signs, which, with hindsight, has proven to be fairly obvious that inflation was rising, close to out of control. The belief is that if the Central Bank had been more aggressive in its hikes at the start of the cycle, that may not have had to be still hiking now. To defuse that criticism, it has decided to commission a review of its economic forecasting. The man chosen to lead that review is Ben Bernanke, a former Chair of the Federal Reserve. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
A position on the Chancellor’s Economic Council is akin to being appointed to the Bank of England’s Monetary Policy Committee but without the responsibility. The role of the Council is to “second guess” the MPC and make theoretical judgements on monetary policy, but without the responsibility that those decisions have in the “real world"".” At its latest meeting, the Council, which is made up of seven members including former Bank of England Committee and Karen Ward, Chief Economic Strategist at Investment Bank J.P. Morgan, counselled against further rate hikes for fear that they will push the economy into recession. Ward was also quoted recently as saying she believes that the MPC may be using a mild recession as a deliberate strategy to bring down inflation. However, that was coupled with another comment that no blame can be attached to the Bank for “simply doing its job.” Those two comments illustrate the futility of appointing a shadow MPC which can make pronouncements, often with the benefit of hindsight, without the responsibility of how they affect the lives of real people. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
When the IMF produced its last global review, the Government pushed back against its findings believing that the economy would not contract for the requisite two consecutive quarters this year that constitute a recession. In its latest review, the Fund reversed its prediction and agreed with the Government’s view that although it would be “nothing to write home about”, the UK economy would grow in 2023. The IMF believes that the UK economy will grow by 0.4% this year, up from a prediction of a 0.3% contraction in its last global review. While any growth is welcome in the current environment, the economy will remain in the “slow lane” when compared to most other G7 economies. Way out ahead in the “growth race” is the United States, where 1.8% growth is predicted. While the right-wing English press gloried the fact that the German economy will underperform and be the only economy in the group that grow more slowly than the UK, the fact is that with an election on the horizon, Rishi Sunak will need to perform a miracle or rely on the Opposition, completely blowing their substantial lead in the opinion polls to be re-elected. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
The Chief Economist at the IMF, in delivering the Funds’ latest review, made a wide-ranging speech yesterday in which he outlined the Fund’s view of the world economy as well as his expectations for growth and inflation. His most significant predictions were around Europe, where he believes that the UK economy, although still struggling to make any headway, only growing by 0.4% this year, will outperform Germany, which is stuck between stagnation and recession. Pierre-Olivier Gourinchas told his audience that the UK's upgrade from a 0.3% contraction in its earlier report was due to stronger-than-expected consumption figures and the confidence that has been derived from the fall in energy prices. The Windsor Protocol has reduced the level of uncertainty surrounding Brexit, but only Germany will perform worse than the UK among the G7 nations. The UK’s financial sector has shown “surprising resilience” following the collapse of Credit Suisse and is not showing any signs of a significant issue with bad or doubtful loans. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
There has been outrage over the Bank of England’s decisions to award its staff bonuses totalling twenty-five million pounds despite its demand that the rest of the country exercise restraint in pay awards and bonuses. Andrew Bailey’s assertion that unsustainable wage rises are in part responsible for stoking inflation appears not to apply “close to home.” While the awards are not necessarily excessive in themselves and are in line with what has been paid in previous years, the revelation will embarrass the Bank’s Governor at a time when his and his teams’ credibility is low after a series of ill-judged comments. The soaring cost of mortgages that are being reset after their fixed rate period expires is leading to borrowers facing deficits in their monthly outgoings, leaving them facing either “dipping into” savings or using expensive credit cards or short-term loans to pay their household bills. This will undoubtedly lead to a significant downturn in retail sales which will, in turn, feed into a continued downturn in overall economic activity. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
Last month's fifty-point hike in the base rate of interest is being considered a “rush of blood to the head” that came because of the headline rate of inflation in May remaining unchanged. Using the same logic, the market expects the MPC to revert to its staid policy of twenty-five-point hikes that have become its “staple offering” for almost the entire period of its current rate hike cycle. The meeting, which takes place next Thursday will be the first since Silvana Tenreyro completed her stint as a member, and it is unlikely that her “ultra-hawkish” views on inflation will be continued by her replacement, Megan Greene. Greene who will bring a wealth of international economic experience to the role will take time to bed into the role just as her predecessors have. With Michael Saunders having left almost a year ago and Tenreyro having just left, the MPC has been shorn of two economists who believed that rates would have risen faster in response to the factors that were driving inflation. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
This week’s publication of inflation data for June illustrated how much more the Bank of England could have done had it not been timid about the effect its actions could have had on the economy. The Bank and the Treasury have not worked in tandem to bring inflation lower, and it is as if the two agencies do not talk to each other. There is little question that the actions of the Chancellor, Rishi Sunak, planted the seeds that eventually grew into the highest rate of inflation in a generation, but the Bank of England has lacked the courage seen in other G7 nations to “take the bull by the horns” and tighten monetary policy significantly faster than it has. Now, with inflation beginning to retreat, due in part to their most recent action in hiking rates by fifty basis points, they are left wondering if they could have been more aggressive. In the seventies and early eighties, it was said of the economy, which was plagued by industrial action which made union leaders into TV celebrities, that the UK suffered from a malaise which emanated from a nation living in the past and trying to repeat the energy created by the post-war years. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.
