Beyond Currency

The current turmoil in the banking sector brought about by the collapse of Silicon Valley bank in the U.S. could affect up to two hundred firms in the UK in the tech sector.

Rishi Sunak and Jeremy Hunt met with the Bank of England Governor, Andrew Bailey, to both put in place measures to shore up the banking sector and provide any necessary assistance to any suitors who wish to buy the UK arm of the failed lender.

HSBC remains the most likely buyer of the bank’s UK operations, although it is thought that both J.P. Morgan and Goldman Sachs are also interested.

A survey conducted over the weekend found that around 350 UK companies have accounts with the bank while, of those, 200 consider the bank their primary financial partner.

This means that those firms will either struggle to gain access to their funds or will be unable to use working capital facilities. It is believed that two and a half billion pounds of capital is tied up in accounts of UK tech firms.

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.

After a highly contentious few months of industrial action, it seems that the Government and representatives of nurses and ambulance crews have reached an agreement on pay for the current financial teat and the next, which starts in a couple of weeks.

It has been agreed that a one-off payment of a minimum of £1,655 will be made to supplement the pay award in the current year, with a 5% pay rise to follow from April.

Both sides agree that this was the best possible offer that was available. It will go a long way to satisfy the nurse's demands, while the Government believes that this is the most the taxpayer could readily afford.

The budget remains the topic of severe debate in Westminster, as the Chancellor has been heavily criticized for his comments that there will be no recession this year. Despite the Office of Budget Responsibility confirming that it also believes that the UK will just about manage to avoid a technical recession, several bank’s economists disagree.

They feel that Jeremy Hunt has taken advantage of the fact that the country may not see the regulation of two consecutive quarters of economic contraction that means the country is technically in recession, but conditions will be such that in every measurable way, there it will feel like a recession.

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.

Jeremy Hunt delivered a Budget yesterday in which he lent heavily on outside agencies opinions on the UK economy for validation of the Government’s strategy for a revival of growth post-pandemic and post Brexit.

The IMF, which had been severely critical of the plans put forward by Liz Truss during her brief term as Prime Minister, commented recently that the strategy that the country is following will, in time, reap the rewards of steady, if not spectacular growth and controlled inflation.

The Chancellor made two bold statements that formed the cornerstones of the entire presentation. Again leaning heavily on the views of outside agencies, this time the Office for Budget Responsibility, He predicted that the UK economy will not face a recession this year, and by year-end inflation will be below 3%.

In what he labelled a back to work budget, Hunt, as expected, provided four billion pounds in additional support for childcare in order to encourage parents to be able to consider a return to the workplace.

One move that drew heavy criticism for the opposition benches was the scrapping of the upper limit on private pension pots before they attract tax.

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 year since the last budget has seen major upheavals in the economy and political landscape. There have been three Prime Ministers, while the 2022 budget was delivered by the current one.

There is always speculation about what the budget will contain, and this year is no expectation. With talks continuing over public sector pay, Jeremy Hunt has already indicated that there will be no fresh funds allocated to that sector.

It appears that the biggest additional funding will come in the area of childcare, where around an additional four billion pounds will be allocated to provide free childcare to one and two-year-olds.

Yesterday’s release of employment data showed that the claimant count fell for the eighth consecutive month, although wages are still failing to keep pace with inflation.

Having seen an exodus of EU workers following Brexit, the plan is to plug that gap to a certain extent, by encouraging a return to the jobs market for those who have been providing care for their own children. It is estimated that 90% of those are women.

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.

In another blow to the already fragile UK housing market, concerns are growing that borrowers will be unable to afford their mortgage repayments if interest rates continue to rise.

Although there isn’t a great deal of evidence that households have overleveraged in the manner seen a few years ago when lenders were happy to advance 110% of the value of the security offered, confident that property values would soon catch up, mortgage payments are set to continue to rise with lenders unwilling to allow borrowers to lock-in a fixed rate given the volatility of the market.

The Bank of England is widely expected to raise interest rates again at the March meeting, which will take place next week. While the three independent members of the MPC have been vociferous in expressing their voting intentions, it is unclear if the Bank of England officials who make up the bulk of the committee will vote for a twenty-five or fifty basis point hike.

The British Chambers of Commerce published a review of the UK economy yesterday, in which it reported that its members believe that there is a possibility that over the first two quarters of 2023 there will be a technical recession with GDP contracting moderately, but seeing growth returning in the second half of the year.

This is not a widely held view given the data that has been delivered since the turn of the year.

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.

Jeremy Hunt will deliver his first budget this week. He clearly recognizes one area that can deliver the level of growth that the economy needs if it is to avoid recession.

Data published last week show that, potentially, the economy is missing out on around twenty-seven billion pounds in additional growth due to the current cost of childcare, which means that it often isn’t viable for one parent to return to work after maternity leave.

This black hole is ninety percent made up by women.

Hunt has promised that he will address this issue in the budget.

The recent successes that have been achieved by Rishi Sunak over Brexit agreements and illegal immigration have, Gary Lineker notwithstanding, have noticeably improved both the Prime Minister's standing, his approval rating to such an extent that he is gaining significantly on Sir Keir Starmer the leader of the Opposition.

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 economy is losing around twenty-five billion pounds annually from the number of (mostly) women who are unable to return to work due to the cost of childcare. The Chancellor is under mounting pressure from his own MPs to provide further support to this sector of the economy in his forthcoming Budget, which he will deliver to the House of Commons next week.

Another area of the economy that is failing, according to Andrew Bailey, is the number of workers who have opted to take early retirement rather than return to work following the recession.

According to Bailey, the UK is unique among its G7 partners in experiencing this phenomenon, which is potentially a further source of both lack of output and rising inflation due to the lack of genuine skills that have disappeared from the jobs market

This situation is exacerbated by the exodus of foreign workers that has happened since Brexit.

The Bank of England has been accused of not being fully committed to using monetary policy to bring inflation under control, as it has steadily raised interest rates close to the level when they will become restrictive on demand.

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.

Monetary Policy Committee member, Swati Dhingra, nailed her colours firmly to the dovish mast, yesterday as she called for an immediate end to rate increases.

She believes that any further hikes present a material risk to the economy in the medium term. In her opinion, interest rate increases take about a year to see their full effect on inflation, and with rates having risen by 390 basis points over the last fifteen months, there should be a pause to fully evaluate their effect.

She voted against hikes at both the December and February meetings. Which leads to a conclusion that she feels that the rise in interest rates should have been halted at 3%, instead further increases have seen the base rate rise by another 100 points.

She doesn't feel that there is sufficient evidence to hand that inflation is becoming embedded in either wages or margins.

Dhingra believes that consumption remains weak even without the full effect of a significant tightening of monetary policy being seen.

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.

In past periods of high inflation, the Bank of England has not had to sustain interest rate hikes for any length of time in order to bring it under control because the UK has a history of having relatively high interest rates, which meant that the point at which rates became restrictive is reached relatively quickly.

That has not been the case during the latest rise in inflation, since rates had been allowed to fall close to zero as price rises had become benign as the developed nations of the world recovered from several crises.

However, during and just following the Pandemic, there was a huge increase in fiscal support which saw the public encouraged to spend. A classic example of this was then Chancellor Rishi Sunak eat out to help out scheme.

Because rates had been cut to almost zero. It has taken a significant length of time for them to begin to restrict demand. In fact, even after hiking at every meeting for fifteen months, short-term rates are only now reaching a neutral point.

This means that small and medium size businesses are facing rising costs due to as yet untamed inflation, as well as paying increased rates on their overdrafts and other working capital facilities.

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.

Bank of England Governor Andrew Bailey remains unconvincing in his commitment to bring inflation under control, as he appears more concerned to avoid being accused of tipping the country into a recession that may be difficult to escape.

Despite the Central bank having hiked rates at every Monetary Policy Committee meeting since December 2021, Bailey has been lukewarm in his determination, appearing to place more emphasis on avoiding the economy contracting.

With inflation beginning to fall as energy prices, at least, continue to fall, and some stability is being seen at lower levels, Bailey won’t continue to sanction higher short-term rates for a moment longer than is necessary.

He is able to call on the support of his colleague from the Bank at MPC meetings, but the three independent members have very different views on what needs to be done.

Catherine Mann has voted for larger rate increases at the last three meetings, while Silvana Tenreyro believes that economic growth should be more protected by taking a breather and pausing rate hikes.

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.