Beyond Currency

While the wave of industrial action that is blighting the outlook for the public sector shows little sign of abating, the Bank of England is likely to be concerned by the inflationary nature of pay deals in the private sector.

The January employment report was published yesterday and while the jobless rate remains close to a historic low at 3.9%, it is the average earnings figure that will contribute to another hike at the next rate setting meeting.

Average earnings not including bonuses rose by 6.7% in the three months to December, and another 12.9k workers left the claimant count. The previously published claimant count figure was revised from -19.7k to -3.2k.

In the Budget due next month, Chancellor Jeremy Hunt is expected to do away with the cap on Bankers bonuses that was an EU initiative made law in 2014.

Another possible change in taxation that is expected in the Budget is a reduction in VAT. It is unlikely that it will be an across the board cut, fuel and public transport are two areas apparently being looked at.

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.

Brexit has cost the UK £28 billion, according to Bank of England official and MPC member Jonathan Haskell. That equates to roughly £1,000 per household.

The majority of that figure relates to a fall in private sector investment in the country, which has slowed to a trickle and is a significant contributor to the significant fall in productivity and output.

The vote to leave the EU has resulted in severe scarring to the economy and according to Haskell, the Government can only hope that the damage inflicted is not permanent, although it will take a generation for the country to return to its place at the top table.

It is apparent that small business groups want to be involved in discussions about the future relationship with the European Union. Rishi Sunak recently ruled out a deal similar to that of Switzerland, where the country has access to the single market in exchange for a reduced contribution to Brussels’ budget.

There has been a lot of noise recently about the UK becoming a high taxation economy, and that is partly why global brands like AstraZeneca are leaving for lower taxation regimes. Two of the largest Eurozone economies, France and Germany, have tax receipts roughly equal to half the size of their economies. For the UK, that figure is about 40%.

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 economy failed to expand at all in the fourth quarter of 2022, but the fact that it didn’t contract either can be seen as a positive, as it means that the country didn’t suffer the ignominy of being the only G7 economy to actually suffer a recession.

There have been doubts raised regarding the whole two quarters of negative growth denoting a technical recession and while it may be practical to provide the financial markets with a guide to a nation’s performance, in reality it has no practical meaning.

Judging a country’s performance over a period of two months to decide if it is contracting is an impractical notion. There are so many moving parts that contribute to a recession that simply to say the accepted two quarters of contraction means nothing in the real world.

Two half yeast of negative growth would be a more suitable period over which to judge a country’s performance, but for now, the Government can breathe a sigh of relief that it was enough of a close call to mean that it got away with it.

The Chancellor of the Exchequer commented that while the fact that the country did not suffer a recession in 2022 is welcome, it is not out of the woods yet. There are still hard decisions to be made, inflation is still too high, government borrowing needs to be brought under tighter control, public sector pay deals need to be struck, and output from both manufacturing and services is not where it needs to be.

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 Governor of the Bank of England, Andrew Bailey, clashed with members of the Parliamentary Treasury Select Committee when they were critical of the Bank’s actions in tightening monetary policy to drive down inflation.

With headline inflation still well into double figures, some committee members accused Bailey and the MPC of damaging confidence in the Central Bank.

While providing his half-yearly testimony before Parliament, Bailey was asked how he can expect the public to be confident that the right decisions have been made over the past eighteen months given the continued high level of inflation in the economy.

Bailey clashed with committee chairman Harriet Baldwin over the Bank’s delay in raising interest rates until the furlough scheme had come to an end. Inflation has remained above the Bank’s 2% target every month since December 2021.

Bailey countered by commenting that since the scheme was considered vital to drive the economy forward as the country was emerging from the Pandemic and was inflationary by its very nature, inflicting higher interest rates on borrowers would have been counterproductive in the MPC’s opinion.

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 is a growing possibility that the UK could avoid a technical recession this year, according to a survey published by the National Institute of Economic and Social Research published yesterday.

However, the Institute still predicts that the country will see a prolonged and significant fall in living standards, while it also reduced its expectation for GDP this year to 0.2% from 0.7% previously. It also reduced its prediction for 2024 from 1.7% to 1%.

The Institute’s Managing director commented that its report paints a particularly downbeat picture of the UK, which will be slow to recover from the energy price shock that it saw in 2022.

One-in-four will be unable to afford heating and food without dipping into savings, or seeking government support.

One of the Prime Minister's goals for 2023 is to see inflation halved and the Bank of England is acting cautiously, but judiciously in trying to drive inflation lower, although the natural fall in prices will see that goal take a little longer to achieve.

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 actions of the Bank of England over the past years or so have been occasionally difficult to understand. The presence of three independent voices on the Monetary Policy Committee means that there are times when policy is driven by a theoretical view of monetary policy which differs from the practicality of dealing with the bank’s mandate to provide a platform for price stability and economic growth.

This has led to Andrew Bailey delivering what have been termed dovish hikes, being almost apologetic for having to tighten monetary policy. The presence of Catherine Mann, Silvana Tenreyro, and Swati Dhingra bring the air of an intellectual discussion to committee meetings, which lessens their impact.

The Comments from Catherine Mann this week added a significantly hawkish voice to the MPC process and being only one of nine voices, her opinions are often far more influential than is actually the case.

The six Bank of England officials who sit on the Committee have both executive responsibility for their roles at the Bank and the task of creating an environment for stability. For example, Bailey and Sir Jon Cunliffe had to calm markets following the potentially disastrous mini budget that followed Liz Truss’ election as Conservative Party leader and Prime Minister.

Looking ahead and past the theoretical views of the independent members of the MPC, it is likely that the Banks will continue to tweak monetary policy at the next two or three meetings rather than decisively creating an environment where inflation is driven lower by interest rates that are actively dampening 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.

MPC member Catherine Mann spoke yesterday of her fears that a more dovish view on inflation that she is seeing from her colleagues could see the Bank of England pause the current cycle of interest rate hikes, only to be forced to begin them again as inflation remains at its current high level.

She believes that the tried and tested method of using data to spot turning points in the economy is being ignored due to the pressure being exerted on the Committee by the continuing cost of living crisis.

She feels that rather than seeing the cost of living fall if short-term interest rate increases are paused, or halted altogether, the economy will still see a significant recession in the next year to fifteen months, but the high level of inflation will remain and drive further demands for inflation busting pay demands in the public sector.

Furthermore, she went on to say that she remains mindful of the interest rates decisions being made by the country’s G7 partners and the fact that rising inflation is an issue for the global economy that has arisen primarily as the world has exited the Pandemic.

Mann acknowledged that there is a degree of interconnectedness between economies, particularly in the developed world, due primarily to the growth of digital communication and instant money transfers.

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 is still no definitive answer to the questions about the length and depth of the recession, which the UK is probably already seeing. There is no question that the economy is slowing, but there are too many imponderables to be able to say that the country will be in recession at the end of 2023 or how bad the telltale signs of a recession will be.

Unemployment remains at a historic low, and although business liquidations are beginning to rise, they are still not rising to a level which raises significant concerns.

The property market is one of the more obvious areas where the continuous interest rates rises that have taken place over the last year or so are beginning to see and effect. House prices are 3.2% lower than they were last August and high street bank, Santander, believes that they will fall by 10% this year.

Despite the gloom, the mortgage lenders are returning to market with a wider rate of products offering protection against higher rates.

The single most important reason for the disarray that enveloped the mortgage market in 2022 was Liz Truss, who almost completely destroyed confidence with a misguided policy of cutting taxes and funding them with significantly higher borrowing.

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 Governor of the Bank of England, Andrew Bailey, having presided over the latest Monetary Policy Committee meeting, spoke of his confidence that the worst of the downturn has passed and the recession that has been forecast and has probably already started will be both shorter and shallower than is being forecast elsewhere.

Not being prone to over exaggeration during his close to three years as Governor, Bailey is considered by the markets to be a pragmatic and cautious Governor.

For this reason, the financial markets place a great deal of confidence in his comments.

Although the IMF reported this week that it sees the UK suffering from a downturn that is unmatched by any other developed economy, Bailey studiously avoided referencing their report in his own statement.

The MPC saw fit to hike rates by fifty basis points, the tenth consecutive meeting at which they have tightened monetary policy.

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.

UK consumers are seeing their confidence to be able to perform the tasks that until recently seemed perfectly normal to them; put food on the table, provide a warm, family home and go to work for a wage which allows them to once in a while enjoy one or two luxuries, drain away

Longer term, buying a house or a car are no longer considered within reach, and this disenchantment is manifesting itself in industrial action as real wages continue to fall.

While not every reason for the current cost of living crisis can be laid at its door, the current government must shoulder a large part of the blame for first allowing the situation to become so grave and then failing to act other than to put in place temporary measures to help in the short term.

The NHS and virtually every other part of the public sector from teachers to border control staff to driving test examiners and civil servants, took industrial action yesterday, and the message to Rishi Sunak and his Cabinet is becoming clearer by the day, if the present government continues to deny them a living wage then they will elect a more sympathetic Party.

While the government continues to stand firm, the edifice of public services is crumbling around them. Productivity is falling rapidly, as workers believe that if they are being paid breadline wages, they will do the bare minimum.

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.