Beyond Currency

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.