Beyond Currency

The Bank of England’s Monetary Policy Committee has been meeting and will announce its decision on short term interest rates at lunchtime today. It is probable, but by no means certain, that the decision will be to hike by fifty basis points.

Almost as important as the decision on interest rates will be the release of the Bank’s projections for the economy.

This will provide advance guidance to the markets about the Bank’s expectations for growth and inflation over the rest of the third quarter. The most recent monetary policy summary predicted that inflation could reach 11%, but there is a real possibility that that will be revised upwards, possibly to as high as 15%.

Were that to be the case, the Bank would be certain to continue to raise rates.

That does seem to be an extreme view, particularly with the price of petrol having fallen recently. However, with Ofgem, the energy regulator, stating recently that the estimates for the rise in the energy cap in October are likely to be revised upwards, a further significant rise in inflation should not be discounted.

There are growing signs that the country is heading for a recession. Insolvencies are growing at a rate not seen since 2009, while output in the SME sector has fallen by 20%.

SME businesses are disproportionately affected by the fuel crisis, so this may be a temporary issue since forecourt petrol prices are beginning to fall.

There are the major supermarket chains driving a price war, and this should see headline inflation moderate. This will add another layer to the Bank of England’s interest rate decision, which will be announced at lunchtime tomorrow.

Andrew Bailey and his colleagues are split about whether a further 50 basis points is justified. So far in the current cycle, the Bank has been reactive to data and over the past month inflation has had less of an impact while globally, slowing economies have been making headlines.

The financial markets are still pricing in 50 basis points, but it is likely that Bailey will make this another dovish hike and provide advance guidance regarding the bank’s possible reaction to a slowing economy.

The UK has long been a magnet for foreign investment. Following Brexit and the Pandemic, funds are beginning to flow into the country again. Several banks are looking to reinstate real estate investment trusts that had become dormant when investors shied away due to Brexit uncertainty.

London is seeing renewed interest. Birmingham, which is undergoing regeneration as the host of the Commonwealth Games is in the spotlight. Manchester is also being seen as a significant investment opportunity.

As the race to be the new Prime Minister continues, Liz Truss continues to attract the support of former candidates. Nadeem Zahawi and Penny Morduant have now come off the fence and pledged their support for Truss.

A cynic may believe that they have now seen which way the wind is blowing and see their path to Cabinet post as being more certain under Truss.

Although recent forums have been undecided about whether the Bank of England should hike rates this week, it remains likely that the Monetary Policy Committee will raise short-term interest rates by fifty basis points to 1.75%.

Falling headline inflation sees the forecourt price of fuel fall by 10% in some parts of the country. The Bank of England may reconsider its plans to hike rates by fifty basis points at its meeting this week.

The fall in petrol prices has gone unheralded, as the gaze of market commentators was fixed upon the prospect of a recession. Surveys show there is little likelihood of any growth in the economy in the next three months.

If the Bank of England presses on with its plan to hike by fifty basis points, then a recession becomes even more probable.

The MPC has become more hawkish in general in recent weeks, with Catherine Mann taking up the campaign for tighter monetary policy as her colleague Michael Saunders leaves the Committee. He has fought a lone battle for interest rates to rise faster and more aggressively ever since inflation began to rise.

In hindsight, Saunders’ campaign may have been justified. If the Bank had been more aggressive when it started to hike rates last December, it might have begun to moderate or even pause hikes by now, providing a degree of support to the economy.

One of the cornerstones of the British economy is set to suffer a significant downturn. The housing market has so far been fairly immune to rising interest rates, but that is about to change as the effect of rising interest rates as well as the cost-of-living crisis combine to make homeowners think again about selling up and moving on.

Lloyds Bank, Britain's largest mortgage lender, has reported that its mortgage book rose by just 1% in the three months to June. The Bank’s Chief Executive reported that if it hadn’t been for clients rushing to lock-in lower rates by mortgaging existing properties, activity would have fallen significantly.

Despite there having been no major data releases this week, sentiment around the UK economy and its ability to avoid a recession. With the Bank of England meeting next week to decide on a further hike in interest rates, Andrew Bailey has signalled that a further fifty-point increase is likely.

Although it began to hike rates last December, the Central bank has fallen behind the U.S. where the FOMC has adopted a far more aggressive set of policies.

The drip feed of monthly hikes of twenty-five basis points were intended to tighten monetary policy while also allowing the economy to maintain an, albeit lower, level of 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.

The contest to be the next Prime Minister continues to move further away from policy and looks like being fought more on personality. It is unclear whether either candidate is comfortable with the way in which their teams are portraying them, but they are allowing the mudslinging to continue.

With Rishi Sunak continuing to trail Liz Truss in polls of Conservative Party members, the best they were able to come up with yesterday was to label her economic programme as fantasy.

It is true that Truss’s promise of tax cuts and where the funding for them will come from does appear to be based some distance from reality, but it would be more beneficial to attack the policy rather than the person.

Truss’s plans to channel her inner Thatcher and face striking unions head on has drawn stinging criticism of deliberately creating confrontation with rail workers leaders and the threat of General Strike.

There was another one-day strike by rail workers yesterday and a vote that action will continue for as long as it takes. Even though the rail network has been privatized, the Government is still pulling the strings with funding and support linked to not just performance but control of expenditure.

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 now seems certain that the Bank of England will raise short term interest rates by fifty basis points when its Monetary Policy Committee meets next week.

The Bank’s Governor, Andrew Bailey, has spoken recently of prioritizing the Bank's reaction to the various threats to the economy.

In keeping with other G7 Central Banks, the Bank of England sees inflation, whatever its cause, as being the most pressing issue.

Rising energy prices continue to be a significant contributor to the cost-of-living crisis, with the price cap on gas prices set to be increased again in the autumn.

It has been a feature of the cost-of-living crisis that is sweeping the nation that consumers are looking to the Government for assistance, which has traditionally not been the case.

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’s Chief Economist Huw Pill summed up the dilemma facing not just the Bank of England, but other G7 Central Banks as well. He warned of larger interest rate hikes being needed but is also concerned about a slowing economy.

His message was that high and rising inflation needs to be tackled by tighter monetary policy, but that will see the economy produce no increase in growth.

He agrees with the Bank’s Governor that bringing inflation down is and indeed should be the most important focus of its current policy.

An increase in the size of hike at the next meeting, compared to those that have come before since the Bank started tightening policy last December, is certain for next week’s MPC meeting.

Andrew Bailey has been providing advance guidance that a fifty-point hike is on the cards, with core inflation continuing to rise as the headline begins to level off.

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 six-week battle to be the new Prime minister has now begun, with both Liz Truss and Rishi Sunak traversing the country meeting as many Conservative Party members as possible.

It is as likely that this election will be decided on personality as it will on policy.

Truss is the more traditionally Conservative candidate, while Sunak will lean heavily on his record as Chancellor through one of the most difficult economic climates in a generation.

Former Johnson adviser Dominic Cummings took a swipe at Truss on Friday, taking to Twitter to label her a truly useless remainer, who has done nothing in Government other than gabble with hacks.

Output in the UK services sector which makes up around 80% of GDP fell in July, but managed to remain in expansion. UK services PMI came in at 53.3 which was above most analysts’ expectations. Manufacturing also managed to stay above the 50 level which separates contraction and expansion, coming in at 52.2.

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 a rather typical outcome of election campaigns in the UK that the candidates spend more time trying to discredit their opponent’s plans than they do promoting their own.

The race to be the new leader of the Conservative Party and therefore Prime Minister of the UK is beginning to take an all too familiar tone.

Both Rishi Sunak and Liz Truss plan to cut taxes. This is likely to be a vote winner, but it is the timing of the cuts that is the bone of contention.

Truss is of the opinion that there is room for tax cuts to be initiated immediately. She commented yesterday that the policies of the Johnson Cabinet, of which she was a member and her opponent was Chancellor, held back economic growth in the country and contributed to the current slowdown in output and activity.

Her remarks have been ridiculed by Sunak supporters who believe that if Truss was the principled politician she claims to be, she should have resigned rather than accept policies which were against her expectations.

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.