Beyond Currency

Following last week’s hike in interest rates, this week we will see the first evidence if the series of hikes is having any effect on inflation.

In May, headline inflation rose to 9%, and it is expected that a small increase to between 9.1% and 9.3% will have been seen in June.

The wholesale price of fuel has moderated, and this has only just started funnelling through into forecourt prices. The Bank of England has been reticent in providing any idea about how quickly they expect their tightening of monetary policy to begin to have an effect.

The constant drip feed of hikes contrasts with both the FOMC which is using a method of far larger hikes and also possibly the ECB which may still hike by fifty basis points next month.

Andrew Bailey, the bank’s Governor, when pressed by journalists in his press conference following last week’s announcement, commented that he believes that inflation could reach 11%.

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 duly complied with the view of just about every commentator, analyst and economist in the financial market yesterday by hiking interest rates by 0.25% to 1.25%. This is the highest level rates have been since 2008.

Those with floating mortgages will see their repayments rise straight away while those on a fixed rate/fixed term will enjoy the luxury of a lower rate for a little longer.

Andrew Bailey, the Bank’s Governor, commented in his post decision press conference that inflation could reach 11% this year. That set off a fury in the press, which believes every word he says.

While the situation in the country is likely to get worse before it gets better, there was a little good news. The wholesale price of both petrol and diesel fell by two pence, although this hasn’t yet been reflected in the pump price.

No one is predicting the end of fuel price inflation, but it is the first move in the right direction for quite some time.

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 expected interest rate hike of twenty-five basis that will be announced by the Bank of England Governor later this morning, while being something of a disappointment to those who see the economy falling into recession in the coming months, will still leave interest rates at a supportive level.

The neutral rate in the UK is between 1.5% and 2.5%. That is double the level that the base rate will be at, at the end of the day.

Hawkish MPC member Michael Saunders, who will leave his role as an external member of the MPC in September, commented recently that he believes the neutral rate to be a little over 2%.

Given that today’s hike will take interest rates to their highest level in fourteen years, and the economy has changed immeasurably since rates were averaging around 5%, any estimate of the neutral rate is little more than a guess.

It is difficult, and unprovable at what point interest rates stop stimulating growth and start to restrain 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.

This week’s Bank of England will hike interest rates, by twenty-five basis points, despite data being released yesterday that showed that the economy has officially begun to contract.

GDP contracted by 0.3% in April, while both manufacturing and industrial output also fell.

While it is too early to say that the economy is in free fall, there is little doubt now that Q3 may mark the beginning of a recession. Given the headwinds that the country still faces, it is possible that the slowdown in output could last until at least the end of the year.

There was a drag on economic activity created by the phasing out of Coronavirus vaccination programmes, but even if they still existed, GDP would only have been 0.1%. This shows that the real economy is slowing at a considerable rate.

With the Bank of England still committed to the fight to reduce inflation and the country seeing fuel prices rise every day, they will be faced with the unenviable task of throwing petrol on the fire.

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 have been two beneficiaries of the rise in fuel prices so far this year.

The first was the fuel companies, but they have received a demand for windfall tax from the Treasury.

The other is the Government itself.

Last November, when Rishi Sunak delivered his budget to parliament, his team of economists provided estimates on what the average price of various forms of energy would be and based expected tax income upon those estimates.

Since there is no expectation that any of the Treasury’s team would have predicted the pace, or eventual top, of the rise in the forecourt price of petrol and diesel.

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.

Prime Minister Boris Johnson has emerged from yet another near-catastrophe wounded but not yet mortally and has regurgitated a former vote winning policy in an effort to relight voter confidence in his Government.

Having survived a vote of confidence in which 148 of his MPs polled in favour of him being removed from office, it now seems to be a long way back.

As the economy begins to slow into what looks like stagnation, Johnson faces a major job to repair the damage of Brexit and the Pandemic while also trying to repair his own scandal hit reputation.

He will be unsure of the support of his senior colleagues who may see him as a useful stopgap while the economy goes through a cost of living crisis that may well worsen before any recovery begins.

There is an air of MPs biding their time, allowing Johnson even more rope to hang himself, in the knowledge that he will surely oblige.

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 further outcome of the Bank of England’s current policy to raise interest rates to try to bring inflation back under control has been its effect on the housing market. There is an entire generation of homeowners who have never had to contend with their mortgage repayments increasing as is being seen currently.

With inflation unlikely to begin to fall in the short term and the current cost of living crisis, households are being forced to cut back in several areas. The knock-on effect of this is a fall in levels of activity on the High Street, which, in turn, drives retail sales lower.

This then ripples through the economy and eventually contributes to a slowdown. The one difference from the current situation is that a slowing economy generally leads to a fall in inflation as activity drops but that is not the case currently, with several factors combining to push prices higher.

Energy remains the major contributor to inflation in the UK. The forecourt price of a litre of unleaded petrol is now approaching two pounds. This means that it now casts almost £100 to fill the tank of a regular family car.

When Chancellor of the Exchequer, Rishi Sunak, was pondering a windfall tax of energy companies recently, one of the main downsides of such a policy was economists’ belief that every tax eventually becomes a burden for the individual.

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.

Boris Johnson, having survived a vote of confidence in which 148 of his Party’s MPs voted to oust him from office, has promised to refocus on getting the job done.

One of the pillars of the Conservative victory at the General election was the commitment to levelling up. This was the main reason why the red wall, the area of traditional socialist voters from the formerly industrial wasteland in the North of England where Johnson made massive inroads based on the promise that investment would from south to north providing new infrastructure, transport links, and most importantly, employment.

Now, having gone through Brexit and the Pandemic, the Treasury is struggling to find the funds to make good on those promises. While reasons for the Government being behind on several of its pledges are easy to find, the electorate is prone to ignoring excuses when it comes to their vote in an election and ask what did changing my vote actually done for me?

There is an idealistic value to switching a vote from Labour to Conservative that harks back to the Thatcher years. The parents of those young voters who paved the way for Jonson to return to Downing Street would have been horrified that their children voted for the bosses Party.

This change may be short-lived unless Johnson can conjure up a miracle before 23rd January 2025. This Government has been characterised by scandal when it had the size of majority that only comes once in a generation. Instead of using that for good, Senior Members of the Government, Johnson included, have taken advantage of the inability of the opposition to affect policy decisions.

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 Prime Minister survived a vote of no confidence last evening, as his critics were unable to garner sufficient support to oust him from office.

Boris Johnson will know that his critics have gone away, and although he cannot now be challenged again for a year, his performance will remain under intense scrutiny.

That having been said, for all his faults, Johnson is considered to be the Conservative’s trump card in elections. It would now be considered foolhardy for rebel MPs to challenge him again, unless there is another scandal of the magnitude of Partygate between now and this time next year, given the fact that the next General election will be less than 18 months away.

The Chancellor, Rishi Sunak, testified before the Treasury Select Committee yesterday. Sunak remains an important figure in any leadership debate. His popularity soared when he arranged payments to those being furloughed during the Pandemic, but he was then heavily criticized for raising taxes in his budget last November, and was considered to be slow in arranging help for the lowest paid as the cost-of-living crisis began to bite.

Having had a meteoric rise in stature within the Party, Sunak would be considered favourite were there to be a leadership ballot.

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 looks likely to slowly slip between the waves, as multiple headwinds combine to contribute to a recession which may arrive by the end of the next quarter.

Activity, particularly in the services sector, is expected to drop into contraction, while the actions of the Bank of England at its next meeting, which takes place next week, could be the final straw. Any delay in hiking rates again, would mean that Andrew Bailey would probably be accused of ignoring his duty.

Questions are being asked about the ability of the Prime Minister to remain in power, as rebels within his own party appear to be lining up to challenge.

The Chairman of the Parliamentary Conservative Party will need to receive 54 letters or emails from Government MPs demanding a vote of confidence, in order for such a ballot to take place. in order to force a vote of confidence.

Battle lines are already being drawn, with rebel MPs calling on Boris Johnson to resign to avoid the ignominy both personally and for the Government of their leader being forced from power.

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.