Beyond Currency

The Bank of England is facing mounting criticism over its handling of the economy since the country emerged from the Pandemic.

Critics are pointing to the fact that the Bank’s Governor, Andrew Bailey, failed to recognize the warning signs of rising prices when he first had an opportunity to act last summer.

While the Chancellor was praised over his actions in providing support for businesses and their workers, the Monetary Policy Committee became mired in its concerns over whether the nascent recovery would be blown off course, by a rate hike to nip rising prices in the bud.

It would, of course, have been a bold decision and one that no other G7 Central bank was prepared to take, particularly since the UK also had Brexit to contend with.

Nevertheless, the reason that the MPC was created was to provide as wide a range of views on the state of the economy as possible and to act in a manner that reduced the burden on a single person.

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 considered likely that the Government will need to provide a second round of support, as the cost-of-living crisis is expected to continue well into 2023.

A survey conducted by Citibank has shown that the expectation is that inflation will remain above 6% for at least another year. With a rise in the energy cap confirmed for October, they could easily be another in early 2023 taking the average family’s bill above £3,500.

The end of the low interest rate, low inflation era is well and truly over. Savers will face the dilemma of making sure that their investments are now able to keep up with inflation.

Although interest rates will rise and stay at levels not seen for a considerable time, they will remain below the level of inflation.

Overall, the housing market will also suffer with capital gains hard to come by as mortgage rates rise, encouraging homeowners to stay put and consider other options.

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 is facing severe storm clouds over the next few months as the Government continues to bury its head in the sand over the weakening economy.

The package of emergency measures introduced last week are a band over a bullet hole, and pay no heed to the additional increase in the energy cap that is set to be increased again in October.

Currently, the fuel cap is set just short of £2,000 but is set to be increased to £2,800 in early Autumn.

With a majority of close to 80 seats, Boris Johnson is bulletproof as long as he retains the support of his Parliamentary Party.

There have been some rumours of his losing some of that support as two further MPs declined the whip, leaving them to vote as they wish. If 54 MPs out of 360 submit letters expressing that they have no confidence in the Prime Minister, a vote will be held, with a simple majority upholding the decision.

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 Government announced yesterday that it would introduce a package of measures to help with the cost-of-living crisis that is threatening to engulf the economy.

Chancellor Rishi Sunak announced that every household will receive a £400 payment to contribute towards their energy bill. That is replacing the £200 payment that had already been announced. Furthermore, the £400 will not need to be repaid over five years as the £200 payment had been.

Eight million of the lowest income families will receive a one-off payment of £650. Additionally, the disabled will receive a payment of £150. This means that the worst-off households will benefit from these measures to the tune of £1,200.

Having seen the Chairman of Ofgem, the fuel and energy regulator, announce this week that the energy cap will rise by a further £800 in the Autumn, these measures have been welcomed by all sides of the House of Commons.

The additional payments that will total approximately £15 billion will be partly funded by an additional levy on the profits of energy companies. That will amount to £5 billion. The Chancellor refused to call it a windfall tax when interviewed following the announcement.

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 looks likely to survive the publication of senior civil servant Sue Gray's report on parties in Downing Street, which, he says, vindicates him and shows that he didn’t lie to Parliament.

There is a significant degree of ambiguity in the report, given that the leader of the opposition believes that the opposite is true and Johnson should resign to spare his Party any further embarrassment.

It is likely that Johnson will sign off on plans to support the lowest paid families who are struggling as the cost of living continues to soar.

The Chancellor is expected to act in the next few days to provide support with energy bills in particular as the announcement of a further hike in the domestic energy price cap in October will be confirmed. The cap was raised to just below £2,000 last month and will rise again to around £2,800 in October.

The economy is slowly grinding to a halt following the release of data on activity in the economy earlier this week. Fears are returning that the economy could face a period of stagflation and may actually already be experiencing it as inflation has reached 9% while data is predicting the beginning of a contraction.

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.

Output in the services sector of the UK economy collapsed this month, according to preliminary data from PMI surveys that was published yesterday. It fell from 58.9 last month to 51.8 in the current period.

A reading of below 50 signals contraction, and it appears that output is heading in that direction, according to forward-looking indicators. Manufacturing output also fell, but by a less significant amount than services, which makes up around 80% of GDP.

Companies' costs hit another all-time high as energy bills skyrocketed. There is no cap on commercial fuel bills, so they face the full impact of the current crisis.

The survey points to the economy virtually grinding to a halt. The data will also have an effect on the Bank of England's plans to tighten monetary policy further after hikes at four consecutive meetings. Activity has slumped to a fifteen-month low, which was a direct result of the Covid lockdowns at the time.

It now looks likely that the Government will introduce measures to help the poorest families cope with the rising cost of energy as the energy cap is set to rise to £2,800 a year in October from its current level just shy of £2,000.

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.

Andrew Bailey admitted when speaking at a conference in Vienna yesterday that the cost-of-living crisis is driving the UK into recession.

He agreed with a questioner who commented that the effect on real wages of rising inflation is bound to hit demand.

However, he refused to believe that the fact that the Central bank failed to respond quickly enough initially drove demand higher and therefore stoked inflation. He went on to say that one of the primary discussions at the Monetary Policy Committee when agreeing the necessary level of tightening revolves around demand and balancing that with bringing inflation lower.

A tight labour market is another issue that is stoking inflation with wages now a significant contributor to inflation, while post-Covid, the workforce has fallen by a little over 1%.

External shocks are playing a significant part in the volatility of the economy. The rise in energy prices and the conflict in Ukraine have created headwinds that could still blow it off course.

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 sense of inevitability about the slowdown in the activity in the economy, despite the strength of the employment market.

Data released last week showed that the claimant count fell by 56.9k, far more than analysts had expected. However, with inflation reaching 9% and leading indicators of output slowing, there are growing fears that a recession will be almost impossible to avoid.

The cost-of-living crisis that had been feared since the Chancellor announced tax rises last November and rise in the cap on energy prices in response to the exponential rise in the cost of wholesale energy has exacerbated the issue.

It displays a worrying lack of forward-thinking on the part of Rishi Sunak that he was unable to foresee the issues created by the country’s emergence for the Pandemic, although, clearly, he was taken by surprise by the ferocity of the conflict in Ukraine and the effect it has had ion supply chains of several foodstuffs.

The Prime Minister has promised to use fiscal firepower to mitigate the cost-of-living crisis, He likened the support the lowest paid need to the support that was provided during the furloughs as lockdowns bit into wage packets.

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.

Ever since the Bank of England began to hike interest rates, there has been an air of reluctance among MPC members. This is excluding Michael Saunders, who would see a reason to hike rates no matter how deep a recession the economy had fallen into.

It will be interesting to see if any current members of the MPC or even Saunders’ replacement, Dr Swati Dhingra, will be a hawk, although given her credentials, that is unlikely.

The term dovish hike appears to have been coined specially to describe how the Committee votes. Comments made before MPC meetings are often accompanied by figurative hand wringing, and once the announcement a shrug and a sense of inevitability appear to suffice.

There is an expression that is attributed to the rail authorities in the UK, who, in winter, often refer to the wrong kind of snow which defeats their efforts to keep the service running punctually. To be fair to the Bank of England, what it is currently experiencing is the wrong kind of inflation.

Currently, inflation is rising due to several factors, none of which are directly attributable to any activity in the UK economy.

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.

Headline inflation rose, as predicted, to 9% in April, that is a full 2% higher than it was in March.

The main culprits, over and above energy, were lamb, milk and sugar. Shortages are continuing to push prices higher.

The Office for National Statistics saw 78 of the 80 prices it monitors rise in April.

Many products that are traditionally produced domestically saw significant rises, even more than headline. Butter and milk soared by 11.8% and 13.2% respectively. However, the 54% increase in the energy price cap was by far the most significant increase.

The rise in the cap together with wholesale gas and fuel costs means that energy contributes more than 33% of inflation.

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.