Beyond Currency

Since he came to power, it has been an obvious policy of Prime Minister Rishi Sunak to be seen to be “getting on with the job.” Naturally far less flamboyant than his predecessor, Boris Johnson, Sunak has not made many significant policy speeches, but that is beginning to change.

His only major success has been the delivery of the Windsor Framework, which allowed Brexit to be completed. This was achieved without the bluster and threats that had accompanied the end of the UK’s relationship with the European Union, and that has become the “Sunak way.”

However, over the past few weeks, the beast appears to have “awoken from his slumber”, seemingly realizing that he won’t stand a chance of winning the election by trying to appease every voter, so he has decided to try to win back voters who have voted Conservative, possibly for the first time, in 2019.

He, first, risked aggravating the environmental lobby by granting licenses to drill for oil and gas in the North Sea and, just yesterday, deciding to stop treating the NHS as a “Sacred Cow” and expecting it to take the blame for lengthening waiting lists, which are due to “internal protocols” and poor management.

He hopes that this new “can’t please all the people all the time attitude” will galvanize backbenchers into rallying around, particularly those who are still smarting from the way the Party and Parliament treated Johnson.

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.

House prices in the UK fell by almost 4% last month as interest rate increases made passing an affordability test more difficult, particularly for first-time buyers.

This was the largest fall since 2009, the height of the financial crisis. The fall coincides with mortgage rates rising to their highest level in fifteen years. Currently, a two-year fixed-rate home loan costs, on average, 6.85%.

The average price of a house has fallen by 13k since the peak that was reached last August. Currently, a first-time buyer who has a deposit of 20% will see that mortgage payments account for 43% of their salary. This is an increase of 10% over this time last year.

The rate of inflation fell to 7.9% last month, and a survey of food production showed that food price inflation has peaked in the past couple of months as the cost of grains and vegetable oils fell significantly.

However, food price inflation may be hit by Russia’s decision to pull out of the treaty it had agreed to allow the safe passage of grain carriers using Black Sea ports.

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 yesterday challenged the accepted logic over global warming and climate change by agreeing to issue hundreds of new licenses for exploration and drilling for oil and gas in the North Sea.

It had been agreed that for countries to meet zero carbon targets by their agreed time that existing supplies should be mothballed, and a greater concentration would be given to sustainable sources of power.

Rishi Sunak, who had already invited the ire of the environmental lobby by pushing back against the Mayor of London’s plan to extend the ultra-low-emissions-zone around London, has been accused of a “desperate vote-winning policy” to kick-start the Government’s campaign to win the next General Election for which they are trailing far behind the Opposition the opinion polls.

Data released yesterday showed that consumer lending rose to a five-year high last month. However, while this would be a sign of a growing economy in normal circumstances, it appears that rather than buying new cars or consumer goods, households are borrowing to supplement their funding of household budgets in the face of a continuing cost-of-living crisis.

The continued hiking of rates by the Bank of England, coupled with continued high inflation, is seeing monthly payments on loans, overdrafts and credit cards reach their highest level in a generation.

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.

HSBC and Nationwide led the way last week in reducing their standard rate for floating rate mortgages as interest rates stabilized. However, the rate for a two-fixed loan was still higher than it was at the start of the month. The peak was at 6.89% earlier.

The pressure on the Monetary Policy Committee is expected over the next year as inflation begins to fall, but in the short term, it is expected that there will be another seventy-five basis points of hikes before a pause is announced.

During the prolonged period over which the Bank of England has continued its cycle of rate hikes, its Governor, Andrew Bailey, has faced criticism for ignoring the signs, which, with hindsight, has proven to be fairly obvious that inflation was rising, close to out of control.

The belief is that if the Central Bank had been more aggressive in its hikes at the start of the cycle, that may not have had to be still hiking now.

To defuse that criticism, it has decided to commission a review of its economic forecasting. The man chosen to lead that review is Ben Bernanke, a former Chair of the Federal Reserve.

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 position on the Chancellor’s Economic Council is akin to being appointed to the Bank of England’s Monetary Policy Committee but without the responsibility.

The role of the Council is to “second guess” the MPC and make theoretical judgements on monetary policy, but without the responsibility that those decisions have in the “real world"".”

At its latest meeting, the Council, which is made up of seven members including former Bank of England Committee and Karen Ward, Chief Economic Strategist at Investment Bank J.P. Morgan, counselled against further rate hikes for fear that they will push the economy into recession.

Ward was also quoted recently as saying she believes that the MPC may be using a mild recession as a deliberate strategy to bring down inflation. However, that was coupled with another comment that no blame can be attached to the Bank for “simply doing its job.”

Those two comments illustrate the futility of appointing a shadow MPC which can make pronouncements, often with the benefit of hindsight, without the responsibility of how they affect the lives of real people.

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.

When the IMF produced its last global review, the Government pushed back against its findings believing that the economy would not contract for the requisite two consecutive quarters this year that constitute a recession.

In its latest review, the Fund reversed its prediction and agreed with the Government’s view that although it would be “nothing to write home about”, the UK economy would grow in 2023.

The IMF believes that the UK economy will grow by 0.4% this year, up from a prediction of a 0.3% contraction in its last global review.

While any growth is welcome in the current environment, the economy will remain in the “slow lane” when compared to most other G7 economies. Way out ahead in the “growth race” is the United States, where 1.8% growth is predicted.

While the right-wing English press gloried the fact that the German economy will underperform and be the only economy in the group that grow more slowly than the UK, the fact is that with an election on the horizon, Rishi Sunak will need to perform a miracle or rely on the Opposition, completely blowing their substantial lead in the opinion polls to be re-elected.

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 Chief Economist at the IMF, in delivering the Funds’ latest review, made a wide-ranging speech yesterday in which he outlined the Fund’s view of the world economy as well as his expectations for growth and inflation.

His most significant predictions were around Europe, where he believes that the UK economy, although still struggling to make any headway, only growing by 0.4% this year, will outperform Germany, which is stuck between stagnation and recession.

Pierre-Olivier Gourinchas told his audience that the UK's upgrade from a 0.3% contraction in its earlier report was due to stronger-than-expected consumption figures and the confidence that has been derived from the fall in energy prices.

The Windsor Protocol has reduced the level of uncertainty surrounding Brexit, but only Germany will perform worse than the UK among the G7 nations.

The UK’s financial sector has shown “surprising resilience” following the collapse of Credit Suisse and is not showing any signs of a significant issue with bad or doubtful loans.

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 has been outrage over the Bank of England’s decisions to award its staff bonuses totalling twenty-five million pounds despite its demand that the rest of the country exercise restraint in pay awards and bonuses.

Andrew Bailey’s assertion that unsustainable wage rises are in part responsible for stoking inflation appears not to apply “close to home.”

While the awards are not necessarily excessive in themselves and are in line with what has been paid in previous years, the revelation will embarrass the Bank’s Governor at a time when his and his teams’ credibility is low after a series of ill-judged comments.

The soaring cost of mortgages that are being reset after their fixed rate period expires is leading to borrowers facing deficits in their monthly outgoings, leaving them facing either “dipping into” savings or using expensive credit cards or short-term loans to pay their household bills.

This will undoubtedly lead to a significant downturn in retail sales which will, in turn, feed into a continued downturn in overall economic 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.

Last month's fifty-point hike in the base rate of interest is being considered a “rush of blood to the head” that came because of the headline rate of inflation in May remaining unchanged.

Using the same logic, the market expects the MPC to revert to its staid policy of twenty-five-point hikes that have become its “staple offering” for almost the entire period of its current rate hike cycle.

The meeting, which takes place next Thursday will be the first since Silvana Tenreyro completed her stint as a member, and it is unlikely that her “ultra-hawkish” views on inflation will be continued by her replacement, Megan Greene.

Greene who will bring a wealth of international economic experience to the role will take time to bed into the role just as her predecessors have.

With Michael Saunders having left almost a year ago and Tenreyro having just left, the MPC has been shorn of two economists who believed that rates would have risen faster in response to the factors that were driving 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.

This week’s publication of inflation data for June illustrated how much more the Bank of England could have done had it not been timid about the effect its actions could have had on the economy.

The Bank and the Treasury have not worked in tandem to bring inflation lower, and it is as if the two agencies do not talk to each other.

There is little question that the actions of the Chancellor, Rishi Sunak, planted the seeds that eventually grew into the highest rate of inflation in a generation, but the Bank of England has lacked the courage seen in other G7 nations to “take the bull by the horns” and tighten monetary policy significantly faster than it has.

Now, with inflation beginning to retreat, due in part to their most recent action in hiking rates by fifty basis points, they are left wondering if they could have been more aggressive.

In the seventies and early eighties, it was said of the economy, which was plagued by industrial action which made union leaders into TV celebrities, that the UK suffered from a malaise which emanated from a nation living in the past and trying to repeat the energy created by the post-war 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.