Beyond Currency

One sector of the economy that has been particularly hard hit is vehicle production.

Although the days of huge plants supplying the country with all the vehicles it needed are long gone, it is nevertheless still an important sector.

The decimation of the UK vehicle industry tells the story of the rise of manufacturing capability in the far east and the inability of the developed world to compete.

While this is not limited to the UK, other countries like France and Italy do still have significant vehicle sectors, although they have seen the benefit of partnering up.

The global shortage of semiconductors has hit the spare parts manufacturers particularly hard, but car sales in the country, which includes imports as well as vehicles manufactured in the UK, fell by 14.3% to its lowest level since 1998.

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 Monetary policy committee is facing one of the most crucial meetings of its twenty-five-year history when it meets next week.

Accused of being too sanguine about rising inflation last summer when it was still working to protect the economy from the effect of the pandemic on monetary policy, the Central Bank is now stuck between a rock and a hard place.

Its current rate hike cycle, which is expected to see interest rates rise to 1% for the first time since February 2009 while not considered to be wrong given rising inflation, which could reach 10%, but may not be fit for purpose.

The Chancellor of the Exchequer, Rishi Sunak, is sure to be in contact with the Bank’s Governor Andrew Bailey, which may lead to questions about the Bank’s independence.

In Parliament, where there is a culture of blame, there has been very little discussion of the role of the Central Bank in the current issues the economy faces. The evidence still points to inflation continuing to rise, whale talk of a recession is still a little anecdotal.

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.

Bank of England Governor Andrew Bailey, when questioned about when the Bank would begin to wind down its support for the economy by divesting itself of Government Bonds that were purchased in order to add liquidity to the market during the Pandemic, answered that he imagined it would start when interest rates reached 1%.

Bailey has developed a habit of answering questions about long-term issues without giving them due consideration, and often pre-empting the opinions of his colleagues on the MPC.

While the opinion of the Governor carries significant weight, the Monetary Policy Committee comprises nine individuals and each vote carries the same weight.

Popular opinion suggests that the mood of the MPC is sufficiently hawkish for them to agree to a further rate hike at next week’s meeting, despite clear evidence of a slowing economy.

If the hike takes place, the rate will reach 1% and questions will be asked about the expected reduction in the size of the bank’s balance sheet.

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 are fears that the UK economy is weakening at such a rate that it will be the first G7 economy to face stagflation.

The Governor of the Bank of England has already expressed his fears that hiking rates too quickly will slow the economy to such an extent that the Central bank will actually contribute to the overall malaise facing the economy, rather than achieving its goal of lowering inflation.

Rising inflation has led to a fall in retail sales as household budgets have been hard hit, causing consumers to be more considerate in making purchases. Online sales have been particularly badly hit, as the country’s emergence from the pandemic also contributes to a slowdown of shopping via the internet.

Despite the drop in retail sales, falling by 1.4% in February, they were still 2.2% above pre-Covid levels according to the Office for National Statistics.

The rising inflation crisis looks set to continue as factory gate prices were cited by manufacturers as a significant contributor to price rises according to flash data released yesterday.

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.

Data released on Friday illustrated the full potential of the slowdown in the UK economy. Retail sales fell by 1.9% month-on-month, following on from a 0.5% fall in February. This contributed to a year-on-year rise of just 0.9% versus market expectations of a rise of 3%.

Data for services output, the sector which makes up 80% of UK growth, was also released. This had been showing significant strength over the past few months, but in March, output fell back to 58.3 following an exceptionally strong read of 62.6 in February.

In most cases, analysts would have written off a single month’s poor data as a blip or an anomaly, but these figures fuelled concerns that the economy has seen the best of its recovery from the pandemic and the growing cost of living crisis is beginning to affect consumer confidence.

The fall in retail sales was particularly poignant, with fears growing that the raising of the energy cap is forcing people to choose more carefully how household budgets are spent.

The opposition have called for a Parliamentary debate on the crisis, which should include a supplementary budget.

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 Central Bank meetings that will be held in the first week of May are each going to be crucial in their own right, but combined will set the tone for the financial markets for the rest of the year.

The Bank of England’s MPC appears to be unable to commit to a fight against inflation given the concerns being expressed by some of its members about contributing to a slowdown in the economy which eventually becomes a recession.

Catherine Mann, one of the newer members of the Committee, spoke yesterday of her concerns that rates will have to rise at an even faster rate than is currently being predicted, since the current pace of tightening may not dampen demand sufficiently to stop wage inflation becoming ingrained in the economy.

At the time of the first increase in interest rates in February, Mann voted for a fifty basis-point increase, believing that front loading the tightening of monetary policy would add to its effect. It turned out she was in the minority, and she fell back into line in March when he voted for the twenty-five-basis point increase that was eventually agreed.

The Bank of England, which has been independent of Government since 1997 when the Monetary policy committee was formed, faces both an opportunity and a challenge to cast off its conservatism and act to bring the economy back under control at its next meeting.

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 medium term fate for Sterling lies in the hands of the Bank of England and its plans to lower the level of inflation, which is currently running at 7%, up from 6.1% a month ago.

The Bank faces a tricky balancing act as it endeavours to tighten monetary policy to drive inflation lower, but remains aware that the economy remains fragile and could easily be tipped into recession if the tightening is too aggressive.

With energy prices having risen as the price cap was raised at the beginning of the month. Gas and electricity prices to domestic users have been the most significant contributor to inflation over the past month.

Yesterday, the six principal energy suppliers called upon the Government to provide some relief to consumers. They called for the energy cap to be abolished in favour of a simpler and fairer system in order to avoid a horrific situation next winter when it is expected that the cap will be raised again.

The Parliamentary Business, Energy and Industrial Committee was told that scrapping the current cap in favour of a more social arrangement would help the lower paid while the better off would pay more.

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.

In a report released yesterday, the International Monetary Fund commented that it believes that the UK will have the slowest growth in the G7 in 2023.

The IMF projections are for the country to see more persistent inflation eroding households spending power, and higher interest rates will slow business investment.

The fund has cut its forecast for growth this year from 4.7% to 3.7% and for 2023, it sees whole year GDP at just 1.2%, down from 2.3% previously.

The shock from higher energy prices, while applicable to several countries, will be particularly damaging to the UK given the rate at which household bills are expected to rise.

The Prime Minister faced MPS yesterday for the first time since he was fined for breaking his own Government’s rules over social gatherings during lockdown.

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 Chancellor of the Exchequer, Rishi Sunak, is facing mounting pressure to leave his post following a perfect storm of criticism of both his personal and professional behaviour.

Sunak was virtually unknown outside the Parliamentary Conservative Group when he was appointed to his role, his first ministerial post.

He quickly got to grips with providing support to those suffering from the lockdowns put in place to curb the advance of the Coronavirus Pandemic. He received several accolades about the measures he initiated and was credited with almost single-handedly saving the economy.

Now, as the country emerges from the pandemic, Sunak faces three major challenges, any of which could derail his meteoric rise to become favourite to replace the Prime Minister should he face no alternative but to leave his post.

A few weeks ago, rumours began to circulate regarding the tax status of his wife.

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 rise in the cost of living shows no sign of abating as headline inflation hit 7% in March. The cost of fuel was the major factor in the increase, while several foodstuffs linked to Ukraine and Russia also contributed.

Unlike the slowdown seen in the U.S., the rise in core inflation also shows no sign of slowing down.

The rise in the headline figure eclipsed the expectations of analysts, who predicted that the rate would reach 6.7%.

Following the significant increase in household energy bills, inflation is on track to top out at 9% according to global banks Goldman Sachs and J.P. Morgan. That high is expected to be reached either this month or next, although there will be another spike when the energy cap is adjusted again in October.

With the economy slowing as evidenced by data released earlier in the week, stagflation is now being seen as a genuine possibility.

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.