Beyond Currency

"The Bank of England is planning to add fuel to the mortgage fire as it discusses lifting restrictions on banks' house loan rules.

The property market has been a mainstay of the UK economy for decades and was given a boost during the pandemic as Chancellor Rishi Sunak provided a stamp duty holiday to ensure that activity remained high during the various lockdowns.

That benefit has now been removed, so the Bank of England is looking at ways to increase activity in an attempt to support activity.

The Bank is expected to increase the volume of higher value loans that banks are able to provide.

It is simply being labelled as the Bank keeping up with the market, but underlying that reasoning is a plan to ensure that the property market remains at the forefront of the country’s 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.

"When inflation began to rise, the Bank of England, its Governor in particular, was fairly sanguine about the risk, calling it transitory. That may indeed be the case, and it became a convenient reason for a Bank that was unsure what it needed to do as the pandemic raged.

Now, the recovery looks like it may be hitting the buffers, and officials, looking for a new excuse to cover the possibility that they may have got it wrong, see supply chain bottlenecks as a convenient scapegoat.

Now, every issue that is becoming known is met with the supply chain excuse.

It may indeed be the fact that demand is fast outstripping supply, but it is also true that anyone with an ounce of planning knowledge could have foreseen issues for the economy from the departure of thousands of EU citizens who left the country as Brexit became certain and freedom of movement to the UK was about to disappear.

Chancellor of the Exchequer Rishi Sunak tried to put a brave face on the considerable slowdown in growth in the economy yesterday by commenting that the fact the economy is growing at all is a tribute to the fact that the country is moving in the right direction.

"

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.

"MPC member Silvana Tenreyo spoke yesterday of her belief that monetary policy shouldn’t be a tool to fix short-term shocks to the economy.

She expects the supply chain bottlenecks that are causing a disparity between supply and demand to fade in 2022, but the economy will remain fragile and in need of the support that low rates are providing.

She went on to say that the bigger inflation will become a concern if it spills over into the wider economy. Tenreyro was backed in this view by the Bank’s Governor Andrew Bailey, who spoke of his concern that wage demands will create a spiral that will see inflation become a permanent issue.

Bailey was at pains to say that the Central bank is unable to control fuel and energy prices, and it is clear that a rise in interest rates would have no effect on the soaring wholesale cost of gas.

Bailey is still trying to regain a measure of credibility following the Bank of England’s apparent U-turn over a rate increase., investors were completely wrong-footed when the MPC voted 7-2 to leave interest rates unchanged last week.

"

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 National Institute for Economic and Social Research (NIESR) released a report yesterday that paints a very dark picture of the UK’s economic prospects for 2022.

The country faces lower than average growth and continued high inflation.

While the causes of the rise in inflation may indeed be transitory, in that they are driven by a specific set of issues, that cause is expected to continue for a considerable time, possibly the whole of next year.

While demand is outstripping supply across most areas of the economy, following the country’s emergence from Coronavirus lockdowns, the effects of Brexit are yet to be fully felt.

The economy had come to rely on workers from the EU, despite the message from Brexiteers that they were the cause of high unemployment in the lower paid sector.

"

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, intends to continue to provide markets with advance guidance of the Bank’s thinking, despite the fact that that information may not always be reliable.

Bailey believes that any advance guidance given to the market should be considered to be subject to the caveat that such guidance is only valid if the economy is moving in the direction that the Bank expects.

Using that model, to understand last week’s decision to keep interest rates on hold for longer should be interpreted to mean that the economy is not growing as the Bank had expected, and it has therefore decided to prioritize growth over inflation.

Bailey was back on the wires yesterday for the first time since the Bank jolted markets with a notable change of direction.

Although he still believes that inflation remains transitory, he commented that the Bank will have to act by tightening monetary policy should rising inflation begin to spill over into wage demands.

"

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 fallout from the Bank of England’s decision to leave interest rates unchanged at its meeting last Thursday continues.

Governor Andrew Bailey has been accused of misleading markets with his recent comments, to which his response has been weak. We expect to raise interest rates in the coming months, but no one said at which meeting we would start.

Bailey's credibility has been badly affected, and it will take some time for him to be trusted again.

Bailey contends that the decision was based upon a consideration of the latest economic conditions. This led the members of the Monetary Policy Committee to decide by a majority of 7-2 to leave interest rates unchanged.

The failure to act at this point, as inflation continues to climb, will mean that when rates are increased, they may need to rise in a less gradual manner.

"

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.

"Members of the Bank of England’s Monetary Policy Committee voted 7-2 in favour of leaving short-term interest rates at the historically low level of 0.1% at their meeting, which concluded yesterday.

The two members who voted for a hike were David Ramsden, Deputy Governor for Banking and Markets, who is concerned about what he calls rampant wage demands over the next few years and Michael Saunders.

Saunders is a perennial hawk who believes that the level of support being provided to the economy risks fuelling expectations of higher inflation.

The vote to hold fire on any rate increase came despite the Bank’s latest forecast for medium term inflation, showing that price increases could reach 5% by next April.

At his press conference following the meeting, Bank of England Governor, Andrew Bailey commented that it is not the job of the MPC to act in accordance with market expectation. In that regard, Bailey is being compared to his predecessor, Mark Carney, who earned the reputation of being an unreliable boyfriend, often hinting at action by the Committee, only to fail to follow through when the meeting voted.

"

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 Monetary Policy Committee will conclude its latest meeting at lunchtime today. While the outcome of the meeting remains too close to call, continued expansion in the economy means that the odds slightly favour a rise in interest rates.

The size of any hike is also in question. It may be ten basis points, or it could be twenty-five. Whatever happens, the outcome of the meeting is sure to have a significant effect on the outlook for the economy in the short to medium term.

Services PMI rose in October from 55.4 to 59.1 beating the flash estimate by a considerable margin. Business costs are rising at what is becoming an alarming rate, and these are being passed on to consumers, resulting in a continued rose in inflation.

The surge in operating costs reported by services companies was the highest since 1996.

Although the vote will be close, a hike in rates now would send a signal to the market that the recent comments regarding inflation being transitory have now been superseded by events.

"

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.

"Brexit has been predicted to have a larger negative effect on the UK economy than the coronavirus Pandemic. While that may be true in terms of the length of time the economy will be affected, in terms of GDP contraction, it won’t be as significant.

That having been said, the supply issues that are concerning the MPC as it meets today, will continue far longer in the UK than they will in the EU for several reasons. The most obvious is the UK’s access, or lack of it, to the EU’s single market. That will be partially balanced by the wider scope that the UK has in sourcing raw materials and negotiating its own deals for their supply.

The petty wrangles that exist with France over fishing quotas and access to ports are slowly diminishing, but unless and until there is an agreement that both sides can adhere to these issues will continue to flare up.

The same is true of the Northern Ireland protocol, where both sides are playing a dangerous game, with the Good Friday Agreement continually in peril.

The members of the Monetary Policy Committee will be agonizing over how they will vote when considering whether short-term interest rates should be raised or not.

"

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 opposition Labour Party have had an easy time in criticizing the Government’s performance since the start of the Pandemic. Boris Johnson and his team have made some high-profile errors in some areas, and not acted fast enough in others.

One Minster who has been fairly secure in his role, and has stood up to some of Johnson’s excesses, is Chancellor Rishi Sunak. While some may say that his role has been fairly simple since he took over from Sajid Javid at the start of the Pandemic, he has targeted the right sectors for support and while generous, cannot be labelled profligate.

Yesterday, Sunak presented his Budget to the House of Commons, although in truth, most of the juicier proposals had been in the public domain as long as six weeks.

One new proposal that the Labour Party will find difficult to criticize when the debate on the Budget begins later today is how the Government is planning to fight hardcore unemployment.

Having faced questions over the withdrawal of £20 per week additional payment of the Universal Credit benefit, Sunak has, in basic terms, used the funds to increase the rate of pay for the lowest paid.

"

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.