Beyond Currency

"This week’s meeting of the Bank of England’s Monetary Policy Committee could see the first split votes of the current cycle. While there is certain to be a 9-0 vote on leaving interest rates at historical lows, there may be one or two votes in favour of reducing the level of asset purchases.

That would be a fairly cosmetic event, since there is still a majority in favour of support remaining at its current level. It would, however, drive the view that the landscape is changing and there is a change if not on the horizon, then certainly coming closer.

Andrew Haldane, the bank’s ex-Chief Economist, voted to cut the current round of intervention from £150 billion to £100 billion. That was seen as Haldane’s final act of the campaign over his final few months to convince the nation about how strong the recovery has been.

This week’s meeting of the Bank of England’s Monetary Policy Committee could see the first split votes of the current cycle. While there is certain to be a 9-0 vote on leaving interest rates at historical lows, there may be one or two votes in favour of reducing the level of asset purchases.

This week’s meeting will see how strong the views of Michael Saunders and Dave Ramsden are. They have both spoken recently of the need to tighten policy sooner rather than later. It is hard to discuss this issue factually since it is a completely new event and comes down to the opinion of those in the know.

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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.

"Next week’s MPC meeting will be crucial in the Bank’s plans to both support the economy and head off inflation that is continuing to rise, but at a slower pace.

While there will be no change to interest rates, which will continue to be held at a historically low level, the discussion about beginning the taper of asset purchases will be significant.

There have been several comments made by MPC members recently in which their position has either changed or softened. It remains to be seen whether the vote to retain the current level of purchases sees any votes against. If that were to happen, it would be a major signal to the market that the end of support for the economy is approaching.

Next week’s MPC meeting will be crucial in the Bank’s plans to both support the economy and head off inflation that is continuing to rise, but at a slower pace.

The comments that have been made have so far ignored the inflation question. They have mainly been questioning the strength of the recovery, either saying that it is sufficiently robust to stand on its own or concerned that there are too many imponderables to take the chance of needing to reverse a decision in the Autumn.

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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.

"Any thoughts that the Bank of England may be considering tightening monetary policy were dashed when usually hawkish Gertjan Vlieghe commented that he does not believe that now is not the time to tighten monetary policy.

The level of uncertainty, that could still derail the recovery, means that the Bank is unlikely to tighten monetary policy this year.

Despite there being almost zero chance of a rise in interest rates or any change to the Asset Purchase Scheme, next week’s meeting will still attract the market's attention since there is a possibility that Andrew Bailey will provide further guidance as to the Bank’s intentions.

Any thoughts that the Bank of England may be considering tightening monetary policy were dashed when usually hawkish Gertjan Vlieghe commented that he does not believe that now is not the time to tighten monetary policy.

The IMF published updated guidance following a review of potential global growth forecasts yesterday. The UK is set to rival the U.S. by growing by 7% this year. "

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 MPC member Gertjan Vlieghe spoke yesterday of the need for the recovery from the Pandemic to be creative, as traditional policies have little room left to help. He went on to say that as longevity increases, the Government should consider raising the retirement age.

As workers come close to retirement they save more and spend less, and this depresses interest rates.

The Pandemic has brought about changes in working practices that could suit older workers. The most prominent of these is working from home.

Bank of England MPC member Gertjan Vlieghe spoke yesterday of the need for the recovery from the Pandemic to be creative, as traditional policies have little room left to help. He went on to say that as longevity increases, the Government should consider raising the retirement age.

Vlieghe ended by saying that he is not against negative interest rates as a policy choice, and next time monetary stimulus becomes necessary he would vote according to the situation at the time. Nevertheless, he believes that the Bank’s current monetary policy stance will remain in place for several quarters to come.

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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.

One week on from Freedom Day and the ‘pingdemic’ continues to draw criticism, fuelling conspiracy theories of lockdown by proxy.

The economy is performing well and the recovery is progressing nicely, but inflation is above the Government's target and creeping higher, so there is already reason to start tapering support, but with the global recovery fuelled by printing money, Central Bankers seem reluctant to be the first to turning down the money taps.

The FOMC meet this week. Since Powell formally put tapering on the agenda, we can expect discussions to mirror those reported from most Central Bank meetings. Inflation will remain a key driver of these discussions. New York is reporting raging inflation, which is expected to rise further and we have preliminary Q2 GDP due out on Thursday, which will surely be available to the Fed.

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 Deputy Governor for Monetary Policy Ben Broadbent spoke yesterday of his belief that the appropriate response to the current rise in inflation is to ignore it.

This is based on a growing belief that given the level of support that has been pumped into the economy to keep it afloat during the Pandemic, inflation is both a small price to pay and a wholly expected outcome.

Strong demand and supply bottlenecks continue to drive prices higher, but the trend for higher prices is unlikely to persist.

Bank of England Deputy Governor for Monetary Policy Ben Broadbent spoke yesterday of his belief that the appropriate response to the current rise in inflation is to ignore it.

Broadbent finds himself at odds with his MPC colleagues Dave Ramsden and Michael Saunders, who last week surprised markets by calling for tighter policy sooner rather than later.

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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 concern for the Government around the jobs market in the UK.

On the one hand, payrolls are growing at a rate not seen in many years as the economy reopens, but the rate at which workers are receiving messages from the Government’s track and trace app telling them to self-isolate is growing at a similar pace.

The muddle over what is happening since Monday’s reopening of the economy can almost totally be laid at Boris Johnson’s door.

There is a growing concern for the Government around the jobs market in the UK.

Although he has faced several almost impossible decisions trying to balance the spread of the Delta Variant of the virus with the need for the economy to reopen, he has appeared both confused and driven by short-termism.

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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.

"Following last week’s inflation data that showed prices are still rising rapidly, monetary Policy Committee Member Jonathan Haskel was the first to put his head above the parapet.

Haskel said he sees two major issues that could derail the recovery in the coming weeks/months.

First would be the bank withdrawing monetary support by slowing the rate at which it is purchasing assets or ending the programme completely and, second, the continued rise in cases of Covid-19 driven by the highly transmissible Delta Variant.

Two of Jonathan Haskel’s colleagues on the MPC have called for tapering to begin sooner rather than later. Gertjan Vlieghe and Michael Saunders, both considered hawks, believe that the bank should be preparing the ground for a tightening.

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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.

"Today, the UK removes virtually every restriction that was enforceable by law due to the Coronavirus Pandemic.

In a move that was perhaps symbolic of the Government’s recent handling of the crisis, the Health Secretary has been forced to self-isolate having been pinged by the test and trace app, which left the Prime Minister and Chancellor in something of a dilemma over where they needed to also self-isolate.

Their first instinct was that they didn’t need to remove themselves from public life, only to perform a 180 a couple of hours later.

While it appears somewhat farcical for the UK to be lowering its guard just as the number of infections reached its highest level for close to six months, this is a more complicated issue than it appears on the surface."

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 yesterday showed that the economy is going to reach pre-Pandemic levels faster than had been expected. The employment report showed that the claimant count fell by 114k following an upwardly revised 151k fall in May.

The flip side of this strong showing for the economy is the growing concern that the country will face labour shortages in several sectors going forward.

Five years on from a Brexit vote which many feel was swayed by a belief that the country would be better placed if it relied less on workers from the EU, the country now faces a situation where it may need to amend employment law to allow foreign workers to return.

With inflation growing at a rate which must be ringing alarm bells at the Bank of England was further evidence contained in the employment report. Not only are more people finding work, they are also being paid 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.