Beyond Currency

The Government confirmed yesterday that having provided support for businesses trying to cope with Brexit and families dealing with the issues created by the Pandemic, there will not be any backing provided for those currently struggling or facing significantly higher mortgage payments soon.

While lenders have removed hundreds of mortgage products from their “shelves” as uncertainty dominates the market, interest rates continue to rise.

Although there is a link to the Bank of England’s continual hiking of interest rates, the reason that the mortgage market is so affected is due to the lack of clarity over when rates stabilize.

The cost of a typical two-year fixed mortgage is now above 6% when eighteen months ago when thousands of fixed-rate loans were repriced, they were at, or below 2%.

There will be no support offered to borrowers in the form of stamp duty “holidays”, or other measures as were seen during the pandemic.

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 mandate is to promote growth in the United Kingdom economy, while keeping inflation under the Government’s target.

While looking like it has spectacularly failed on both counts since the Pandemic, neither fiscal policy, nor the global economy have been on their side.

Andrew Bailey, the Bank’s Governor has been accused of being too cautious in delivering tighter monetary policy even though they were the first Central Bank among G7 nations to begin to hike rates.

Other Banks, notably both the Federal Reserve and European Central Bank started hiking rates significantly after the Bank of England but have managed to exercise a degree of control over rising inflation that has not been clear from the MPC’s actions.

The Fed’s success is shown in that they are the first G7 Bank that was able to pause the cycle of interest rates due to the significant fall in inflation recently.

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 returned to moderate growth in April as services activity bounced back. Consumer activity was the strongest that has been seen so far this year.

A positive first quarter was marred by a contraction of 0.3% in March, but the economy made up for that with growth of 0.2% in the first month of the second quarter.

As fears of a recession this year recede, the Bank of England received support from the Chancellor of the Exchequer, Jeremy Hunt, who commented that the Monetary Policy Committee faces little choice but to continue to raise interest rates in the face of stubborn inflation.

He went on to say that the Government would be “unstinting” in its support for the Central Bank to do what it takes to defeat inflation.

With the base rate of interest already at 4.5% and another meeting scheduled for next week, there is speculation that it could reach 5.5% before the end of the 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.

The Bank of England appears certain to hike rates when the MPC meets next week. Andrew Bailey, the Bank’s Governor virtually confirmed the need for still higher rates during his testimony to the House of Lords.

He confirmed his view that inflation will eventually fall back close to the Government’s target of 2%, despite it taking significantly longer than anyone at the Central Bank had first imagined.

Bailey has received criticism from MPs in the past for being too timid in dealing with rising inflation. While other G7 Central Banks have increased the size of the increments of their own tightening of monetary policy, the MPC has “plodded along” hiking by twenty-five basis points at each of its last twelve meetings dating back to December 2021.

Yesterday he quoted data that had just been released showing that private sector wage growth continues to show an extremely tight labour market.

In the three months to April, wages in the private sector rose by 7.6%. He was asked if the Bank of England could have done more in the early days of the current cycle to prevent the current situation.

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.

Jonathan Haskel, an independent member of The Bank of England’s Monetary Policy Committee spoke yesterday of his view that interest rates will have to rise from their current level of 4.5% if inflation is to be brought under control.

Haskel went on to say that his personal view is that the risks to the economy are skewed towards inflation. It is likely that he was influenced by recent predictions that the country will just about avoid a recession this year, while the prices have failed to stabilize completely.

“Although our present circumstances are far from ideal, embedded inflation would be far worse”, Haskel went on to say.

His MPC colleagues Swati Dhingra and the Bank’s Governor, Andrew Bailey will speak later.

Bailey will appear before the Parliamentary Economic Affairs Committee, while Dhingra will be speaking to students at the Manchester Metropolitan University.

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 political landscape in the UK incontrovertibly changed at the end of last week as former Prime Minister, Boris Johnson, resigned in the wake of the publication of the report into “Partygate” which he labelled little more than a “witch-hunt”.

There were further departures confirmed by some of his supporters while Johnson himself hinted that he would be back, possibly standing for the seat vacated by former minister Nadine Dorries.

Prime Minister Rishi Sunak returned from his trip to Washington, having made little progress over a free-trade agreement with the U.S. which is now unlikely to happen before elections take place on both sides of the Atlantic.

Sunak now faces three by-elections, two of which will be held in constituencies that can hardly be called safe.

While staying well ahead in opinion polls, Labour will also face a serious test of its electability, having abandoned a significant part of their investment policies.

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.

Rishi Sunak and his Conservative Cabinet are set to miss one of the main promises from their 2019 election manifesto by not agreeing on a free-trade-agreement with the United States.

Sunak, on a fleeting visit to Washington, met with President Biden yesterday and signed the “Atlantic Declaration”.

This set out a greater degree of economic security. The agreement includes a specific trade pact that includes deals over the vital minerals used in electric car batteries, closer cooperation over defence industry issues and new data protection protocols.

It falls well short of the free trade agreement that was promised as part of the Government’s Brexit strategy.

With both leaders facing re-election, Sunak brushed aside criticisms and concentrated on the positives which provide UK manufacturers access to around three-hundred and seventy billion dollars of green subsidies, which form part of Biden’s initiative to boost green investment in the U.S.

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 is expected to have the highest rate of inflation and the second-lowest rate of growth in 2023, according to a report published by the OECD yesterday.

Inflation is expected to average 6.9% this year, while growth is expected to be 0.3%, which is an upgrade on the earlier estimate where a contraction of 0.2% was predicted.

Although neither the OECD nor the IMF predict a recession this year, a lot will depend on the actions of the Bank of England.

Interest rates that have been increased at every meeting of the Monetary Policy Committee for the past eighteen months most likely stand on the cusp of becoming restrictive on demand and possibly contributing to a recession.

It is the base case of the OECD that the Bank will end its cycle of hikes following the meeting that is due to take place two weeks from today, or if they feel that core inflation is unlikely to fall, one further 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 Government’s 2% target for headline inflation is looking increasingly impossible to reach.

Given the lack of growth expected over the balance of 2023, many analysts and commentators believe that if the Bank of England is unable to drive it lower in the current environment, then as growth begins to pick up interest rates would need to be raised significantly further, and even then making the UK a “low inflation economy” is neither in the Bank’s nor the Government’s best interests.

Rishi Sunak has apparently floated the idea of “considerable” tax cuts to drive the economy forward despite them being seen as little more than a sop to win votes in the upcoming General Election.

The inflationary effect of such a tactic would push any thought of achieving the 2% target even further away.

The country is falling further and further behind its G7 partners over an entire range of public services so supplying less money by way of tax receipts to bolster the NHS, the courts and public transport, among others, will threaten their complete collapse.

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.

Services and composite output data for May were released, and both remained around the same level that was seen in April.

The Services PMI showed that the sector is still well into an expansive phase at 55.2 which pushed the composite number for services and manufacturing combined to 54, from 53.9 previously.

As part of the data, services firms noted strong input costs from wages which have been growing for the past three months. This will continue to add pressure to core inflation and will likely lead the Bank of England to continue to hike interest rates.

The nature of wage increases is that once workers, or their representatives, claim a wage increase, based upon headline inflation at the time that negotiations begin, there is a lag before that increase is paid.

In the meantime, as is the case currently, headline inflation has begun to fall making the pay award appear to be more generous.

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.