Beyond Currency

The inflation rate is still above 10% despite the Bank of England having hiked short-term interest rates eleven times in succession and is set to hike again at its next meeting on May 11th.

While the headline is still far too high for the Central Bank’s liking. Component parts are also alarming. Food price inflation is at its highest in 45 years, reaching 19.2% in the twelve months to March, up from 18.2 a year earlier.

The Monetary Policy Committee is being accused of showing a significant lack of imagination in using tried and, to date, tested methods to try to counter rising prices despite them having no visible impact thus far.

There seems to be an almost fatalistic view being taken over inflation although the policy of little and often over rate hikes clearly fails to work.

Both the Federal Reserve and European Central Bank have had a degree of success by using jumbo rate hikes to bring inflation down, while the Bank has used its current tactic for fear of crashing the economy.

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 modest return to growth signalled by Q1 GDP was bolstered by the release of flash PMI data on Friday which showed the largest increase in almost a year.

The UK economy is heavily tilted towards services output which makes up about 80% of total output.

In April services output rose to a level of 54.9 after a march figure of 52.9, while manufacturing continued to languish falling to 46.6 from 47.9 last month.

Inflationary pressures continue to wane in manufacturing, but demand for services will see prices continue to rise in that sector.

Demand for financial services was one of the main contributors to overall services growth. One issue is that financial services are often susceptible to rising interest rates.

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 release of employment and inflation data has painted a different picture to the optimistic noises emanating from the Government and more recently the Institute of Directors.

Following an unexpected rise in jobless numbers, the figures for inflation in March showed that despite the Bank of England having raised interest rates, albeit in modest increments, at every meeting of the MPC since December 2021, at an annual rate in excess of ten percent.

Chancellor of the Exchequer, Jeremy Hunt, and his colleagues at the Treasury were disappointed recently by the IMF report which placed the UK at the bottom of the league table for GDP this year in the G20.

While the Government likes to speak in terms of potential and future performance the IMF is using a completely different set of models and tends to disregard current output as a measure of future performance.

It is different to put a positive spin on a monthly employment report which shows that jobless claims went from a fall of 18.8k to a rise of 28.2k. In fact there was very little official comment on the data at all.

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 recent campaign to try to convince people that the economy is on the right path hit the buffers yesterday as the March employment report showed that claims for unemployment benefit rose by a little over 28k and the unemployment rate, despite being close to all-time lows, ticked up a little to stand at 3.8%.

Another blow to the economy showed that insolvencies have risen to their highest level since monthly records were produced three years ago.

2,457 companies were liquidated last month, up from 1,784 in February. Companies are facing rising costs, especially energy, which in many cases has seen two or three-fold increases.

Higher interest rates have also had a significant impact. While the Bank of England has been using monetary policy to slow demand, it is likely that rates have reached a point where they are restricting growth.

This is expected to have an effect on the MPC’s decision on whether to increase rates at their meeting next month. With headline inflation in March to have possibly fallen to below 10% when the data is released later this morning, the time may have come to pause the hikes which have taken place at every meeting since December 2021.

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 set to rebound strongly in the second half of the year according to separate reports released by two of the country’s most prominent accounting firms.

The fact that the country managed to dodge a recession last year is a significant indicator that better times are, although the cost of living crisis is holding back consumers from loosening the self-imposed shackles that have been imposed by rising energy and food prices.

Reaction to the IMF's rather gloomy prediction that the economy would be the worst performing in the G20 this year fails to note that the miniscule increase in GDP this year needs very little to see it improve to a level which puts it on a par with the U.S. and Eurozone. Both are predicted to suffer recessions this year.

The Bank of England may have stumbled onto the most effective method of tightening monetary policy since it began to hike rates in December 2021.

Little and often has been the watchword of the Central Bank, while both the Fed and ECB have been far more aggressive.

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 speaking at the IMF last Friday, played down the risk of further disruption to the UK banking sector.

Turmoil created by the collapse of two U.S. regional banks and the issues that led to Credit Suisse having to accept a forced takeover by Union Bank of Switzerland, Bailey is fading, and believes that the reforms that have taken place since 2008 have reinforced the sector.

However, he still acknowledged the risk inherent in the overall financial sector due to the growth of non-bank institutions such as hedge funds and pension companies.

He believes that there will need to be fresh legislation brought in by the Financial Conduct Authority and approved by the Government in order to better control their affairs. Bailey acknowledged that this is a difficult path to negotiate since these funds contribute a significant amount to the UK economy in tax.

Last week, Sterling continued its recent rise against a weakening dollar. The overall situation created by G7 Central Banks considering bringing to an end their recent cycles of tiger monetary policy is the overriding driver of the currency market currently.

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 stagnated in February as the country had zero growth for the month which led to a rise of just 0.1% in the year to date. The reason for this lack of growth is mostly due to the strikes which have been called in several public sectors of the economy.

The latest strike by junior doctors which has seen a four-day walkout this week looks to be the most contentious. Nurses and train drivers have accepted offers recently.

After monthly growth of 0.4% in January, the economy had been expected to post further growth and the zero number disappointed the markets.

Chancellor of the Exchequer, Jeremy Hunt has been accused of painting an overly optimistic view of the economy recently. He commented recently that the economy is faring better than expected, continuing weak data.

Andrew Bailey, the Governor of the Bank of England, speaking at the meeting of the IMF in Washington, asserted that the UK financial system is robust, and he is not expecting any further contagion from the recent turmoil.

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 IMF reiterated its view that the UK economy will be one of the worst performing major economies. It expects the country to experience a contraction of 0.3% during 2023, although this is a slight improvement over its previous outlook.

It expects a marginal rebound in 2024 when it believes that the economy will grow by 1%. The continuing high price of gas, although it is now receding, the rise in interest rates and trade performance still affected by Brexit are cited as the main reasons for the decline.

The Office for Budget Responsibility agrees that the economy will contract by but by slightly less than the IMF prediction. It estimates that there will be a contraction of 0.2% but no recession.

The Chancellor of the Exchequer, Jeremy Hunt, struggling to find any positives in the IMF report, commented that the UK has upgraded its own forecasts for this year as well as 2024 and 2025. He pointed out that the IMF has praised the Government for its current economic policies that will eventually lead to sustainable growth.

Hunt also announced a change to the makeup of the Bank of England’s Monetary policy Committee yesterday. Silvana Tenreyro will leave in early July. She will be replaced by Megan Greene.

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 hike in utility prices that came into force on April 1st has had the effect of slowing retail activity, even though the wholesale cost of energy has fallen since last Summer.

Should this continue rather than being a knee-jerk reaction, the Bank of England will be faced with an awkward decision when it next meets early next month.

Inflation is falling, and while that is expected to continue by the markets, there are two imponderables. The first is core inflation, which doesn’t include energy and foodstuffs, is not reacting to rate hikes as much as the headline.

Furthermore, there is disagreement between members of the Monetary Policy Committee about how much the effect of recent rate hikes are still to be seen in economic activity have interest rates reached the point where they are restricting activity.

It could be, as argued by MPC member Silvana Tenreyro, that rate increases that have taken place since the turn of the year have not yet had their desired effect. This may be in the course of moving rates into restrictive territory, and may cause inflation to fall too quickly, and have the knock-on effect of driving the economy into a recession.

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 apparent disagreement that has surfaced between members of the MPC has raised the level of uncertainty about what the Bank of England will do next.

Silvana Tenreyro believes that even one more rate hike may cause inflation to fall too far and drive deflation as demand collapses.

Huw Pill, the Bank’s chief economist on the other hand, believes that the current policy is correct since, having travelled so far down the road, it would be foolish to stop now.

It will be dangerous for the credibility of the MPC if factions develop, particularly if the various department heads at the Bank appear split on what action needs to be taken next.

The UK services sector produced another encouraging performance to offset the continued decline of Manufacturing.

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.