10 May 2024: Bailey stands strong over rates


  • MPC votes 7-2 to leave rates unchanged
  • Jobless claims show employment is easing
  • A moderate recovery is underway, despite German woes
GBP – Market Commentary

Dhingra and Ramsden voted for a cut

Following yesterday’s meeting of the Monetary Policy Committee, at which the base rate of interest was left unchanged for the sixth consecutive time, Chancellor of the Exchequer, Jeremy Hunt in agreeing with the decision, told Andrew Bailey that cutting rates prematurely risks having to raise them again as inflation appears to be far from dead.

In his post-meeting press conference, Bailey sounded an optimistic note, telling reporters that interest rates can be reduced once inflation is more clearly under control. In the lead-up to the Committee’s March meeting, the headline rate of inflation had fallen to 3.4% and then subsequently to 3.2%.

Bailey is concerned that the pace of deflation does not reflect the relatively high level of interest rates, although the more hawkish members of the committee dropped their calls for rates to be increased and voted along with the majority of their colleagues from rate to remain on hold.

The vote was 7-2 with two committee members calling for rates to be cut, fearing that a failure to cut rates may drive the economy back into recession.

Swati Dhingra and David Ramsden voted for rates to be cut. While Dhingra’s dovish views are well known, this was the first time a permanent member of the Committee has not voted in tandem with his colleagues.

This was a subtle, yet key step on the road to a cut in rates.

The decision was disappointing news for the home loan market. Although house prices are still buoyant, several lenders have recently increased the rates they charge for two and five-year fixed-rate mortgages, which will in time dampen demand and consequently prices.

The Head of UK Residential Property research at prominent estate agent, Knight Frank, told reporters that the UK housing market activity has improved this spring, but there is still a sense of hesitancy among buyers and sellers as they wait for the first rate cut in four years.

The Bank of England is waiting for the inflation rate to fall closer to its 2% target and will leave rates unchanged for another six weeks.

Another factor in the Bank’s decision is the fact that wage growth is still stubbornly high, although there was evidence in the latest data that it may well be slowing down as inflation falls.

The April data is due to be published next Tuesday, with wage growth expected to fall below 5.5%. Inflation data is not due for release until the following week,

The pound was barely affected by the Bank’s decision, which was generally expected. It initially fell to a low of 1.2445 but, having rallied to a high of 1.2552 eventually closed at 1.2523.

USD – Market Commentary

Analysts appreciate the Fed, the public not so much

The market is gradually coming round to the idea that a rate cut this year is by no means a done deal.

While Fed Chair, Jerome Powell has remained constant in his advance guidance, giving the market a set of economic conditions that will allow the FOMC to begin to cut interest rates, several of his colleagues have become, if not openly hawkish, certainly open to leaving rates unchanged for the rest of the year.

At the end of last year, it was considered likely that the first cut in rates would take place in March. Then, as the level of job creation and wage growth remained high, rates were predicted to be cut in June. The latest FOMC meeting “poured cold water” on that theory, as FOMC members “queued up” to express their concerns that the rate of deflation may have stalled.

Now this week, popular wisdom considers that a cut may not take place until November, if at all. As the year wears on, and the Presidential Election comes closer, politics will play a part in the decision-making process, despite Powell’s assertion that the Committee barely discusses its views on the outcome.

One of Donald Trump’s former White House Advisers spoke yesterday of his fears that Trump be sent to prison either during or at the end of his trial for falsifying business records. He has constantly run the risk of being held in contempt and being put in jail for his constant disregard of a gagging order that he has been placed under.

Kevin Hassett, former White House Council of Economic Advisers Chairman, said a prison sentence would be a “big risk” to financial security as the US is already experiencing a period of slow growth.

This was dismissed as scaremongering, a tactic that Trump supporters have used several times.

Trump has repeatedly broken the gag order on his hush money trial that prevents him from making statements about witnesses or the jury, culminating in Judge Juan Merchan threatening him with jail if he does not stop.

The story of the economy currently is that the pace of consumer activity is showing no sign of abating, and while this continues the Fed will leave rates unchanged.

One member of the FOMC spoke recently of his view that all the effects of the slowdown in inflation have been seen on the supply side of the economy, with supply chains seeing significant improvement and the Baltimore Bridge disaster having limited effect. It had been hoped that leaving rates unchanged would see demand slow, but so far that has not been the case.

The dollar index is still supported by rate expectations. Yesterday it fell marginally to a low of 105.20 and closed at 105.22.

EUR – Market Commentary

Brussels is against the appropriation of Russian assets

There is a row brewing between the U.S. and UK and one side, and the European Commission on the other.

The cause of this friction is the handling of Russian assets seized due to the invasion of Ukraine.

Both London and Washington believe that the assets should be forfeited to pay for the rebuilding of major towns and cities in Ukraine following more than two years of bombing.

Brussels, on the other hand, believes that such actions would be considered illegal since there has been no hearing or verdict from any court.

Next month, G7 leaders will meet to discuss the potential confiscation of approximately US$ 300 billion in Russian central-bank assets that are sitting frozen in G7 countries, as well as in non-members Switzerland and Belgium.

The outcome is far from certain, even though the U.S. has already transferred a small amount of funds to Estonia to be used to begin the rebuilding of Ukrainian infrastructure damaged by Russian shelling.

Recent comments from Austrian Central Bank Governor Robert Holzmann have refocused the market’s attention on the possibility of a rate cut by the ECB next month. Holzmann has highlighted the economic dangers of “going it alone” due to the potential effect on the currency market, and particularly a significant fall in the value of the Euro.

This would see inflation rise again, even though the effect on exports would be positive. Holzmann is sufficiently practical to see that the ECB does not operate in a vacuum and since the creation of the monetary union, the Eurozone needs to be aware of developments in other economies that will affect competitiveness.

He acknowledges that the two economies are growing at different rates, with the Eurozone barely showing any growth this year, while the U.S. is expected to grow between 2% and 2.5% over the same period.

Although a cut in rates is still the market’s favoured outcome from the meeting of the Governing Council that will take place on June 6th, it should not be considered a foregone conclusion.

The Euro is still in a narrow range, held in position by a lack of “natural buying interest” and the possibility that a rate cut will be delayed.

Yesterday, it rallied to a high of 1.0784 and closed at 1.0782.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.