11 November 2021: Tenreyro explains no vote

Tenreyro explains no vote

11th November: Highlights

  • Monetary policy shouldn’t be used to offset short-lived shock
  • Inflation rises again. Headline and core at 30-year highs
  • Pointless growth competition won’t phase Lagarde

Bailey says wages key to rate hike.

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.

Just two weeks before, Bailey had told the market that the bank would have to act to curb inflation, which has reached a level of 4.5% recently.

The Governor, at the very least, showed a high degree of misjudgement of his colleagues’ views on the economy and at worst misled the market. He will need to be more circumspect in future if he is to repair the damage to his reputation.

Bailey also denied that the MPC had bottled it by deciding against raising rates due to a concern that in the current environment, were a rate hike to lead to a further slowdown in the economy without any material effect on inflation, the Government would make them a scapegoat for the failure of its own policies.

The pound remains under pressure from the market’s expectations for the economy published by the NIESR this week. If their expectations are proved correct, the Bank may not be in a position to be aggressive over interest rates even as long-term inflation expectations grow. Sterling fell to a low of 1.3405 yesterday, closing at 1.3408.

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Biden accused of dithering over next Fed Chair

Inflation continues to skyrocket in the U.S. with the headline number reaching 6.8% in October. The narrower measure of inflation without food and energy rose by 0.6% month on month to 4.6% year-on-year.

The Fed will have an advance warning on inflation at its meeting last week but decided to stick with the guidance it had already given about completing the taper of additional support before interest rate hikes are even considered.

President Biden, having just managed to get his $1.2 trillion Infrastructure Renewal bill through Congress, demanded patience from commerce and industry yesterday to give the new funding time to flow through the economy.

As well as facing criticism over the apparent slowdown of the recovery, Biden is being accused of dithering over his decision about who will be the Chairman of the Federal Reserve once current incumbent Jerome Powell’s first term ends in February.

On his record of providing support to the economy during the Pandemic, Powell should be a shoo-in, but he is hampered by his links to the Trump Administration, having been nominated and supported by the previous President.

This is enough to make some Members of Congress take an instant dislike to him, although their dislike is thinly veiled by attacks on his record on tackling Governance of Wall Street as well as unease over his and other members of the FOMC’s personal financial actions.

The rising star of the Fed is Lael Brainard who is seen as a steady pair of hands who has a good record in demanding tougher oversight of the financial markets.

Biden is expected to make his decision imminently and the markets are clearly talking their own book, by indication that he will choose to stick with Powell based solely on his past performance and a promise to tighten up oversight.

Biden spoke yesterday of his concern over rising inflation, but also said that an independent Federal Reserve is able to decide how best to tackle rising prices. He called upon the Federal trade Commission to look into any price fixing that may be happening.

The dollar index rallied yesterday, pulling away from crucial support and broke what has been expected to be strong resistance at 94.60. It reached a high of 94.90, its highest level since July 2020. It subsequently closed at 94.88.

ECB President preparing for post-Covid world

The ECB President Christine Lagarde is beginning to look forward to life after Covid, as she begins to consider how to tackle the legacy issues remaining from the time when she didn’t spend every day firefighting.

While she is aware of the issues facing individual economies that come from strict control of debt to GDP ratios and budget deficits, it appears that she is looking at demanding banks repair balance sheets damaged by the wave of bad debts that are a legacy of the financial crisis.

Lagarde is of the opinion that the economy has been set on the correct course by continuing to provide support even after the current round of PEPP expires at the end of the first quarter.

She has sufficient support within the Central bank’s Governing Council to ensure that growth is favoured over tackling inflation that is considered both transitory and confined to the supply side of the economy.

Despite this, as in the UK, Lagarde will want to see wage demands moderated, although she faces criticism from Germany in particular, of the effect high inflation is having on savings and pension pots.

Germany is in danger of becoming a drag on the recovery in the Eurozone, with cases of Covid on the increase and the death toll from the virus now over 100k.

It is feared that should the pandemic return in force this will affect consumer confidence and spending and prolong the supply chain issues that have plagued the entire region.

Manufacturing makes up a far larger proportion of GDP in Germany than in other nations, so the supply chain issues are disproportionately affecting German industry.

Where Germany has been able to wield its industrial might as a weapon in controlling what it considers to be profligate spending by other Eurozone members, it is now at their mercy to a certain degree as they promote growth over inflation, encouraged by ECB policy.

The euro suffered at the hands of a surging dollar yesterday. It fell to a low of 1.1477 yesterday, closing at that level. In concert with the dollar index, this was the single currency’s lowest closing level since July last year.

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About 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.”