13 April 2023: IMF accused of doom-mongering


  • UK debt to GDP ratio about to top 100% for the first time
  • Core inflation falls to its lowest level since 2021, while headline rises marginally
  • Holzmann believes that data support a 50 point hike
GBP – Market Commentary

Labelled as instinctively anti-Brexit

The UK is facing the prospect of its government borrowings rising above the level of its output for the first time as the country’s debt to GDP ratio is set to rise above 100%.

According to IMF forecasts, it is likely that government debt will top out at 101% in 2028. The IMF’s calculations run counter to those of the Office for Budget Responsibility.

The lender of last resort, uses a slightly different model to which the OBR believes is not as accurate as its own and this has led to the difference which amounts to around £6 billion, which is within its own margin for error.

In last month’s budget, Hunt added another twenty billion to the country’s borrowing costs. The additional funds for childcare he announced as well as tax cuts to enable firms to invest in expansion of their businesses. He had already reined in around fifty-five billion in spending that had been tabled by Liz Truss during her brief period as Prime Minister, in his Autumn Statement.

This drew praise at the time from the IMF which commented that the Government had set the country on the right path.

A combination of weak growth which lowers the absolute amount that will be raised in taxes and pressure on public spending will drive the rise in the debt to GDP ratio.

When looking further at the IMF Spring report which was released to accompany meetings it is hosting in Washington this week, several MPs along with economists believe that the IMF has shown a bias against the UK by highlighting the issues created by Brexit.

They believe that at the end of the day, its data is both open to interpretation while the margins between the growth figures between, for example, the UK and Germany are tiny in relative terms.

Nevertheless, Opposition MP’s and their supporters in the press have leapt upon the figures to show how thirteen years of Conservative Government have seen the country’s economy stagnate.

There is little doubt that the Chancellor has set ambitious targets for the economy, with an ageing population, pressure on the NHS and interest rate hikes all potential banana skins.

With an election on the horizon, it is expected that there will be further sweeteners for the electorate over the next eighteen months, although the Treasury firmly believes that there are better times ahead.

The pound has now clawed back close to all losses that it incurred over the last week’s thin markets.

Yesterday, it rose to a high of 1.2495 and closed at 1.2482.

USD – Market Commentary

Fed may pause rate hikes

There has been a noticeable shift among FOMC members over the past few months as Fed Chairman, Jerome Powell, has become slightly marginalized due to his, what some economists call, overly hawkish attitude to inflation and tighter monetary policy.

The CPI data for March that was published yesterday will see that debate continue as there have already been murmurs of a pause in the programme of fate hikes.

The release last evening of the minutes of the latest FOMC meeting showed that the committee was more concerned over the turmoil in the financial markets caused by the collapse of the Silicon Valley Bank which, at the time, drove fears of contagion similar to the 2008 financial crisis.

Several members of the committee voted for a pause in rate hikes as the Fed produced an internal report that banking sector stress may tip the economy into a recession.

The debate that ensued illustrated the FOMC’s concerns at the time, but in the end, as ultimately appears to have been proved correct, there was little effect on the Central Bank’s overall rate-hike campaign.

The internal report forecast a mild recession over the final quarter of this year and the beginning of 2024, although it also predicted a strong recovery over the rest of 2024 and 2025.

It is imagined that as in the UK, thin margins of error will have swung the needle back to the economy stagnating later this year rather than seeing two quarters of contraction.

Lael Brainard, until recently the Vice-Chairman of the Fed and now heading up President Biden’s economic think tank, spoke yesterday of her belief that the banking sector in the U.S. is both resilient and stable.

Notwithstanding any lingering fears of contagion, the FOMC is likely to signal an end to its policy of higher interest rates following its next meeting early next month.

The dollar reacted poorly to the news that core inflation fell by 1% last month from 6% to 5%, although the headline did tick up by 0.1% to 5.6%

The dollar index fell to a low of 101.43, again challenging support at 101.40. It closed at 101.54.

EUR – Market Commentary

Rate increases to provide support to single currency

The single currency is likely to experience an extended period of relative strength over the medium term as it gleans significant support from changes in the relative interest rates.

While the Fed is widely expected to call a halt to its policy of further interest rate hikes following its next meeting, the hawks remain firmly in control of ECB monetary policy.

Robert Holzmann, the head of the Austrian Central Bank, current holder of hawk in chief status, spoke yesterday of his belief that the current data when viewed through a lens of future inflation expectations, makes a fifty basis point hike at the next Governing Council Meeting imperative.

Having raised interest rates by three-hundred and fifty basis points since last July, conventional wisdom should lead to a belief that the Central bank should now be considering a pause in the cycle.

There have been three back to back hikes of fifty basis points, but there is no indication yet about a time for reflection.

The ECB President was clearly swayed by the arguments for higher interest rates last Autumn as her support for tighter monetary policy saw her take on a more hawkish view, where prior to that she had tried to provide support to those more indebted nations who were struggling.

As it turns out Ms Lagarde’s change of heart has proved correct. There has been no crisis yet due to funding difficulties and if anything inflation is still not falling fast enough.

The view of the market is that they will probably hike twice more, by fifty basis points, before announcing a pause at the beginning of Summer.

With both the Federal Reserve and Bank of England expected to pause imminently. The euro is expected to rally strongly over the rest of this quarter. It is likely to challenge resistance at 1.1180 and 1.13 versus the dollar and Sterling respectively.

Yesterday the Euro briefly reached above the 1.10 level before falling back to close at 1.0991.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
12 Apr - 13 Apr 2023

Click on a currency pair to set up a rate alert

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.