13 June 2023: MPC member sees more rate hikes


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  • No pause in sight despite improving inflation outlook
GBP – Market Commentary

Haskel sees inflation to remain elevated for some time

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.

At the most recent meeting of the MPC, Dhingra voted against the hike that was eventually agreed believing that the economy needs time to adjust to the hikes that have already taken place.

The Governor will appear in front of members of the House of Lords to make the case for Central Bank independence, a subject that is close to his heart.

Since the Bank began the current cycle of interest rate hikes, there have been several questions asked about the decision to give the Bank its independence and form the Monetary Policy Committee in 1997.

The current situation with inflation, which has spawned the worst cost of living crisis in a generation, is the first time the Bank’s independence has been tested and not all MPs believe the current format is ideal.

There was a proposal recently that the outgoing member of the MPC should be replaced by a person from the Treasury. So far Bailey has avoided the subject once he made his first thoughts known.

It is unlikely that Bailey will be asked to elaborate on the expected outcome of next week’s interest-rate-setting meeting, although there has been little change to the overall view of the committee recently.

The May employment report will be published this morning. It is expected that the unemployment rate will creep up to 4%, from 3.9% in April. The ONS data is a little easier than the U.S. employment report, and predictions of a fall in the claimant count of around 10k are unlikely to be too wide of the mark.

The pound started the week on the back foot as it fell to a low of 1.2487. It managed to claw its way back above the 1.25 level, closing at 1.2505, as the market positioned itself with respect to the important Central Bank meetings that take place in New York and Frankfurt this week.

USD – Market Commentary

Falling cost of fuel to help Fed

Today’s release of the May inflation report may show that the FOMC will be well served by pausing its current cycle of interest rate hikes.

The report is expected to show that headline inflation moderated again last month, falling from 4.9% to 4.1% due mainly to a significant fall in the cost of gasoline, in particular, diesel fuel.

Core inflation is also expected to have fallen but not as dramatically as the headline as the service sector continues to pass on increasing costs to its customers.

As the members of the FOMC gather in New York today for their six-weekly rate-setting meeting, the expectation is still that they will announce a pause in their cycle of interest rate hikes that have continued for the past eighteen months.

It would be a surprise if rates were increased for the eleventh meeting in a row, despite Jerome Powell’s clear concern that inflation could easily flare up again.

Many members of the committee have spoken recently of their desire to pause, but not yet end the current cycle of hikes.

The expected fall in the rate of inflation will likely bring price increases to their lowest level since April 2021.

The market expects to see greater transparency from the Fed as interest rates have reached a critical phase. Some economists believe rates have reached a restrictive phase, while others believe that they are currently neutral.

If there is to be a pause when the decision is announced tomorrow, the subsequent data will be closely watched to see if inflation has been defeated while any increase in the job creation reported for this month may set alarm bells ringing.

The dollar index gained some of the ground it lost last week as it reached a high of 103.75, closing at 103,62 yesterday. There may well be some increased volatility for the rest of this week as traders and investors pore over the statement made by Jerome Powell, once the decision has been made, looking for clues about future interest rate changes.

EUR – Market Commentary

Fastest hike cycle in ECB’s history to grind to a halt

The ECB President, Christine Lagarde, is beginning to look further and further afield for reasons why the Bank needs to continue to raise interest rates, despite the Eurozone falling into recession.

Her latest target is large corporate businesses she came close to accusing of taking advantage of elevated inflation levels to raise their prices to inflate their profits.

While the market has become “immunized” to further rate hikes recently since it became clear that there would be no halt to the cycle before the ECB takes its summer break. However, speculation is beginning to grow again that the end of the road may be in sight.

The words of doves like Pablo Hernandez de Cos and Luis de Guindos have been largely ignored by the investors, as they have been “crying wolf” for a considerable time. It will only be when Klaas Knot, Joachim Nagel and the others of the Frugal Five begin to see inflation as close to being under control that the market will sit up and take notice.

The popular view after the most recent meeting of the Governing Council was that two more hikes would be sufficient, but with Lagarde having commented that a pause or halt to hikes has not yet been discussed, nothing is certain.

Slowly but surely the inflation outlook is improving, but it is the pace of the fall and the damage it is doing to the economy while it stays elevated that concerns Lagarde.

The speech that she makes following the hike that will be announced on Thursday will be one of the most important of her Presidency. Although she is committed to a high level of advance guidance, she won’t want to be too direct for fear of giving the markets a clear expectation that the Bank will end the cycle of hikes at the July meeting.

The Euro and dollar are locked in a speculative bubble where the expectation is not backed up by hard evidence, although that may change later this week.

Yesterday, the common currency rose to a high of 1.0790, but there was no interest in challenging resistance around 1.0795, and it drifted back to close at 1.0756.

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.