Bailey blamed for complacency
18th February: Highlights
- Brexit trade rules hurting business
- Initial jobless claims appear to have bottomed out
- Supply chain issues may have cost a significant period of equivalent growth
Former Johnson aide blames lack of tightening
Lyons believes that the Bank’s failure to act before December in hiking interest rates has set back the recovery from the Pandemic, but, more importantly, placed the country in danger of falling into recession in trying to play catchup.
The rise in the wholesale cost of gas, driven primarily by the Pandemic coupled with the forthcoming rise in national insurance contributions, has placed the country in danger of slipping into recession.
Lyons also took aim at the Bank of England’s forecasting of the rise in inflation, which he says has constantly downplayed the seriousness of the situation. It appears that forecasts have been moulded to fit the shape of the MPC’s predictions, rather than the other way around.
Bailey’s communication with the markets has been ineffective. This has led to accusations of misleading them over a November rate hike.
It is emerging that many UK exporters believe that Brexit has harmed their business and are still waiting to see when they will see any benefit. The most significant and obvious issue remains staffing. Whether it is butchers to man abattoirs or seasonal daffodil pickers, the ability of British firms to get produce to market is suffering.
The issues are mainly around red tape on both sides of the English Channel. Workers applying for short term visas don’t see any benefit to going through the process, while British firms looking to sell into the EU are facing seemingly endless bureaucracy.
This will be another factor in the looming problems which will slow output. Boris Johnson is keen to move on from the issues he has faced so far in 2022, but the economy is going to bring further criticism as he tries to play down looming issues by emphasizing the positives, which are decreasing rapidly.
The pound is hemmed in by significant selling interest around the 1.3650 level versus the dollar, while buyers reside close to recent lows around 1.3480/90.
Yesterday, the pound reached a high of 1.3638, closing at 1.3617.
Possibility that rates could be hikes before meeting growing
While the most recent inflation figures showed inflation to be continuing to rise, they didn’t cause a surprise. Hiking before March 16th could be counterproductive for the Central bank’s reputation, possibly leading to accusations of panic.
St. Louis Fed President James Bullard has been vocal lately, leaving no one in any doubt that he believes the Fed is falling behind the curve. He is calling for the 100bp of hikes to have been provided before July 1st.
In an interview on CNN, Bullard commented that the time has come to completely remove any accommodation and front loading already agreed rate hikes would allow the market to adjust appropriately.
He doesn’t believe that hiking rates aggressively risks a recession, and voiced concerns about tight labour markets and the way inflation is eating into wages.
Hiking rates by 100 BP by the end of Q2 risks a certain repricing of asset markets, but there is a need to ensure that the exuberance caused by historically low interest rates is removed gently.
As the economy begins to emerge from the Pandemic, it looks like weekly data for jobless claims has reached something of a plateau. There has been a significant drop in lay-offs, which has seen the data fall over a three-month period.
However, workers are also sluggish in taking on new roles as they are expecting significant pay increases due to the rate of inflation and could potentially miss out if they move back into employment sooner than they feel necessary.
The dollar index continues to suffer from a lack of drivers, either positive or negative.
Yesterday, it was virtually unchanged at 95.83 having traded in a narrow range all day.
Monetary union has been littered with missteps
In the early days, there were plenty of concerns voiced about one size fitting all. It took a while, but the perennially profligate nations which had traditionally seen ballooning budget deficits eventually had to be reined in using (what they considered to be) Draconian spending curbs that led to the introduction of the growth and stability pact.
There have been several other predictably unpredictable issues, leading finally to a deal with Russia to run a pipeline to supply gas to Europe, naively believing that at the time of any conflict or other crisis, the supply wouldn’t be cut off or severely curtailed.
With reports of continued skirmishes between Russian backed separatists and the Ukrainian army growing, the situation in Eastern Europe is beginning to escalate.
This will be a disaster for Brussels on many fronts. It is now being estimated that the rise in inflation, due in no small part to the rise in the wholesale price of gas over the past year, has set the EU back at least a year in terms of growth.
While this is not unique to the bloc, the EU had the weakest economy going into the Pandemic, so the effect of seemingly uncontrolled inflation will be magnified.
Once the ECB begins to normalize monetary policy, it will begin to face the twin issues of its balance sheet and a potential bad debt mountain that banks have been allowed to retain on their balance sheets but not being required to make provision for.
Any talk of a more federalized EU has been shelved, with its most prominent advocates facing more pressing issues.
It is hard to say what form the EU have in five years’ time, while a ten-year horizon has almost infinite possibilities.
One of the imponderables will be the fate of the euro. It is believed that it would one day replace the dollar as the global reserve currency, but that seems to be even further in the distance than it has ever been.
Yesterday, the single currency traded in a narrow range as traders wait for further hawkish comments from the ECB to supply some positive energy.
It traded down to a low of 1.1323, closing at 1.1359 as it stays some way from any significant support or resistance.
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.”