18 March 2024: Inflation set to fall to a two-year low

18 March 2024: Inflation set to fall to a two-year low


  • Glimmers of hope, but still a long way to go
  • This week will be dominated by the FOMC
  • No question, if Germany slumps, so will the Eurozone
GBP – Market Commentary

MPC still won’t cut rates this week

The Monetary Policy Committee of the Bank of England meets this week, and while there is a slim chance of a cut in interest rates, it is considered more likely that they will remain unchanged.

Inflation data for February will be published on Wednesday. It is expected that the headline rate will fall to 3.6% according to a poll of economists conducted by Reuters. This is in line with consumer expectations that inflation will fall to a low of 3% in the coming year. In November, expectations were at 3.3%.

In January, the headline rate of inflation was at 4%. Although this is well below the high that was seen last year, it is still double the Bank of England’s 2% target. When he came to power, Rishi Sunak vowed to halve the rate of inflation and although it is unclear what influence the Government has over the rate of inflation, that goal has been met.

In a speech recently, Andrew Bailey, the Governor of the Bank of England said that inflation does not necessarily have to fall to 2% before the Bank can begin to cut rates if it is on a clear path towards the target rate.

The five permanent members of the Committee have voted as a “bloc” since the pause was agreed last September, and there is no reason for that situation to have changed in the run-up to this week’s meeting. The four independent members, Dhingra, Greene, Haskell, and Mann have each been a little noisy in stating their opinions.

Catherine Man is the most hawkish, voicing several reasons that inflation remains “sticky,” from the attacks on shipping in the Red Sea to the amount of cash that the well-off continue to spend. She may be tempering her view, however, commenting recently that her vote for a hike at the last meeting was a “close run thing.”

Swati Dhingra represents the other end of the “interest rate spectrum.” Since joining the committee in September 2022, she has held the most dovish view. When rates were rising, she voted for no change, and since the pause, she has voted for rates to be cut. It is likely that, given inflation is continuing to fall, that she will vote for a cut on Thursday.

Megan Greene voted for a hike for a hike at every meeting she had attended until February, when she voted for no change, while showing a hawkish demeanour, she wants to see more evidence that inflation is solidly on a downward path before agreeing to a cut in rates, He has voted for a hike at every meeting since the pause.

The recent comments from Bailey make a cut in rates more possible on Thursday, but he was sufficiently ambiguous to make the committee’s decision far from a certainty.

The pound fell from its recent highs last week, reaching a low versus the dollar of 1.2725 and closing at 1.2735. Against the single currency, it fared no better, falling to a low of 1.1681 and closing at 1.1696.

USD – Market Commentary

Powell is likely to provide more advanced guidance

It is considered that the U.S. economy is currently experiencing a period of unprecedented growth. Although the GDP data for the past two quarters is not particularly significant, when compared to other G7 economies, it is performing well above the trend.

Despite interest rates being at multi-year highs, employment remains buoyant, while both productivity and output remain resilient. Ever since the FOMC began to hike interest rates, the market has been waiting for the effect on employment to be felt, only for job creation to continue to rise at a healthy level.

The level of support that the Biden Administration has pumped into the economy appears to have gone a long way to negating the most telling effect of the rate hikes, but in a converse way, fiscal policy has helped “take the edge off” the most telling effects of rate hikes.

It is as if the economy emerged from the Pandemic “too strong” and that is why rates will remain “higher for longer.”

The economy has been 40% stronger in the fourteen quarters since the brakes were slammed on by Covid-19.

A poll of economists commissioned by the Financial Times has shown that they feel that the most likely time for a cut in interest rates is September, with only 10% seeing a cut at this week’s matting and only 30% expecting a cut by July.

There is a conflict between politics and economics. President Biden would appreciate a cut in rates for household budgets to be less constrained by the time voting takes solace in November, while Jerome Powell wants the “last mile” of the fight against inflation to be as smooth as the past six months.

It is hard to fathom why Treasury Secretary Janet Yellen would believe it necessary to state her view that the economy is not heading for stagflation in a speech last week unless it was to support her boss’s hope for a cut in rates.

The Fed fiercely protects its independence, and while Powell will listen to Biden’s view, he remains his own man.

The dollar index is reacting to the market’s view that the Fed will be the last G7 Central Bank to cut interest rates. Last week, it rallied to a high of 103.49 and closed at 103.44. Although it failed to recoup all its losses from the previous week, it is well on the way to doing so.

EUR – Market Commentary

Inflation is proving more resilient in Eastern Europe

Suddenly, the ECB is considering individual nations’ and regions’ inflation rates to avoid the cut in interest rates that the overall Eurozone economy desperately needs.

It emerged last week that the Central Bank is particularly concerned that the inflation rate in some Eastern European members of the Eurozone and the Baltic States remains well above the Eurozone average, and the programme of rate hikes that recently ended has not had the desired effect.

This is little more than an attempt to justify the unjustifiable on the part of the remaining hawks on the Governing Council.

Meanwhile, there has been a shift towards a more “dovish” approach from other members that illustrates the difficulty that Christine Lagarde is experiencing currently.

Not only did arch-hawk, Robert Holzmann comment recently that the ECB appears to be preparing for a rate cut, but over the weekend, Olli Rehn the Governor of the Finnish Central Bank, and one of the “silent majority” who have consistently voted for rates to remain high, said that rate cuts are now a significant topic of discussion among ECB members.

Furthermore, Boris Vujcic, Governor of the Croatian Central Bank, the ECB’s newest member, told reporters in Zagreb that a “stumble” in the Eurozone economy, could hasten the pace at which rate cuts take place.

The economy has been “stumbling” for several months, so Vujcic will likely vote for rate cuts going forward.

Economists at the European Commission have finally removed their blinkers and agreed that the “fate” of the Eurozone depends on Germany making a recovery from its current malaise. They believe that the German economy needs to undergo a significant systemic change to recover its position as the region’s strongest economy.

There is no reason for other Eurozone members to experience a feeling of schadenfreude at Germany’s predicament since their fate is inexorably linked.

The euro failed to test the 1.10 level yet again, falling short of its target. Last week, it fell to a low of 1.0873 and closed at 1.0888.

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.