- Soaring mortgage costs threaten a recession
- Biden considers tax rises, while Trump concentrates on the economy
- Is the Eurozone suffering from stagflation?
Another two hikes and the risk of a recession grows substantially
While looking like it has spectacularly failed on both counts since the Pandemic, neither fiscal policy, nor the global economy have been on their side.
Andrew Bailey, the Bank’s Governor has been accused of being too cautious in delivering tighter monetary policy even though they were the first Central Bank among G7 nations to begin to hike rates.
Other Banks, notably both the Federal Reserve and European Central Bank started hiking rates significantly after the Bank of England but have managed to exercise a degree of control over rising inflation that has not been clear from the MPC’s actions.
The Fed’s success is shown in that they are the first G7 Bank that was able to pause the cycle of interest rates due to the significant fall in inflation recently.
While the Fed has been accused of risking pushing the economy into a recession and the ECB is now having to cope with an economy that is now in recession, both have been proactive, while Bailey and the rest of the MPC have been too timid, caught between hiking rate too quickly and failing to control inflation.
This week, the MPC will meet again and there is little doubt that they will hike interest rates by twenty-five basis points to 4.75%. The market is expecting short-term interest rates to “top out” at close to 6%, which translates into a further five hikes, meaning that it could be next Spring or even early summer before any pause is agreed.
There is significant angst being shown among homeowners about the regulation of the mortgage market currently that is seeing lenders introduce new products, only to withdraw them sometimes on the same day.
The Government is loath to provide any further support to mortgage borrowers since they have been receiving help from paying exceptionally low rates and are only now “reaping the whirlwind”.
The issue for the Bank of England is that having presided over an exceptional period of low interest rates and a steady flow of mortgage products, the increase that hit the market between now and the beginning of the fourth quarter will push inflation up, and have a detrimental effect on the economy. It is believed that one point six million homeowners face an increase in their mortgage payments that will cost a further fifteen billion in total, this will come directly from economic activity.
This “mortgage time bomb” has been brewing for some time but very few considered it or were advised that it was coming by their mortgage provider.
Last week, the May employment was published. This showed that the claimant count fell by 13.6k while the April figure was revised down by almost half.
This week in addition to the MPC meeting, May inflation data will be released. It is expected that the headline will have fallen moderately, as lower fuel prices are countered by continued high food price inflation.
Sterling had a strong week as it reacted to the pause in rate hikes announced by the FOMC. It rose to a high of 1.2848 and closed at 1.2821.
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Another FOMC member accused of insider trading
He faces hostility from all sides. The Democrat side of the aisle still holds a “natural grudge” against Powell as he is a registered Republican voter and was appointed by former President Donald Trump. This means that they feel he favours big business to the exclusion of the man in the street.
The Republicans meanwhile feel that he has raised rates too far too quickly which has eaten into corporate profits, which contributed to the collapse of three regional banks.
In this testimony, he will provide the rationale behind the pause in rate hikes that was announced last week, although it is likely that he will remain coy about what the actions of the FOMC will be in July.
He will use the “data-led” excuse, although given that the May employment report was the second strongest seen so far this year, yet the Fed still paused, that reasoning may need a little tweaking.
Raphael Bostic, The President of the Atlanta Fed and an outspoken member of the FOMC has reported that last May, after there had been just one interest rate hike, that he transgressed rules over trading guidelines. This will force the Central Bank to relive one of its worst-ever scandals.
The Trades were completed during the “blackout period” during which both trading and commenting on the expected actions of the Central Bank are prohibited.
Two members of the FOMC have stepped down since trading regulations were tightened in 2021 in response to other transgressions. It is likely that Bostic will have little alternative but to follow suit.
In May inflation continued to fall, again due in the main to lower fuel prices, with the headline reaching 4%. It is now half what it was at the same time last year and is at its lowest rate in two years.
If Powell can avoid a recession and engineer a soft landing for the economy, Politicians of both sides may be persuaded that his appointment may have been close to the only correct decision Trump made.
The dollar index fell significantly as the market reacted to the rate pause which means that a widening gap will be seen between U.S. and other G7 interest rates.
It fell to a low of 102.00 and closed at 102.29. The major support level on the medium-term chart is at 101.30. This may be tested, but is likely to hold given that the comparison of economic activity favours the U.S.
Even a September hike is not off the table
She has already provided a strong indication that a hike should be expected in July and even after the August “break” a further hike could be seen in September.
The recession that was announced recently is unlikely to end now before the end of the third quarter as monetary policy is likely to remain tight and gate even tighter.
There is some serious disagreement brewing within the Governing Council.
Joachim Nagel, the President of the Bundesbank went even further than Christine Lagarde in the wake of the latest hike. He believed that there is “still some way to go” with rate hikes before the target of 2% inflation is reached.
His French counterpart Francois Villeroy de Galhau spoke of his view that no one should “rush to a premature conclusion about either the calendar or the terminal rate”.
He feels that the surge in the value of the euro seen following the Fed’s pause is overdone and unjustified. A higher Euro makes Eurozone exports more expensive and weakens the region’s competitiveness.
De Galhau went on to say that the Council is supposed to be “data-driven, not forecast driven”, so making predictions about further hikes is both pre-emptive and disrespectful.
The Belgian Central Bank Governor, Pierre Wunsch, commented that if core inflation, which excludes energy and food, stays above 5% that a September hike is “evidently possible”.
The Frugal Five has a new Member. The Slovenian Central Bank Head, Bostjan Visle, believes that a September hike is possible if inflation turns out to be even more persistent than it is now.
The Euro rose to a high of 1.0976 and closed at 1.0940. It now appears to have the impetus to break and hold above the 1.10 level as the dollar’s correction turns into a trend.
Have a great day!
Exchange rate movements:
16 Jun - 19 Jun 2023
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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.