Does Bailey need to go?
Morning mid-market rates – The majors
1st June: Highlights
- Has the Bank of England dropped the ball?
- Inflation still considered a short-term issue
- Record inflation driven by energy costs
Fuel prices continue to rise. How long until a litre costs £2?
Critics are pointing to the fact that the Bank’s Governor, Andrew Bailey, failed to recognize the warning signs of rising prices when he first had an opportunity to act last summer.
While the Chancellor was praised over his actions in providing support for businesses and their workers, the Monetary Policy Committee became mired in its concerns over whether the nascent recovery would be blown off course, by a rate hike to nip rising prices in the bud.
It would, of course, have been a bold decision and one that no other G7 Central bank was prepared to take, particularly since the UK also had Brexit to contend with.
Nevertheless, the reason that the MPC was created was to provide as wide a range of views on the state of the economy as possible and to act in a manner that reduced the burden on a single person.
So far, there has not been a clamour from the financial market or the Government over what was basically a wrong decision in keeping interest rates low due to concerns over the strength of the recovery.
It is a double-edged sword for Bailey, since had the committee been sufficiently hawkish to begin to reduce support sooner, much sooner, the outcome could have been far less serious. However, had inflation, in the words of Federal Reserve Chairman, Jerome Powell, indeed been transitory, the recovery may well have been choked off.
In any event, the recovery has petered out due to a number of events over which the Central Bank has little influence. Brexit has seen tightness develop in the labour market, while the Russian invasion of Ukraine has seen energy prices rise to historically high levels.
As the economy grapples with a considerable slowdown and output slides towards contraction, questions over whether Bailey can remain in the role will begin to be asked.
The MPC is supposed to provide a collective decision-making process which is fine when it is making the right calls, but as soon as there is a sniff of blood in the water, the spotlight falls upon the Governor.
Yesterday, the pound continued its retreat that began on Monday, it faces resistance around the 1.2640 which, while not being particularly solid, is proving difficult to break given the lack of momentum being generated in a holiday shortened week.
It fell to a low of 1.2560, closing at 1.2603.
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Biden refuses to use economy as political trump card
Hawkish elements in the Democrat Party have been severe in their criticism of the Fed Chairman Jerome Powell’s handling of the economy, and are far more vociferous than the staider arguments emanating from Parliament in the UK.
Biden and Powell will meet later today to discuss the current state of the U.S., and global economies, which to certain observers, are one and the same thing.
Powell will brief the President on the Fed’s plans in the coming months to tighten monetary policy, as well as what its expectations are for a slowdown that could be sufficiently fierce to push the economy into recession later this year or early next.
Those politicians who are most vociferous about the economy see Powell as an easy target. They believe that since Powell was appointed by Trump, he can be blamed for whatever it is that ails the economy. They are fearful that when the midterm elections take place in November, that they may lose their seats, and it will be the fault of a Republican.
However, the vote to reappoint Powell was supported on both sides of the House and despite there having been some heavyweight Chairmen in the past, Powell’s received the highest level of support in recent memory.
Biden spoke yesterday, first, congratulating Powell on his confirmation. He went on to say that as well as fighting rising inflation, the Fed must support the transition from recovery to steady growth. He believes that the administration must provide the Central Bank with the space to do its job.
Had these words been uttered by Biden’s predecessor, they would most likely have been interpreted as the President distancing himself from the issue.
There have been comments from market commentators that point to a greater pullback in the dollar index than have been predicted recently. There has been a relaxed air about traders who believe that a correction within the trend is healthy.
However, concerns are growing that what started as a correction could develop into something more.
There remains solid support around the 101.20 level, but a weak result from this week’s employment report may provide the catalyst for a test of the support.
Yesterday, the index rose marginally to 102.17 in quiet trade and closed at 101.76.
ECB President ignores inflation, but market won’t
While in the past, she has been commanding in her desire to support the economy, which has not proved to be particularly successful.
Her non-vocal support for an end to negative interest rates and a tightening of monetary policy has seen the euro gain a tailwind, with some commentators predicting a test of the 1.10 level versus the dollar.
The downside of Lagarde’s actions is that it will be difficult for her to take as much credit as a collection of her colleagues, since it was the mention of a fifty-basis point increase in rates next month that initially lit the fuse.
The rise in energy prices was a significant contributor to another rise in inflation in May.
Preliminary data released yesterday showed that average prices across the Eurozone rose from 7.7% in April to 8.1% this month. Core inflation also rose, from 3.5% to 3.8%.
This was a little lower than inflation in Germany that was released on Monday.
By far the largest contributor to the rise in inflation was energy, which made up 39.2% of the rise, compared to 37.5% in April.
With the decision on the sixth round of sanctions on Russia creating a significant level of disunity, it is likely that price rises in the Eurozone have not yet peaked, as they appear to have in the U.S.
Unemployment in Germany remained unchanged at 5% this month.
Banque De France Governor Francois Villeroy de Galhau commented prior to the release of the data that the normalization of monetary policy is now a pressing matter, and he would like to see interest rates back in positive territory before the end of the next quarter.
The euro has been supported at 1.07 versus the dollar for almost two weeks and in order for its recent rise to be confirmed, that level will need to hold when it is first tested.
Yesterday, the single currency fell to a low of 1.0679, but rallied to close above the support line at 1.0734.
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.”