20 May 2024: The MPC is diverging further

Two clear “factions” make up the Bank of England’s Monetary Policy Committee: the “permanent”, and the “Independent” members.

The Permanent members tend to vote as a bloc and have been accused in the past of being prone to “groupthink”. In contrast, the independent members can be more “free-spirited”, allowing them to look at the potential for changes to monetary policy based on their underlying view of longer-term drivers.

Over the period since a majority of the committee voted for the cycle of interest rate hikes to end, the independent faction has become split with doves and hawks voting for rates to continue to be hiked or cut at once.

Swati Dhingra has become the “Standard Bearer” for the doves, with Catherine Mann the most vociferous of the hawks. The other two independent members, Megan Greene and Jonathan Haskell make up the rest of the “independent team”.

Mann has voted with the permanent members for rates to remain unchanged at the two most recent meetings, and she has been joined by Haskell who had previously voted for a hike.

Greene has proven to be the most “guided” by the data since she joined the Committee in July last year. At her first meeting, she “ran with the pack” voting for rates to be raised. Then, at her next three meetings, she sided with the hawks, but since the turn of the year she has voted for no change.

Her voting record has been accompanied by comments which show that she is prepared to be guided by the data on a meeting-by-meeting basis, unlike her colleagues.

At the most recent MPC meeting, David Ramsden voted for a cut in rates. This is the first time that a permanent member of the Committee has “broken ranks” since the appointment of Andrew Bailey as Governor.

This is a significant development. Following the last meeting, Haskell has spoken of his view that inflation risks are ebbing. However, his more recent comments have confused observers.

In late April he spoke of the need for the Bank of England to arrive at a position where inflation is “controlled” but went on to say that he believes that once the current hurdle has been negotiated, inflation is likely to remain close to the Bank’s target of 2% for a considerable time.

The next meeting of the MPC takes place on June 20th. There may be more votes for a cut depending on the outcome of the April inflation data, which is due for publication on Wednesday. It is forecast the headline rate may have seen a significant fall.

Last week, the pound gained as the market digested the possibility of a rate cut by the Fed taking place sooner than expected. It rallied to a high of 1.2712 and closed at 1.2706.

The Chairman of the Federal Reserve, Jerome Powell, has contracted Coronavirus and is working from home. He has cancelled any public engagements, although he is well enough to perform his regular duties.

While this is not of great concern, it is perhaps symbolic of the fact that the Fed, in line with the rest of the country, has more work to do to eradicate an issue that has been hanging over the country for longer than expected.

In the case of the Fed, the problem is inflation, which has been proven to be a stranger adversary than had been imagined when the FOMC agreed to halt its programme of interest rate increases last July.

Since then, the headline inflation rate has become “stuck in a groove” that a Fed Funds rate of between 5.25% and 5.50% is seemingly unable to change.

Several members of the FOMC have been calling for patience in the period since the turn of the year, but inflation still is stubbornly high.

There are three “schools of thought” concerning inflation currently “doing the rounds”.

The first is that rate hikes were halted prematurely, and Powell succumbed to pressure from the market.

The second is that when it was clear that inflation had begun to level off, a further hike should have taken place in either December or January. This would have the dual effect of showing that the Fed remained serious about inflation and giving the market a “jolt”, shaking it out of its belief that the next move would be a cut.

The third opinion is that, given the fact that the economy continues to perform well, a hike should be considered at once. This would be considered a “reset” and allow the rate cuts to begin in September, as has been considered likely by members of the FOMC recently.

Over the past thirty years, the Fed has been anything other than predictable.

It began with Alan Greenspan’s “irrational exuberance” speech in 1996 and continued through Ben Bernanke channelling his inner Milton Friedman in 2002, calling for money to be “dropped from a helicopter” to provide added liquidity.

However, it is now continually doing what the market expected, which means it has lost its “edge”.

The current status quo will not allow the economy to grow further, but neither will it see inflation fall.

Get well soon, Jay, and start to consider a more radical path.

The dollar index has substantially corrected since the thought that the economy may be slowing down was first considered. Last week it reached a low of 104.08 and closed at 104.41.

A rate cut in June is still a genuine possibility, although the “hawks are gathering” to place doubt in Governing Council member’s minds that the time is right.

Arch hawk, Isabel Schnabel, spoke last week of her view that while a cut next month will be “doable”, the data that is currently available is not conducive to this being the first in a series of cuts.

This has led observers to consider this as a warning that the cuts may need to be reversed if the path of deflation doesn’t continue.

Understandably, there is a degree of nervousness among traditional hawks that a rate cut will take place before inflation reaches its target.

However, leaving rates unchanged until headline inflation has reached 2% risks a severe overshoot, pushing real interest rates even lower and signalling the start of further inflation that may be hard to control.

It is always a delicate time when a cycle is about to turn. The decision to pause the cycle of hikes was tough and took significantly longer than it should have done to happen.

It has taken a significant amount of agonizing to reach the point that the ECB is at now, and nerves are beginning to show.

The fact remains that the Eurozone economy is in considerable need of a cut in rates. This will help the states on the periphery to consolidate their recent increase in activity while allowing the major economies, in particular Germany and France, to see a light at the end of the tunnel.

The Eurozone needs to see a significant improvement in consumer activity, which will lead to an increase in confidence and set the economy on a path to sustainable growth.

German Economy Minister Robert Habeck has defended the country’s billion-euro investments into green steel plants, saying it was needed to avoid a breakdown of whole regions’ industries and secure supply of steel at times of geopolitical uncertainty.

Habeck is a member of the Green Party, which is expected to struggle in the elections that are due to take place next month. Many Germans believe that the

the country is being left behind since it is trying to compete with countries like China and India, which have a less-than-solid commitment to green policies.

The region’s hoped-for export-led growth has been hit in the short term by the recent rally in the euro.

Last week, it climbed to a high of 1.0895 and closed at 1.0880. This rally is still being considered a dollar correction, and the market is beginning to be comfortable to sell into any further perceived Euro strength.

Have a great day!