22 February 2024: Bailey will still want to be certain before cutting rates

22 February 2024: Bailey will still want to be certain before cutting rates


  • A delay in cutting rates risks a hard landing – Dhingra
  • A surge in productivity has solidified economic resilience
  • The Spanish economy is the envy of the Eurozone
GBP – Market Commentary

Dhingra sees no risk of a fall in credibility from an early cut

Independent MPC member, Swati Dhingra, followed up her testimony to the House of Commons Treasury Select Committee earlier in the week with a plea to her colleagues to consider the very real consequences of a failure to cut interest rates from their current, sixteen-year high.

Although she has voted for a cut at several MPC meetings recently, Dhingra will have been encouraged by the testimony of Bank of England Governor, Andrew Bailey, who told MPs that as wage increases continued to moderate, there is no reason to delay a rate cut until inflation has reached the Treasury’s target of 2%.

Dhingra believes that waiting for indicators to reach a particular level when those indicators are lagging the “real” economy, is counterproductive and carries its risks.

Since wage growth had been between four and five per cent before the global financial crisis, the current level of 6% is consistent with an inflation rate of 2%, particularly given the productivity gains that have taken place since 2008/10.

When considering the possibility of a soft landing for the economy, Dhingra warned that history shows that “overtightening” presents a risk of a hard landing, where job creation falls into negative territory without a comparable fall in inflation.

Andrew Bailey’s “dovish pivot” took the City by surprise, particularly when he spoke of his view that the “recession” may have already ended.

Some commentators believe that Bailey was attempting a “Mia Culpa” by almost acknowledging that rates had indeed been overtightened. This has also led to a significant rise in expectations that a cut may take place soon, although the situation doesn’t warrant an emergency, inter-meeting cut.

Bailey believes that household incomes are improving as the cost-of-living crisis eases, without the surge in demand that was seen following the end of the Pandemic, and the labour market is resilient.

He may have started a new trend by giving a label to the severity, or otherwise, of a contraction in the economy.

The press reacted in a “black or white” manner to the news that the economy had entered a recession, without considering that the lack of meaningful growth meant that there was a risk that the economy would slip into what Bailey now calls a “weak recession”.

The pound has failed to react to mounting speculation that the Bank of England may be the first G7 Central Bank to cut interest rates. Sterling rose to a high of 1.2642 and closed at 1.2633 as the dollar lost more ground.

USD – Market Commentary

Wells Fargo Bank sees a “spate” rate cuts

The constant promise of a soft landing for the U.S. economy is taking on “boy who cried wolf” status, as inflation continues to moderate while job creation remains strong.

A soft landing is such a fabled event that there is no “hard and fast” rule as there is for a recession.

It may be that Jerome Powell, who appears to have taken on the role of “de facto arbiter” of a soft landing, fears that once he declares that the economy has achieved a soft landing, then things can only deteriorate.

Although there was nothing radical in the minutes of the latest FOMC meeting, it was agreed that rates have now topped out for the current cycle.

Although there is a general feeling that a rate cut may be imminent, any weakening in the labour market would hasten that decision.

Powell will have been encouraged that one of the long-standing indicators that the economy is heading for a recession has been removed as the Conference Board is no longer predicting a downturn, although the yield curve is still inverted.

President Biden will deliver his last State of the Union address of the current Presidency on March 7th. He is likely to point to his “achievement” in presiding over an economy that has seen inflation fall from close to double figures to around 4% currently.

Biden has, however, allowed the country’s fiscal deficit to continue to grow, which has added more pressure on the Federal Reserve to retain a bias towards tighter monetary policy.

Biden is still trailing a long way behind Donald Trump in polls concerned specifically with their economic plans.

The Fed has already signalled that there will be seventy-five basis points of interest rate cuts this year, but Wall Street Bank, Wells Fargo, believes that that may be more cautious than what takes place.

They believe that in a “spate” of cuts that will begin “imminently”, there could be up to one-hundred and fifty points of cuts as the employment market begins to suffer.

That is not the majority of Wall Street Economists’ base case but may not turn out to be as radical as many imagine.

The dollar index appears to have run out of steam as it continually butts against selling pressure that is on any approach to 105. It is challenging support at around 103.90 but is unlikely to see much further downside.

EUR – Market Commentary

Lagarde is still cautious

Although ECB President, Christine Lagarde continues to side with the “hawkish tendency” on the Bank’s Governing Council, there is a growing belief that a rate cut is getting “ever closer”.

The split between the hawks and doves is becoming wider, it will be left to the less “radical” Central bank Governors who make up the rest of the Council to sway their colleagues towards the first of what may be several cuts in rates.

Lagarde is unlikely to want to see increments of more than twenty-five basis points, as that may send the wrong signal to the market.

Overall, she feels that although the Eurozone economy is struggling for meaningful growth, there are sufficient “bright spots” for the region to avoid falling into a recession.

According to its Finance Minister, the German economy is in “troubled waters”. It is hard to say if that is better or worse than the “dramatically bad” situation described by Robert Habeck in his last quarterly review.

So far, the German Economy has managed to avoid falling into a full-blown recession and provided its economy receives some relief, most likely in the shape of a rate cut, it may escape the worst ravages of falling demand and high energy costs.

Germany appears to have been a victim of its success, as it has continued to rely on energy-hungry heavy industry, while developed countries were switching to service-based economies to compete with the growing industrial might of China.

Germany has indeed “borne the brunt”, at least economically, of Russia’s invasion of Ukraine, although only history will judge the folly of almost total reliance on imports of energy from a nation that only considers its necessities.

The German “malaise” appears to be spreading to its closest neighbours. The latest data for Dutch and Belgian consumer confidence and retail sales points to downturns in a sector that has been supporting their economies as the effect of the Pandemic has faded.

Any further decline may push their Central Banks closer to voting for a cut in interest rates.

The Euro is enjoying a good week as the dollar continues to struggle. It rose to a high of 1.0824 yesterday and closed at 1.0817.

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.