Pressure mounting to end QE
22nd September: Highlights
- OECD sees inflation elevated for at least two years
- Employment vital to FOMC aspirations
- Policy support and vaccination programme lead to OECD economic upgrade
Shadow MPC votes to abandon asset purchases early
However, the shadow MPC that is supported by the Times newspaper voted 9-0 in favour of ending QE early, with £50 billion of Treasury Bonds still to be purchased as part of the programme.
The committee, which is made up of well renowned economists and former members of the MPC, believes that ending support now would provide adequate notice for the beginning of rate increases that will be needed to keep inflation in check.
Some members went as far as suggesting a 0.25% increase in rates immediately, as well as the end of QE.
While there is no question that the genuine MPC will act in this manner when it announces its decision tomorrow, the fact that there is a growing belief that the UK should begin to tighten monetary policy may weigh heavily on the committee members’ minds.
The Government agreed to meet the costs of restarting a CO2 plant threatened by the increasing cost of wholesale gas supplies. The Prime Minister, in New York for the UN General Assembly, has been accused of being out of touch about the reality of rising bills on household budgets.
While in New York, Johnson met with the U.S. President Biden, who appeared to downplay the chances of a UK/U.S. trade deal.
It is now possible that the UK will join the North American Trade Pact instead of pursuing a deal of its own. This is a major blow to the chances of the post-Brexit UK becoming a significant player in global trade.
The pound trod water as the market awaits the outcome of the MPC meeting. Despite the rather hawkish outcome of the shadow MPC, it is more likely that there will be a degree of advance guidance offered and a split vote concerning interest rates.
Sterling rallied versus the dollar reaching a high of 1.3693 but fell back to close at 1.3660.
Economy struggling with employment and inflation
While this is, for now, little more than speculation, a November start would allow Powell adequate time to formulate plans for any hike in rates, although such a move is not expected until well in 2022.
The distinction that is being made between the withdrawal of support and a rise in short term interest rates is not favoured by all members of the FOMC. The more hawkish members do not see any reason why the two cannot go hand-in-hand.
This, together with the individual Fed’s projections out to two years, will make the outcome of this meeting one of the more significant events so far this year.
The Chinese Premier announced yesterday that the Government will no longer fund coal-fired power plants. This is a major first step in something of a rapprochement in the relationship between the U.S. and its rival global superpower and could lead to a reopening of talks.
The tactics employed by former President Trump in dealing with China were more designed to try to dominate while President Biden may be accused of being weak over this relationship, it is more likely that it will reap a more positive result.
After the Treasury Secretary appealed to Congress to allow passage of a Bill to increase the debt ceiling and avoid an historic default that would damage credibility, the Bill passed its first stage yesterday.
The Bill that will see all Government debt funded until December and suspend the borrowing limit until the end of next year is now likely to pass.
As the market awaits the outcome of the FOMC, the dollar took a breather following its recent rally.
The dollar index traded in a narrow range between 93.28 and 93.05, closing at 93.21. The short-term fate of the index will be determined by events later today, but there is significant resistance to be overcome at 93.40 which could hamper a further advance.
What about the outstanding issues?
While there is no doubt that the success of the vaccination programme and the level of support being provided to the economy has turned around the fortunes of the bloc, there is still the situation that was surrounding the economy prior to the economy to be dealt with.
Lagarde has been almost totally immersed in support measures, having taken over the reins at the Central bank as the pandemic was beginning to arrive in Europe.
Bank liquidity and bad loans will be two of the first issues that need to be dealt with. Banks’ withdrawal behind their own national borders will ease the issue going forward, but balance sheet weakness will see the need to raise extra capital will be a priority.
Lagarde’s predecessor, Mario Draghi, may have to use his popularity in his home country to make tough decisions about the banking situation in Italy. It is expected that there will be some mergers in the sector.
The Italian budget deficit and debt to GDP ratio will also have to be addressed and this may lead to a period of austerity, Draghi is known to favour investment over support so if he is able to buy more time from Brussels, he may embark upon an infrastructure renewal programme to provide jobs and investment.
The OECD report into the Eurozone economy raised its predictions for growth to 5.3% for 2021 and 4.6% for 2022. This is roughly in line with Lagarde’s own predictions given in a n interview last week.
The OECD sees inflation remaining above 2% going forward. Its expectation if for CPI to remain around 2.1% for the rest of this, although it may see a marginal fall in 2022
The euro also traded in a narrow rage yesterday. It rallied to a high of 1.1748 but fell back to close unchanged at 1.1725.
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.”