23 April 2024: KPMG sees inflation reaching “target”

23 April 2024: KPMG sees inflation reaching “target”


  • Mortgage lenders hike rates due to uncertainty over future cuts
  • Growth maintained its pace in March
  • Scholz provides a “politician’s optimism”
GBP – Market Commentary

Ramsden sees inflation settling around 2%-2.5%

The five lenders that constitute most of the mortgage lending market independently raised the rates at which they priced new loans yesterday.

NatWest, Barclays, Accord, Leeds Building Society and HSBC, each cited the uncertainty surrounding the amount by which interest rates will be cut later this year.

Medium and long-term interest rates have risen over the past few weeks as consumer price inflation in both the U.S. and UK, is due to the “stickiness” of consumer price inflation.

The rises were insignificant, but the message they sent was more meaningful.

Some economists believe that the Bank of England may not feel sufficiently confident about the path of price increases to cut rates before November. This is despite Andrew Bailey confirming recently that the Monetary Policy Committee does not have to wait until inflation reaches its 2% target for cuts to begin.

One of Bailey’s colleagues on the MPC, Dave Ramsden, spoke of his “increasing confidence that the trajectory of UK inflation will reach the target and “hover” around that level for several months.

This alternative view perfectly demonstrates the uncertainty developing as the economy has begun to improve.

While Ramsden can speak from a general perspective, lenders at the “sharp end” must be more cautious since a wrong decision can cost them millions.

Ramsden believes that the UK has moved from being an “outlier” due to the unique influences that drive inflation, to a “laggard,” suffering from a higher level of inflation that is gradually improving.

Although the Bank of England’s February projection foresaw a reversion to the two per cent CPI inflation target from April to June this year, it also warned of the transitory nature of this equilibrium, with an anticipated rise in the second half of the year, possibly hitting 2.8 per cent by the beginning of 2025.

Accounting firm, KPMG, also released a statement yesterday in which it commented that it believes that inflation will return to target in the coming months. However, it also assumes that risks remain.

The level of uncertainty that surrounds geopolitical conditions has increased significantly since the Hamas attack on Israel last October and the responses from Iran and Israel to more recent attacks they have made on each other.

The threat of all-out war has lessened over the past few days as tensions have eased a little.

Sterling began the week on the “back foot” as the dollar reasserted its dominance over the currency market. It fell to a low of 1.2299, its lowest level since mid-November, but recovered to close at 1.2350.

USD – Market Commentary

The economy may no longer be on a “golden path”

At its most recent meetings, the FOMC has agreed that there will be at least three cuts in interest rates throughout 2024.

The most recent economic projections confirm that outlook, but recent comments made by members are beginning to alert the market, that there may be yet another “pivot” that will happen at the next rate-setting meeting due to take place on May 1st, with the “dot plot” falling to two rate cuts this year.

The “dot plot” shows projections for the federal funds rate. Each dot on the graph represents the view of a Fed policymaker for the rate’s target range at the end of each year shown.

Markets focus on the median “dot” or projection.

In speeches made recently, not only has there been an apparent change in the view of FOMC members, but those views have coalesced into a more hawkish attitude overall.

FOMC members have “fallen into line” with the opinion of Jerome Powell, who has been more hawkish than his colleagues since rate hikes were halted last September.

Before the turn of the year, Powell “went along” with the market’s view that rates would fall “significantly during this year.

However, since January, the Fed Chairman has been concerned that inflation has not been falling at the pace that was expected while the overall strength of the economy has been surprising, highlighted by the continued growth in new jobs being created.

Despite some “naysayers,” the outlook for the economy is bright, with the IMF recently commenting that GDP growth over the rest of this year will be double that of the G7 average.

It was felt that the different views of several Regional Fed Presidents reflected conditions in the areas of the country they represent.

However, FOMC members Daly, Mester, Kashkari and Bostic who represent San Francisco, Cleveland, Minneapolis, and Atlanta, four cities that are diverse in both geography and economic output, have recently pivoted towards a more hawkish outlook that predicts less rate cuts than had been previously expected.

The dollar index is being driven by the comparative expectations for the size of rate cuts from G7 members this year. Yesterday it climbed to a high of 106.39 and closed at 106.13.

There appears to be some resistance cited around 106.40, but once that is cleared, the index will continue towards its medium-term target of 108.00, which was its high in late 2022.

EUR – Market Commentary

Scholz is confident about the German economy

The rush for improved growth may cause members of the G7 to try to provide greater subsidies, especially to exporters, to encourage increased output in that sector.

That is according to ECB President, Christine Lagarde, who is concerned that even members of the Eurozone may try to encourage economic growth.

Although there are strict controls governed by the European Commission on “incentives” handed down to buyers of goods originating in Eurozone nations, other members of the G7 Japan and the U.S. see subsidies as a legitimate tool.

Lagarde prefers to keep the “playing field level” rather than create artificial markets that are often guided by geopolitical factors as opposed to the more general economic drivers like productivity and comparative wages.

The elections that are due to take place over the next couple of months in RU nations will mark the end of the first term as President of the European Commission of Ursula von der Leyen.

Throughout her Presidency, von der Leyen has lost her single most avid supporter in Angela Merkel, and her deficiencies on the wider European stage have been laid bare.

She confirmed in February that she would be seeking a second term in office, but, weeks later, cracks started to appear in Brussels, with European Commissioner Thierry Breton publicly pointing out the lacklustre support Ms von der Leyen had so far received.

She is even lacking support at home in Germany, where even former EU Brexit Negotiator, Michel Barnier, refused to publicly support her.

In France, she is suffering over her handling of the agricultural issues that the Union faces, which is leading to criticism over the seeming hegemony that Germany is promoting.

Two major figures in the EU have “thrown their hats into the ring,” although neither has confirmed their intention to run.

Mette Frederiksen is the Danish Prime Minister. Were she to run, it would be seen as a counterbalance to the rise of right-leaning factions that have been growing as the region grapples with immigration issues.

The other possible contender is a true European heavyweight.

Mario Draghi, the former Prime Minister of Italy, and President of the ECB, is showing interest in returning to the European stage. He would doubtless command significant support, given his almost single-handed saving of the Euro twelve years ago.

One slight outlier, but a person with experience in the role as a former vice-president of the Commission, is Kristalina Georgieva, the current MD of the IMF and a person with experience in taking an almost moribund group and moulding it into a powerful and influential force.

The elections take place over the second weekend in June.

The euro trod water yesterday, although the dollar attempted to exert influence to drive it lower. It fell to a low of 1.0623 but recovered to close almost unchanged at 1.0654.

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.