25 July 2023: Bailey’s pay restraint warnings do not apply to BoE staff

25 July 2023: Bailey’s pay restraint warnings do not apply to BoE staff


  • Economic activity is falling as the economy stalls
  • Service activity slows to a five-month low
  • Weak Eurozone PMIs send the euro lower
GBP – Market Commentary

Mortgage crisis sends homes into deficit

There has been outrage over the Bank of England’s decisions to award its staff bonuses totalling twenty-five million pounds despite its demand that the rest of the country exercise restraint in pay awards and bonuses.

Andrew Bailey’s assertion that unsustainable wage rises are in part responsible for stoking inflation appears not to apply “close to home.”

While the awards are not necessarily excessive in themselves and are in line with what has been paid in previous years, the revelation will embarrass the Bank’s Governor at a time when his and his teams’ credibility is low after a series of ill-judged comments.

The soaring cost of mortgages that are being reset after their fixed rate period expires is leading to borrowers facing deficits in their monthly outgoings, leaving them facing either “dipping into” savings or using expensive credit cards or short-term loans to pay their household bills.

This will undoubtedly lead to a significant downturn in retail sales which will, in turn, feed into a continued downturn in overall economic activity.

There has been a huge increase in food bank usage by individuals and families who are in work but are still finding managing their outgoings impossible.

Although the overall rate of inflation fell last month, due in part to the fifty-basis point increase in the base rate, it remains the highest in the G7 group of nations and will lead to a continuation of the Bank raising interest rates, well into the Autumn.

Overall economic activity continues to slow, according to data released this week. Although services output continues to expand, the rate of expansion is slowing dramatically, and can no longer be relied upon to keep the country afloat.

The Composite rate of activity which considers both manufacturing and services output fell from 52.8 to 50.7 last month.

The data will make it difficult for the Bank of England to repeat its fifty-basis point hike when the Monetary Policy Committee convenes next week.

Having experienced a rise to levels not seen in fifteen months over the past few weeks, the pound is now under severe pressure as the market had its fears over a recession this winter rekindled.

Sterling fell to a low of 1.2797 versus the dollar yesterday and closed at 1.2827.

USD – Market Commentary

Housing market rebound may see the Fed act further

A little like the boy who cried wolf, the FOMC meeting this week is again being accused of creating conditions in the U.S. economy that will lead to a recession.

Having paused its cycle of interest rate hikes last month and yet still seeing the headline rate of inflation continue its recent fall, this time to 3%, it will be hard for Jerome Powell to justify another hike this month when the decision is made tomorrow.

The timing of the release of inflation data for June means that there has been little opportunity for FOMC members to make their voting intentions public.

Before the data was released, there had been a clear majority of Regional Fed Presidents who favoured another twenty-five-point hike, but it is safe to assume that rates have now reached a restrictive state, and their views may have been altered.

Several Fed officials have repeatedly said that they are driven by the data, so with the rate of inflation falling and straightforward evidence that employment is “cooling off”, it may be time for the Fed to extend its pause.

Having made it clear that the pause seen in June was, at the time, to be considered temporary, there is no reason that it couldn’t be extended with the proviso that a further rate hike may be revisited later if inflation either stops falling or stagnates.

That would be a more cautious approach than Powell has favoured recently, but this may not be the time for him to want to make certain that price rises have finally been defeated.

It is true that the market has questioned the Fed’s decision-making for several months, with last month’s pause being expected. Although Powell did say that it was likely that it would only be for one month, the data could easily be used as justification for an extension.

The dollar has recovered from the fall it has seen recently, but it is open to further falls, depending on tomorrow’s decision.

It may be that the market appreciates the fact that inflation is now close to the Fed’s 2% target and a further pause is fully justified considering the improvement in manufacturing output in June, which saw the composite number rise from remain well above contraction.

The dollar index rose to its highest level in two weeks yesterday. It reached a high of 101.42, closing at 101.38.

Today will see the release of data for house prices and consumer confidence. Although the housing market has seen an increase in activity recently, prices are still expected to be moderately lower.

EUR – Market Commentary

Bleak economic outlook and disinflation taking hold

Eurozone business activity shrunk far more than expected this month, as demand in the services sector declined. While services, which have propped up overall activity, declined for the first time his year, manufacturing output was at its best level since before the Pandemic.

European markets are now concerned that the ECB may be unable to stop hiking rates for some time come since it has become “addicted” to the thought of bringing inflation back close to its 2% target far more quickly than is practically possible without driving the economy deep into a recession.

There have been plenty of bold statements, even from Finance Ministers and Central bankers from the weaker economies, that a mild recession is preferable to continuing high inflation.

Unfortunately, it is impossible to micromanage the eurozone with twenty diverse economies to such a degree that further hikes would not create conditions that led to a severe downturn while inflation remains above target.

The region is currently suffering from disinflation. This is a temporary slowing in the rate of inflation and is used to describe a situation when the inflation rate has reduced marginally over the short term. Unlike inflation and deflation, disinflation refers to the rate of change in the rate of inflation.

The ECB has already said it will hike rates again at its meeting this week, but there has been a significant push bask concerning a hike at September’s meeting.

Members of the committee will have the benefit of two months’ worth of data to come to a decision, but the data appears to have become secondary to the hawks’ determination to see inflation return to target, although most will agree that that is unlikely to happen before the end of next year at the earliest.

Philip Lane, the ECB’s Chief Economist, spoke last week of his belief that monetary policy is having an effect far more quickly than was seen earlier in the year. He was alluding to the fact that interest rates are close to becoming restrictive on demand which will accelerate the more restrictive they become.

The common currency appears close to waving goodbye to the 1.10 level, at least in the short term. A further pause announced by the FOMC tomorrow may change that, but for now, the Euro has entered another downtrend.

It fell to a low of 1.1060 yesterday and closed at 1.1065. There is some support at 1.1010, but below that, a fall to 1.0870 is possible.

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.