27 June 2023: MPC voted 7-2 in favour of a 50-point hike

27 June 2023: MPC voted 7-2 in favour of a 50-point hike


  • Hunt wants to get tough on overpricing
  • Pace of growth is becoming more regional
  • Fall in bank lending set to accelerate
GBP – Market Commentary

Bailey stubbornly sings the same song on pay rises

In his speech following last week’s rate increase announcement, The Governor of the Bank of England, Andrew Bailey, spoke of his concern that at least part of the continued rise in inflation is being caused by what he called unsustainable wage increases.

There is no reliable data for the level of pay settlements that have been agreed, but in the public sector, the Government has tried to stick to the pay award that has been recommended by the independent pay arbiters.

Bailey has used this reasoning in the past but fails to abide by his words closer to home. Each of his colleagues who make up the Monetary Policy Committee earns more than £300k a year, with Bailey himself taking home around £600k in pay and bonuses last year.

It is felt that pay and, more particularly, bonuses should be linked to productivity, output, and performance, but with inflation remaining uncomfortably high, it is hard to make a case for anyone on the MPC to have performed at, or above, expectation.

At last week’s MPC meeting, the hike was agreed by a majority of 7-2. In the past, the two less hawkish members, Swati Dhingra and Silvana Tenreyro, have voted to leave rates unchanged, this time, both voted for a twenty-five-point hike.

Jon Cunliffe, the third independent member, has spoken often about the need for rate increases to be “meaningful,” so his vote for a fifty-point hike was never in doubt.

The Chancellor of the Exchequer, Jeremy Hunt, met with leaders from the grocery and energy sectors to discuss and investigate what they are doing to bring prices down at the “coalface” as there is concern that lower wholesale prices are not being passed on to customers as fast as rises.

A similar accusation has been made against banks who have also been accused of raising rates for borrowers as rates increase, but not affording the same advantage for savers.

With the Prime Minister having told the country’s mortgage borrowers to “keep the faith” over rising interest payments, neither the Government nor the Central Bank is either willing or able to provide anything other than verbal support for the long-suffering public.

Yesterday, Sterling fell for the fifth time in the past six sessions, showing that last week’s rate increase has been offset by fears for the economy. It reached a low of 1.2688 and closed at 1.2712.

USD – Market Commentary

Central Bank in danger of “hobbling” banks

The Fed and big business have often had a strained relationship, particularly when there is a Democrat Administration. The same is true of the interaction between the Central Bank and the main money centre banks,” especially those headquartered in Wall Street.

These banks consider it to be their duty to second guess the Fed over monetary policy and, at great expense, have created models to both predict economic performance using similar data, but often coming to quite different conclusions.

It has been known for some time that the “titans” of finance and tech, like Jamie Dimon, Elon Musk, and Jeff Bezos, disagree with Jerome Powell about the effect of the Central Bank’s cycle of rate increases concerning the economic effect of rate increases.

Each has predicted, in varying degrees, the negative impact, which they all believe will drive the country into a recession, of further rate increases. The only thing they do not completely agree on, is the depth of any recession.

Now, the Fed, having recently applied stress tests to the balance sheets of all banks, in the wake of the failure of three regional banks recently, is considering further restrictions on bank’s business by demanding a larger capital allocation be made against several, what are considered by Fed, to be higher risk transactions.

The large banks have railed against the suggestion, particularly since they have no issue over the raising of interest rates to their current level of 5% from close to zero over the past fifteen months or so.

Nonetheless, the Fed, which was criticised for what the market felt was a lack of regulation that contributed to the collapse of Silicon Valley Bank, is preparing to make the results of the stress tests public along with suggestions about how regulation may be tightened.

Now that President Biden has confirmed that he will stand for re-election next year, he has begun to extol the success of what the Administration calls Bidenomics, although it is often difficult to discern what he has done differently to many Democrat Presidents who preceded him.

The Dollar index lost ground as the market quickly recovered its poise following the chaos of the past few days in Russia. This led to an improvement in risk appetite.

The index fell to a low of 102.61 and closed at 102.76.

EUR – Market Commentary

Sparring continues over continued rate hikes

The likelihood that the ECB will not only continue to hike interest rates well into the autumn but keep rates at a restrictive level for some considerable time is still causing significant disagreement between members of its Governing Council.

Christine Lagarde, who has taken it upon herself in recent months to announce the result of upcoming meetings, has begun to come in for criticism from not only the more dovish members of the committee, but also those who have been content to “go along” with the (hawkish) status quo.

Since Lagarde has already said that a hike at next month’s meeting is “very likely,” it has been left to the opponents of continued rate hikes to “get their retaliation in early” by talking down the prospect of a further hike in September.

The idea of a pause, which was announced by the Federal Reserve at its most recent meeting, while unusual, is becoming “fashionable” with a few ECB members calling for similar action.

It is well documented that there is a view that interest rate rises precede, often by several months, their effect on demand, and with output from the economy continuing to decline, a pause, if not a halt to further hikes may be prudent.

Lagarde, who has the full support of the Austrian and German Central Banks, clearly feels that she can carry the rest of the Governing Council with her. While she cannot be seen to be encouraging a recession, she sees it as the lesser of two evils.

There are some economies within the Eurozone which are not yet in recession and may not suffer a contraction at all, but they are still being swept along in “what is considered good for the entire region.” This may be a form of retaliation for support that was provided to those same countries during and immediately following the Pandemic.

There was a collective sigh of relief yesterday as the situation in Moscow calmed down. Although Putin is not a popular figure in the Eurozone, to put it mildly, even his rule is preferable to anarchy.

The Euro regained most of the ground that it lost on Friday, rising to a high of 1.0920 and closing at 1.0906.

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.