Bank of England hike by 75bps
4th November: Highlights
- UK facing longest-ever Recession
- Services PMI is still in positive territory
- Mild recession won’t stop rate hikes – Lagarde
GBP – Rate hike biggest in 30+ years
In his press conference following the announcement, Andrew Bailey spoke of the UK facing the prospect of its longest recession in history. While it won’t rival the recession caused by the Pandemic for depth, it will continue well into 2024.
Following its biggest hike since 1989, the eventual high may reach 5.25%. Bailey believes that rising inflation will moderate quite soon and begin to fall in the second quarter of 2023.
Meanwhile, the country faces the prospect of a significant economic contraction, with unemployment doubling from its current level of 3.5%, its lowest level since 1974.
Bailey was unabashed about the Bank of England continuing to hike interest rates despite the country facing a tough couple of years, saying that the situation would be far worse if prices continued to rise unchecked.
The continued high price for wholesale gas has been checked somewhat by Government action, but the price will remain high relative to its price in recent years as the country tries to switch to supplies that do not rely so heavily on Russia.
Rates are now at their highest level since 2008, when the bank was under pressure due to the financial crisis and began its programme of quantitative easing, which it has only just begun to reverse.
Anyone who has a tracker or variable rate mortgage will be hit hard by continued interest rate rises. Lenders are currently withdrawing fixed-rate loan offers due to the continued anxiety caused by recent events.
The Governor spoke of how difficult it will be to regain a degree of credibility that was lost as Liz Truss introduced a series of policies designed to kick-start growth but only succeeded in almost destroying pension investments.
The pound reacted poorly to the prediction of a long recession. It fell to a low of 1.1151 against the Dollar, closing at 1.1164.
USD – Can they afford a fifth consecutive 75-point hike?
As the odds in favour of a recession increased to seventy-five, Powell resembled a man trying to bail out a leaky boat with a teacup.
As the Central Bank has increased the increments by tightening interest rates, inflation continues to rise.
Although Powell appeared less hawkish in his press conference, the market’s hopes that he may indicate a slowing down or even increase rates to a halt were dashed. It seems that the FOMC intends to continue tightening monetary policy until it can declare victory in its fight against rising prices.
The issue is still that there is no alternative to raising interest to slow demand and bring inflation down, but given the unusual drivers of the current rise in inflation, there may be other measures that could be used that are not so destructive for the economy.
The publication of the October Employment report will take place later today, and given the Fed’s insistence that it is data-driven, a significant fall in the headline non-farm payrolls could see the Fed pivots from its now familiar stance.
Politicians, including President Biden and the man whom he defeated in the 2020 Presidential election, Donald Trump, are crisscrossing the country to drum up support for candidates standing in next week’s midterm elections,
Trump gave the strongest sign yet that he intends to stand in the 2024 Presidential Election,
Data for the United States trade balance were released yesterday, and it showed the deficit rose as the recent bout of dollar strength drove exports lower.
The Dollar Index continues to attract support given the Fed’s monetary policy message but cannot garner sufficient momentum to test its recent highs. It rose to a high of 113.13 but fell back to close at 112.98.
EUR – Strong recession signal from output data
While a long and damaging recession is not the Central Bank’s base case currently, Christine Lagarde must be now leaning heavily toward accepting the facts that are staring her in the face.
Output and economic activity across the entire region have fallen off a cliff in recent months. The unemployment rate has been at record lows in recent months and is beginning to show signs of a turnaround.
The Governor of the Bank of Latvia spoke yesterday of the risk that inflation will become rooted in the economy if it continues to rise for an extended period.
His country has among the highest inflation rates of any Eurozone member, at over 20%. The Central Bank Governor Martins Kazaks was critical of the actions of the European Union in supplying blanket support to the entire population, as the economic effect of the Pandemic risked the total collapse of the Eurozone.
Kazaks believes that support should have been targeted. Although his own country received significant support, it cannot afford to provide the same level of support now that the ECN is withdrawing as there is not enough funding available in the country’s budget.
As the war in Ukraine continues, the EU continues to suffer and on several fronts. The price of several staple foodstuffs has continued to rise with no end in sight while, despite the best efforts of individual nations to limit energy use, there are still likely to be shortages as winter draws on.
Having introduced a less stringent target for inflation eighteen months ago, which should allow it more flexibility to control price rises. It seems that the idea has been abandoned in the short term as Christine Lagarde continues to talk of the two percent target, which tighter monetary policy is supposed to achieve.
The Euro continues to drift lower in aimless trade. This betrays the view of traders whose default position is to be short of the single currency.
Yesterday, it fell to a low of 0.9730 and closed at 0.9848.
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.