5 April 2023: Pill and Tenreyro in opposition


  • Two MPC members have opposite views on monetary policy
  • J.P. Morgan CEO sees dual threat to the economy
  • Consumers’ inflation expectations fall
GBP – Market Commentary

Pill wants to complete the task, Tenreyro sees rate cuts

Silvana Tenreyro is the most dovish independent member of the Bank of England’s Monetary Policy Committee. She has voted for interest rates to remain unchanged at the last two meetings of the committee.

Yesterday, she spoke of her view that the Central Bank may need to cut interest rates earlier than has been previously forecast in order to avoid what she called a significant inflation overshoot.

She believes that as the full effect of previous rate hikes are fully felt, they will drag down the economy, raising the spectre of a recession.

Last month, the MPC voted to raise rates for the 11th consecutive meeting, raising the base rate to 4.25%.

It is widely felt that the Bank will raise interest rates by a quarter of a percent at its next meeting on May11th, and then announce a pause in hikes.

In contrast, Huw Pill, the Bank’s Chief Economist, believes that rates need to rise at least once more in order to see the job through on inflation. He feels that the Central bank cannot be sure that it has raised rates sufficiently to tame inflation. Although he agrees with Tenreyro that the scale of hikes should be sufficient to soon bear down on inflation.

He went on to say in an interview yesterday, that, on balance, the onus remains on ensuring that sufficient tightening is achieved for the MPC to be confident that inflation will sustainably return to the Government’s target.

The vast chasm in the opinions of two members of the MPC is not a good look for the committee. While the Government is committed to having as broad a range of views as possible represented, their views may be best kept private since they are in danger of demonstrating serious divisions.

Ms Tenreyro is representative of the four independent members of the MPC who have a reputation for looking at the economy from a more intellectual viewpoint, while the five Bank of England employees look at things more practically.

It remains to be seen how soon the Bank has to cut rates, with the current estimate for that to be some time in the fourth quarter.

The pound continued its recent rally against a struggling dollar yesterday. It climbed to a high of 1.2525 and closed at its highest level since early June last year, at 1.2505.

USD – Market Commentary

Mixed views on employment data rising

Economic data released recently has pointed to the economy falling into recession this year. The fact that the U.S. economy affects the economies of all nations, whether developed or developing, will set alarm bells ringing at the IMF and World Bank.

Their view had been until recently that the U.S. economy would grow at a low rate this year and see an acceleration in 2024.

The Federal Reserve’s current fascination with inflation now looks to have reached the point where it is actively restricting demand, something that the Central Bank will need to avoid going any further.

This is raising the possibility that it will be forced to abandon its proposed final hike at its meeting early next month. Data released yesterday showed that the number of job openings fell dramatically, which signal the start of workers abandoning job hopping and remaining content to stay in their current jobs.

The employment report that is due on Friday will be the first of two that will be published before the next FOMC meeting. As we have said before, the headline non-farm payrolls are notoriously difficult to predict, but the odds are now favouring a significantly lower number.

For several months, Jamie Dimon, CEO of J.P. Morgan has been warning that the actions of the Fed increase the danger of the economy slipping into recession. Like the boy who cried wolf, the market had grown used to his dovish pronouncements, but now it is sitting up and taking notice.

In a note to investors published yesterday, Dimon warned that the economy is in danger of not only seeing a technical recession, but a full-blown slowdown which will be led by falling employment which may even turn negative.

He went on to say that he isn’t yet comfortable that the turmoil that was caused by the collapse of Silicon Valley Bank has abated. He feels that the risk appetite of banks towards one another has been severely impacted and this could lead to a credit crunch.

The dollar has been correcting for several weeks now, and the news that it may lose the support of higher interest rates may have turned a correction into a trend.

Yesterday, the dollar index fell through major support at 101.70 reaching a low of 101.45 and closing at 101.58. It has continued to weaken in early Asian trade, reaching a low of 101.40.

EUR – Market Commentary

Consumers expect inflation to fall significantly this year

A survey of consumers in the Eurozone that was conducted recently has found that they are confident that inflation will be at or close to the Central Bank’s target of 2% by the end of the year, although they do believe that rate cuts will end after the next meeting.

The survey also revealed that concerns over a recession are growing and that there is a high level of uncertainty about how strong any recovery will be.

The Governor of the Bank of Ireland and ECB Governing Council Member, Gabriel Makhlouf commented yesterday that the effect of the Bank’s programme of interest rate increases is well under way, although the Governing Council will need to be well aware of the lag between rates being hiked and the full effect being felt in the economy.

He believes that the calibration of rate increases will need to be viewed through a lens of their medium effects.

He feels that the full effect of the rate increases that took place before the end of last year have now been absorbed, and the steep fall in the rate of inflation last month is due to the latest increases.

While the Governing Council needs to remain steadfast as it continues to tackle inflation, some heed will need to be taken of some Eurozone members concerns about an overshoot.

While inflation remains high and a significant issue in Germany, the next largest economies of France, Spain and Italy are all experiencing significantly lower rises in prices.

The fall in the energy price has been a major contributor to falling inflation, and the region must press on with diversifying its suppliers of gas in particular.

While the ECB remains on track to lower inflation, concerns will be growing about economic output.

Eurozone manufacturing remains in troubled waters, according to the Chief Business Economist at S&P Global Market Intelligence. Demand has fallen for 11 straight months, and it is likely that there will be renewed calls for the Central Bank to review its decision to continue to tighten monetary policy.

The euro continues its seemingly unstoppable progress towards 1.10. Yesterday it reached a high of 1.0973 and closed at 1.0953.

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.