5 September 2023: Time to reform the MPC?


  • Fuel cost increase add to cost of living rise
  • Biden not done much towards economic recovery
  • Eurozone economic confidence continues to tumble
GBP – Market Commentary

A more representative group may be better looked upon

The Prime Minister is facing another barrage of criticism as news emerges about the concrete scandal in the country’s schools and whether he cut the rebuild budget when he was Chancellor of the Exchequer since, apparently, the Government was made aware of a potential problem in 2018.

Rishi Sunak, having “cleared up the mess left by his predecessors, was readying himself to relaunch the Conservative Party in preparation for an election which must be held in the next fifteen months.

His opposite number, Sir Keir Starmer set about his own relaunch yesterday as he reshuffled his Shadow Cabinet by promoting several “Blairites” while moving the Party away from its traditional roots associated with the hard left.

There was further disappointment for the Prime Minister as the average cost of fuel rose by 6.68p per litre and diesel by 8p. This will add around £4 to a full tank of fuel.

Private rental costs have also seen a significant rise as demand continues to outstrip supply. Average rental costs across the country as a whole rose by 5.8% in August. Both fuel and housing costs will be at the forefront of the minds of MPC members when they meet to agree on any changes to monetary policy.

It is expected that Andrew Bailey and his colleagues will hike the base rate of interest by twenty-five basis points when they next meet on September 21st.

There are growing calls for the Government to launch a formal review of the makeup of the MPC since it is facing accusations of indulging in “groupthink,” which is rendering the role of its independent members. IT is felt that just the Governor, Deputy Governor for Monetary Policy, and the chief Economist along with the three independent members should make up a more streamlined group.

Since there would be an even number of members in such a scenario, the idea has been put forward to either a Treasury representative should be appointed to put forward the Government’s opinion, or the Governor should be given a casting vote.

It is not unusual in times of high inflation and tightening monetary policy for the Central Bank to come in for criticism, but the Prime Minister could view changes to the makeup of the MPC as an easy “win” to show how he is listening to backbench opinion.

Sterling began the week by recouping some of the loss it made last week. It rose to a high of 1.2642 and closed at 1.2626.

USD – Market Commentary

Powell could allow discussions to develop without his input

The Fed is becoming increasingly likely to announce another pause in its cycle of interest rate hikes at its next meeting. While Jerome Powell was in a hawkish mood in his most recent speech, he can point to the press conference that was held after the most recent FOMC meeting in which he commented that the future path of interest rates was unlikely to be linear.

A lot will depend on the August Inflation report which is due for publication on September 13th. It is currently expected that the rate of inflation will have fallen again with both the headline and core providing some incentive for a pause.

Headline inflation is expected to be at 3% while the core, which has proven to be stubborn, may see an even more significant fall, to below 4.5%.

If these predictions are proved correct, the FOMC will have ample reason to leave the target for fed funds unchanged.

It is well known that the Fed Chair remains more hawkish than some of his colleagues on the FOMC. Observers point to the fact that he and other Washington based members take an overall view of the economy, while regional Fed Presidents concentrate on their own regions that have often widely varying economies.

For this reason, when the conversation turns to a moderation of rate increases or a pause, Powell often recuses himself to allow since he does not want to be seen to be leading the conversation in a particular direction.

With a Presidential only a little more than a year away, President Biden’s record over several key issues is beginning to come in for closer scrutiny.

Overall. He has displayed a far more “gentle touch” than his predecessor, appointing what he considers to be very able Secretaries to run the Administration.

This has led to accusations that he has not really had much of a hand in policy decisions, even though he must justify the country’s overall direction to Congress.

As far as the economy he reappointed Jerome Powell to the Fed Chair and gave the role of Treasury Secretary to Powell’s predecessor, Janet Yellen. Given the tough decisions that have needed to be taken, particularly risking a recession to bring inflation down, the fact that a soft landing is even being considered is a testament to this pair of experienced professionals’ tenacity and foresight.

The dollar index has been unable to break through stubborn resistance around the 104.30 for a few sessions now and may need to see a mild correction to gather momentum to push through. Yesterday, it fell marginally to a low of 104.02, closing at 104.11

EUR – Market Commentary

Rate advantage unlikely to provide adequate support

Although the Euro remains in “striking distance” of its “watershed” level of 1.10 versus the dollar, very few market participants view it in a positive light. This is despite the interest rate advantage that it is expected to accrue in the coming weeks and months.

While the Fed has inflation under sufficient control to consider a pause in tightening monetary policy of this month and its October meeting as well, the ECB is still considering a hike at its next meeting, with nothing to suggest that a pause will be agreed in October either.

Economic confidence is still draining away as more members’ economies shrink and are facing an uncertain winter and recessions.

The European Commission is conspicuous by its absence in shoring up confidence, while the role of the European Parliament is being openly questioned. Although no one expected monetary union to be perfect first time, the reluctance to make any studies of potential changes or tweaks, particularly to fiscal policy, are potentially alarming.

A natural evolution would seem to be the most normal process, but for this to happen, Ursula von der Leyen, the President of the European Commission, would have to take a far more prominent role, something that she appears reluctant to do.

The appointment of Christine Lagarde to be President of the Bank was a “clever” move since it aligned the delivery of monetary policy with the political astuteness needed since she has no Eurozone Finance Ministry to work alongside.

Lagarde spoke yesterday of the need for Central Banks to keep inflation expectations firmly grounded, something that the ECB has been doing for the entire year so far.

She gave no hint about how the meeting of the Governing Council will view the economic changes that have been delivered since its past meeting. She was less hawkish than she has been previously.

For this reason, the market still only rates the chances of a hike to be at around 30%.

Joachim Nagel, the President of the Bundesbank also spoke yesterday.

He was noticeably reluctant to discuss the possibility of a further hike later this month, preferring to concentrate on maintaining price stability. If Germany fails to support a hike, then the efforts of Martins Kazaks and Robert Holzman may have been in vain.

The euro was unaffected by the comments made yesterday and is likely to remain in its current range for this week and next, barring any unforeseen issues evolving.

Yesterday, it rose to 1.0808 and closed at 1.0794.

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.