6 February 2024: Bailey softens his stance on rates


  • Inflation to remain the highest in the G7
  • Fiscal deficits predicted to derail the economy
  • Investors’ confidence is improving
GBP – Market Commentary

Services output continues to improve

Even though he faces the prospect of the UK continuing to have the highest inflation rate in the G7, Andrew Bailey has softened his stance over rate cuts somewhat. He has now acknowledged that rates will need to fall in the coming months to ensure that the economy doesn’t fall into a recession.

However, he still believes that the MPC is right to continue to focus on bringing inflation down by keeping rates at sixteen-year highs for the time being.

He has listened to the arguments of his fellow MPC members, but he feels that the majority opinion is that rates should remain at an appropriate level to strike a balance between inflation and growth.

However, Hugh Pill, the Bank’s Chief Economist, struck a more hawkish tone in a question-and-answer session yesterday. Pill would only commit to rates being cut this year, saying that any cut would be a “reward” for a fall in inflation. He believes that rates should remain unchanged until inflation is anchored at 2%

Despite adverse weather conditions and pressure on household spending, retail footfall held up well in January. Although the attitude of shoppers is quite different from “spend, spend, spend,” the consumer is proving far more resilient than the financial markets may have imagined.

Footfall was lower in January year-on-year than it was in 2023, but the drop was only 0.8%, which is well within the margin for error.

The fact that a quirk of the Calendar meant that the Holiday extended into the first week of January benefitted retail parks which saw an increase in footfall of close to 2% while High Streets continued to suffer.

There is a general malaise surrounding the profitability of High Streets, with large retail groups loath to invest in what they consider a “money pit”.

It remains to be seen if the increase in footfall translates into better retail sales figures since the January sales are seen as an excuse for a family day out.

The UK is seeing the largest level of disruption to its economy amongst its European peers from attacks on shipping in the Red Sea.

Twelve per cent of UK importers have reported delays in expected delivery times. In comparison, Greece, France, and Germany, the next European nations seeing serious disruptions, reported delays of between seven and ten per cent of expected deliveries.

Re-routing vessels away from the Gulf of Aden and the Red Sea is both costly and time-consuming, but insurance premiums are becoming prohibitive.

The pound suffered at the hands of a strengthening dollar yesterday, although it continues to hold up reasonably well against the Euro. It fell to a low of 1.2518 versus the Greenback and closed at 1.2537. Against the Euro, it gave back some of its recent gains, falling to a low of 1.1664 and closing at 1.1670.

USD – Market Commentary

Fed forecasts haven’t changed much since December

Jerome Powell gave a far more hawkish assessment of the prospect of rate cuts in a speech on Sunday evening.

He said that the FOMC wants to see more evidence that inflation is moving sustainably towards the Fed’s 2% target. While confidence is rising, the Committee wants to be more confident before taking the step of cutting rates.

If this sentiment is repeated when other members of the FOMC speak later in the week, it will be a significant departure from recent attitudes.

While Powell has freely admitted in the past that he is more hawkish over inflation than his colleagues, if there has been a wholesale change of attitude this will be a major change to the outlook and rate cuts could be delayed until late Summer or possibly early Autumn.

By that time, the economy may be beginning to falter, according to Paul Tudor Jones, a billionaire veteran hedge fund manager.

He believes that the economy will suffer under the weight of the country’s fiscal deficit.

Tudor Jones believes that there are two momentous events taking place in the U.S. economy currently. The first is the “reckless spending” that is taking place, while there is the positive benefit to productivity for Artificial Intelligence, which will be “stunning and stupendous” over the next few years.

AI is set to differ from other innovations that have taken place over the past couple of decades since it will benefit the lives of all Americans, not just the five thousand or so people who are directly involved.

However, before the benefits of AI can be reaped, the economy will need to deal with rising debt levels. A budget deficit of six or seven per cent and rapid consumption growth is simply unsustainable.

Loretta Mester, the President of the Minneapolis Federal Reserve, and a voting member of the FOMC this year, will be the “first cab off the block” later today when she becomes the first member of the committee, apart from its Chairman, to give her view on interest rate cuts.

She has agreed that rate cuts can take place in the Summer in recent speeches, but the market will be studying her words for any subtle change to her view.

The dollar index made significant strides following Powell’s speech. It rallied to a high of 104.60 and closed at 104.45.

This was its highest close since early November.

EUR – Market Commentary

GDP data buys the ECB more time

Christine Lagarde appears to be unshakeable in her belief that any cut in interest rates can be delayed until the summer. Her opinion has been supported by the latest economic news. First, it was announced that GDP is still “drifting along the bottom”, and a recession has been avoided for the time being, while investor confidence is rising.

The latest release of the Sentix Index of Investor Confidence showed that it had “improved” from -15.8 to -12.9. That will provide cold comfort to those waiting to see positive numbers.

Lagarde reiterated that a decision to cut interest rates is fraught with dangers and is not as straightforward as the market may imagine.

Some thought must be given to the pace of growth currently taking place in the twenty different Eurozone economies and while a cut would undoubtedly help some, in others it may well reignite inflation.

Lower energy prices contributed to a 0.2% fall in inflation last month but given the pace at which energy prices rose last year, the Governing Council will want to see more substantial falls before feeling sufficiently confident to cut rates.

There is little doubt falling energy prices have contributed to a rise in consumer confidence. By some measures, confidence is at a two-year high.

Ireland is the latest Eurozone member to announce that its inflation rate is close to the ECB’s two per cent target.

It does seem that there needs to be a sea change in the attitudes of the Governing Council since, for now, it appears to want to ignore positive data to “beat down” inflation as much as possible.

It is still a “great unknown” just how close inflation came to “running away with itself” but the ECB is unwilling to take any risks once inflation returns to its target.

The Euro saw its lowest close since November 6th as the dollar at last found a significant degree of strength from Powell’s hawkish comments and a far stronger employment report than the market had expected.

The common currency fell to a low of 1.0723 and closed at 1.0742.

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.