7 September 2023: Dhingra will vote for a pause at this month’s meeting

Bank of England Governor, Andrew Bailey spoke yesterday of his view that interest rates are close to their peak but remains cautious that inflation may return.

Testifying before the Treasury Select Committee, Bailey emphasized that this is only one of nine opinions, and he was not trying to provide the market with advance guidance of the Monetary Policy Committee’s intentions.

He went on to say that there is no clear upwards path for interest rates following their increase to 5.25% at the committee’s most recent meeting.

The feeling in the market prior to yesterday was that rates would peak at either 5.50% or 5.75% but now a pause has become far more likely.

Bailey stood by his previous comments that inflation would fall sharply over the rest of the year.

Bailey’s comments were echoed by one of his independent colleagues on the MPC.

Again, speaking yesterday, Swati Dhingra, who has been a consistent dovish voice over recent meetings reiterated her view that changes to monetary policy need to be given time to work their way through the system.

She believes that interest rates are “already high enough” and that a further hike presents a greater risk than a pause. Feels that the Central Bank’s economists may be overestimating the current level of inflation.

The potential threat from a further rate hike comes in the form of increased borrowing costs that may reduce supply going forwards. This is the same as squeezing demand and could happen very quickly as rates become restrictive.

It is unnecessary to increase the “pain level” that is being felt by both households and small businesses. The overestimation of inflation comes from the lack of domestically generated price increases, while events outside the country’s borders remain.

The Pound reacted poorly to the comments, falling to a low of 1.2482 and closing at 1.2502.

The likelihood of a pause at the next MPC meeting has seen a major plank of ongoing support for the pound removed and it could now be on a downwards trajectory, with an eventual target of 1.1850

The Senate yesterday approved the appointment of Philip Jefferson to be Jerome Powell’s deputy at the Federal Reserve.

Jefferson’s role will be to assist Powell in ensuring that the Central Bank’s monetary policy decisions are in line with its mandate to promote maximum employment while maintaining price stability.

He joins at a time when the cycle of interest rate hikes is likely coming to an end.

There is a feeling in the market that a pause will be agreed at the next FOMC meeting, although there is still sufficient inflationary pressure remaining for prices to begin to rise again, demanding further action later in the year.

The Fed will have been cheered by the news that Goldman Sachs has lowered its expectations of a recession happening in the next six months to just 15%

Another FOMC member, Boston Fed President, Susan Collins sounded a note of caution yesterday. When asked about the possibility of the Fed having already peaked, she agreed that rates are now high enough, she warned that any respite from higher rates could be “fleeting”.

She believes that the FOMC has time to be patient as the economy is now showing a degree of resilience that wasn’t there six months ago.

She agreed with recent comments from her colleagues that rates are close to their peak, but a lot will depend on the data “from here on in”.

There is no need to make definitive statements and the market should understand that there are several imponderables that may facilitate the need for higher rates in the future.

She also agreed that the need for a cut in rates is some distance down the road and doesn’t yet even deserve consideration.

The dollar index received a boost from the fall in Sterling yesterday, although it was already showing the potential towards having a stronger week already.

Yesterday it rose to a high of 105.02 and closed at 104.82.

Next week’s inflation report for August will be seen as the “clincher” in many people’s eyes. It is possible that headline inflation could fall below 3% which would mean a pause was all but certain.

The more dovish members of the ECB’s Governing Council appear to have seized the initiative in calling for a pause in interest rate hikes.

The Heads of both the French and Italian Central Banks spoke yesterday of their view that rates are near their peak, and it would be the right decision to pause now to “keep something back”, should inflation begin to rise again.

Françoise Villeroy de Galhau and Ignazio Visco could almost have given each other speeches considering how close their views are to each other’s.

Both believe that all courses of action are open to the Central Bank next week, but a pause has now become a far more significant possibility.

With Christine Lagarde tempering her rate hike rhetoric since returning from holiday and Bundesbank President Joachim Nagel appearing to be slightly hobbled by the state of the German economy, the tide may be turning in favour of the doves.

There are still a few hawks who favour a further hike like The Heads of the Austrian and Latvian Central Banks.

They were joined yesterday by the head of the Slovenian Central Bank who said yesterday that the ECB must hike interest rates next week, possibly for the last time to “finally nail” inflation.

The words of Peter Kazimir will be the last that will be heard on the subject since members of the Governing Council have now entered the blackout period during which they are banned from further comment for one week prior to the meeting.

Kazimir admitted that a pause is a compelling argument for discussion next week but feels that another hike will be necessary so make it now and then declare an end to the matter. This is favourable to keeping the market guessing and continuing to damage confidence.

With most of the Governing Council now back from holiday, there have been strong arguments made on both the hawkish and dovish sides. A period of contemplation will now take place, with the market none the wiser about the eventual outcome of the vote.

The common currency managed to halt its recent fall, although it remains far from convincing. It rose to a high of 1.0748 yesterday and closed at 1.0727.

Have a great day!