8 March 2024: Pill says a rate cut is some way off


  • The OBR believes that Brexit is hurting the economy and will continue to do so
  • Permanent members are the most hawkish FOMC members
  • The ECB leaves rates unchanged for the fourth consecutive meeting
GBP – Market Commentary

Brexit creating a 4% “hole” in GDP

The Bank of England’s Chief Economist has warned that a cut in interest rates is still “some way off”.

The Bank has left interest rates unchanged at recent meetings to allow the fourteen consecutive hikes that began in December 2022 to bring inflation down to take full effect.

Pill believes that there needs to be “compelling evidence” that the Consumer Price Index is down to a sustainable level, although the fact that inflation has remained at around 4% for the past couple of months shows that wage settlements are still having a detrimental effect on prices, and the economy is still seeing “secondary effects” that are making inflation “sticky”.

It could be argued that the significant fall in inflation before the end of the year had more to do with the “mechanical effect” of elements in the calculation like energy prices dropping off.

For that reason, it is unlikely that the MPC will vote for a cut before June, despite the protestations of some independent members of the committee.

For now, the Permanent members of the MPC are leaning more towards the hawkish view expressed by Catherine Mann that heeding the demands for rates to be cut at once, which is the interpretation of Swati Dhingra.

Brexit is dragging down the economy and its impact is set to get worse due to new trade barriers; the Government’s Budget watchdog is warning. The Office for Budget Responsibility believes that the economy is set to grow by a paltry 0.8% this year before picking up to grow by around 2% in four years.

While going through the details of Jeremy Hunt’s Budget, the effects of the energy price shock and Brexit are still having the effect of “headwinds” on growth.

It is estimated that the UK’s departure from the European Union will have the cumulative effect of a 4% fall in GDP. Brexit supporters have criticized this opinion as being “overly pessimistic”.

The OBR went on to estimate that the volumes of UK trade will fall by 15% before the economy can make up for the shortfall. The OBR’s outlook chines with the view of the Bank of England, which believes that a long-term squeeze on the country’s economic potential is playing out.

Although at the time of the referendum, the Labour Party couldn’t make its mind up about whether it supported Brexit or not, it is generally regarded as being opposed, while the Conservative Party who were faced with the task of complying with the will of the people are generally believed to have been in favour.

The pound rallied to reach its highest level for the year as prospects for a rate cut before June faded. It climbed to a high of 1.2811 and closed at 1.2808.

USD – Market Commentary

Cutting rates too soon endangers the Fed’s excellent work

Over his two prepared testimonies to Congress this week, the Fed Chairman has provided the market with a marginally less hawkish view of the economy.

It is obvious that his daily contacts with the permanent members of the FOMC have led to a concern that inflation is more “dormant” than dead, and a rate hike that could be considered premature could “awaken the beast”.

The regional Fed Presidents who make up the rest of the Committee have gradually changed their opinions on rate cuts as further data shows the potential that rather than experiencing a soft landing, they could easily be on the verge of overheating.

The publication of the February employment report later today may convince the market that a rate cut is unlikely before June.

If the headline Non-Farm Payroll numbers even come close to emulating the figures from the past two months, rates will remain unchanged.

Furthermore, given the fact that the Fed is more interested in trends than one-off figures which could be an anomaly, a rate cut is already a less than ten percent chance.

In his evidence before Congress, Powell admitted that confidence is growing that inflation may be moving sustainably towards its target of 2%, but he agreed with other members of the FOMC who have said recently that they need to be convinced that a rate cut wouldn’t lead to a flare-up in inflation.

There has been a gradual increase in the number of weekly jobless claims which has seen the four-week average remain well above the 200k level which has, in the past, been considered a watershed. However, since the economy has created close to 700k new jobs since the start of the year already, it is not beyond the realm of possibility that that figure could reach a million today.

The dollar index has broken through its medium-term support and fallen to a low which has not been seen since January 15th. Yesterday it fell to a low of 102.80 and closed adjacent to that point.

The next important level is 102.40, which, if broken, could lead to a period of sustained weakness for the Greenback.

Next week will see the release of inflation and retail sales data which will be important but unlikely to sway the FOMC, at its meeting the following week, to begin to cut interest rates.

EUR – Market Commentary

The Hawks are still in control

The culmination of yesterday’s ECB Governing Council meeting, far from producing a “watershed moment”, became yet another damp squib as the market’s lingering hopes for a cut in short-term interest rates were dashed yet again.

In truth, the market had been well-prepared for the Central Bank to take no action, given the advance guidance that its President Christine Lagarde had provided recently.

In her post-meeting remarks, Lagarde did hold out some hope for a rate cut, but not until the June meeting when the first quarter wage data will have been fully digested.

The ECB has lowered both its inflation and growth expectations, which together should lead to a rate cut.

The Bank expects the inflation rate to fall to 2% in the next few months, and it is now evident that the more hawkish members of the Governing Council want to see it reach that level, but be able to feel confident that it will remain close to that level before agreeing to a rate cut.

Going forward, GDP is likely to remain weak for the rest of the year, despite a few “bright spots”, no matter what path the ECB follows.

Given the comments made recently, it is obvious that the ECB would not consider a mild recession to be the worst of outcomes since it would likely “anchor” inflation at a lower level.

There are sure to be negative comments from Finance Ministers and Central Bankers from nations that are struggling for growth currently, even when they are seeing inflation fall more rapidly than the overall Eurozone rate.

The final data for fourth-quarter GDP will be released later today. It is expected to show that the region saw zero growth between October and December, and there is a possibility that it will show that the Eurozone, as a whole, dipped into recession.

The Common currency is having its best week for some time. It has risen for eleven of the past fourteen sessions. Yesterday it rose to a high of 1.0949 and closed at 1.0947.

It has the potential to test the 1.10 level again. But unless there is a major change in the market’s perception of the dollar and Euro, it is likely to fail again.

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.