Inflation Set To Fall ... Interest Rates Set To Follow ...
Bond yields rallied, Sterling slipped against the Dollar this week. The latest US inflation suggests CPI is heading higher. Analysts are beginning to rethink, the forward outlook for US interest rates and the actions of the Federal Reserve. It doesn't take much to spook markets. Uncle Sam's CPI inflation increased to 3.2 per cent in February from 3.1 per cent prior month. Producer prices increased to 1.6 per cent in February, up from 1 per cent in January and 0.8 per cent in November last year. Markets moved. Ten year bond yields increased to 4.31% in the U.S. and 4.10% in the U.K. Sterling slipped from $1.29 to $1.27. When it comes to understanding market moves, "Any explanation is better than none" (Nietzsche). In the U.K. We won't have to wait long for an update. The MPC is set to meet this week. A decision on UK rates due Thursday. The latest inflation data is due on Wednesday. This will give some steer to the direction of travel on prices and base rates. So what to expect? Market forecasts suggest consumer price inflation will have fallen from 4 per cent in January to 3.5 per cent last month. This, on the back of slowing food and energy prices. Core inflation, excluding food and energy, is expected to have eased from 5.1 per cent to around 4.5 per cent. Strong disinflationary pressures and tight monetary policy may cause inflation to fall below the 2 per cent target this year. The Office for Budget Responsibility produced new forecasts this month. They indicate inflation will hit the 2 per cent target in the second quarter and will stay below target for the rest of the year, ending the year at 1.4 per cent. The Bank of England forecasts suggest inflation will hit the 2 per cent target in the second quarter but inflation is expected to rise in the second half of 2024. Inflation will end the year a 2.8%, meeting the 2 per cent target only in 2025, the Bank said. Falling food prices and energy costs the critical drivers. Intervention of the Ofgem price caps of great assistance in April. The rosy coloured outlook for inflation may not be so easy to achieve. Oil prices Brent Crude averaged $83.48 dollars in February compared to $82.59 last year. Prices averaged $75 dollars in May and June 2023. The latest earnings data suggest whole economy earnings were 5.6 per cent in January (6.1 per cent excluding bonuses). Moving in the right direction but as yet incompatible with the 2 per cent target. Service sector inflation, accounting for almost half the index, increased to 6.5 per cent in January, up from 6.3% in November. So we await with interest, the February figures for inflation. Some steer on what happens next with Base Rates may then follow. Bank of England Interest Rate Decision ... There is little or no expectation the Bank of England will lower rates this week. Rates on hold the probable decision. The only excitement, the voting mix, "stick or twist". As David Smith writing in the Sunday Times this week points out ... "It is now more than seven months since the MPC last changed interest rates.. It would be a big surprise if there is not another hold this week. That does not mean that there will be no interest in Thursday's decision. Last month, one member of the committee, Swati Dhingra, voted to cut, while two members, Catherine Mann and Jonathan Haskel, voted to raise rates. The other six were happy to leave things unchanged. Some of the speculation this week is therefore, whether anybody else joins Dhingra in voting for a cut rates, which at this stage is considered unlikely, and whether Mann and Haskel throw in the towel on further rate rises." So when will there be a cut in rates? Following this week's meeting, the MPC will have five more meetings and five more opportunities to cut interest rates this year. Markets think May is too early. June is favoured for the first cut of 25 basis points. August, September, November and December are the remaining meetings scheduled this year. December too close to Christmas. November too close to an election, if he makes it that far! We anticipate base rates at 4.5 per cent by the end of the year. That would suggest rates cuts possible in August and September but not much more to follow in 2025 . In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%. As always, "'The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals." Oops, that's the Fed, not the Old Lady, talking.
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It was budget day on Wednesday. No rabbit from the hat, no bounce for the dead cat. The Deep State was silent. The Chancellor of the Exchequer presented his Spring budget. It will be his last before the election. An election which could take place as early as May.
It's going to be great. We will be the creative capital of Europe, the next Hollywood, the next Silicon Valley. Not for the moment, the low tax, "Singapore of Europe" but we are still working on that. National Insurance will be abolished (but not anytime soon). We begin with a with an additional 2% cut, to an 8% rate, beginning in April this year. Full expensing of leased assets to be included for business tax relief. Capital gains tax for sales of second homes to be cut from 28% to 24%. We are on track to become the world's next Silicon Valley. We have become Europe's largest film and TV production centre. Studio space in the UK has doubled in the last three years. At the current rate of expansion, we will be second only to Hollywood by the end of 2025. We are providing more military support to Ukraine than nearly any other country. Our spending will rise to 2.5% of GDP as soon as economic conditions allow, or the Russians invade the Baltic states. Plans for leveling up continue, more money for Cambridge and Canary Wharf. AstraZeneca to invest £60m to expand their footprint on the Cambridge Biomedical Campus. Canary Wharf to be transformed into a new hub for life science companies. Problems in the hospitality sector identified. The freeze on alcohol duty will be extended to April 2025. The 75% business rates discount for pubs will continue. Fuel duty will be frozen for the thirteenth year in succession. The freeze means fuel duty will remain at 57.95p per litre, as it has since March 2011. The 'temporary' 5p cut on the fuel tax, first introduced in March 2022 by Chancellor Rishi Sunak, will remain in place until March 2025. The investment needed to modernise NHS systems so "they are as good as the best in the world" will be fully funded by central government. It will cost £3.4 billion and unlock £35 billion of savings, a ten fold payback assuming development costs can be kept under control and we don't use Huawei, Fujitsu or TikTok. "We will slash the 13 million hours lost by doctors and nurses every year to outdated IT systems. We will use AI to cut down and potentially cut in half, form filling by doctors. We will digitise operating theatre processes allowing the same number of consultants to do an extra 200,000 operations a year." We will also get rid of fax machines and use WhatsApp. We have made good progress ...
OBR forecasts show we have made good progress on the Prime Minister's three economic priorities. Inflation has halved ... Debt is falling ... Growth is 1.5 percentage points higher than predicted. The OBR expects the economy to grow by 0.8% this year and 1.9% next year. After that growth rises to 2%, 1.8%, and 1.7% in 2028. Inflation will fall to 2%. Underlying debt, will be 91.7% of GDP in 2024-25, then 92.8%, 93.2%, 93.2% before falling to 92.9% in 2028-29 with final year headroom of £8.9bn. (That's enough for another NI cut!) Business confidence is returning ... Business confidence is returning. Investment is surging. In the short period since the Autumn Statement, Nissan have announced they will build two new electric car models in the UK. Microsoft and Google have announced data centres worth over £3 billion. Thanks to the Business Secretary, the Global Investment Summit unlocked £30 billion of investment. There will be more money for police technology ... There will be more money for police technology. We will spend £230m rolling out time saving technology which speeds up police response times. Victims will be able to report crimes by video call (assuming their phones haven't been nicked). Drones will be used as first responders, under a new "Use Your Phone or Talk To A Drone" campaign. This way, all incidents will be attended with a "Fly By" at least. The crime response stats will be improved at the "flick of a joystick". Non Dom status will be abolished ... Non Dom status will be abolished raising £2.7 billion a year but there's a catch ... From April 2025, new arrivals to the UK will not be required to pay any tax on foreign income for their first four years of UK residency. This is a more generous regime than at present and one of the most attractive offers in Europe. But after four years, those who continue to live in the UK will pay the same tax as other UK residents. In a two-year period, individuals will be encouraged to bring wealth, earned overseas, to the UK where it can be spent, invested and taxed! This measure will attract £15 billion of foreign income and generate more than £1 billion in extra tax, it is said. Yes they will be arriving by the boat load, who could resist that offer. Overall, abolishing non-dom status will raise £2.7 billion a year by the end of the forecast period. That's assuming "they stay to pay". There aren't many, anyway, approximately 37,000, of which 90% choose to leave with seven years as it is. If they come and leave within four years, they will be better off under the new regime. It's a four year window. Time to work things out and time to buy a second home in Monaco. Village Hall Boost ... More good news, there will be £5m to renovate hundreds of local village halls across England so they can remain at the heart of their communities, hosting food banks and social services as local authority budgets are slashed. Liz Truss complained, when ditched as Prime Minster, she had been "downed by the deep state". The Bank of England, the Office for Budget Responsibility, the International Monetary Fund, the Economist and the Financial Times were all, she claimed, part of the Deep State. A sinister left-wing cabal promoting something called "wokeonomics" and an anti growth agenda.
"We have to understand how deep the vested interests of the establishment are, how hard they will fight and how unfairly they will fight in order to get their way". "That is what I learnt from my time as a government minister and my time in No 10." [Obviously a quick learner.] This time, this budget, the deep state was silent. Or was it? According to Tom Peck in the Times on Friday, maybe the Institute of Fiscal Studies should be added to the Deep State Hit List. "The IFS post-budget briefing is where budgets traditionally go to die". Director, Paul Johnson, the Wonk King, stands up in front of the assembled wonks and nobly fulfills his role of national, post-budget, extractor fan. The smoke is sucked away. The mirrors smashed." Reality revealed. "Nothing that Jeremy Hunt did yesterday, changed anything," Paul Johnson said on Thursday "We are still heading for a parliament in which living standards will be worse at the start than at the end. That's pretty much unprecedented." Tax revenues are seen to rise to the highest level, as a share GDP, since 1948. Pensioners will be punished by the latest budget moves. Risks to borrowing from certain tax cuts now, are to be paid for by back loaded uncertain increases in the future. Spending plans are largely unspecified. Richard Hughes Director at the OBR has called Government spending plans a " work of fiction". "Some people call [the projections] a work of fiction, but that is probably being generous. At least someone has bothered to write a work of fiction, the government hasn't even bothered to write down what the departmental spending plans are", he said. The IFS claims, there would need to be at least £20 billion of spending cuts, for departments other than the ring fenced departments of, health, defence, education and child care. Where would they come from? This, will be a "staggeringly hard choice". "How do you make cuts, given NHS waiting lists, local authorities at or near bankruptcy, backlogs in the justice system, long-term cuts to university funding and struggles in social care and prison systems". The £20 billion plus savings from productivity improvements are ambitious. The inclusion of £5 billion revenue annually for energy hikes in the future, flies in the face of history. How do you make cuts? The answer is, you don't or can't. The staggeringly hard choice will almost certainly be somebody else's problem, given the next spending review will take place rather conveniently, after the next election. Some agree with Professor Philip Cowley and have signed up to his Campaign to Scrap the Budget. "Such occasions of parliamentary theatre, give governments an incentive to put short-term gimmicks above serious policy development". Short term gimmicks? Never! Yep, tough choices to be made but after the next election. It could be sooner than you think ... Retail sales bounced back in January following a disappointing quarter at the end of 2023. Sales volumes were up by almost 1% in the month, year on year. Sales values increased by 4%.
Consumers were spending big on alcohol (27%), music (34)%, computers (27%) and cosmetics (9%). Flowers, plant and seed sales were up by 18%, second hand goods sales increased by 29%. Biggest losers were chemists (-18%) and clothing retailers (-8%) . There is a pattern in there somewhere. Remember "Any explanation is better than none". Nietzsche. So what of the recession? Did you miss it? Markets, journalists and analysis were disturbed by the latest GDP date released on Thursday. The GDP monthly estimate for December 2023 revealed Real Gross Domestic Product (GDP) is estimated to have fallen by 0.3% in the three months to December 2023, compared with the three months to September 2023. According to the ONS, "On a quarterly basis, this gives two consecutive falls in GDP, with a fall of 0.3% in Quarter 4, following a fall of 0.1% in Quarter 3." For some, this constitutes a technical recession, defined as two consecutive falls in quarterly GDP. For purists (and those with pedantic disposition) this is not the case. The definition of recession requires two consecutive falls in quarterly GDP year on year, not quarter on quarter. This did not happen. The so called "technical recession" is in fact a "phantom recession." For the year as a whole, the UK economy is expected to have increased by 0.5% in 2023, compared to prior year. In the first half of the year, GDP increased by 0.6% in Q1 and Q2. Growth then slowed to 0.5% in the third quarter, then fell in the final quarter of the year by -0.3%. It was a strange quarter and a strange slow down. According to the latest employment data, the unemployment rate actually fell to 3.8% in December, the number unemployed fell to 1.3 million from 1.5 million in June. Data hardly consistent with a lurch into recession. Analyze the GDP fall by sector and the pattern becomes even more confusing. Strong growth was experienced in manufacturing and government spending, especially on health and education. Construction output slipped in the quarter, down by 1.2%. We still expect growth of 2.5% in the year as a whole, following a strong performance in the first half of the year and Q3. It is within the service sector down by -0.2% the damage occurred in the final quarter. Retail sales were down by 1.5%, this impacted on transport storage and communications, down by 1.4% overall (1.7% in retail and 2.0% in transport and storage.) In the leisure sector, distribution, hotels and leisure output fell by 1.7%, accommodation and food sales specifically fell by 1.6%. Maybe there is something of a structural change occurring in the sector as consumer spending is redirected. This month, Pryzm night club owner Rekom announced the closure of seventeen venues with the loss of 500 jobs. Students pre-drinking and not going out mid-week is to blame for nightclubs closing, the boss of the UK's biggest club chain has said. New data suggests close to 400 clubs permanently shut down between March 2020 and December 2023, according to the Night Time Industries Association (NTIA). Overall, the UK restaurant industry demonstrated resilience in the face of challenges including inflation, rising energy costs, food costs, staff turnover, recruitment difficulties and transport strike action. Yet ... According to the BDO Restaurant and Bars Report for 2023, over half of consumers cut back on discretionary spending to put the money towards energy bills. Of these people, 6 in 10 intended to achieve this by reducing how often they eat out (Barclaycard); 77% of UK hospitality firms reported a decrease in diners and drinkers at the end of last year. Outlets are responding by reducing opening hours and days to reduce energy costs. The British Beer and Pub Association reported over 500 pubs closed for good in 2023. In the Hotel sector, according to "Visit Britain" Hotel Occupancy rates were actually up in the final quarter from 76.3% to 77.0% thanks to a slight increase in the December performance. Overall, a disappointing performance in the leisure sector in the final quarter. The trade will be looking for a budget boost in the March statement on business rates, lower VAT and reform of the apprenticeship levy. The step up in the National Living Wage in April is unlikely to improve sentiment. The easing of price pressures on food and energy will help. The anticipated fall in base rates will undoubtedly assist. For the year as a whole, we still expect modest GDP growth of 0.7% in 2024 and over 1.3% in 2025. Inflation is expected to slow further, our base rate outlook is unchanged. Expectations of a midsummer rate cut increased sharply this week in response to the release of cooler than expected inflation data for January. The Bank of England will make the first cut to interest rates since 2020 at its June meeting, if not before, according to money market bets.
Financial markets are now forecasting, with a probability of 70 per cent, the Monetary Policy Committee will lower the base rate from 5.25 per cent either at, or before, the June 20 meeting. Markets had expected inflation to ease up to 4.1% in the month. As it was, goods inflation eased to 1.8% from 1.9% prior month. Service sector inflation edged up to 6.5% from 6.4%. Food inflation eased to 7%, energy costs were down by just over 18%. Core inflation was steady at 5.1%. The headline CPI rate was unchanged at 4.0%. The arithmetic of goods and service sector inflation, a model in which both are equally weighted, suggests 4.1% would have been nearer the mark for January CPI but that would also apply to November and December for that matter. The inflation numbers followed updates on earnings and wages in the latest employment data. Earnings increased by 5.8% in the three months to December from 8% in the previous quarter ending September. We expect the rise in earnings to ease to 4.5% by the end of the year Q4. Inflation CPI to end at 3.5% in the final quarter. Not quite as optimistic as the Bank of England perhaps but even so ... Our base rate scenario is unchanged, we expect base rates to end the year at 4.5% with the first cut in May or June ... 1 No charges for Biden in classified documents probe but ...
Joe Biden carelessly kept classified documents and notebooks at his home, according to a special counsel report released Thursday. The report said the evidence wasn't strong enough to charge the president with crimes. The report's description of Biden as "an elderly man with a poor memory" prompted a furious response from the president at a hastily called news conference hours later. The 345-page special counsel report portrayed Biden, 81, as someone who haphazardly kept notebooks and documents with classified information at his home, and struggled to recall key dates in his life. In concluding Biden should not be prosecuted, Special Counsel Robert Hur, a former Trump-appointed US Attorney in Maryland, offered a political indictment of the president's fitness. Hur described the leader of the free world as a "sympathetic, well-meaning, elderly man with a poor memory". This would make him impossible to prosecute (and difficult to elect). Republicans quickly seized on that stinging characterization to attack the Democratic incumbent as unfit for office, well no surprise in that! 2 Trump is on a glide path to the Republican nomination ... Trump is on a glide path to the Republican nomination, or should we say "coronation". Trump romped home in the Nevada and US Virgin Island caucuses Thursday night, continuing his unbeaten streak and making Nikki Haley's campaign appear futile. After wins Thursday in Nevada and the US Virgin Islands, Trump remains undefeated and in total command of the primary race. Trump's win in Nevada was never in doubt in a state where party leaders molded the delegate-awarding contest to benefit him. Trump's chief rival, Haley, was not even an option for caucus goers Thursday. Haley, the former South Carolina governor chose instead to take part in the state-run primary conducted earlier this week, where Trump was not on the ballot. Haley finished second to"none of these candidates". A "Non Of The Above" embarrassment confirming her fading relevance in the race. "Nota Bene", It's a landmark. 3 Good signs for Trump in the Supreme Court case ... Trump appears poised for a win at the Supreme Court. Justices expressed deep skepticism that Colorado could declare him an insurrectionist and bar him from their election ballots. Even liberal justices were skeptical that Colorado should be able to declare the former president an insurrectionist and disqualify him from the state's ballot. The question of whether Trump actually engaged in insurrection was barely mentioned in the arguments. This was a clear indication the justices could sidestep Trump's behaviour on January 6, 2021, in a decision that seems likely to affirm his eligibility to appear on presidential ballots. Trump is not in the clear yet. Trump related questions loom for the Supreme Court, such as whether Trump enjoys absolute immunity from prosecution. His lawyers have until Monday to ask SCOTUS to review a DC appeals court ruling last week that Trump does not have super immunity and that he can be prosecuted for trying to overturn the 2020 presidential election. So what can we expect? It's all set for a November run off between a "sympathetic, well-meaning, elderly man with a poor memory" and a 'vicious, vindictive, unfeeling, self serving, malicious, old man with a revenge agenda and a blatant disdain for the American democratic process." Memory not that great either. It's Uncle Joe up against a relative you wouldn't leave alone with the kids ... and certainly not the U.S constitution, for four more years (At least). Fighting Over The Deck Chairs On The Titanic ...
Twenty five points behind Labour, in the polls, over 50 MPs about to jump ship, the Tories continue to fight over the deck chairs on the Titanic, as disaster looms.. Not content with the Balkanization of the Conservative party with five, or is it six families, Liz Truss, who did for Pork exports to China what Rishi Sunak appears to be doing for EV sales in the U.K., is to launch another faction. The Pop Con, faction. The reaction to the launch of "Popular Conservatism" has been mixed, with significant criticism from various quarters, including within her own party, the media, and the public. The initiative, aimed at galvanizing Britain's "secret Conservatives" and pushing back against left-wing ideologies, has been met with skepticism and irony, particularly given Truss's own unpopularity following her brief tenure as Prime Minister. Critics within the Conservative Party have expressed doubts about the necessity and positioning of this new faction. Some Tory MPs have questioned the space "Popular Conservatism" intends to fill, given the existence of other groups advocating for similar libertarian economic policies. The absence of several key MPs from the launch event, including Ranil Jayawardena and Simon Clarke, who were initially billed to speak but later withdrew, indicates a lack of unified support for Truss's movement. The media's response has been both satirical and critical. The Guardian's commentary likened the "Popular Conservatives" to a "Tory tribute act sounding a death knell for irony," highlighting the perceived absurdity of Truss leading a movement for popularity, despite her own unpopularity. This onslaught of satire and criticism reflects a broader skepticism about the movement's impact and Truss's leadership particularly. Public opinion, remains largely unfavorable towards Liz Truss, with recent polls suggesting she is one of the least popular politicians in the country. Ranked 152nd with a 10% approval rating according to YouGov. Widespread unpopularity underscores the challenges Truss faces in rallying support for her "Popular Conservatism" movement. The movement's success in influencing Conservative Party policies and public opinion remains to be seen, but initial responses suggest it faces significant hurdles. Like "do we really need another Tory variant?". The great thing about the Tories, they never stop fighting, the unfortunate facet of action, it always appears to be amongst themselves ... Good news for the Chancellor last week. The government borrowed £35 billion less than expected in the first nine months of the financial year. The chancellor, it was said, is estimated to have, between £15 billion and £20 billion to spend on his budget in March. What a stroke of luck!
Or was it? This week, in a note to self Jeremy Hunt has admitted there is no more money after all. The chancellor, has said there will be less room for tax cuts in the spring budget next month. This, just days after the International Monetary Fund warned that the UK needed to focus on repairing public finances and a week after the OBR dismissed the Treasury spending forecasts as a work of fiction. (The week in which we also warned of the Bond Market Vigilantes). Hunt, who in November announced he was cutting the main rate of national insurance contributions, was widely believed to be gearing up for another tax giveaway after dropping a series of hints about what could be the Conservatives' last budget before a general election. However, the chancellor said he needed to manage expectations. "It doesn't look to me like we will have the same scope for cutting taxes in the spring budget that we had in the autumn statement," Hunt told the BBC's Political Thinking with Nick Robinson podcast. "I need to set people's expectations about the scale of what I'm doing, because people need to know that when a Conservative government cuts taxes, we will do so in a responsible and sensible way." His comments come days after the IMF issued a strong warning to the chancellor against cutting taxes in his March budget, noting that any tax giveaways would probably require extra borrowing or post-election spending cuts. The International Monetary Fund warned against pre-election tax cuts as it downgraded Britain's growth prospects. It said the country should instead curb borrowing and prioritize public spending in areas such as health and education "Preserving high quality public services will imply higher spending needs over the medium term than are currently reflected in the government's budget plans. Accommodating these needs while assuredly stabilizing the Debt to GDP ratio will already require generating additional high quality fiscal savings, including on the tax side". It is this context, that IMF staff advises against additional tax cuts. This follows the statements last week from Richard Hughes, Chairman of the OBR in front of the Treasury Select Committee. The Chairman of the Office for Budget Responsibility (OBR) essentially called the government's post 2025 plans, or the conspicuous lack thereof, a flight of fiscal fantasy. In a striking attack on the government Hughes, said ministers were not being honest with voters about the probable scale of public sector cuts because they had failed to publish detailed spending plans for the period after April 2025. "Beyond 2025 we know virtually nothing," Hughes told the Lords economic affairs committee. "It is just two numbers one for total current spending and one for total capital spending. I think some people have referred to that as a work of fiction. I think that's probably generous, given that someone has bothered to write a work of fiction whereas the government hasn't even bothered to write down what its spending plans are." So we say again, it is all a bit rum. In the space of a few weeks in the autumn, the Treasury, moved from a position in which the Chancellor had no money to play with, to one where he could announce some crowd pleasers because of the effect of higher inflation on tax revenues. Last week, it seems the Treasury moved from a position in which the Chancellor had spent all the goodies in the Autumn statement, to one where he could provide more vote winners in the Spring budget. Now it seems in a note to self, there is no more money for vote winners after all, pressure from the IMF and the OBR not withstanding. It's another episode of "Soap, Life In Downing Street". The intro to Soap, the U.S. Sitcom in the seventies,always began with an intro to the stories of the week and the summary "Confused you won't be after this week's episode". Or will you? At the MPC meeting this week, the committee voted by 6 votes to three, to hold base rate at 5.25%. So much for group think, of which the Bank is oft criticized, two members voted for a rate hike and one voted for a rate cut.
Swati Dhingra, voted in favour of a 0.25-percentage-point reduction to the base rate, marking the first vote for monetary easing in almost three years. Dhingra thinks the Bank is at risk of over-tightening if it waits for data showing sharp declines in wage growth. Jonathan Haskel and Catherine Mann, on the other hand, voted for another rate rise to 5.5 per cent. They think that wages (rising by 6.5%) are still dangerously high. A majority of six MPC members, including Andrew Bailey, the governor, and Huw Pill, the chief economist, voted for another month of no change. Andrew Bailey delivered a mixed message to the markets, pointing out that the MPC was "not at the point where we can lower rates'. Nevertheless, he said, the main question facing rate setters at future meetings was 'how long we need to maintain this position". This is a significant change in stance. The MPC has removed its previous guidance relating to the need for more rate rises, suggesting that the Bank's next move would be a reduction in borrowing costs. In the US, this week, the Fed also shifted its guidance to financial markets to remove its previous language on the need for more monetary tightening. Chairman Jerome Powell opened the door to rate cuts, without specifying when they were likely to happen. A cut as early as May remains a possibility. Markets were previously exciting about a possible March cut. Governor Bailey hinted at a potential rate cut, markets assume in June. This would mark the first easing of monetary policy since 2020. Andrew Bailey said, "The economy is "moving in the right direction", possibly towards a position that could cause the Bank of England to consider cutting interest rates. The obsession with the "Suite of Models" continues. The "models" suggest inflation may hit the 2% target in the second quarter of the year. Thereafter, the headline CPI rate is expected to rise in the latter half of 2024 closing at just under 3%. (The "models" are also pretty optimistic about earnings and wage settlements). The Governor called for caution, suggesting that while rate cuts are on the horizon, they may not be as substantial as financial markets anticipate. In a later statement, Chief Economist How Pill decided to cloud the market view further. The day after the statements from the Governor, Hugh Pill indicated the Bank may have to raise interest rates, as a next step, instead of cutting them. Pill highlighted potential risks, such as developments in the Middle East, that could necessitate a response from the Bank. He also pointed to sustained inflationary pressures from wages, the job market, and service industry prices as reasons to be cautious about rate cuts. Despite market expectations for a rate cut to 5% by May or June, Pill emphasized that the Bank does not have sufficient evidence yet to support a reduction in rates. "There are dangers from developments in the Middle East for example, that if they were to become manifest we would need to respond to, and that would certainly alter my assessment of the speed or even the direction of future movements in rates". So what can we make of it all? Our overall forward guidance outlook remains unchanged. We expect a series of three base rate cuts in the current year possibly beginning, in May or June. We model base rates at 4.5% in the final quarter. Don't be too surprised if inflation fails to perform as the Bank's ""suite of models" suggest. Models are like that ... |
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