MPC Facing Critical Vote

MPC Facing Critical Vote

Damned if they do, Damned if they don’t…

There are three weeks until the next MPC meeting in the U.K. but traders will already have the date circled in red on their calendars.

A one-month break in meetings should have given MPC members more time to come to a considered judgement but conflicting requirements and even more conflicting data have led to a situation where previous votes and announcements of voting intentions will count for nothing!

Take a look at the MPC’s mandate. The Bank’s monetary policy objective is to deliver price stability, low inflation and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%.

So, it’s clear then we can expect a hike on August 3rd. Or can we?

Governor facing a credibility issue.

Governor Carney has flip-flopped about a rate hike. A couple of weeks ago in the Mansion House Speech, he said that now is not the time for a rate hike. Well, that flies in the face of the MPC mandate for a start, since it seems with a target of 2% and inflation likely to top 3% next week the time seems ideal!

More recently, seemingly having had a chat with Andrew Haldane, his Chief Economist, he has been quoted as saying that a conversation about higher rates will have to take place. Personally, I don’t see that his stance has changed but the market did, pushing Sterling close six-month highs. Since then, there has been a falloff in both current and future manufacturing data so we are probably back to square one.

Being Governor obviously means that you can bring a little flexibility to the role. When the MPC was brought into being by Gordon Brown in 1997, the minor matter of Brexit didn’t exist and it was assumed that if inflation were to be so much above the government’s target there would have to be growth in the economy.

Business investment plans have “fallen off a cliff” with 72% of CFO’s seeing worse conditions following Brexit with just 8% feeling positive.

Meanwhile in the Eurozone!

The sun shines, the birds sing. German Finance Minister Wolfgang Schäuble is busy putting his towel on a sunbed at 6am in a Four Seasons hotel somewhere on the Mediterranean.

All is well with the world of the nineteen. No, that is not the new name of the G20 now that the U.S. has decided that it opposes everything that isn’t stamped with a Stars and Stripes.

I give you….. The Eurozone. Undoubted star of the global economy. Whoever doubted that nineteen diverse economies could be brought together under a single monetary policy, interest rate and currency. Well, me for one.

Oh, of course there have been some tweaks here and there but to have seen Italy and Germany, not to say Greece and Germany could come together in such a way is something of a miracle.

Despite a widening interest rate differential, the common currency has risen by 10% this year against the dollar having been in danger of reaching parity. Parity is more likely now for the Euro against the pound as Brexit brings major headwinds to the U.K.

President Trump will be pleased that Germany heeded his warning over currency manipulation and allowed “its” currency to rise. Surely that is the telling motif of Trump’s first six months. Economic ignorance coupled with a bully’s witlessness.

Alan Hill is Treasury and Trade finance specialist for Middleton Jones and the Principal Consultant at