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The recent global shift in sentiment regarding inflation has had a limited impact on the mindset of MPC member Megan Greene. In a recent address in Leeds, Greene steadfastly advocated for an upward adjustment of the Bank of England's (BoE) key policy rate. She expressed concern that adopting a too-conservative approach might pose greater risks than the consequences of inflationary pressures. Greene emphasized the potential scenario where inflation persists, necessitating more aggressive rate hikes later. Furthermore, she raised doubts about the assumed restrictiveness in the current monetary stance, suggesting it may be less robust than commonly perceived.
The validity of these concerns gains prominence when examining core and services inflation within the United Kingdom. Despite the headline inflation rate receding to 4.6%, services inflation remains notably elevated at 6.6%. The BoE attributes this to domestically generated inflation linked to the dynamics of the labour market. Recent Labor market indicators support this perspective, with the unemployment rate dropping to 3.5%, potentially explaining persistently high wages. The 3-month annual growth rate stands at an impressive 7.9%, showing only a marginal retreat from the recent peak of 8.5%.
Adding to the narrative, the BoE's Decision Maker Panel survey reveals that inflation expectations for the next 12 months hover around 4.4%, with a slightly diminished projection of 3.2% for the subsequent three years. While these figures exhibit a modest descent, they remain conspicuously high. The survey also estimates a robust 5.1% growth in wages over the next 12 months. Notably, the BoE appears more concerned about domestically generated inflation within the UK compared to counterparts in the United States or the euro-zone. Economist Catherine Mann underscores this point by emphasizing that services inflation would need to decrease from its current 6%-plus level to 3% for overall inflation to be effectively managed.
Looking ahead, the prevailing market sentiment anticipates a 25 basis points cut by the BoE in August of the upcoming year—a decision expected later than those forecasted by both the European Central Bank (ECB) and the Federal Reserve. The evolving stance of the ECB, influenced by recent evidence of accelerated declines in inflation, introduces a discernible divergence in policy expectations, leaving the EUR/GBP currency pair vulnerable to further depreciation. Over the last five trading days, EUR/GBP has breached its 50-day, 100-day, and 200-day moving averages, and the current outlook suggests that risks are considerably tilted towards the downside. As the gap widens in inflation and policy expectations, the currency pair faces an increased susceptibility to further declines in the foreseeable future.
In a separate development, the GBP-USD pair is exhibiting modest strength this morning, buoyed by certain Bank of England (BoE) remarks and favourable data. BoE member Haskel reiterated his hawkish stance, emphasizing that his vote to increase rates is driven by the concern of preventing the economy from becoming entrenched in a problematic situation of embedded inflation. Megan Green, the newest addition to the Monetary Policy Committee (MPC), also echoed a hawkish sentiment last Thursday. She highlighted the possibility that the current policy might be less restrictive than previously assumed, cautioning that "doing too little" could be the suboptimal choice, describing it as "the worst option."
In contrast to the hawkish tones from BoE officials, the market sentiment appears to lean towards a different narrative, with pricing indicating expectations for nearly three rate cuts by the end of 2024. Last Friday's data paints a somewhat improved picture, characterized as "less awful than before." November's house prices registered the third consecutive monthly increase, although they still stand 2% lower than the same period last year. The final manufacturing Purchasing Managers' Index (PMI) for November inched higher to 47.2 from the initial flash estimate of 46.7 and the October figure of 44.8. However, these levels provide little cause for celebration, as production has experienced a nine-month continuous decline, and both new orders and exports remain in a downtrend.
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