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The Monetary Policy Committee meets later this week to decide whether another hike in interest rate is needed, or if the fourteen that have taken place in this cycle have slowed demand sufficiently for inflation to follow.

Over the past two weeks there have been a series of mixed signals, none more so than the employment report for August.

Wage inflation has now exceeded consumer price increases, which points to a wage/price spiral continuing, but the unemployment rate is starting to increase which is a clear indication that interest rates are now at a level where they are restricting demand.

While it is certain that the five permanent members will vote in unison, there have been some interesting comments from the independent group recently.

Swati Dhingra is of the opinion that not only is a hike not justified at this time, but the cycle would have been halted before now.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

It was expected that the economy would have failed to post any growth in July as the poor weather and a series of strikes led the economy to shrink by 0.5%.

Another hike in interest rates also contributed to falling demand and led to fears that the good news that has been seen recently about the UK’s prospects has ended.

It had been predicted that the economy would have shrunk by 0.2%, but construction projects and retailers saw activity fall by significantly more than expected.

The country has been walking a tightrope for several months teetering on the edge of a lowdown which has been averted by a series of one-offs. It is possible that the country is already experiencing a mild recession that has been masked.

A recession, in which the economy contracts for two consecutive quarters cannot be ruled out as economists have already been expecting the economy to flatline between now and the end of the year. If the issues that have provided positives now turn negative, they could easily result in contraction.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

There has been a remarkable turnaround in the fortunes of the country in the past three months. The country was headed for a damaging recession as a “doom loop” of negative economic developments looked likely to engulf it.

Then the IMF produced a report in which it predicted that the UK would not fall into recession this year and the ONS updated its data on the country’s post-Pandemic performance and suddenly confidence is beginning to flow again.

Yesterday’s employment report for August showed that wages have finally caught up with prices and both should now begin to increase in unison.

Average wages rose by 8% annually which is likely to be the highest of the three measures which determines the level of the increase in the state pension and other benefits from next April.

The “Triple Lock” under which benefits increase each year by the highest of average wages, inflation and 2.5%, was introduced in 2010 by the coalition government as a method of ensuring that the state pension “kept up” with overall wage growth.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Catherine Mann is far and away the most hawkish member of the Monetary Policy Committee. She spoke yesterday of her view that interest rates should continue to rise if inflation remains above the Government's 2% target.

She went on to say that in her opinion, it would be better in the long run if the Bank erred on the side of over-tightening rather than bring the cycle of hikes to an end only to be forced to begin again should inflation flare up again over the winter.

Mann accepted that her opinion may be wrong but if the Bank had continued to raise rates and inflation decelerates at a faster rate than she expected she wouldn’t hesitate to introduce rate cuts sooner than expected.

While her views are considered radical, she is showing the kind of proactivity that has been found wanting during Andrew Bailey’s term as Governor.

Of the nine members of the MPC, five are permanent, the Governor, the deputy Governors responsible for monetary policy, financial stability, markets and banking, and the Chief Economist.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The data that is due to be published this week will go a long way towards determining the path for Sterling for the rest of the year.

Tomorrow, the August employment report will be released. It is expected that the claimant count will have increased marginally while earnings have exceeded inflation, meaning that in real terms, people will begin to feel better off.

Inflation is likely to have moved slightly higher since the rising cost of a barrel of oil is reflected in the forecourt price of petrol and diesel. The data will show that the inflation is well on the way to meeting Rishi Sunak’s pledge to halve the rate of inflation by the end of the year.

The economy will have shrunk by up to 0.3% in August but the Q3 results due next month are expected to show marginal positive results. With inflation falling and the economy “bumping along the bottom,” the conditions that will lead to an end to interest rate hikes are slowly appearing on the horizon.

Several economists believe that the next meeting of the MPC will agree to a hike of twenty-five basis points in the base rate, but that could be the last in this cycle.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Huw Pill, the Chief Economist at the Bank of England spoke yesterday of the determination of the Bank to “see through to the end” its fight against inflation.

Many observers took that as a hint that there will be another twenty-five-basis point hike in interest rates when the MPC meets again in three weeks’ time.

Pill went on to say he and his colleagues are aware of the unnecessary damage that could be inflicted on the economy if rates are raised too much, but the Bank feels it must concentrate primarily on tackling inflation. Interest rates are likely to stay elevated for some time.

Inflation fell to 6.8% in July and while it can be considered to be moving in the right direction, the base rate needs to be at a level where it is restricting demand, but not severely affecting employment and growth unnecessarily.

The most recent employment data shows that there is still capacity since the claimant count is constant, while he feels that the country can avoid a recession in the coming months.

Beyond Currency Market Commentary:
Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.