Wage inflation & recession risks

If you prefer to watch the video briefing then please click on the image.

Bank of England leadership fear wage inflation

Jon Cunliffe, the Bank of England Deputy Governor, was the only MPC member to vote against a rate hike at the latest meeting.

He does not think that the Bank will have to take sustained action to prevent high inflation from becoming ingrained. Yes, inflation needs to be tackled, but he does not see a valid comparison with the energy crisis back in the 1970s, when OPEC limited production and quadrupled the price of oil. The difference, according to Cunliffe, is that the 1970’s oil crisis saw inflation rise and stay elevated, but he feels any such concerns are unfounded within the current climate.?

But managed a subtle pledge of allegiance to his boss, Andrew Bailey, by warning against the public becoming convinced that the high and rising inflation needs to be countered by demanding higher pay.?The difference is that Bailey made these demands with his salary of ￡575k, while Cunliffe has a poverty spec taxpayer funded salary of only around ￡200k.

In the market, Sterling drifted either side of 1.3125 and we opened around 1.1975 against the Euro.?

Will the US rate hikes lead them into recession?

There is growing market expectation that we may see a recession in the US. This wouldn’t arrive until early next year but the market fears that projected rate hikes of about 2.5% may well slow the economy to the point of recession.?

The Fed minutes are due out tomorrow and the market will be looking for clues to confirm that a 50bp rate hike looks likely, and whether they will start to reduce the Fed balance sheet next time they meet on May the 4th. One to keep an eye on because if policy does look likely to diverge further from the UK and eurozone, then we could see the dollar index move closer to the 100 level. Yesterday it topped out at 99.10.

Eurozone recession now unavoidable?

The Eurozone inflation, currently at a historically elevated and being exacerbated by the conflict in Ukraine, is going to have a significant effect on growth.

The markets are concerned that ECB President, Christine Lagarde, is happy to acknowledge the high level of inflation but does not see any real threat of stagflation coming from reduced growth and activity.

The bank will also be keeping an eye on wage increases but so far they have not been rising as an effect of raised inflation.

So far, the German Government has committed to removing Russian supplies by the end of the year, but there have already been calls for the Government to step up the level of aid to ailing sectors of the economy and the Chief Executive of Deutsche Bank spoke yesterday of his fears for the German economy, where he believes they face a deep and long-lasting recession if imports of Russian oil and gas are completely halted.

It is hard to see how the Eurozone can avoid a recession now, but in the longer term it may be recovering just as the US economy dips into its own recession, which could see EUR/USD begin a long climb back towards the 1.30 levels. For now though, we are trading around 1.0970.