Bailey, PMIs and Polish Interest Rate Decision in Focus 

Yesterday saw Andrew Bailey, the Governor of the Bank of England, speak before the Treasury Select Committee where he suggested that Threadneedle Street was probably “near the top of the cycle.” With all eyes on the Bank of England’s next policy meeting on 21 September, the general market consensus is projecting a 25bps rate hike to bring the base rate to 5.5 while money markets are also implying that a terminal rate of 5.8% has been priced in by Q4 2023.

With Bailey commenting on the falling rate of inflation and his assertion that “indicators are signalling the fall in inflation will continue” he also indicated that the impact of rate hikes was yet too fully hit the economy. Here, he suggested that “we’ve definitely got a substantial amount of transmission to come” while maintaining that “we have to factor that in our policy decision.” Notwithstanding falling inflation, core (currently at 6.9%) remains persistently high and only marginally down from its peak level of 7.1%. Nevertheless, Bailey’s somewhat dovish undertones marked something of a departure from previous rhetoric, which thus fed into sterling sell-off throughout the course of yesterday’s session.

Elsewhere, Bailey also encouraged banks to pass on higher rates to savers – a sticking point which the Treasury Select Committee has raised consistently over the last few months. The Governor also suggested that the UK economy remains more resilient than may have been projected with demand proving robust, while Huw Cunliffe (the BoE’s Chief Economist) suggested that there were ‘mixed signals’ in light of easing wage growth and rising unemployment. All eyes are now on the BoE’s next MPC meeting on 21 September.

Yesterday’s US ISM Services PMI indicated the strongest level of growth in the American service sector in half a year. Despite some mixed data out of the states in recent weeks, yesterday’s PMIs were another signal that the world’s largest economy remains resilient in light of monetary tightening and wider economic headwinds. Augusts’ figure of 54.4 far exceeded exceeding forecasts of 52.5 and also marked a sizeable uptick from July’s figure of 52.7. This came as Business Activity rose to 57.3 from 57.1 in July representing the 39th consecutive monthly increase while employment activity in the services sector also rose for the third consecutive month.

While the print was welcome news for American firms concerned about dampening demand, price pressures showed signs of increasing (with this index rising to 58.9 from 56.8 in July) over August, renewing inflationary fears. Rising cost pressures came as the Inventories Index expanded for the fourth consecutive month.

The National Bank of Poland surprised markets yesterday following their decision to cut their benchmark interest rate by 75bps, brining it to 6%. While markets had been projecting a modest rate cut of 25bps, few were expecting to see the NBP enact this level of monetary loosening, especially having maintained their 6.75% benchmark rate for 11 consecutive policy meetings. The NBP’s decision comes as CPI eased to 10.1% on an annualised basis, while month-on-month inflation has come in at 0% over May, June and August as well as a deflationary -0.2% print over July, as demand softens. Given their proximity and inter-connectedness, the impact of the war in Ukraine has hit the polish Economy particularly hard with supply side pressures feeding into inflation levels in double digits for most of 2022.

The decision to loosen monetary conditions also comes as central bank policy members consider the Polish economy’s contractionary growth which saw quarter-on-quarter GDP slip 2.2% over Q2. On an annualised basis, the polish economy has also seen two consecutive quarters of contraction following a 0.3% reduction in GDP over Q1 and 0.6% contraction over Q2 2023.

Looking forward, the NBP’s press release also stated that they “will continue to take all necessary actions in order to ensure macroeconomic and financial stability, including above all to bring inflation down to the NBP inflation target in the medium term. NBP may intervene in the foreign exchange market.”

Ahead of the ECB’s policy meeting on 14 September, this morning at 10:00 will see the release of Eurozone employment data along with eurozone GDP which is expected to come in at 0.6% on an annualised basis and 0.3% on a quarter-on-quarter basis. This afternoon, focus will turn to across the Atlantic with the release of US initial jobless claims, where markets will be keen to get an a further indication on the health of the US labour market following last week’s data which showed US unemployment rise to its highest level since Feb 2022.