Little Visibility Over Black Hole

As attention continues to focus on what measures the Chancellor Rachel Reeves will announce to fill what No.11 has identified as a as £22bn “black hole” left by the Conservatives, the FT’s Freedom of Information request to seek a breakdown of government overspend has been declined.

Though the government has signalled the source of some of the blackhole (for example an overspend due to public sector pay awards and flood defences programmes), exact details still remain unclear.

According to the FT, the Treasury said that “A release in line with this request risks creating a chilling effect, as officials and ministers feel less able to make free and frank decisions relating to ongoing discussions to manage down in-year pressures”.

The denial of the FIR will renew concerns that the government is lacking transparency over the issue. Such concerns will no doubt be exacerbated by the controversy surrounding how the government intends to fill the hole.

At the centre of this controversy remains Reeves announcement that about 10m pensioners who do not receive pension credit will lose the winter fuel payment of up to £300. With the measures expected to apply from mid-September, Reeves remains under significant pressure, not least from Labour backbenchers to U-turn on the measure.

Speaking on the issue, the Shadow Leader of the House of Commons Chris Philp tweeted that “Conservatives will oppose Labour’s plan to strip the winter fuel payment from 84% of pensioners who are living in poverty”.

Following the ECB’s July cut (which eased rates from record highs after nine consecutive months), and their subsequent hold in August, it is widely expected that Frankfurt will cut 25bps at 1315 this afternoon.

Here, the 25bps cut brought their main refinancing operations rate to 4.25%, while their marginal lending facility and deposit facility eased to 4.5% and 3.75%, respectively.

This monetary policy meeting today comes as Eurozone CPI dropped 0.4 percentage points to 2.2% in August, hitting its lowest level since July 2021, giving Eurozone Hawks some comfort. Growth concerns – particularly in Germany – have also compounded pressure on the ECB to loosen monetary policy, with data in August indicating that the largest economy in the Eurozone contracted 0.1% between Q1 and Q2 24.

Across the 20-member Eurozone, the economy grew 0.2% over the course of the second quarter of the year, decelerating from the 0.3% recorded in Q1, renewing pressure on Frankfurt to ease borrowing rates from their highest level since the currency union’s inception.

Nevertheless, while today’s decision will likely bring about the ECB’s second cut in as many months, policy makers will likely reiterate the inflationary challenges remaining. For example, with annualised core inflation still remaining elevated at 2.8%, headwinds remain for the central bank.

Yesterday afternoon, the latest print from the US indicated that the consumer price index (annualised) eased 40bps from July’s figure to 2.5%.

This marked the fifth consecutive month where the rate of inflation has fallen and represents the lowest level of inflation since February 2021.

While easing inflation will serve as positive sign for policy makers in their battle to bring inflation back to the Fed’s 2% target, the print nonetheless marginally surpassed expectations. This came as the index for shelter rose 0.5 percent in August and was cited as being the main factor in the all items increase by the Bureau of Labor Statistics. Moreover, with core inflation rising from 0.2% to 0.3% on a monthly basis, the print indicates that the Fed are not out of the woods yet.

Such was the lack of conviction as to whether the Fed will conduct a 50bps rate cut on 18 September, yesterday’s print saw markets downwardly revise expectations of such a 0.5 percentage point cut given how inflation remained higher than the consensus.

On a monthly basis, prices rose 0.2% – coming in line with expectations.