Hello, in the City listeners. We're dropping this episode and future episodes of In the City earlier in the week. That's because we have a special treat for you, releasing this Friday. As many of you know, this famously is a year of elections. Around forty percent of the world's population have voted or will have the chance to vote in twenty twenty four, and those votes will shape the
geoeconomic landscape for years to come. The implications are huge and worth exploring, which is why we're launching a bonus series called Voternomics. Bloomberg's head of Government and Economics, Stephanie Flanders, opinion columnist Adrian Woolridge, and in the city's very own Allegra Straton will lead the charge. Every Friday, they'll take a few steps back from the weekly news agenda and help you understand how the latest political movements are influencing markets,
business and policy. This year, voters around the world have the ability to affect markets, countries, and economics like never before. Let voter Nomics help you make sense of it all. So on Tuesdays, you'll still get a weekly taste of what's driving the conversations happening in the City and on Wall Street and now on Fridays, a more focused look and where politics and markets collide. Stay tuned, and we hope we.
Enjoy Bloomberg Audio Studios, podcasts, radio news.
Are we excited?
We're so excited?
Is he?
Yeah?
We have a lot of time.
Lass Sugar'll be a low at some point as well.
I forgot my question.
Welcome to the City of London, the.
City of the City, the City of London. Please mind the gap between the and the financial hearts of the country.
The city, the city.
Welcome to in the city.
Then clear of the doors. Time for a weekly look at the conversations motivating power brokers, policymakers and financiers the world over. This week all lies on the US and UK economies and the race to cut interest rates. First, I'm Francis.
Laqua, I'm David Merritt, and I'm alegra Stratton. Hi everyone, I'm.
So sorry.
That's where I was like, oh my god, wait wait wait wait wait, that was.
Perfect I supposed to say hell no.
So this week, this week, we're lucky enough to have Phil Aldrake, who's just come back from the IMF World Bank meetings to give us a glimpse of the conversations and the corridors of power and actually what central banks will do next.
Welcome back to in the city, Phil Hi. Hi, tell us about your trip. What was it? What was the word on the ground in DC as have one debated the state of the world economy.
It was slightly because obviously, whilst the meetings were happening, we're having the Israeli Evran strikes and obviously Ukraine and Russia still going on, So there was these two The backdrop was these two wars and political uncertainty that is
becoming just the norm at the moment. Then it was kind of all seen through the very imf prism of what it means for the global economy and what it means for interest rates, and and you know, you have at the moment this prospect of the Federal Reserve in the US possibly even pushing interest rates higher because inflation is proving quite sticky, and the MS was saying that the US economy is overheating effectively, and that has repercussions for the developing world, where you know, they have a
lot of debt priced in dollars and it becomes more and more unaffordable as the as the dollar increases, and then back here in the UK and in Europe we're seeing a sort of central bank divergences as the Eurozone Central European Central Bank and Bank of England look like they may be going in opposite direction or moving significantly earlier than the FED.
Just to back up a little bit on the US economy, the people haven't been tracking it that closely. How do we get it all so wrong? I mean, there are predictions for a recession in the US. This year, we had the fastest hiking cycle in recent memory, and yet the IMF. What you're just saying now is the IMF saying the US economy is overheating. How is that possible
with interest rates where they are? And how did the whole world and all the economists and all the market traders that everyone get it all so wrong.
Well, as someone said that the Inflation Reduction Act is one of the what they think is one of the cathalytic factors here, and as they said, it doesn't increasing, it doesn't do what it says on the tin, it's doing the opposite. So there's a hell of a fiscal.
Stick because it's stimulating manufacturer.
Yeah, there's.
Huge hor money.
There's a huge amount of money going into the US economy, and there's all these concerns about debts spiking up to unsustainable levels there, et cetera. And that is what is driving the economic growth in the US. And it is remarkable. I mean, across the world there hasn't been this recession that was anticipated by as a result of much higher interest rates. I mean the UK had that, you know, it's had that tiny little technical recession, but we're already out of it, it seems.
I mean, what I loved was twenty twenty three because we were expecting a flat lining economy. Then it was in a recession, then it was growing. I mean, it's true that everything was all over the place, but part of it is also reshoring, right, So the US economy is bringing back so much of their manufacturing that that kind of boosted everything seems to have them happening at the same time. So after COVID people are spending, there's
a lot of immigration that's helping with productivity. So it's almost like the perfect storm to the upside for the US economy.
Yeah. Yeah, So the Made in America policies of Biden, massive, massive, fiscal spending those two things, and have seen that there has definitely been a massive increase in space power, living standards are improving, GDP is growing really fast, and the IMF estimates that the US economy is now zero point seven percentage points above what is sort of it's it's actual speed limit, which effectively they'll be saying, you know, all else equal, there should be rate rises, and obviously
they've just they've just started, they've just started to hold rates after a massive increase in rates. Two.
So, a few weeks back, I saw commentary that maybe in the States the FED would be inclined to do a cut as a as a helping hand to Biden. That now sounds like that might be for the birds the.
Current juncture, that definitely looks extraordinarily unlikely. And obviously J Powell, the head of the FED, has has pulled back and he's he's he's definitely signaling that they're not going to be cutting anytime soon. Seems extraordinarily unlikely that they are actually going to raise rates as the IMF forecast would suggest. But they but they don't look like they're going to do any interest rate cuts.
I mean, obviously it's also important, isn't it what the central bankers say and everyone poor particular cleap of the fair everyone pause over the exact phrasing the sentences. Every comma or full stop means something. But there is a theory is they're not that by him saying that they were going to be or signaling rate carts earlier this year has actually added to inflation because people have baked in already that that was coming. So is it? Is it?
Pal's full? There's the messaging. I mean, I know it's you know, it's an impossible art, isn't it being a central banker? But did they get the messaging wrong? Is that why everyone mispriced where inflation was headed? Well?
Inflation was falling quite quickly last week. Actually, Jeremy hunt in the out in the US. When he was out in the US, he actually suggested that you can declare victory, UK can declare victory over inflation. And that's effectively what what had happened in America. They effectively declared victory over inflation and then inflation.
But then the very next day, right the very next day, the drop wasn't as much as was.
Effected exactly, and then and so what you're seeing is the inflation persistence that really that underlying you know, the way wages rising services which services, inflation is proving sticky and so they haven't been able to squeeze inflation out as easily as they thought in the US, and the fear would be for you know, the read across to the UK would be that maybe we still have very
high underlying measures of inflation. And the fear is that is that, you know, we have also going to find that we are also going to find it more difficult to squeeze out these last vestiges of inflation.
But the difference, I guess here rather depressing me is that we don't have going along with that inflation roaring GDP growth boosting, you know, large increases in domestic manufacturing. So the Britain finds itself, as you said earlier, it's just emerged from a very mild technical recession, but a recession less. So we're nowhere near where the US is in terms of great.
Yeah, well exactly that was the That was the IMF analysis in their World Economic Outloo. Basically, both the Euros and UK are operating below what the capacity of the economy is, which means that we've you know, we in theory do need to cut rakes to just boost that sort of demand level to get to get the economy going at it, growing at its speed limit as economists like to term it. So we are in a very
different place to the US. The economy it's looking like it is picking up at the moment, so that's definitely positive, but it's not going gangbusters at all. I mean, obviously we're growing at zero point five percent this year according to the IMF, which is pretty miserable.
Really, just to sort of remove ourselves from America and step back to where we are right now, which is the UK. Tell us about Andrew Bailey, I'm kind of fascinated by him and by his Munch Policy Committee. Now, firstly, they is an institution, seemed kind of gloriously free wheeling and that they'd say very different things on very different days. Is that your impression is that to me it seems quite healthy.
Yeah. I think this is part of the way that the bank operates, which is particularly they've got four external members, so they've got five on the Monetary Policy Company, five internals, so five will represent exactly what the Bank of England think. So they would you'd expect them to move more as a sort of homogeneous mass. And then the five externals are there effectively to challenge you know, consensus opinion, and you know, so that the idea is to is to
break group think. And if you think back to the Carneie days where you know, group think was an issue became an issue in the political sphere for why why does the bank all seem all all of the members of the NPC all seem to vote the same way. We should be having checks and balances on monitary policy
decision making. So the fact that Megan Green and Catherine Mann in particular have been you know, distinctly more hawkish than recent comments from the governor Andrew Bailey or his deputy Dave Ramsden, you know, just is does show that the committee is working as you say it is. It is healthy to have.
So I wouldn't get that at the top of a political party, and maybe maybe you would. It's refreshing because it is a genuine dialogue and I think probably both views are valid, right, So it's not that one is more valid than the other, but it's just difficult to you know, one day we think, oh, right, Bailey's gearing up to cut quite soon, and obviously that has an effect on the markets, and then the sort of you know, a day and a half later you get somebody from his team saying something different.
You'll have different governors depending on their characteristics, on their personalities. And Andrew Bailey is definitely the kind of person who is quite happy to tolerate dissent and does and doesn't see it as something that undermines him, although you know,
externally it can look like he's undermined. You know that he may want to vote in one direction and others on the committee may vote against him, and he could We haven't seen it with Andrew Bailey, but he could potentially be outvoted and as the governor, that might look like he's a weak governor. Mervin King was outvoted a few times when he was governor, but that I don't think it doesn't act Actually it doesn't actually undermine the governor's authority or the institution.
But you know, to Allgo's very good point. They did have to get Ben Bernanke to do a review on communications at the Bank of England. So you have people like Madam and Elieren saying actually it's refreshing and you know, you have all views and so you can assess. But then they had to get an external former Fed president to look at how it was working because markets were complaining that they weren't getting the right information.
Yeah, that the market reaction to how the bank communicates is is a tricky one because because there isn't a as you say, because there isn't a single voice. Bankei's review doesn't resolve that because basically these people, these are supposed to be people with their own individual opinions on things.
But it it is, it does help. What he's proposing does help communicate, you know what, what they see the economic outlook to be the he's he wants to improve the communication of their forecast, of their ability, you know, of of the way that they see policy will evolve as which is a bit more like the American system where there's the dot plot, so you can see see it's not going to be the dot plots, but you can see something which would indicate the way policy should move.
And at the moment they don't really provide that. In fact, they don't provide that at all, which is a much more confusing way of communicating.
So my favorite moment of the press conference is sometimes where someone says, but the market was expecting this, and usually I mean it's happened twice where Governor Bailey says, well, Bloomberg Economics got it right.
Speaking of Bloomberg Economics is predicting that the bank starts to cut in the summer, and lots of other people banks are predicting that too, but traders are not so help us on pick that.
This is another tricky one. And actually this has seemed to be one of the main issues that Andrew Bailey was trying to address out at Washington at the IMF. But so the market path in the UK for rate cuts has a first rate cut happening in I think it's even moving as we're speaking, but in around September, and it pushed the first rate cut out to the market had pushed the first rate cut out to November.
At one point.
Part of this is because our market path, our market is affected by what happens in the US, and because because the Federal Reserve is such a powerful global institution, it changes the outlook in the way the markets price everything, and so the outlook for the UK then looks different, and that effectively creates a communication problem for the Bank of England because they have their own vision of what the market pass should be and at one point this
year they thought the indication seemed to be that first rate rice could be in June. If it's not going to happen until November according to market to the markets, that seems extraordinarily unlikely under current forecasts. So the Bank of England officials are trying to talk the market round into sort of stripping out this this sort of Fed premium that's sort of priced into the UK market to try and get it back on track. And this is.
I mean, it's like the Fed's gravitational pull and what it does to dollar. It's I mean, every time essential banker says, well, we focus on our own economy, it's like, well, yeah, sure, buddy, but everything around you is changing.
So if the FED doesn't cut interest rates until the end of the year or maybe next year, and we and we wait in the UK, we're just going to punish our economy. But the but the difficulty for the bank is that then we would have more inflation because twenty percent of the basket of currencies that were measured against is the dollar, and so you know, you they
have to think about their second round effects. And this was the discussion in terms of BOE policy at the IMF was, you know, if the US isn't going to cut till much later and the UK will if there is a sterling reaction, you've got factor that into your thinking of how many cuts you're going to be doing, because you're going to get some inflation back into the
system just by cutting interest rates. So it is, it is confusing, but it is and it reques wise clear communications which obviously you know haven't been perfect in the past and as the world, but they're definitely moving towards this. This the ability to move at different times, so the first cut can come in the UK and in the European at the European Central Bank before the FED without without these severe repercussions.
That's do we really need to be I mean, it fills a little bit from everything you've been saying for that. You know, the market is a few steps behind here, and why do we need to cut rates in the UK. You know, we hit the footze hundred hit a record yesterday. We're taping this on Tuesday, right, we had a record in the UK stock market. We've seen reports that house prices of stabilizing, our asking prices are going up a
little bit. We're out of that technical recession. That doesn't really add up to me as a moment when you start cutting interest rates, does it, And especially if inflation, as Allegra said, is proving stickier than it was supposed to take.
You speak day like a man who's not thinking about politics shouldn't be either.
Yeah.
I actually obviously they're very if you ask them, they are absolutely adamant that politics doesn't come into their thinking at all.
Of course, not part of.
The reason that the economy is doing better, as you were saying earlier, Davis, because interest rates the market public interest rates had fallen quite sharply, so that effectively had brought in lower borrowing costs for mortgage for mortgages, and and and commercial and small businesses as well. You know they they would be facing lower lower borrowing costs. The reason why you have to I think rates have to
be cut as well. The banks. The bank's own internal analysis is that you know, the stable rate, the interest rate that we need in the UK is significantly below five and a quarter percent, so you can cut to say four and a half or wherever it ends up being without Actually, you know, if you've got your foot on the break at the moment, you're just easing the foot off the break rather than putting it on the accelerator.
So that's that just can help growth in general. But also, you know, small businesses are paying off debt rather than investing. You know, companies are worrying about future debt sustainability issues, Households are being are still having to reset onto higher rates, and.
That's a really extended process and it's.
Very because of the fixed rate phenomenon here. But so so you know, there is there is pain that is still coming through the economy. So it's it's and the idea, the dream, certainly from the political point of view, is that you get this soft landing where you know, inflation comes down to its two percent and you just and you just get the economy just going taking off at the same time corflation comes down, and yeah, and then exactly, and then the election is held in October or whenever it is.
I read in maybe one of your brilliant pieces there was an analyst quoted as saying we shouldn't really have a rate cut this year, or maybe it would be November December, but maybe there will be one. I'm quoting here as a political favor to a government that at some point is going to want to have an election.
How does that work?
What is that actual relationship as far as you can tell, Yeah, no, I am quoting somebody.
Yeah, yeah, it's a.
There was that there some It's definitely in the reason some people, some people do.
Do think that the bank has to get ahead ahead of the game here, because if it's necessary to cut rates economically, and you're already in the process of an election, so there's the campaign has started, et cetera. You cut rates at that point, say three weeks after the election election is called. I mean, it is going to become a massively political issue and there will be cries of foul play about the bank doing it if they.
Clear you think that?
Is it a rule or is it an expectation that they wouldn't do anything during an election.
I don't think. I think they wouldn't do anything during an election. So I went back through the data, and they did do it during an election campaign once. I think it was two thousand and one, but it was like two days after the election was cooled, so they
were obviously already planning it, but they wouldn't. I don't think they would want to start cutting in an election if they were if they were already you know, done a rate cut or possibly two rate cuts, and then you go into the election, and then you have to keep cutting rates because the economy is saying that. It makes it clear that you really need to. I think they could continue doing it at that point, but they don't. But they need to get ahead of the game here,
otherwise they can inadvertently be dragged into politics. And the thing I think the bank desperately wants to do is to avoid being dragged into politics.
Phil Aldrick, thank you so much, Thank you my pleasure.
Thanks for listening to this week's In the City from Blomberg.
This episode was hosted by me Francin Laqwaw with David Merritt.
It was produced by Summer Sadi, with additional editing by Blake.
Maple's Brendan Newman is our executive producer. Sage Bauman is head of Podcasts Special Thanks to Phil Aldrich.
Please do you subscribe, rate, and review wherever you listen to podcasts