Full story: Fed chair says he will not resign even if pressured by Trump after interest rate cut
US Federal Reserve chair Jerome Powell said he would not resign if he received any pressure from Donald Trump’s new administration to step down as the central bank lowered interest rates by a quarter-point Tuesday afternoon.
Trump has been a persistent critic of the Fed and its independence, calling its officials “boneheads” in his last administration and arguing that he should have a role in setting interest rates.
Responding to a question as to whether he would resign if Trump asked him to leave his role, Powell responded with a blunt “no”. Powell also said the White House demoting Fed governors from their leadership roles is not “not permitted under the law”.
The Fed lowered interest rates by a quarter point on Thursday, knocking them down for the second time in a row as inflation continues to ease and a Trump presidency hangs over the central bank.
Rates now stand at 4.5% to 4.75%, down from a decades-high level of 5.25% to 5.5%. The Fed lowered interest rates for the first time since 2020 in September, by a half point.
More here:
Goodnight! GW
Fed cuts rates: What the experts say
Sonu Varghese, global macro strategist at Carson Group, says today’s decision to lower US interest rates by a quarter of one percentage point was not a shock:
No surprises from the Fed as they cut rates by 25 bps, in an effort to recalibrate policy as they see both inflation and employment risks being in balance
The Fed is going to closely follow the data going forward, and will likely move gradually rather than making big moves (like they did in September)
Powell does not seem inclined to predict where policy rates will be further out, nor make any predictions of what they expect for fiscal policy impact on the economy.
James Knightley, chief international economist at ING, predicts the Federal Reserve will manage one more rate cut before Christmas:
In terms of where we go from here, inflation is looking better behaved and the jobs market is cooling but not collapsing, so the Fed is in a position to continue loosening monetary policy closer to neutral gradually. We think they will cut by 25bp again in December, but the outlook thereafter is less clear and there is a strong chance of a pause at the January FOMC meeting.
Previously, the market was expecting the Fed funds rate to bottom somewhere in the 3-3.5% area by next summer. With Donald Trump winning the presidency, his key policy thrusts are extended and expanded, including tax cuts, tariffs, and immigration controls. This may keep the growth story more supported in the near term, but there is likely to be more concern at the Fed about the inflation implications from trade protectionism and labour supply constraints. As such, the market has moved to price a slower, more gradual easing cycle with a slightly higher terminal rate of 3.5-3.75%. We agree with this right now.
Salman Ahmed, global head of macro & strategic asset allocation at Fidelity International, says it’s too soon for the Fed to respond to “Trumpflation”:
“As expected, the Federal Open Market Committee (FOMC) cut rates by 25bps today and tweaked the language to add a degree of caution when it comes to the future path of monetary policy. Chair Powell indicated that for now elections will have no impact on the outlook but looking at the proposed policy agenda, 2025 may be a different story.
“Even for December, data conditionality was raised a notch as Powell backed away from any guidance on pace and size. All in all, we think December is a close call and terminal rates are likely to bottom at higher level than priced given scope for reflationary fiscal driven policy next year. Indeed, if the reflation impulse and tariff policy driven inflation comes back, hikes may have to come to the table.”
After being adamant that he wouldn’t say anything today that “relates directly, or indirectly to the election,” Jerome Powell did so anyway.
Rogier Quaedvlieg, senior US economist at ABN AMRO Financial Markets Research, says the Fed chair gave us two important statements at today’s press conference.
First, on the question whether he would step down when asked to leave, the brief response was ‘No.’ He later added in response to a different question that it was not permitted under the law for the president to remove the Fed chair.
Second, he stated that the elections will have no effect on Fed policy in the near term. He explained that the Fed would carefully assess and model fiscal policy changes as they are taking shape, and incorporate them into projections when finalized. But they are always just part of the model, and the overall trajectory of the economy, not individual fiscal policies, is what determines monetary policy.
Finally he added, ‘We don’t guess, we don’t speculate, and we don’t assume.’
Updated
And finally…
Q: Would it be appropriate to undershoot your inflation target, to help people catch up after the impact of higher prices?
Powell says that’s not how the Fed’s framework works, and says low inflation can also be a problem.
[Why? He doesn’t say, but basically it’s bad for consumption; people delay buying decisions because prices might be lower, or at least not much higher, in future]
Fed's plan for stagnation? Not to have stagflation.
Q: What is the Fed’s plan if we start to see stagflation?
Powell says the Fed’s plan is not to have stagflation, so it doesn’t have to deal with it (!)
He explains that policymakers are executing a balancing act, as changes to interest rates affects the two sides of its mandate in opposite ways (lowering borrowing costs helps employment, but is inflationary, and vice versa)
Q: Can you rule out an interest rate hike next year?
Powell won’t make any promises that far away, but it’s definitely not the plan.
That plan is to move interest rates gradually down to neutral levels.
Powell: The world went through a global inflation shock
Q: Many average Americans are not feeling the strength of the economy in their wallets – what’s your message to them?
Powell says the Fed knows people are still experiencing the effects of high prices, and “totally respects” how people feel about the economy.
He point out that the US was far from the only country to suffer rising prices, saying:
We went though, the world went though, a global inflation shock.
Inflation went up everywhere, and it stays with you because the price level doesn’t come back down.
Powell adds that it takes several years of real wage growth to recover from that; that’s what the Fed’s trying to do.
It’ll be some time before people regain their confidence, he adds.
Powell says it is “not permitted under the law” for a president to remove a Fed chair; asked whether president can demote “governors with other leadership positions” (ostensibly about Michael Barr, Fed vice chair for financial supervision); Powell said there is NO legal authority…
— Liz Ann Sonders (@LizAnnSonders) November 7, 2024
Here’s a video clip of Jerome Powell stating that he can’t be shoved out of the Federal Reserve hot seat by the occupant of the Oval Office:
BREAKING: Federal Reserve Chairman Jerome Powell just defiantly told a reporter that If Trump tries to fire him, he can't.
— Brian Krassenstein (@krassenstein) November 7, 2024
Powell is right.
Reporter: Do you believe the president has the power to fire or demote you?
Powell: Not permitted under the law. NOT PERMITTED UNDE… pic.twitter.com/V1yz6EfGRF
Powell: President is "not permitted under the law" to fire me
Q: Does the president have the power to fire or demote you? Has the Fed determined the legality of a president demoting any other governors with leadership positions.
“Not permitted under the law”, Jerome Powell replies fimly.
Q: Your predecessors, Greenspan and Volcker spoke up loudly when they were concerned about large budget deficits – will you do that too?
Jerome Powell replies that the US government’s fiscal policy is on an unsustainable path
The level of debt relative to the economy is not unsustainable, but the path is, he explains, and ultimately it is a threat to the economy.
Q: What is the Fed hearing from company CEO’s about where the economy is going?
Powell says he’s had a really interesting set of discussions, and the comments are encouraging – that the labor market is back to normal.
“People feel good about where the economy is. Demand is obviously pretty strong”.
This is a strong economy.
Powell adds that it’s remarkable how well the US economy is doing; it’s outperforming its international peers.
Fed’s Powell:
— Faisal Islam (@faisalislam) November 7, 2024
US economy is performing “remarkably well” outperforming global peers and “if anything people feel next year could be even stronger than this year”…
Rather setting up a story that Trump can not claim credit for an economic revival that is already well under way.
Updated
Powell says he would not resign if Trump asked for his resignation
Federal Reserve chair Jerome Powell has declared that he would not quit his job running America’s central bank, even if Donald Trump demanded it.
He’s given a terse, one-word answer, to the question at today’s press conference.
Q: Some of the president-elect’s advisors have suggested you should resign. If he asked you to leave, would you go?
“No”, replies Powell.
Q: Can you follow up? Do you think, legally, you’re not required to leave?
“No”, Powell repeats (appearing to purse his lips too).
Powell slams door on Politico reporter who asked about potential pressure to resign by Trump administration.
— Matt Birch (@themattbirch) November 7, 2024
"No." X2
That look is priceless. 😂 pic.twitter.com/uAMO0zksJd
Some history: Trump picked Jerome Powell to lead the Fed in 2017, rather than reappoint Janet Yellen.
But by 2019, Trump appeared to be regretting his hiring choice, upset that the Fed was keeping interest rates too high, and denied threatening to demote Powell.
Reuters reported today that Trump and and his economic team’s currently think Powell should remain leading the central bank until his term expires in May 2026
Updated
Q: Did you learn anything about what the Americans think about the economy from the election result?
Fed chair Jerome Powell says he won’t talk about anything that relates directly, or indirectly, to the election.
Won't stop folk in the room asking about it though FFS
— Michael Brown (@MrMBrown) November 7, 2024
*POWELL: NOT GOING TO TALK ABOUT ANYTHING RELATING TO ELECTION
Q: Core PCE inflation is 2.7% on a 12-month basis, over your target, so why didn’t you pause rates today?
Jerome Powell says shorter-term PCE measures show less price pressures.
Q: The latest economic data has been strong, and the stock market jumped yesterday – so why cut interest rates at all?
Powell says the latest strong economic data is “a great thing, and highly welcome”.
But monetary policy is still restrictive today, even with the new rate cut. And while the job isn’t done with inflation, the Fed believes it’s appropriate to “recalibrate its policy stance” with a cut today.
Q: Could the rise in US borrowing costs be caused by expectations of higher deficits?
Powell won’t be lured into speculating about what’s driving bond yields.
[the backdrop to the question, though, is the calculation that Donald Trump’s fiscal plans would add $7.5tn to the US national debt].
But he gives an example – if Congress is rewriting the tax code, the Fed would follow its work, and assess the likely impact ready for when the law is passed.
Then that work (along with a lot of other information) also goes into the Fed’s models.
That process happens all the time, with any administration – the next administration is “no different”, he insists.
Q: Why have you changed the language of your statement (It now says inflation has made “progress”, not “further progress”, and has dropped a reference to gaining ‘greater confidence’ that inflation was on target’)?
Powell says the Fed isn’t trying to give a signal to the markets, it’s more that those tests were met at the last meeting when it started cutting rates.
Q: What will you be looking at in December when you next set rates?
Powell stays firmly on message, saying that like at every meeting, Fed policymakers will look at the incoming data and how that affects the outlook.
He adds that the Fed is on a path to a more neutral stance, but it depends “where the data leads us”.
Q: You have noted before that higher borrowing costs can weigh on economic activity – are the threats from higher bond yields different today, now inflation is nearer your target?
Powell says he has watched the run-up in bond rates, but they’re still below their levels last year.
The Fed does take tighter financial conditions into account, he says, but we’re not at the stage where it feels any need to respond.
Powell: We won't guess what Trump administration will do
Onto questions.
Q: How is the Fed assessing the likely economic policies we will see from the next administration?
In the near term, the election will have no effects on our policy decisions, Fed chair Jerome Powell replies.
He then points out that the Fed doesn’t know what the timing and substance of any policy changes would be, so they can’t assess the effect on the economy.
We don’t guess, we don’t speculate and we don’t assume.
Inflation (a key factor in the US election) has ‘eased significantly’ in the last two years, Fed chair Powell declares.
The PCE inflation measure shows that prices rose 2.1% in the year to September, Powell points out. Ie, just above Fed’s 2% target.
[The problem, though, is that this still leaves the price level much higher than a few years ago, which is why many American households feel poorer]
Powell says recent employment gains would have been higher without the impact of labour strikes and the hurricanes which hit the US in October.
Powell: US economy is strong overall
Federal Reserve chair Jerome Powell begins today’s press conference by telling the assembled media that the Fed is “squarely focused” on achieving its duel mandate of maximum employment and stable price.
Powell says the economy is strong overall, while the labor market has cooled from overheated state but remains solid.
He adds:
We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2% goal.
Watch the Federal Reserve press conference here
The Fed will give a press conference in a few minutes to explain today’s decision to cut US interest rates.
It’s being streamed here (currently playing some soothing piano music; ideal after this week….)
Updated
Fed: The economic outlook is uncertain
There’s no direct reference to the presidential election in the Fed’s statement – but the US central bank does cite the ‘uncertain’ economic outlook.
The Fed’s FOMC committee say:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Fed cuts rates
America’s central bank has followed its British counterpart, with a quarter-point rate cut.
The US Federal Reserve has lowered interest rates for the second time in a row as inflation continues to ease and a Trump presidency hangs over the central bank.
Rates now stand at 4.5% to 4.75%, down from a decades-high level of 5.25% to 5.5%. The Fed lowered interest rates for the first time since 2020 in September, by a half point.
Late last month, the personal consumption expenditure (PCE) price index, a closely watched measure of inflation, dropped to 2.1% – close to the Fed’s inflation target rate of 2%. The main measure of inflation, the consumer price index (CPI), was 2.4% in September, the lowest it has been in three years.
In a statement, the Federal Open Market Committee (FOMC), the Fed board that sets interest rates, said:
“Inflation has made progress toward the committee’s 2 percent objective but remains somewhat elevated.”.
AXA Investment Managers are sticking with their forecast of one quarter-point cut to UK interest rates per quarter next year.
That would bring Bank rate down to 3.75% at the end of 2025.
Gabriella Dickens, their G7 econmust adds:
Further ahead, though, we think there is a risk that ongoing sluggish demand – as households struggle to ramp up spending in a world where real wages are rising only modestly and mortgage rates are higher than they otherwise would have been – will lead to excess supply opening up earlier than the Bank anticipates, exacerbated by our expectation of a material slowdown in the US in 2026.
As a result, we think there is scope for additional cuts into 2026, whereas the market has Bank Rate broadly flat from the end of next year.
Bond trading giant Pimco is “sceptical” that the UK budget will drive inflation meaningfully higher.
Pimco economist Peder Beck-Friis says:
While the budget increases near-term borrowing, fiscal policy is still set to remain tight ahead. As a result, we continue to expect inflation to cool and the BOE to eventually pivot to a more dovish stance, cutting more than what is priced into financial markets.
As such, we haven’t changed our view on gilts, which we continue to find attractive.
Bank of England summary
Time for a recap:
The Bank of England has cut interest rates despite warning that Rachel Reeves’s budget will complicate its battle against high inflation by keeping the rate above its 2% target for a year longer than previously anticipated.
In a decision widely expected in financial markets, the Bank’s monetary policy committee (MPC) voted by a majority of eight to one to reduce the base rate from 5% to 4.75% to ease the pressure on households and businesses from high borrowing costs.
However, the central bank said the chancellor’s tax and spending plans would add to inflationary pressures even as they contributed to faster economic growth, in a development likely to be seized on by the government’s critics.
Casting its verdict on last week’s budget, the Bank said it expected the chancellor’s £70bn of additional spending backed by higher taxes and borrowing to add about 0.5 percentage points to headline inflation and 0.75% to gross domestic product (GDP).
It said the impact would be driven in part by Reeves’s plan to raise the rate of employer national insurance contributions (NICs) and the national living wage, in a development that led one member of the MPC – the external economist Catherine Mann – to push for interest rates to be held at 5%.
Andrew Bailey, the Bank’s governor, signalled that borrowing costs were still likely to come down in future, although cautioned against expectations for rapid action amid lingering concerns over above-target inflation becoming entrenched in the economy.
He said:
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much. But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
During a press conference in London, Bailey was quizzed about his concerns about the US election. Bailey said the Bank would work with Donald Trump’s administration, but also warned that the “fragmentation of the world economy” must be avoided.
Bailey also explained that the increase in UK employers’ national insurance contributions could lead to higher prices in the shops, lower profit margins, smaller wage rises or job cuts – or a combination of all four.
City economists say it is unlikely that the Bank will cut rates again in December.
Here’s the full story:
The Bank of England now faces a “key and new uncertainty” about how companies respond to higher National Insurance contributions announced in the budget, says Sandra Horsfield of Investec.
Horsfield explains:
Should they pass these on in the form of higher prices, this could be a new upside risk to inflation persistence – a line of thinking embedded in Catherine Mann’s hawkish dissent.
On the other hand, if pricing power is limited, companies may compensate for this by lowering planned wage growth and staff levels, which would mean more downward influences on inflation. The MPC has chosen a middle path as its baseline, but stressed uncertainties on both sides – and its willingness to react should that judgement be wrong.
City firm TS Lombard predict the Bank will manage five more quarter-point cuts to UK interest rates by the end of next year.
That’s despite the inflationary pressures from the Budget, and possibly from nre US tariffs.
TS Lombard told clients:
We still pencil in Bank Rate at 3.5% by yearend 2025.
To us, the balance of risks looks skewed to an accelerated easing cycle, i.e., a scenario where faltering employment and quicker wage disinflation all but eliminate policymakers’ remaining concerns about the persistence of domestic CPI inflation – with lower interest rates helping to keep the public debt interest bill in check.
ING developed markets economist, James Smith, agrees that another rate cut next month is unlikely:
“Nobody will be very surprised to learn that the Bank of England has cut interest rates this month. Bank Rate has been taken a quarter point lower for the second time this year, which leaves it at 4.75%.
Instead, everyone wanted to know what the Bank made of the latest budget. Big spending increases will, investors have assumed, reduce the scope of the BoE’s rate-cutting cycle.
“In short, the Bank is refusing to be drawn on where interest rates are likely to go next. It was always very unlikely that Governor Andrew Bailey would also choose to double down on his comments a month ago when he hinted that rate cuts could become “more aggressive”.
Interestingly, the Bank has used its latest Monetary Policy Report to play down the latest fall in services inflation which, at 4.9%, is well below the Bank’s forecast from August. Like us, it expects those numbers to stay broadly unchanged into the end of the year.
Smith also predicts the Bank will have managed six more cuts by next autumn:
If services inflation continues to fall more meaningfully next year, as many of the surveys seem to indicate, then we think we are still likely to see rate cuts accelerate.
Remember, markets are pricing fewer than three rate cuts from here on in. That would leave UK rates more than two percentage points above the European Central Bank in a year or so. We don’t think that sounds particularly realistic. Our view is that rate cuts will be cut at every meeting from February until rates reach 3.25% next autumn.”
The TUC have welcomed today’s cut to UK interest rates, saying it will help households and businesses.
TUC General Secretary Paul Nowak hopes the Bank will press on with further cuts:
“Today’s rate cut was the right decision, and the Bank of England should now keep moving with further reductions.
“With inflation below the government’s target, ongoing cuts will support the economy and relieve cost of living pressures on households and businesses.
“It’s good that the Bank’s forecast has recognised the gains to growth that October’s Budget will bring.
“With increased investment, stronger public services and lower interest rates, the process of repairing and rebuilding Britain has begun.”
BREAKING 🚨 | Interest rates have been cut to 4.75%.
— Trades Union Congress (@The_TUC) November 7, 2024
Low inflation green lights further rate cuts to relieve cost of living pressures.
The process of repairing and rebuilding Britain has begun.
Over in Prague, the Czech National Bank has cut its interest rate, following both the UK and Sweden today.
At its latest policy meeting, the CNB Bank Board lowered its two-week repo rateby 0.25 percentage point to 4.0%
It has also lowered the discount rate by the same amount to 3.0% and the Lombard rate [charged by central banks on short-term loans to commercial bank backed by collateral] to 5.0%.
December rate cut looking unlikely
UK interest rates seem unlikely to be cut again this year.
The Bank of England has one more scheduled meeting, in mid-December, but the money markets indicate a rate cut from 4.75% to 4.5% is just a 21% chance.
Professor Costas Milas, of the University of Liverpool’s Management School, tells us that another cut is unlikely before early 2025:
The latest Monetary Policy Report suggests that by keeping Bank Rate at its latest level of 4.75%, UK inflation will remain above the 2% target up until 2026Q1. This inflation persistence relates, to some extent, to the inflationary measures of the latest Budget. Notice, however, that as I explained recently in an LSE Business Review Blog, Divisia M4 is a powerful predictor of UK inflation.
Divisia M4, which recorded strong negative growth rates previously, has picked up substantially in 2024Q3 (it jumped up from -4% to -0.6% over the last three months). The strong increase in money liquidity, expected to accelerate in the forthcoming months, will push up inflation over and above the fiscal measures of the budget.
Bank Rate cuts will remain on hold, for now.
Trump trade drives Wall Street to record high
Over in New York, the US stock market has hit a record high for the second day running.
The S&P 500 index, the narrower Dow Jones Industrial Average and the tech-focused Nasdaq all hit new peaks.
The S&P 500 is up 0.4%, while the Nasdaq gained 0.7%.
This follows a strong post-election rally yesterday….
S&P 500 had best post-election trading day ever and best day since November 2022, surging 2.5%; massive divergence in performance of large cap segments with 9% separating best-performing Financials, up 6%, from laggard Real Estate, down 3% pic.twitter.com/WPwrR2oFLx
— Liz Ann Sonders (@LizAnnSondersxz) November 7, 2024
…which drove up the combined wealth of the world’s richest people by a record $64bn.
Updated
Rachel Reeves may count herself lucky that the news this week has been dominated by Donald Trump’s return to the White House rather than the Bank of England’s latest decision on interest rates, our economics editor Larry Elliott writes:
It was always nailed on that the Bank would deliver a November cut in interest rates, and borrowing costs have duly been shaved from 5% to 4.75%. Of far more interest was what happens next and here the message was that the budget has made the Bank’s monetary policy committee (MPC) warier about the pace of future policy easing.
The Bank estimates that the increases in spending announced by Reeves last week will mean quarterly growth in a year’s time will be 1.7% as opposed to the 0.9% it was forecasting in August. Inflation, as measured by the consumer prices index, will be 2.7% rather than 2.2% and it will take a year longer, until early 2027, for the government’s preferred measure of the cost of living to return to its 2% target.
Over in the US, the number of new Americans seeking unemployment support remained low last week.
The number of seasonally adjusted initial claims for jobless benefits rose to 221,000 last week, an increase of 3,000 from the previous week, but still a historically low level indicating the labour market remains robust.
US jobless claims remain low, holding in a range that's prevailed for the last two-plus years. This leading indicator suggests that the positive skew for the labor market will continue for the near term: pic.twitter.com/17YVomykw3
— James Picerno (@jpicerno) November 7, 2024
The path to future UK interest rates cuts has been “muddied” by Rachel Reeves’s Budget and the election of Donald Trump as US president, says Laith Khalaf, head of investment analysis at AJ Bell.
Khalaf adds:
Both these events have the potential to be inflationary, which would mean interest rates staying higher for longer. That doesn’t necessarily imply rates won’t come down, but the pace of decline is likely to be slower.
“The market is still pricing in another [UK] rate cut either in December or February, and then another one by May 2025. There are some more bullish voices out there, including Goldman Sachs who have forecast UK base rate to fall to just 2.75% by next Autumn. The fact the decision to cut rates was almost unanimous will put some powder in this argument. But if Donald Trump pushes ahead with a restrictive trade policy, that would really put the cat amongst the pigeons when it comes to UK inflation and interest rates.
Updated
Budget means Bank of England "won’t cut rates as fast and as far"
City economists have been digesting the Bank of England’s interest rate decision, and the monetary policy report it also released at noon.
Capital Economics have concluded that the budget means Bank of England won’t cut rates as fast and as far as it would otherwise.
They told clients:
While cutting interest rates from 5.00% to 4.75% today, the Bank of England implied that the Budget means rates will continue to fall only gradually.
We agree and due to the Budget (and not the US election), we have concluded that rates will fall slower to only 3.50% in early 2026 rather than to 3.00%. This still implies that rates fall below investors’ expectations of a low of 4.00%.
Q: And are bond vigilantes stalking the UK debt markets after the budget?
Governor Andrew Bailey says his assessment last week was that we are seeing a natural process working its way though.
But there will be “some quite sharp movements in prices”, as there were last week, as the happens.
And that’s the end of the press conference, with Bailey wishing our Larry all the best again.
Q: Was it usual to discuss the market response to the budget with the chancellor last week?
Andrew Bailey says he is now on his fifth chancellor since becoming governor (and the 6th since he was appointed!).
So I can speak with quite a bit of experience of different chancellors.
Frankly I talk to all chancellors regularly, and I talk to all chancellors about markets.
Bailey says the Bank invests a lot in market intelligence; it has a responsibility to share that with the Treasury.
Q: Will the uncertainty around the UK’s labour market be increased by the business tax increases in the budget?
Andrew Bailey cites the problems with the UK’s labour market statistics, where the Office for National Statistics has struggled to get enough people to respond to its surveys.
Monetary policy can’t be put on hold until those problems are fixed, he says, but it does make the job harder.
Q: Can you now see a scenario where you could move more aggressively on rate cuts, as you suggested to the Guardian last month?
Andrew Bailey repeats that there has been more progress lowering inflation than expected (CPI fell to 1.7% in September). If that continues, the Bank will respond to it.
Q: Do you expect a more volatile and less predictable US administration?
Bailey again refuses to speculate about how Donald Trump’s administration will behave.
Q: Did Rachel Reeves do a good enough job of preparing markets for her budget, by presenting her new debt rule during her trip to the IMF in Washington?
Bailey says he has discussed fiscal rules with the chancellor, and the market reaction to Rachel Reeves’s changes, and that it’s good that the chancellor has addressed the issue of fiscal rules head-on (reminder, she is moving the UK onto the PSNFL debt measure).
Q: What complicates your life more? An inflationary budget, or the prospect of tariffs?
Governor Andrew Bailey won’t speculate about tariffs, but points out that external shocks have been the bigger factors during his time as governor [that would include Covid and the Ukraine war].
Updated
Q: Is it reasonable to conclude that the outlook for inflation would be broadly consistent with your 2% target if the Bank made four more quarter-point cuts over the next year, as the markets expect?
Bailey emphasises that the Bank will take a “gradual” approach to easing policy – but won’t say if ‘gradual’ means one cut every quarter.
Q: The dollar strengthened strongly yesterday as the US election results came in, and bond yields rose – if that continues, how will that effect the UK economy?
Andrew Bailey points out that the UK’s interest rate curve – which shows where the markets expect borrowing costs to be – didn’t rise yesterday in line with the US.
However on Friday, when weak US jobs data hit the bond market, they did move together.
He adds:
It’s important that we see what the policies the new Trump administration decides to announce are. We’re not at that point yet.
The Bank of England’s regional agents have heard that UK firms have found it harder to pass on costs through higher prices in the last year, Andrew Bailey tells today’s press conference.
Q: Companies in the services sector will be hardest hit by the rise in employers’ NICs contributions. This morning, the boss of Sainsbury’s said it would be inflationary.
Are you being slightly optimistic with your inflation forecasts, such as for inflation?
Andrew Bailey says the NICs change “clearly raises the cost of employment”, and that he laid out the various channnels – wages, profits, prices, and employment levels – where the impact could flow through (as covered in this earlier post).
Bank deputy governor Clare Lombardelli says there’s “a lot of uncertainty” over how firms will respond to the NICs measures.
The Bank has assumed a range of responses, and has modelled changes to both wages and prices, Lombardelli explains, adding:
We also think it will change over time, and affect different firms in different sectors differently.
Updated
BoE: must avoid fragmentation of the world economy.
Q: Donald Trump says ‘tariff’ is the most beautiful word in the dictionary – do you agree? And what do they mean for a country’s growth and inflation?
Governor Andrew Bailey says there are “many words in a dictionary”, and he doesn’t have a favourite.
But on tariffs, he says:
We do have to watch very carefully the fragmentation of the world economy.
It’s important, so we have to consider those consequences for both monetary policy and financial stability objectives.
Frankly there are a lot of risks attached to the fragmentation of the world economy.
Q: How much of the recent increase in expectations for UK interest rates was due to domestic factors, versus international ones?
Andrew Bailey says the latest data on changes in the the interest rate curve shows quite a large international element.
Q: At what level of interest rates will interest rates no longer be restrictive?
There’s no danger of the Bank giving a straight answer to this one.
Andrew Bailey insists that the Bank does not have a level of neutral interest rates in mind.
But he does give some guidance – he doesn’t expect rates to fall to the very low levels we saw a few years ago, unless there is a major shock.
Q: How exposed is the UK economy to a potential global trade war? As we export more services than goods, are we more immune?
Andrew Bailey says the UK is an open economy, adding that he won’t make any presumptions or speculate about what may happen.
We will have to watch this very closely.
Bailey adds that there will be a “very open dialogue” between the UK and US governments.
Updated
Bank of England will work with Trump administration
Q: How does the Bank of England assess the risk of trade protectionism from the US election result?
Governor Andrew Bailey says the Bank always responds to announced policies.
He explains that the Bank works with all US administrations – mainly on financial stability, rather than monetary policy issues, adding:
We look forward to working with the new administration. We worked with the previous Trump administration, we work with the current administration. That’s our job, that’s what we do, without any presumptions.
Q: Your forecasts show inflation isn’t returning to target until the middle of 2027, compared with the middle of 2026 which you thought before the budget, so has the budget made your job harder?
Bailey says the ‘good news’ from the Bank today is that inflation has been falling faster than expected.
But there is “greater uncertainty out there”.
Firstly, greater global uncertainty “without doubt”.
Also, the Bank wants to see the impact that budget measures have on the economy.
Q: Has the market reaction to the budget been orderly?
[reminder, UK borrowing costs jumped after Rachel Reeves presented the budget on Wednesday].
Andrew Bailey says the market had been positioned for lower interest rates at the start of last week, and some of those positions closed as the market moved after the budget.
Then on Friday afternoon, the US election was the dominating event on the market.
Bailey says the Bank’s staff heard that investors were reluctant to take positions until they knew the result of the US election.
Q: Should households expect mortgage rates to be higher than they would have been otherwise, due to the budget?
Andrew Bailey points out that mortgage rates have fallen since the Bank’s last monetary policy report in August.
He doesn’t indicate that the budget will drive up mortgage rates, saying:
I don’t think that it’s sensible to conclude that the path of interest rates will be particularly different.
Larry Elliott applauded off the pitch
On to questions, and the first goes to my esteemed colleague Larry Elliott.
Q: Is the message from this report that interest rates will stay higher for longer because of the budget?
Andrew Bailey begins with a tribute to Larry, who is stepping down from his role of Guardian economics editor this month.
The governor says:
We all want to join together and thank you for everything you’ve done for British economics journalism, and wish you all the best for the future. It’s been a pleasure working with you.
Larry then gets a round of applause – a rare event at these press conferences.
As Bailey points out:
You are of course the first person ever to get applause in this press conference, because we will never.
Larry fans shouldn’t get too despondent (although I am) as he’ll still be writing his fortnightly column.
Onto the question, and Bailey points out that the Bank did cut rates today having seen the budget.
There is some upward effect on inflation, but the path of inflation – we think – returns to the target by the horizon.
Updated
Bailey: How employers might respond to NICs increase
There are different ways the increase in employers’ national insurance contributions announced in the budget could play out in the economy, BoE governor Andrew Bailey says.
It increases the cost of employment, he explains, and there are at least four potential margins of adjustments
Firms could pass it on through higher prices paid by consumers
They could absorb it through lower profit margins or higher productivity
firms could increase wages by less than they would otherwise
They could reduce employment.
Bailey won’t opine on the policy itself, but the Bank must respond to its consequences on inflation, he says.
On the budget, Bailey says overall, fiscal policy is still expected to tighten over the next few years.
But, the measures announced last week will reduce the amount of spare capacity in the economy, he adds, before outlining how budget measures will add 0.5 percentage points to inflation at its peak.
Interestingly, the Bank’s forecasts assume that fuel duty will push up inflation from the second quarter of 2026, even though chancellor Rachel Reeves froze it last week.
Governor Andrew Bailey then explains that the Bank must assess whether the remaining inflation pressures, which manifest in services price inflation and wage growth, will dissipate as global shocks unwind, or not.
Bank begins press conference
The Bank of England are holding a press conference now to discuss today’s decision to cut interest rates. You can watch it here.
Governor Andrew Bailey is explaining that inflation has fallen more than expected over the last year.
Oil and gas prices have been significantly lower than expected a year ago, he points out. Lower than expected food, core goods and services prices inflation has also pulled inflation down.
But, he adds that inflation is “expected to rise somewhat” in coming months, to around 2.5% by the end of the year.
The #MonetaryPolicyReport press conference is about to start. Watch here: https://t.co/icf0GlECA8
— Bank of England (@bankofengland) November 7, 2024
The pound has risen since the Bank of England’s announcement.
Stertling is up almost 0.5% today at $1.294 against the dollar, up from $1.29 just before noon when the rate decision – and the Bank’s latest forecasts – were released.
Bank: Budget will add to inflation, and growth
The Bank of England has calculated that Rachel Reeves’s budget last week will fuel inflation, but also lift the UK’s growth rate.
In its latest Monetary Policy Report, released at noon, the Bank says that measures such as a higher cap of £3 on bus fares, adding VAT on private school fees, and the increase in Vehicle Excise Duty from April, will push up the cost of living measure.
It estimates that the Budget is will boost CPI inflation (which was 1.7% in September) by just under ½ of a percentage point at the peak, “reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures”.
The increase in employer NICs is also assumed to have a small upward impact on inflation.
The Bank explains:
In the near term, the direct effects of the rise in the cap on single bus fares from £2 to £3 and the introduction of VAT on private school fees from January, and the increase in Vehicle Excise Duty from April, push up the MPC’s projection for CPI inflation from 2025 Q1 and Q2.
The measures announced in the autumn budget are also expected to boost the level of GDP by around 0.75% at their peak in a year’s time, relative to the Bank’s August projections.
Updated
Bank: gradual approach to removing policy restraint remains appropriate
The Bank of England says it is appropriate to take a “gradual approach to removing policy restraint” – ie, cutting interest rates.
The minutes of this week’s meeting say:
Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.
The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.
Bank split 8-1 on rate cut
Policymakers weren’t quite unanimous in deciding to cut UK interest rates today.
The Bank’s MPC voted by a majority of 8–1 to reduce Bank Rate by 0.25 percentage points, to 4.75%.
One member – the hawkish Catherine Mann – preferred to maintain Bank Rate at 5%, but was outvoted. Mann cited the increase in demand associated with the Budget.
The Bank says:
At this meeting, eight members preferred to reduce Bank Rate to 4.75%. There had been continued progress in disinflation, particularly as previous external shocks had abated, although remaining domestic inflationary pressures were resolving more slowly. These members put different probabilities on and risks around the three cases, but they believed that a cut in Bank Rate was appropriate at this meeting. They would continue to assess the range of evidence over time.
One member preferred to maintain Bank Rate at 5%. For this member, structural factors in wage and price-setting dynamics continued to draw out the underlying disinflation process, and CPI inflation was projected to remain above the 2% target until the end of the forecast period.
Wage developments might continue to be more robust than projected as firms and workers incorporated past and upcoming adjustments in the National Living Wage and National Insurance contributions. This, along with prospects for more robust demand associated with the Budget, was likely to support pricing opportunities for firms. In the face of these uncertainties, maintaining the current level of Bank Rate would allow time to evaluate whether these upside pressures would materialise.
Updated
Bank of England interest rate decision
Newsflash: The Bank of England has cut UK interest rates for a second time this year.
As City experts had predicted (see opening post), the Bank’s monetary policy committee have voted to lower Bank Rate by a quarter of one percentage points, down from 5% to 4.75%.
It’s the second cut this year, following August’s reduction, and comes after inflation fell below its 2% target in September.
The Bank will have made the decision having assessed last week’s UK government budget and Donald Trump’s election as US president.
European leaders have urged Donald Trump to avoid trade wars, maintain support for Ukraine and to refrain from unsettling the global order, as they arrive in Budapest for a meeting.
Reuters has the details:
“I trust the American society,” European Council chief Charles Michel said as he and others urged Trump to continue to support Ukraine, as they arrived at a meeting of nearly 50 European leaders in Budapest.
“They know it is in their interest to show firmness when we engage with authoritarian regimes. If the United States were weak with Russia, what would it mean for China?”
European Commission chief Ursula von der Leyen said it was now up to the European Union to be united. No EU member state on their own can manage the upcoming challenges, she said.
German government bonds are weakening today, following the collapse of its coalition government last night when Chancellor Olaf Scholz fired finance minister Christian Lindner.
With prices falling, the yield – or rate of return – on 10-year German bunds has risen by around 9 basis points, from 2.396% to 2.483%.
That narrows the gap (slightly) between German and UK debt; 10-year gilts are yielding 4.54% this morning.
Scholz said he had dismissed Lindner after he refused to suspend rules limiting new government borrowing. If that debt brake were lifted, Germany could issue more bonds.
Europe’s economy could see a surge in goods shipments from China if Donald Trump hits Beijing with new tariffs, argues analyst Rory Green of TS Lombard.
Green tells clients that this could lead to a wider proliferation of tariffs:
Beyond China, the impact of restrictions on PRC exports to the US is likely to prove disinflationary initially as Chinese manufacturers redirect sales to other markets.
In the first trade war, Europe was the primary destination and is likely to be so once again. Given the existing market pressure from Chinese competitors globally, we expect this initially deflationary surge in exports to be met with tariffs – not just from Brussels but also from other trade partners.
The proliferation of trade restrictions already under way will accelerate during Trump’s second term and, combined with increased China stimulus, may put upward pressure on global goods inflation.
Turkey is hoping that it could benefit from lower US tariffs under Donald Trump’s next presidency.
Turkey’s trade minister said today that Istanbul expects Trump to lower tariffs on its steel and textile exports.
Trade minister Omer Bolat told broadcaster AHaber:
“We expect that...customs duties will be reduced in our foreign trade, especially in steel and textile products.
Bolat added that Turkey’s defence and financial sectors could also benefit.
UK house prices hit record high in October
The average price of a home in the UK is at a record high but demand could slow as a result of policies in Rachel Reeves’s budget, Britain’s biggest mortgage lender has said.
Halifax’s monthly house price index found that the cost of the average home hit £293,999 in October, the highest ever recorded, outstripping the £293,507 reached in June 2022.
The 0.2% rise in October is the fourth consecutive month of growth, and brought the annual growth rateto 3.9%, from 4.6% in September.
Against the cost of living and rate odds; UK Avg house prices increase 0.2% in October to £293,999 beating the previous peak set in June 2022 of £293,507. The increase in growth was again led by Northern Ireland and Scotland, the South trailing behind @HalifaxBank pic.twitter.com/eLLZtalkA6
— Emma Fildes (@emmafildes) November 7, 2024
The figures suggest homebuyers shrugged off concerns about what would be contained in the chancellor’s debut budget, delivered at the end of October. However, Halifax said measures included in the speech could affect future demand.
Ukraine’s sovereign dollar bonds are rallying for the second day, up over 2%, as investors wager that Donald Trump’s return to the White House could end the country’s war with Russia.
Reuters has the details:
Longer-dated maturities saw the biggest gains, with the 2035 paper rising by more than 2 cents to nearly 50 cents on the dollar, its highest since the bonds were launched in early September as part of the country’s restructuring.
The country’s GDP warrant - a growth linked fixed income instrument that is still earmarked for restructuring - added 2.6 cents to bid at 76.4 cents, the highest since Russia’s invasion in February 2022, Tradweb data shows.
Trump once boasted he could end the decade-long Russo-Ukrainian war in “24 hours”, and his second presidency could be difficult for Ukraine, at a time when Russia is advancing on the battlefield at the quickest rate since 2022.
Analysts at RBC Capital Markets predict the Bank of England will be split on today’s interest rate decision, with a majority voting for a cut.
RBC explain:
We expect the Bank of England (BoE) to recommence its cutting cycle at its November meeting and look for the MPC to deliver a 25bp cut in Bank Rate to take it to 4.75%.
Our best judgement is that the Committee will vote 6-3 split in favour of cutting Bank Rate.
The Autumn Budget has provided the MPC with perhaps more to think about, particularly as regards the near-term outlook, than was anticipated in advance.
The plans set out by the Chancellor this week slow the pace of deficit reduction compared to those from March, which the August MPR forecasts was conditioned on, and would be expected to impact the Bank’s near-term forecasts for growth and inflation which will be released alongside the meeting.
We don’t think the MPC will necessarily adjust its language in the policy statement in response to recent events; key on the day instead will be how the Governor chooses to discuss the impact of the Budget and steer expectations for forthcoming meetings.
Goldman Sachs have cautioned that a trade war could threaten growth in the US stock market.
In a research note on the US election, Goldman say they are sticking with their S&P 500 target of 6,300 points in 12 months time – a 9% gain.
They tell clients:
Robust earnings growth should drive continued equity market appreciation into next year. We forecast EPS growth of 11% in 2025 and 7% in 2026, although those estimates may change as the new administration’s policy agenda comes into clarity.
The prospect of trade conflict poses downside risk to these estimates, while the potential for changing regulatory and corporate tax policy pose upside risks.
After losing ground yesterday, European stock markets are rallying today, despite the political crisis in Germany and worries of a looming trade war with America.
In Berlin the DAX index has risen by 1.25%. Carmakers are recovering some of yesterday’s losses, with BMW up 2.5%.
The pan-European Stoxx 600 is up 0.5%, led by banking stocks – as investors anticipate that interest rates will be higher than previously expected.
Updated
Rate cut in Sweden, but Norway holds tight
There’s drama in the central bank world already this morning!
In Stockholm, the Riksbank has cut Swedish interest rates by half a percentage point, down from 3.25% to 2.75%.
The Riksbank explains that there are “still few clear signs of a recovery”, so it has slashed borrowing costs to support economic activity. It says that if the outlook for economic activity and inflation remains the same, the policy rate may also be cut in December and during the first half of 2025.
The Riksbank adds that it is hard to assess economic developments at present, partly due to the US election, explaining:
There are risks linked to the geopolitical tensions, the economic policy abroad, the krona exchange rate and economic activity in Sweden that can affect the outlook for economic activity and inflation and lead to a different monetary policy stance.
Norway’s central bank has just voted to leave interest rates on hold, though, at 4.5%.
A rate cut in December is not likely either, with Norges Bank governor Ida Wolden Bache saying:
The policy rate will most likely be kept at 4.5 percent to the end of 2024.
Updated
After a rollicking surge yesterday, the US dollar is weakening a little this morning.
The dollar is down 0.3% against a basket of other major currencies, while the pound has gained half a cent (-0.35%) to $1.293.
The euro, which tumbled by 1.8% yesterday, has nudged up by 0.35% today to $1.0765, despite the fears of a eurozone recession.
Supermarket chain Sainsbury’s want the UK government to listen to the concerns of British farmers over last week’s budget.
Farmers are very unhappy that Rachel Reeves has cut the inheritance tax relief on agricultural assets.
Some are threatening to go on strike to disrupt food supplies in protest at the plan, under which assets worth more than £1m, which were previously exempt, will be liable to IHT at 20%, half the usual rate.
The government argues that just 28% of farmers will be affected by the new inheritance tax rules, but that is disputed by the farmers’ union.
CEO Simon Roberts also revealed that the increase in national insurance rates for employers in last week’s budget will add £140m to its costs.
Sainsbury’s boss Simon Roberts says Budget NICs increase will add £140M of costs and will lead to inflation because retailers can’t absorb “unexpected barrage of costs”.
— Ashley Armstrong (@AArmstrong_says) November 7, 2024
Disappointed nothing done on biz rates, due to rise next year too, and calls for govt to listen to farmers
Roberts was speaking after Sainsbury’s reported a 4.6% increase in sales, excluding fuel, in the 28 weeks to 14 September 2024. It says growth in food volume sales was “ahead of the market”, helping to lift pre-tax profits by 4.7% to £356m.
Updated
Mark Haefele, chief investment officer at UBS Global Wealth Management, predicts more market turbulence as Donald Trump’s policy proposals take shape:
Markets have started to digest Trump’s victory, with the initial response pointing to expectations of stronger growth, higher inflation, a slower pace of interest rate cuts, and trade tariffs.
As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings ahead. We advise investors to be ready to use any outsized market reactions to build stronger long-term portfolios.
Updated
Bloomberg: Trump win sparks record $64bn gain for world’s 10 richest people
The fortunes of the ten richest people in the world surged by a daily record yesterday after Donald Trump won a second term as president.
Bloomberg, who have crunched the numbers, explains:
The net worth of billionaires led by Tesla’s Elon Musk, the world’s wealthiest person, surged by $63.5 billion on Wednesday, according to the Bloomberg Billionaires Index.
Musk alone added $26.5 billion to his pot. Amazon.com’s Jeff Bezos and Oracle’s Larry Ellison were also among the top gainers. It’s the biggest daily increase since Bloomberg’s wealth index began in 2012.
Much of the gains for the ultra-rich come down to a surge in US stocks, underscoring bets that Trump, on his return to the White House, will implement an agenda favoring lower taxes and less regulation. The S&P 500 jumped 2.5% in the best post-election performance in history, while the US dollar also gained.
The net worths of the world’s 10 richest people have already surged $64 billion since Trump’s election, according to Bloomberg.
— Marty Swant (@martyswant) November 7, 2024
Musk alone saw his fortune jump $26.5B.
It’s also worth noting how many of these have ties to tech companies. pic.twitter.com/jc3nba4LQZ
Chinese factories appear to have been trying to front-run new tariffs, by shipping more goods to major markets before they are imposed.
New data today shows that China’s exports grew at the fastest pace in over two years in October, as manufacturers responded to the threat of a two-front trade war with both the US and the EU.
China’s exports grew by 12.7% year-on-year last month, customs data showed on Thursday, beating forecasts of a 5.2% increase expected by economists.
Imports fell 2.3%.
📈 #China’s #Exports Surge Amid Looming #Tariffs
— DF (@FigueiDy) November 7, 2024
China's export growth hit a 27-month high in October, rising 12.7% year-over-year to $309 billion, with #US exports up 8.1%, the strongest in 3 months.
We believe Chinese exporters might be front-loading shipments ahead of… pic.twitter.com/gsnEsKUDPg
Updated
Taiwan says will help firms leave China to avoid Donald Trump tariffs
Taiwan will help companies relocate production from China to avoid the threat of tariffs imposed by Donald Trump next year, its economy minister Kuo Jyh-huei said today.
Speaking in parliament, Kuo said the impact of any Trump tariffs on China for Taiwanese firms manufacturing there would be “quite large”, Reuters reports.
Kuo added:
“We will as soon as possible come up with help for Taiwan companies to move their production bases.”
Trump has threatened to impose tariffs of 60% on US imports of Chinese goods, which would threaten growth at the world’s second-largest economy.
Economics minister predicts Trump tariffs will hit Taiwanese companies in China hardest https://t.co/zWtIfv28Ae
— Taiwan News (@TaiwanNewsEN) November 7, 2024
Germany may not need Donald Trump’s help to fall into an economic mess, though.
New data this morning shows that German industrial production fell by 2.5% month-on-month in September, and was almost 5% year-on-year.
Trade across Europe’s largest member also worsened, with German exports falling 1.7% in September. Imports were up 2.1% compared with August 2024, meaning Germany’s trade surplus shrank.
ING say:
The zigzagging of German industrial data suggests that German industry has not yet entered a period of full bottoming out. In fact, industrial production in the third quarter was still some 2% down compared with the second quarter.
After some chunky swings yesterday, markets are calmer today as investors digest the consequences of the US election.
Japan’s Nikkei has dipped by 0.25% today, having surged by 2.6% on Wednesday to its highest close in three weeks.
Japanese financial stocks have risen today, on expectations that Trump’s fiscal policies will lead to higher inflation, and thus higher interest rates.
The yield (or interest rate) on Japan’s 10-year government bonds rose to 1%, for the first time in over three months.
That followed a sharp selloff in US government bonds yesterday, which pushed up US yields.
Jim Reid of Deutsche Bank explains:
That’s because the view is that higher tariffs mean that inflationary pressures will rise, and an extension of the Trump tax cuts under a Republican sweep mean the deficit will go up further in the years ahead. Plus the Fed are less likely to cut rates in this scenario.
In fact, higher inflation expectations were clear from how inflation swaps reacted, with the 2yr inflation swap surging by +18.6bps yesterday to 2.62%.
ECB's de Guindos: Tariff threat adds to uncertainty risks
Donald Trump’s election victory and the threat of tariffs will force policymakers to be more cautious as they bring down interest rates, the European Central Bank’s vice president Luis de Guindos has said.
De Guindos said the heightened uncertainty following Trump’s recapture of the White House meant the threat of trade tariffs could be added to the uncertainty created by the war in Ukraine and the middle east conflict.
Speaking at University College London on Wednesday, he said the ECB was likely to take “small steps, short steps” in its approach to bringing down interest rates, scotching speculation of a cut in the cost of borrowing at the central bank’s next meeting by 0.5 percentage points from 3.75%.
Some analysts had speculated that the ECB would move quickly to bolster the eurozone economy ahead of threatened tariff increases on European and Chinese goods following Trump’s inaguration in January.
“Uncertainty is on the rise,” de Guindos said.
It is huge. And because of that you need to be prudent.
De Guindos, who was the first member of the ECB’s 26-strong governing council to respond to Trump’s electiion, said it will take time to assess how trade policies under Trump will affect the economy.
“If you ask me, are you going to react immediately? — No,” he said.
What we will do is we will incorporate into our projections the trade policy that is announced by the new US administration. And we will take into consideration all the elements. Trade policy, plus the evolution of demand, plus the evolution of energy prices.
But he added: “Tariffs will impact growth negatively and inflation negatively.”
In the meantime he said policymakers would continue to be guided by data and look particularly closely at its bank lending survey to determine whether firms are receiving the loans they need to boost investment.
He said bank lending was feeding through to the real economy following two cuts in interest rates by the ECB, but inflation and economic growth had slowed faster than expected.
He said it was clear from the US election that inflation had played a key role.
It’s quite clear that inflation is a tax the low income people, because it’s quite clear that they consume the large part of their incomes. And they consume the kind of items where prices have been rising the most.
And even though you know it’s clear that the inflation rate is declining, households and consumers, look at prices that are 20% or 30% higher than two years ago.
Updated
Eurozone growth forecasts cut due to tariff threat
Investors and economists are bracing for further economic pain in Europe from a second Donald Trump presidency that could lead to hefty tariffs on European exports into the US.
Berenberg bank is warning this morning that Trump’s return to the White House implies “considerable trade policy risks and geopolitical uncertainty” for European businesses.
Germany – where the government has collapsed following the unexpectedly sacking of the finance minister yesterday – is particularly exposed.
Holger Schmieding, Berenberg’s chief economist, says:
We assume that Trump will initially impose only selective but headline-grabbing tariffs, while threatening to go much further if China and Europe do not offer him significant concessions in negotiations. That would be akin to his approach in 2017-20.
Viewed in isolation, such an escalation of trade tensions could lower 2025 growth in the Eurozone by c0.3 percentage points and in heavily exposed Germany by as much as c0.5 percentage points as uncertainty weighs on business confidence and investment.
However, the eurozone should benefit from the “temporary spillover from more US domestic demand” and a stronger US dollar, which makes euro-priced goods more competitive.
As a result, Berenberg has only trimmed its 2025 annual growth forecasts modestly. Growth in the eurozone next year has been lowered from 1.1% to 1.0%, for France from 0.8% to 0.7%, and for Italy from 0.9% to 0.8%.
Germany will likely be hit harder, with growth of just 0.3% instead of 0.5% next year, it adds.
Updated
ING: Trump trade war could push the eurozone economy into recession.
A looming new trade war triggered by Donald Trump could push the eurozone economy from sluggish growth into “a full-blown recession”.
That’s the view of the investment bank ING, which fears the recession could begin even before Trump – who has said he wants to impose a 10% tariff on all non-US goods – is sworn in next January.
ING says:
The already struggling German economy, which heavily relies on trade with the US, would be particularly hard hit by tariffs on European automotives. Additionally, uncertainty about Trump’s stance on Ukraine and NATO could undermine the recently stabilised economic confidence indicators across the eurozone.
Even though tariffs might not impact Europe until late 2025, the renewed uncertainty and trade war fears could drive the eurozone economy into recession at the turn of the year.
ING also predicts that the European Central Bank will need to do the “heavy lifting” of protecting Europe’s economy by cutting rates, while politicians wait to see what policies Trump actually implements.
It explains:
With these election results, a 50bp rate cut at the ECB’s December meeting has become more probable, with expectations of the deposit rate dropping to at least 1.75% by early summer, possibly followed by further easing towards the end of 2025.
Even though Trump's tariffs might not impact Europe until late 2025, the renewed uncertainty and trade war fears could drive the eurozone economy into recession at the turn of the year.https://t.co/mPyiauahuO
— ING Economics (@ING_Economics) November 6, 2024
Updated
Introduction: Will UK and US cut interest rates today?
Good morning, and welcome to our rolling coverage of business, the financial markets and world economy.
After yesterday’s election drama, monetary policy makes a welcome return to the stage with interest rate decisions in the UK and US.
The Bank of England is widely expected to cut base rate today; from 5% to 4.75%.
With CPI inflation and wage growth both continuing to cool, the Bank should feel confident it can adjust its restrictive policy stance.
To make the decision, the BoE must weigh up the implications of last week’s UK budget, which lifted taxes, spending and borrowing.
But investors are confident that its Monetary Policy Committee will vote to lower rates – a quarter-point cut is a 95% probability, according to the latest money market pricing.
Ranjiv Mann, senior fixed income portfolio manager at AllianzGI, says:
In the short term, although BOE governor Andrew Bailey indicated recently that it may be too early to declare victory on the fight against inflation given some concern about the stickiness of services inflation, we think that a majority of MPC members will still favour cutting rates in November.
The BoE will also be considering the outcome of the US election, and the implications of changes to US trade policy.
As must the Federal Reserve! It is also expected to cut borrowing costs by a quarter-point, when the US cental bank’s policymakers meets today.
Donald Trump’s pro-growth policies, such as tax cuts and tariffs, are likely to lead to higher inflation in the US, which ought to leave less room for interest rate cuts.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
The Federal Reserve is expected to announce a 25bp cut today, but the policy beyond today’s decision must be readjusted accordingly.
The expectation, so far, was that the Fed would cut today by 25bp, and deliver another 25bp cut in December, and a full point cut next year. Now, the December cut is on a slippery ground and the Fed should not consider more than 2-3 rate cuts next year. That’s – at least – the policy response that you would reasonably expect from a central bank as an economist.
The agenda
8.30am GMT: Eurozone construction PMI report for October
Noon GMT: Bank of England interest rate decision
12.30pm GMT: Bank of England press conference
1.30pm GMT: US weekly jobless claims
7pm GMT: Federal Reserve interest rate decision
7.30pm GMT: Federal Reserve press conference
Updated
