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August rate cut hangs in the balance thanks to hawkish Haskel

Journalist: John Choong (Head of Markets and Research), Newspage

ended 23. July 2024

Odds of an August rate cut were dashed to 25% last week after inflation came in hotter than expected. However, it has since recovered to 45% after lighter wage and retail sales prints.

Still, it's not quite the 50/50 odds of a fortnight ago, and one of the reasons lies in how the Monetary Policy Committee's (MPC) most hawkish member, Jonathan Haskel, gauges the outlook for inflation.

Given how hawkish Haskel is, any hint of dovishness from him could kick-start a domino effect, with other members like Bank of England Governor, Andrew Bailey and Catherine Mann potentially voting for a cut in the August meeting. Therefore, it's important to monitor how Haskel assesses inflation risks.

Unlike his dovish peers, Dhingra and Ramsden, who tend to look at more forward-looking data, Haskel tends to rely on backward-looking data instead, such as the vacancy to unemployment ratio. Despite it being a good indicator for how hot the labour market is, it can also result in a lack of proactiveness — something the MPC lacked when inflation began to rear its ugly head in 2021.

Nonetheless, it remains Haskel's go-to metric, and unfortunately, it's unlikely he'll shift his tone come next week. The top left signals a very hot market, with high vacancies and low unemployment, resulting in high inflation. On the other hand, the bottom right indicates a very weak market, with low vacancies and high unemployment, resulting in deflation.

Haskel's goal is to get this indicator back down towards the bottom left, or at the very least, closer to pre-pandemic levels (light blue dots). The green box would be the ideal scenario, where most of those dots consistent with steady 2% inflation are.

But even though good progress has been made since 2022 and 2023, the data so far shows a stagnation in 2024. This could force Haskel to retain his hawkish stance, as he fears that any surge in demand could push those dots back up and fuel the inflation fire again.

Even so, wage growth is projected to cool with services inflation expected to follow in the coming months. This should bring those yellow dots down into the green box. But Haskel isn't a big fan when it comes to forecasts, and prefers datasets provided by the Office for National Statistics (ONS). As such, it will be a huge surprise if Haskel votes for a cut next week.

Having said that, it's worth noting that this will be Haskel's last meeting on the MPC. But with no replacement lined up just yet, the MPC will go into their following meeting with one less hawk, thereby increasing the odds of a rate cut in September. So, unless another hawkish member is appointed by the Chancellor, rate cuts could look like a matter of when and not if in Q4.

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3 responses from the Newspage community

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Editor
Ben Perks
Managing Director at Orchard Financial Advisers
Haskel seems intent on rattling the cage one last time before sailing off into the sunset. The fact he has a differing opinion on which data is most reliable reaffirms that he is totally detached from the issues facing real people. The single mother who is struggling to pay her mortgage during a cost-of-living crisis couldn't care less what the vacancy-to-unemployment ratio is. She just needs help. The Monetary Policy committee need to start looking at, and listening to, the people. The data supports their decisions, it shouldn't form them.
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Editor
Craig Fish
Director at Lodestone Mortgages
When Haskel departs, he should join ranks with Huw Pill and open a goalpost removals business — it's the only thing they are good at. They are cut from the same cloth, and neither of them have any consideration or understanding of struggling consumers or businesses up and down the country. Instead, they've decided to stick to their guns and keep rates higher despite all the leading indicators pointing towards a cut for many months now. Nonetheless, when rates are finally cut in September, the housing market will see a marked improvement and this will in turn bolster house prices as demand increases.
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Kundan Bhaduri
Property Developer and Portfolio Landlord at The Kushman Group
For every Hawkish Haskel, there is a Dovish Dhingra. We believe the Bank of England has got the message loud and clear that the British public now demands change after 15 holds. And change there will be. We believe that the Bank of England will become the first of the three musketeers (its American and European counterparts being the other two) to come up with a major rate cut decision in August. After all, Bailey needs to prove his worth to the new Government, who feverishly await good news to justify their election. The forthcoming MPC meeting will be a face saver event for the Committee lest the public's patience wears thin, with shifting public and media opinion demanding heads roll on the MPC.