Speaker 1: Hello, in the City listeners. We're dropping this episode and
Speaker 1: future episodes of In the City earlier in the week.
Speaker 1: That's because we have a special treat for you, releasing
Speaker 1: this Friday. As many of you know, this famously is
Speaker 1: a year of elections. Around forty percent of the world's
Speaker 1: population have voted or will have the chance to vote
Speaker 1: in twenty twenty four, and those votes will shape the
Speaker 1: geoeconomic landscape for years to come. The implications are huge
Speaker 1: and worth exploring, which is why we're launching a bonus
Speaker 1: series called Voternomics. Bloomberg's head of Government and Economics, Stephanie Flanders,
Speaker 1: opinion columnist Adrian Woolridge, and in the city's very own
Speaker 1: Allegra Straton will lead the charge. Every Friday, they'll take
Speaker 1: a few steps back from the weekly news agenda and
Speaker 1: help you understand how the latest political movements are influencing markets,
Speaker 1: business and policy. This year, voters around the world have
Speaker 1: the ability to affect markets, countries, and economics like never before.
Speaker 1: Let voter Nomics help you make sense of it all.
Speaker 1: So on Tuesdays, you'll still get a weekly taste of
Speaker 1: what's driving the conversations happening in the City and on
Speaker 1: Wall Street and now on Fridays, a more focused look
Speaker 1: and where politics and markets collide. Stay tuned, and we
Speaker 1: hope we.
Speaker 2: Enjoy Bloomberg Audio Studios, podcasts, radio news.
Speaker 3: Are we excited?
Speaker 1: We're so excited?
Speaker 3: Is he?
Speaker 2: Yeah?
Speaker 4: We have a lot of time.
Speaker 2: Lass Sugar'll be a low at some point as well.
Speaker 3: I forgot my question.
Speaker 4: Welcome to the City of London, the.
Speaker 3: City of the City, the City of London. Please mind
Speaker 3: the gap between the and the financial hearts of the country.
Speaker 4: The city, the city.
Speaker 2: Welcome to in the city.
Speaker 1: Then clear of the doors. Time for a weekly look
Speaker 1: at the conversations motivating power brokers, policymakers and financiers the
Speaker 1: world over. This week all lies on the US and
Speaker 1: UK economies and the race to cut interest rates. First,
Speaker 1: I'm Francis.
Speaker 3: Laqua, I'm David Merritt, and I'm alegra Stratton. Hi everyone, I'm.
Speaker 4: So sorry.
Speaker 2: That's where I was like, oh my god, wait wait
Speaker 2: wait wait wait, that was.
Speaker 4: Perfect I supposed to say hell no.
Speaker 1: So this week, this week, we're lucky enough to have
Speaker 1: Phil Aldrake, who's just come back from the IMF World
Speaker 1: Bank meetings to give us a glimpse of the conversations
Speaker 1: and the corridors of power and actually what central banks
Speaker 1: will do next.
Speaker 3: Welcome back to in the city, Phil Hi. Hi, tell
Speaker 3: us about your trip. What was it? What was the
Speaker 3: word on the ground in DC as have one debated
Speaker 3: the state of the world economy.
Speaker 4: It was slightly because obviously, whilst the meetings were happening,
Speaker 4: we're having the Israeli Evran strikes and obviously Ukraine and
Speaker 4: Russia still going on, So there was these two The
Speaker 4: backdrop was these two wars and political uncertainty that is
Speaker 4: becoming just the norm at the moment. Then it was
Speaker 4: kind of all seen through the very imf prism of
Speaker 4: what it means for the global economy and what it
Speaker 4: means for interest rates, and and you know, you have
Speaker 4: at the moment this prospect of the Federal Reserve in
Speaker 4: the US possibly even pushing interest rates higher because inflation
Speaker 4: is proving quite sticky, and the MS was saying that
Speaker 4: the US economy is overheating effectively, and that has repercussions
Speaker 4: for the developing world, where you know, they have a
Speaker 4: lot of debt priced in dollars and it becomes more
Speaker 4: and more unaffordable as the as the dollar increases, and
Speaker 4: then back here in the UK and in Europe we're
Speaker 4: seeing a sort of central bank divergences as the Eurozone
Speaker 4: Central European Central Bank and Bank of England look like
Speaker 4: they may be going in opposite direction or moving significantly
Speaker 4: earlier than the FED.
Speaker 3: Just to back up a little bit on the US economy,
Speaker 3: the people haven't been tracking it that closely. How do
Speaker 3: we get it all so wrong? I mean, there are
Speaker 3: predictions for a recession in the US. This year, we
Speaker 3: had the fastest hiking cycle in recent memory, and yet
Speaker 3: the IMF. What you're just saying now is the IMF
Speaker 3: saying the US economy is overheating. How is that possible
Speaker 3: with interest rates where they are? And how did the
Speaker 3: whole world and all the economists and all the market
Speaker 3: traders that everyone get it all so wrong.
Speaker 4: Well, as someone said that the Inflation Reduction Act is
Speaker 4: one of the what they think is one of the
Speaker 4: cathalytic factors here, and as they said, it doesn't increasing,
Speaker 4: it doesn't do what it says on the tin, it's
Speaker 4: doing the opposite. So there's a hell of a fiscal.
Speaker 3: Stick because it's stimulating manufacturer.
Speaker 4: Yeah, there's.
Speaker 3: Huge hor money.
Speaker 4: There's a huge amount of money going into the US economy,
Speaker 4: and there's all these concerns about debts spiking up to
Speaker 4: unsustainable levels there, et cetera. And that is what is
Speaker 4: driving the economic growth in the US. And it is remarkable.
Speaker 4: I mean, across the world there hasn't been this recession
Speaker 4: that was anticipated by as a result of much higher
Speaker 4: interest rates. I mean the UK had that, you know,
Speaker 4: it's had that tiny little technical recession, but we're already
Speaker 4: out of it, it seems.
Speaker 1: I mean, what I loved was twenty twenty three because
Speaker 1: we were expecting a flat lining economy. Then it was
Speaker 1: in a recession, then it was growing. I mean, it's
Speaker 1: true that everything was all over the place, but part
Speaker 1: of it is also reshoring, right, So the US economy
Speaker 1: is bringing back so much of their manufacturing that that
Speaker 1: kind of boosted everything seems to have them happening at
Speaker 1: the same time. So after COVID people are spending, there's
Speaker 1: a lot of immigration that's helping with productivity. So it's
Speaker 1: almost like the perfect storm to the upside for the
Speaker 1: US economy.
Speaker 4: Yeah. Yeah, So the Made in America policies of Biden, massive, massive,
Speaker 4: fiscal spending those two things, and have seen that there
Speaker 4: has definitely been a massive increase in space power, living
Speaker 4: standards are improving, GDP is growing really fast, and the
Speaker 4: IMF estimates that the US economy is now zero point
Speaker 4: seven percentage points above what is sort of it's it's
Speaker 4: actual speed limit, which effectively they'll be saying, you know,
Speaker 4: all else equal, there should be rate rises, and obviously
Speaker 4: they've just they've just started, they've just started to hold
Speaker 4: rates after a massive increase in rates. Two.
Speaker 2: So, a few weeks back, I saw commentary that maybe
Speaker 2: in the States the FED would be inclined to do
Speaker 2: a cut as a as a helping hand to Biden.
Speaker 2: That now sounds like that might be for the birds the.
Speaker 4: Current juncture, that definitely looks extraordinarily unlikely. And obviously J Powell,
Speaker 4: the head of the FED, has has pulled back and
Speaker 4: he's he's he's definitely signaling that they're not going to
Speaker 4: be cutting anytime soon. Seems extraordinarily unlikely that they are
Speaker 4: actually going to raise rates as the IMF forecast would suggest.
Speaker 4: But they but they don't look like they're going to
Speaker 4: do any interest rate cuts.
Speaker 3: I mean, obviously it's also important, isn't it what the
Speaker 3: central bankers say and everyone poor particular cleap of the
Speaker 3: fair everyone pause over the exact phrasing the sentences. Every
Speaker 3: comma or full stop means something. But there is a
Speaker 3: theory is they're not that by him saying that they
Speaker 3: were going to be or signaling rate carts earlier this
Speaker 3: year has actually added to inflation because people have baked
Speaker 3: in already that that was coming. So is it? Is it?
Speaker 3: Pal's full? There's the messaging. I mean, I know it's
Speaker 3: you know, it's an impossible art, isn't it being a
Speaker 3: central banker? But did they get the messaging wrong? Is
Speaker 3: that why everyone mispriced where inflation was headed? Well?
Speaker 4: Inflation was falling quite quickly last week. Actually, Jeremy hunt
Speaker 4: in the out in the US. When he was out
Speaker 4: in the US, he actually suggested that you can declare victory,
Speaker 4: UK can declare victory over inflation. And that's effectively what
Speaker 4: what had happened in America. They effectively declared victory over
Speaker 4: inflation and then inflation.
Speaker 2: But then the very next day, right the very next day,
Speaker 2: the drop wasn't as much as was.
Speaker 4: Effected exactly, and then and so what you're seeing is
Speaker 4: the inflation persistence that really that underlying you know, the
Speaker 4: way wages rising services which services, inflation is proving sticky
Speaker 4: and so they haven't been able to squeeze inflation out
Speaker 4: as easily as they thought in the US, and the
Speaker 4: fear would be for you know, the read across to
Speaker 4: the UK would be that maybe we still have very
Speaker 4: high underlying measures of inflation. And the fear is that
Speaker 4: is that, you know, we have also going to find
Speaker 4: that we are also going to find it more difficult
Speaker 4: to squeeze out these last vestiges of inflation.
Speaker 3: But the difference, I guess here rather depressing me is
Speaker 3: that we don't have going along with that inflation roaring
Speaker 3: GDP growth boosting, you know, large increases in domestic manufacturing.
Speaker 3: So the Britain finds itself, as you said earlier, it's
Speaker 3: just emerged from a very mild technical recession, but a
Speaker 3: recession less. So we're nowhere near where the US is
Speaker 3: in terms of great.
Speaker 4: Yeah, well exactly that was the That was the IMF
Speaker 4: analysis in their World Economic Outloo. Basically, both the Euros
Speaker 4: and UK are operating below what the capacity of the
Speaker 4: economy is, which means that we've you know, we in
Speaker 4: theory do need to cut rakes to just boost that
Speaker 4: sort of demand level to get to get the economy
Speaker 4: going at it, growing at its speed limit as economists
Speaker 4: like to term it. So we are in a very
Speaker 4: different place to the US. The economy it's looking like
Speaker 4: it is picking up at the moment, so that's definitely positive,
Speaker 4: but it's not going gangbusters at all. I mean, obviously
Speaker 4: we're growing at zero point five percent this year according
Speaker 4: to the IMF, which is pretty miserable.
Speaker 2: Really, just to sort of remove ourselves from America and
Speaker 2: step back to where we are right now, which is
Speaker 2: the UK. Tell us about Andrew Bailey, I'm kind of
Speaker 2: fascinated by him and by his Munch Policy Committee. Now, firstly,
Speaker 2: they is an institution, seemed kind of gloriously free wheeling
Speaker 2: and that they'd say very different things on very different days.
Speaker 2: Is that your impression is that to me it seems
Speaker 2: quite healthy.
Speaker 4: Yeah. I think this is part of the way that
Speaker 4: the bank operates, which is particularly they've got four external members,
Speaker 4: so they've got five on the Monetary Policy Company, five internals,
Speaker 4: so five will represent exactly what the Bank of England think.
Speaker 4: So they would you'd expect them to move more as
Speaker 4: a sort of homogeneous mass. And then the five externals
Speaker 4: are there effectively to challenge you know, consensus opinion, and
Speaker 4: you know, so that the idea is to is to
Speaker 4: break group think. And if you think back to the
Speaker 4: Carneie days where you know, group think was an issue
Speaker 4: became an issue in the political sphere for why why
Speaker 4: does the bank all seem all all of the members
Speaker 4: of the NPC all seem to vote the same way.
Speaker 4: We should be having checks and balances on monitary policy
Speaker 4: decision making. So the fact that Megan Green and Catherine
Speaker 4: Mann in particular have been you know, distinctly more hawkish
Speaker 4: than recent comments from the governor Andrew Bailey or his
Speaker 4: deputy Dave Ramsden, you know, just is does show that
Speaker 4: the committee is working as you say it is. It
Speaker 4: is healthy to have.
Speaker 2: So I wouldn't get that at the top of a
Speaker 2: political party, and maybe maybe you would. It's refreshing because
Speaker 2: it is a genuine dialogue and I think probably both
Speaker 2: views are valid, right, So it's not that one is
Speaker 2: more valid than the other, but it's just difficult to
Speaker 2: you know, one day we think, oh, right, Bailey's gearing
Speaker 2: up to cut quite soon, and obviously that has an
Speaker 2: effect on the markets, and then the sort of you know,
Speaker 2: a day and a half later you get somebody from
Speaker 2: his team saying something different.
Speaker 4: You'll have different governors depending on their characteristics, on their personalities.
Speaker 4: And Andrew Bailey is definitely the kind of person who
Speaker 4: is quite happy to tolerate dissent and does and doesn't
Speaker 4: see it as something that undermines him, although you know,
Speaker 4: externally it can look like he's undermined. You know that
Speaker 4: he may want to vote in one direction and others
Speaker 4: on the committee may vote against him, and he could
Speaker 4: We haven't seen it with Andrew Bailey, but he could
Speaker 4: potentially be outvoted and as the governor, that might look
Speaker 4: like he's a weak governor. Mervin King was outvoted a
Speaker 4: few times when he was governor, but that I don't
Speaker 4: think it doesn't act Actually it doesn't actually undermine the
Speaker 4: governor's authority or the institution.
Speaker 1: But you know, to Allgo's very good point. They did
Speaker 1: have to get Ben Bernanke to do a review on
Speaker 1: communications at the Bank of England. So you have people
Speaker 1: like Madam and Elieren saying actually it's refreshing and you know,
Speaker 1: you have all views and so you can assess. But
Speaker 1: then they had to get an external former Fed president
Speaker 1: to look at how it was working because markets were
Speaker 1: complaining that they weren't getting the right information.
Speaker 4: Yeah, that the market reaction to how the bank communicates
Speaker 4: is is a tricky one because because there isn't a
Speaker 4: as you say, because there isn't a single voice. Bankei's
Speaker 4: review doesn't resolve that because basically these people, these are
Speaker 4: supposed to be people with their own individual opinions on things.
Speaker 4: But it it is, it does help. What he's proposing
Speaker 4: does help communicate, you know what, what they see the
Speaker 4: economic outlook to be the he's he wants to improve
Speaker 4: the communication of their forecast, of their ability, you know,
Speaker 4: of of the way that they see policy will evolve
Speaker 4: as which is a bit more like the American system
Speaker 4: where there's the dot plot, so you can see see
Speaker 4: it's not going to be the dot plots, but you
Speaker 4: can see something which would indicate the way policy should move.
Speaker 4: And at the moment they don't really provide that. In fact,
Speaker 4: they don't provide that at all, which is a much
Speaker 4: more confusing way of communicating.
Speaker 1: So my favorite moment of the press conference is sometimes
Speaker 1: where someone says, but the market was expecting this, and
Speaker 1: usually I mean it's happened twice where Governor Bailey says, well,
Speaker 1: Bloomberg Economics got it right.
Speaker 2: Speaking of Bloomberg Economics is predicting that the bank starts
Speaker 2: to cut in the summer, and lots of other people
Speaker 2: banks are predicting that too, but traders are not so
Speaker 2: help us on pick that.
Speaker 4: This is another tricky one. And actually this has seemed
Speaker 4: to be one of the main issues that Andrew Bailey
Speaker 4: was trying to address out at Washington at the IMF.
Speaker 4: But so the market path in the UK for rate
Speaker 4: cuts has a first rate cut happening in I think
Speaker 4: it's even moving as we're speaking, but in around September,
Speaker 4: and it pushed the first rate cut out to the
Speaker 4: market had pushed the first rate cut out to November.
Speaker 3: At one point.
Speaker 4: Part of this is because our market path, our market
Speaker 4: is affected by what happens in the US, and because
Speaker 4: because the Federal Reserve is such a powerful global institution,
Speaker 4: it changes the outlook in the way the markets price everything,
Speaker 4: and so the outlook for the UK then looks different,
Speaker 4: and that effectively creates a communication problem for the Bank
Speaker 4: of England because they have their own vision of what
Speaker 4: the market pass should be and at one point this
Speaker 4: year they thought the indication seemed to be that first
Speaker 4: rate rice could be in June. If it's not going
Speaker 4: to happen until November according to market to the markets,
Speaker 4: that seems extraordinarily unlikely under current forecasts. So the Bank
Speaker 4: of England officials are trying to talk the market round
Speaker 4: into sort of stripping out this this sort of Fed
Speaker 4: premium that's sort of priced into the UK market to
Speaker 4: try and get it back on track. And this is.
Speaker 1: I mean, it's like the Fed's gravitational pull and what
Speaker 1: it does to dollar. It's I mean, every time essential
Speaker 1: banker says, well, we focus on our own economy, it's like, well, yeah, sure, buddy,
Speaker 1: but everything around you is changing.
Speaker 4: So if the FED doesn't cut interest rates until the
Speaker 4: end of the year or maybe next year, and we
Speaker 4: and we wait in the UK, we're just going to
Speaker 4: punish our economy. But the but the difficulty for the
Speaker 4: bank is that then we would have more inflation because
Speaker 4: twenty percent of the basket of currencies that were measured
Speaker 4: against is the dollar, and so you know, you they
Speaker 4: have to think about their second round effects. And this
Speaker 4: was the discussion in terms of BOE policy at the
Speaker 4: IMF was, you know, if the US isn't going to
Speaker 4: cut till much later and the UK will if there
Speaker 4: is a sterling reaction, you've got factor that into your
Speaker 4: thinking of how many cuts you're going to be doing,
Speaker 4: because you're going to get some inflation back into the
Speaker 4: system just by cutting interest rates. So it is, it
Speaker 4: is confusing, but it is and it reques wise clear
Speaker 4: communications which obviously you know haven't been perfect in the
Speaker 4: past and as the world, but they're definitely moving towards this.
Speaker 4: This the ability to move at different times, so the
Speaker 4: first cut can come in the UK and in the
Speaker 4: European at the European Central Bank before the FED without
Speaker 4: without these severe repercussions.
Speaker 3: That's do we really need to be I mean, it
Speaker 3: fills a little bit from everything you've been saying for that.
Speaker 3: You know, the market is a few steps behind here,
Speaker 3: and why do we need to cut rates in the UK.
Speaker 3: You know, we hit the footze hundred hit a record yesterday.
Speaker 3: We're taping this on Tuesday, right, we had a record
Speaker 3: in the UK stock market. We've seen reports that house
Speaker 3: prices of stabilizing, our asking prices are going up a
Speaker 3: little bit. We're out of that technical recession. That doesn't
Speaker 3: really add up to me as a moment when you
Speaker 3: start cutting interest rates, does it, And especially if inflation,
Speaker 3: as Allegra said, is proving stickier than it was supposed
Speaker 3: to take.
Speaker 2: You speak day like a man who's not thinking about
Speaker 2: politics shouldn't be either.
Speaker 3: Yeah.
Speaker 4: I actually obviously they're very if you ask them, they
Speaker 4: are absolutely adamant that politics doesn't come into their thinking
Speaker 4: at all.
Speaker 3: Of course, not part of.
Speaker 4: The reason that the economy is doing better, as you
Speaker 4: were saying earlier, Davis, because interest rates the market public
Speaker 4: interest rates had fallen quite sharply, so that effectively had
Speaker 4: brought in lower borrowing costs for mortgage for mortgages, and
Speaker 4: and and commercial and small businesses as well. You know
Speaker 4: they they would be facing lower lower borrowing costs. The
Speaker 4: reason why you have to I think rates have to
Speaker 4: be cut as well. The banks. The bank's own internal
Speaker 4: analysis is that you know, the stable rate, the interest
Speaker 4: rate that we need in the UK is significantly below
Speaker 4: five and a quarter percent, so you can cut to
Speaker 4: say four and a half or wherever it ends up
Speaker 4: being without Actually, you know, if you've got your foot
Speaker 4: on the break at the moment, you're just easing the
Speaker 4: foot off the break rather than putting it on the accelerator.
Speaker 4: So that's that just can help growth in general. But also,
Speaker 4: you know, small businesses are paying off debt rather than investing.
Speaker 4: You know, companies are worrying about future debt sustainability issues,
Speaker 4: Households are being are still having to reset onto higher rates, and.
Speaker 3: That's a really extended process and it's.
Speaker 4: Very because of the fixed rate phenomenon here. But so
Speaker 4: so you know, there is there is pain that is
Speaker 4: still coming through the economy. So it's it's and the idea,
Speaker 4: the dream, certainly from the political point of view, is
Speaker 4: that you get this soft landing where you know, inflation
Speaker 4: comes down to its two percent and you just and
Speaker 4: you just get the economy just going taking off at
Speaker 4: the same time corflation comes down, and yeah, and then exactly,
Speaker 4: and then the election is held in October or whenever
Speaker 4: it is.
Speaker 2: I read in maybe one of your brilliant pieces there
Speaker 2: was an analyst quoted as saying we shouldn't really have
Speaker 2: a rate cut this year, or maybe it would be
Speaker 2: November December, but maybe there will be one. I'm quoting
Speaker 2: here as a political favor to a government that at
Speaker 2: some point is going to want to have an election.
Speaker 4: How does that work?
Speaker 2: What is that actual relationship as far as you can tell, Yeah, no,
Speaker 2: I am quoting somebody.
Speaker 4: Yeah, yeah, it's a.
Speaker 3: There was that there some It's definitely in the reason
Speaker 3: some people, some people do.
Speaker 4: Do think that the bank has to get ahead ahead
Speaker 4: of the game here, because if it's necessary to cut
Speaker 4: rates economically, and you're already in the process of an election,
Speaker 4: so there's the campaign has started, et cetera. You cut
Speaker 4: rates at that point, say three weeks after the election
Speaker 4: election is called. I mean, it is going to become
Speaker 4: a massively political issue and there will be cries of
Speaker 4: foul play about the bank doing it if they.
Speaker 3: Clear you think that?
Speaker 2: Is it a rule or is it an expectation that
Speaker 2: they wouldn't do anything during an election.
Speaker 4: I don't think. I think they wouldn't do anything during
Speaker 4: an election. So I went back through the data, and
Speaker 4: they did do it during an election campaign once. I
Speaker 4: think it was two thousand and one, but it was
Speaker 4: like two days after the election was cooled, so they
Speaker 4: were obviously already planning it, but they wouldn't. I don't
Speaker 4: think they would want to start cutting in an election
Speaker 4: if they were if they were already you know, done
Speaker 4: a rate cut or possibly two rate cuts, and then
Speaker 4: you go into the election, and then you have to
Speaker 4: keep cutting rates because the economy is saying that. It
Speaker 4: makes it clear that you really need to. I think
Speaker 4: they could continue doing it at that point, but they don't.
Speaker 4: But they need to get ahead of the game here,
Speaker 4: otherwise they can inadvertently be dragged into politics. And the
Speaker 4: thing I think the bank desperately wants to do is
Speaker 4: to avoid being dragged into politics.
Speaker 1: Phil Aldrick, thank you so much, Thank you my pleasure.
Speaker 3: Thanks for listening to this week's In the City from Blomberg.
Speaker 1: This episode was hosted by me Francin Laqwaw with David Merritt.
Speaker 3: It was produced by Summer Sadi, with additional editing by Blake.
Speaker 1: Maple's Brendan Newman is our executive producer. Sage Bauman is
Speaker 1: head of Podcasts Special Thanks to Phil Aldrich.
Speaker 3: Please do you subscribe, rate, and review wherever you listen
Speaker 3: to podcasts