This loss of momentum helps explain why Powell changed his message. By talking up the possibility of upcoming interest rate cuts, he hopes to engineer the mythical “soft landing” – crushing inflation without stagnation and massive job losses.
“If the economy slows, central banks can do something to limit the downside,” Speranza says. “We think there is a significant slowdown in movement, but we do not expect a complete recession.”
The message is very different on this side of the Atlantic.
None of the nine-member Monetary Policy Committee voted in favor of lowering interest rates from 5.25%, while three members wanted a further increase to 5.5%.
In his letter to the Chancellor explaining why inflation remains well above the 2% target, Bailey warned that risks to inflation “have been skewed to the upside, reflecting the potential for continued further stability in domestic wage and price determination, as well as an increasing upside”. Inflation risks from energy prices.”
Financial markets expect four or five interest rate cuts next year, bringing the base interest rate to 4.25% or 4%. Billy resists this message.
Not only are interest rate cuts not on the horizon, but borrowing costs may have to rise further. “Further monetary policy tightening will be needed if there is evidence of more persistent inflationary pressures,” Bailey wrote.
The ECB is closer to Bailey’s position than Powell’s, as the trans-Atlantic divide opens up.
“We must not relax our guard at all,” European Central Bank President Christine Lagarde said on Thursday. “We have not discussed interest rate cuts at all.”
For now, Sunak and his advisor Jeremy Hunt remain supportive of the bank. In his letter to Bailey, Hunt said the MPC “continues to have my full support.”
However, as the election approaches, the relationship between the two men may become more tense. Expect frayed nerves and even more strained finances in the coming year.