Archive

May 16, 2024
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Assets May Inflate Like It’s ‘98

  • Rate cuts are rare outside of recessionary regimes. The 1998 experience seems a more similar historical example for the BoE than 1989 or 2005, when its policy diverged.
  • CPI inflation will probably be less benign because wage growth is much higher, so sterling may not stay as stable. The speed of possible policy reversal would be critical.
  • Loosening monetary conditions when the real economy doesn’t need it risks stimulating a financial bubble. Carefully hedged investments would help avoid the eventual bust.

By Philip Rush

May 14, 2024
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UK: Excessive Pay Problem Persists

  • UK unemployment increased again to 4.3% in March, as expected. The Q1 deterioration still looks spurious, like the preceding strength, but the extent of change is slowing.
  • Vacancies are falling, but so are redundancies. Incumbent workers enjoy high pay increases despite reduced demand for new workers amid broadly high expectations.
  • Average earnings surged beyond expectations again. The absence of progress in pay settlements prevents slowing to a target-consistent pace, but the BoE seems unfazed.

By Philip Rush

May 09, 2024
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BoE Errs Towards Cutting Too Early

  • The BoE’s unsurprising decision to maintain the Bank rate at 5.25% was accompanied by rare pushback against prevailing market pricing. MPC members are more dovish.
  • June’s outcome will depend on developments in their inflation persistence assessment, including wage settlements where the current data are tracking excessively high.
  • That upside seems unlikely to discourage the MPC for long, so we now expect the MPC to start cutting in August but with a pause in February and a risk of a reversal.

By Philip Rush

May 08, 2024
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Policy Rate Reversal Warnings

  • Rate hikes are unlikely to resume unless forthcoming cuts prove premature. Cutting outside recessionary regimes has historically been prone to reversals to higher peaks.
  • 1998’s cuts followed a shock that failed to prove recessionary. Fed cuts in 1967 sowed the seeds of a severe inflation problem. Both cutting cycles were more than reversed.
  • Independent ECB hikes in 2008 and 2012 were rapidly proven policy mistakes. The BoE’s single 2005 cut was also wrong. Hopes that 2024 is benignly like 1989 may be misplaced.

By Philip Rush

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