September 24, 2021

HEW: more energy in the policy debates

  • Over the past week, policy developments have dominated attention. The BoE, Norges Bank and Riksbank all announced (and so did the Fed). Meanwhile, politicians around Europe have been under pressure amid surging prices and slowing activity growth.
  • Next week begins with the election results in Germany and the resultant coalition negotiations. Flash inflation releases for Sep-21 around Europe are the most prominent event of the week for us, where we are close to the rise in the current consensus.

September 23, 2021
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Norway: Norges Bank leads the G10 pack

  • As expected, the policy rate was increased from zero to 0.25%, with a second hike signalled for December. The new rate projection is even higher than we expected.
  • Relaxing Covid rules led to a brisk economic upswing, with mainland GDP at new highs. Underlying CPI-ATE inflation has drifted down, but changes in indirect taxes and substantial energy price volatility have caused CPI and CPI-ATE to diverge.
  • The Norges Bank has produced multiple upgrades to policy rate projections during 2021 and signalled a series of rate increases well ahead of their G10 peers. Risks skew towards disappointment, but that more threatens rate changes beyond Dec-21.

September 23, 2021
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BoE: drops guidance like its hot

  • In September, the BoE MPC voted for an unchanged policy, although Dave Ramsden joined Michael Saunders in dissenting while the two new members supported the status quo. Some non-dissenters may be no less hawkish and merely favour using rates first.
  • Developments are viewed through a hawkish lens as GDP downgrades are seen as supply temporarily constraining strong demand while upside inflation news risks second-round effects. The formal policy guidance was considered no longer useful and dropped.
  • We still believe most MPC members would consider a mid-22 rate hike appropriate, but we expect disappointing demand data to delay that into 2023. However, with a less bullish GDP forecast and ongoing labour market resilience, our risks skew earlier.