Archive

BoE: Policy Mistake Diagnosis

• Inflation expectations have been persistently too high, while productivity trends poorly, driving wage and price inflation forecasts to grind higher in recent years.
• The BoE’s cutting cycle contributed to reversing the trend decline in expectations, and in turning a slight overshoot into a massive one, with a 3.2pp revision since Feb-23.
• We forecasted this excess for these reasons, so it was predictable and therefore a policy mistake to cut so soon. Further surprise should prevent the MPC from cutting again.

By Philip Rush

UK Jobs Suggest Summer Stabilisation

• Unemployment broke a four-month streak of increases at 4.66%, with favourable cohort effects risking a fall soon. Payrolls may also be revised to grow again from July.
• The structural hit from tax increases is matched by the cumulative fall in payrolls so far. Fundamental explanations for its divergence from the LFS aren’t supported yet.
• Ongoing resilience in wage growth stokes unit labour cost pressures alongside taxes that are beyond the target. We still expect the MPC to resist cutting rates again.

By Philip Rush

BoE Cut Proves Finely Balanced

• Four MPC members refused to back the rate cut in August, and only one favoured a 50bp cut, but he was forced to vote for a 25bp cut to break the balanced 4:4 split.
• The group favouring a slower pace of easing may have expanded from 5:4 to 6:3, raising the hurdle to another cut. Four don’t even support the prevailing level.
• Inflation forecast revisions keep trending the profile higher. Rolling resilience in the broader data should keep the BoE on hold in November and beyond, like the ECB.

By Philip Rush

HEM: One-Touch Easing

• Payrolls revisions challenge the rolling resilience seen in most other hard data releases, but seem over-weighted.
• Underlying price and wage inflation mostly track >2%, especially in the UK, which doesn’t need more rate cuts.
• Policymakers biased to ease will deliver it on a batch of bad outcomes, even if the evidence proves fleeting.