Archive

Policy Tightness is Gradations of Weak

• The PMIs mostly revealed surprise resilience in April, albeit with the US disappointing. Divergent surprises may reflect excessive spread changes in policy expectations.
• Residual seasonality may exaggerate current strength and unwind in the summer, but stability in unemployment trends still suggests global monetary policy is not that tight.
• Persistent excess demand requires tight conditions to be sustained. The BoE MPC seems desperate to cut, but resilience should delay it, including relative to Fed pricing.

By Philip Rush

BoE Review: Uncomfortable Guidance

• Ben Bernanke’s review of forecasting at the Bank of England raised many suggestions. We hope the BoE doesn’t dodge two aspects critical to improving its guidance.
• Inflation expectations are poorly captured in forecasts, contributing to misguided market views and leaving MPC members open to attack when critiquing surging wages.
• MPC rate expectations would best replace the conditioning rate path. Absent that, market rates are better than alternatives so that path should not be de-emphasised.

By Philip Rush

Note: This is part of an external compendium of responses to the Bernanke review.

BoE Should Move Behind the Fed and ECB

• Hawkish surprises in the UK and US data pushed back rate cut pricing. Dovish comments from Bailey still weigh on BoE rates, inappropriately keeping pricing below the Fed.
• Underlying inflationary pressures are worse in the UK, where wage growth is persistently high and not backed by productivity, causing the UK’s services inflation to be higher.
• Prevailing policy settings don’t seem set to drive down UK inflationary pressures before the US. Unemployment is trending similarly, suggesting similar monetary tightness.

By Philip Rush

EA Inflation Subdued Enough for the ECB

• The final EA HICP inflation print confirmed the downside surprise to 2.4% from the flash release. Progress gets more challenging as energy and food base effects wear out.
• Although services inflation is stuck at 4%, that is far better than the UK’s 6%, and the median inflationary impulse is broadly settling below the ECB’s target.
• Labour costs might remain inflationary, but the ECB seems to have sufficient confidence to cut in June unless the data surprise significantly to the contrary.

By Philip Rush