ust a month ago, when the Bank of England surprisingly raised interest rates to 5.25% and UK consumer prices reached 3.0%, the pound raced to a fresh 14 year high against the dollar – hitting 1.9915, thus forcing markets to price in two more possible rate hikes in the months ahead. Fast forward to this week, when January’s key inflation numbers were released and the turnaround has proven to be quite remarkable. Given the time lag required for interest rate hikes to feed into consumer price inflation, it is not credible to believe that the Bank of England’s sudden hike a month ago is the reason for a serious easing in inflation in January. That should come in the months ahead.
Let’s look at the figures: producer input prices down 2.0% since December and down 1.6% from January 2006, the annual rate of producer output prices in January eased from 2.2% to 2.1% (obviously cheaper inputs are not resulting in cheaper product for end customers), the annual rate of headline consumer prices eased from 3.0% to 2.7% in the month to January, core consumer prices eased from 1.8% to 1.6%, retail prices eased from 4.4% to 4.2%, wage inflation including bonuses eased to 4.0% from 4.1%, manufacturing units costs down 0.2% in the 3 months to December etc.
February’s Inflation Report suggests that UK inflation will not moderate back to the target 2.0% rate without one more interest rate increase, which oddly enough the report states will not occur until the second quarter. Does this mean further tightening is off the agenda for the Bank of England in March? Apparently so, unless perhaps February’s consumer price data moves back up towards December’s levels. One might wonder, why, if the MPC are so sure inflation will not moderate without one more rate hike, they do not just hike rates in March. Why wait? The MPC are obviously not at one on this question and those members that voted for rates to remain on hold in January will now feel vindicated by this week’s data.
Sterling has largely been in a state of confusion this week, with markets unsure as to whether the currency should be moving up or down. Sterling fell to 1.94 Tuesday against the dollar after that surprising drop in consumer prices, only to jump to 1.9650 Wednesday, following publication of the Bank of England Inflation Report and a broader dollar retreat. We should witness a continuation in the recovery of the euro against the pound though, as the extent of future tightening and interest rate differentials would now seem to firmly favour the single currency, following this week’s data.
Thứ Tư, 14 tháng 2, 2007
Thứ Tư, 7 tháng 2, 2007
The ECB & BoE
The Central banks of the two European majors meet again this Thursday and the markets wait anxiously to see if either party is going to pull any rabbits from the hat this month.
ECB President – Jean Claude Trichet, surprised many in January when he failed to signal a rate rise for the Bank’s next meeting in February. That effectively means rates will stay on hold this Thursday. The market does however expect Trichet to resurrect the word ‘vigilance’ this week, which is a coded signal to the market for a rate hike when the MPC are to meet again, i.e. in March. However, if one looks at the data over the past month, which has been largely mixed, then the market could find itself surprised again Thursday, because there is ample justification for the ECB to hold out for longer. The crucial ingredient is consumer price inflation. Last week, Eurostat published January’s euro zone inflation estimate, which came in flat for the third month running, with an annual rate of 1.9%. Economists were expecting a rate of 2.1%. As the annual inflation rate of 1.9% is inside the ECB’s tolerance level of 2.0%, the ECB will be accused of being heavy-handed if it raises rates again against this inflation background. That in essence rules out any remote possibility of a rate hike this Thursday, but it also raises the possibility that the ECB may choose not to signal a rate hike for March either, giving it an extra month to assess fresh data. While concerns over money supply have been heightened, as M3 money continues to grow, many key business sentiment indicators have softened in the past month, indicating that growth may already have peaked. There is also the problem of the widening diversification problem between the performance of the German economy and the other major economic blocks that make up the euro zone. Against a platter of mixed signals and unknowns, the most sensible course of action for the ECB may be to wait another month and thus to deliver the same message to the market this month, as they did in January. It will be embarrassing to signal a hike now for March, if data were to dictate a different outcome later.
As for the Bank of England, their ability to surprise markets has left many with deep scars in recent months and nobody dare assume the outcome of Thursday’s meeting until the actual rate announcement itself is published on the Bank’s website. The closeness of last month’s vote, when the Bank voted to raise rates unexpectedly by a 5-4 majority, gives some insight into the difference of opinion within the current Committee. Wile debate may be seen to be healthy, the fact that the Bank’s Governor failed to deliver a more decisive vote, points to serious problems with his ability to influence the committee’s other members, which must be a major concern for the Government. To resort to having to surprise financial markets once in 6 months might be construed as a necessary evil, but to do so twice in that period signal something much more worrying. Most economists expect rates to remain on hold this Thursday, but financial markets are not so sure, with many participants deciding to err on the side of caution. It can be assumed that the 4 members who voted to keep rates on hold last time round will do so also this week, so it will only take one of the other 5 to vote with them, to maintain the current rates. What the market does not know however is what January’s inflation figure is. The MPC will have access to this data as they deliberate on their decision. It is wholly unsatisfactory that critical inflation data is not published prior to the BoE’s monetary policy meetings and this coincidently is the principal reason why markets are so susceptible to surprise rate hikes. Had markets gotten print of the 3.0% CPI figure in January, prior to a rate announcement, then financial markets would have priced in a high probability of a rate rise in January, rather than February. Economic data out of the UK has, for the most part, been firm over the past month and the danger must be that inflation will not have dissipated at all, but in fact it may have appreciated again. Against this backdrop and given he market has fully priced in a rate hike for March, could the MPC hike rates again this week? December/ January is a traditional spending time of the year for UK consumers and house markets are in non-seasonal mode, so it might be premature for the MPC to rise rates so quickly again. Indeed, the real impact of both the November and January rate hikes could take a few months to impact on economic data, so a further hike now could seriously damage the economy in the medium to longer term. But given the MPC’s recent track record, should we be surprised?
ECB President – Jean Claude Trichet, surprised many in January when he failed to signal a rate rise for the Bank’s next meeting in February. That effectively means rates will stay on hold this Thursday. The market does however expect Trichet to resurrect the word ‘vigilance’ this week, which is a coded signal to the market for a rate hike when the MPC are to meet again, i.e. in March. However, if one looks at the data over the past month, which has been largely mixed, then the market could find itself surprised again Thursday, because there is ample justification for the ECB to hold out for longer. The crucial ingredient is consumer price inflation. Last week, Eurostat published January’s euro zone inflation estimate, which came in flat for the third month running, with an annual rate of 1.9%. Economists were expecting a rate of 2.1%. As the annual inflation rate of 1.9% is inside the ECB’s tolerance level of 2.0%, the ECB will be accused of being heavy-handed if it raises rates again against this inflation background. That in essence rules out any remote possibility of a rate hike this Thursday, but it also raises the possibility that the ECB may choose not to signal a rate hike for March either, giving it an extra month to assess fresh data. While concerns over money supply have been heightened, as M3 money continues to grow, many key business sentiment indicators have softened in the past month, indicating that growth may already have peaked. There is also the problem of the widening diversification problem between the performance of the German economy and the other major economic blocks that make up the euro zone. Against a platter of mixed signals and unknowns, the most sensible course of action for the ECB may be to wait another month and thus to deliver the same message to the market this month, as they did in January. It will be embarrassing to signal a hike now for March, if data were to dictate a different outcome later.
As for the Bank of England, their ability to surprise markets has left many with deep scars in recent months and nobody dare assume the outcome of Thursday’s meeting until the actual rate announcement itself is published on the Bank’s website. The closeness of last month’s vote, when the Bank voted to raise rates unexpectedly by a 5-4 majority, gives some insight into the difference of opinion within the current Committee. Wile debate may be seen to be healthy, the fact that the Bank’s Governor failed to deliver a more decisive vote, points to serious problems with his ability to influence the committee’s other members, which must be a major concern for the Government. To resort to having to surprise financial markets once in 6 months might be construed as a necessary evil, but to do so twice in that period signal something much more worrying. Most economists expect rates to remain on hold this Thursday, but financial markets are not so sure, with many participants deciding to err on the side of caution. It can be assumed that the 4 members who voted to keep rates on hold last time round will do so also this week, so it will only take one of the other 5 to vote with them, to maintain the current rates. What the market does not know however is what January’s inflation figure is. The MPC will have access to this data as they deliberate on their decision. It is wholly unsatisfactory that critical inflation data is not published prior to the BoE’s monetary policy meetings and this coincidently is the principal reason why markets are so susceptible to surprise rate hikes. Had markets gotten print of the 3.0% CPI figure in January, prior to a rate announcement, then financial markets would have priced in a high probability of a rate rise in January, rather than February. Economic data out of the UK has, for the most part, been firm over the past month and the danger must be that inflation will not have dissipated at all, but in fact it may have appreciated again. Against this backdrop and given he market has fully priced in a rate hike for March, could the MPC hike rates again this week? December/ January is a traditional spending time of the year for UK consumers and house markets are in non-seasonal mode, so it might be premature for the MPC to rise rates so quickly again. Indeed, the real impact of both the November and January rate hikes could take a few months to impact on economic data, so a further hike now could seriously damage the economy in the medium to longer term. But given the MPC’s recent track record, should we be surprised?
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