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The Global Markets Weekly – 9/18/17
BOE Chatter Drives Pound Higher, Fed/BOJ on Deck
Avoiding a confrontation with above-target inflation, the Bank of England’s Monetary Policy Committee (MPC) maintained a steady policy stance at the September 13 policy meeting. The decision to keep the official rate at 0.25% was favored by a 7-2 majority, while the Committee decided unanimously to maintain the purchases of corporate and U.K. government bonds unchanged at £10B and £435B, respectively. The MPC’s decision was another fine balancing act, weighing the economy’s lackluster performance against the jump in inflation to 2.9% in August. Following a weak 0.2% pace in 1Q17, growth hardly accelerated in 2Q17, coming in at 0.3%. This was the slowest six-month growth rate since 2012, making the UK the worst performing economy in the G-7 Group.
Despite the lingering inflationary effects of the pound’s depreciation likely to ratchet inflation to over 3% in the period ahead, Decision Economics expects more chatter but no significant policy action by the BOE to restrain price pressures against the backdrop of continuing economic weakness.
Traders were quick to rush to judgment labeling the MPC’s announcement as “hawkish.” What prompted this reaction was the sentence that, “some withdrawal of monetary stimulus is likely to be appropriate over the coming months.” Comments on Friday by normally-dovish policymaker Vlieghe boosted pound-positive sentiment as well, but his comments were accompanied by some “may”s and “as early as” coming months, not quite the hard flip some envisioned. Vague phrasing is a hallmark of central bank and economist chatter, suggesting only that the Committee is prepared to take action assuming that the economy improves along the official forecast, while inflationary pressures persist.
However, in the face of a wobbly economy and an uncertain political landscape, DE maintains its out-of-consensus view that the government’s projected 1.7% GDP growth in 2017 represents a stretch. DE projects average GDP growth of 1.1%-1.3% in 2017, falling back to about 1% in 2018, but with 30% odds of a recession by the end of next year.
This week we’ll get a key FOMC decision as well as a steady-as-she-goes meeting at the Bank of Japan. For the Fed, already-conflicting data will be further muddled in the months ahead by weather impacts, including inflation figures. Good thing that the well-telegraphed balance sheet announcement is the only major change expected at this week’s decision, with some time to mull over incoming activity and inflation data before the next “on” meeting in December. DE still sees a hike in December as our base case. Fuller preview inside the full Global Markets Weekly publication.
- S.: Data including housing starts (Tue) and existing home sales (Wed) will play second fiddle to the FOMC rate decision (Wed), which includes a Yellen press conference, updated economic projections, and dot plot.
- Eurozone: September manufacturing and services PMIs are due Friday, with the former recovering recent highs in August but the services PMI slipping or steady in each of the last four months.
- UK: Retail sales figures for August (Wed) will come within a clearly decelerating y/y trend since 2016.
- Japan: DE expects no changes to policy when the BOJ meets (Fri). Economic growth has shown some welcome acceleration but chances of sustainably achieving the inflation target remain remote. An exaggerated case of common factors plaguing advanced economy central bankers; having a target hasn’t mean it can be hit, and tools have benefits and costs.
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