If you managed to side-step the interminable speculation over the Brexit negotiations, you will have seen that the European central Bank, Bank of England and US Federal Reserve dominated the news in the last few weeks of Quarter 3.
Will they, won’t they raise rates, or cut their Quantitative Easing (QE) budgets, or find some other means of tightening monetary policy without strengthening their base currency? Is that even possible – or necessary – at this stage, or is this too early? Everyone has an opinion and it’s all guesswork.
Whilst the central bankers purport to be offering guidance on their policy changes, such guidance must be taken with a pinch of salt or is it a spoonful of sugar as espoused by Mary Poppins? When tested against reality, central bankers are not known for the accuracy of their forecasts.
Whatever the outcome, the central bankers will be guided by the facts but not necessarily controlled by the facts. Well the first week of the fourth quarter threw some facts in their general direction that and more will arrive to offer guidance.
As things stand, the general consensus is that The US Federal Reserve is poised to start reducing its massive $4.5tn QE budget. That may take the form of selling bonds or some other extraordinary means but their preferred term for this activity, and that of raising interest rates again, is ‘normalization’ (sic).
US data certainly does point to some pressure to normalise; average wage growth is outstripping inflation; employment data looks very healthy and output data is in the growth range but there is nervousness over whether the US economy is robust enough to withstand another rate hike shock. There is also nervousness over the impact the Fed will have when it cuts the amount of cheap money in circulation. That cheap money has undoubtedly fuelled record highs in US equities markets as well as those of a number of other nations.
The Bank of England (BoE) is less well placed to start hiking the base rate or tightening other monetary controls. Wage growth is barely keeping up with consumer inflation although the fall in the value of Sterling is considered more of a one off inflationary influence and that will work its way out of the figures in the months ahead. But other UK data has been less convincing and, whilst most sentiment indices are still well into the growth zone, the pace of improvement has certainly slowed or stalled in some instances.
We also have to remind ourselves that the BoE, which has always claimed to look forward 18 months or more, is therefore looking beyond the Brexit deadline and must therefore temper its enthusiasm for higher interest rates for as long as it can manage. However, the BoE ran inflation well above its 2.0 per cent target for nearly a decade after its independence was instigated. So, whilst there may be urgency amongst the press for a rate hike, they may be waiting longer than they anticipate.
For its part, the European Central Bank (ECB) seems destined to start tightening monetary policy as soon perhaps as 26 October, when they next meet. Whether they will be brave enough to do so while Eurozone data is still patchy and slightly erratic is an unanswerable question at the time of writing. The rhetoric says they might but their hesitance has been seen in the past and the euro could be set for a very volatile period if the ECB board decides to sit on its hands for a few more months.
And, ultimately, most governments would prefer a weak currency to assist their exporter as long as it doesn’t ramp up domestic inflation. That hasn’t been the case while global demand has been poor but things are changing and, just like the rest of the world, central bankers are slaves to external pressure rather than masters of it.
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