Review of the Bank of England’s MPC monetary policy meeting minutes 19 November 2014
In the minutes they’ve twice mentioned the mid-October wobble in markets for adding to uncertainty over the economy.
Sterling and US dollar implied interest rate volatilities had increased sharply in the middle of
October. The MOVE index of dollar interest rate implied volatility briefly reached its highest levels
since September 2013, a time of heightened uncertainty and speculation over the prospects for US
monetary policy. Although this most recent spike had followed a sequence of weak data releases,
market intelligence suggested that price movements had been exacerbated by some investors closing out a variety of active trading positions that had become increasingly unprofitable over recent months as perceptions of the global economic outlook had softened.
Business survey data released during the month had, in general, added to the sense that economic activity might have marginally less momentum going into the new year than had been assumed in August. It was possible that survey responses had been disproportionately affected by the temporary increase in financial market uncertainty in the middle of the month. More broadly, while a little softer, indicators of output remained at levels consistent with relatively solid growth.
The finger has also been pointed at Europe, as we know
Earlier in the year, the Committee had envisaged that the anticipated easing in growth would be
centred in private domestic demand. Given the slowdown in global economic growth, especially in the
euro area, it had not been surprising to see signs that the recent slowing of output had also been 5
associated with weakening export demand.
A shift in inflation sentiment could become a self-fulfilling prophecy, particularly in wages
With a period of inflation below target in prospect, it was conceivable that firms’, households’
and financial market participants’ expectations of future inflation might begin to drift downwards in a way that could reinforce the weakness of inflation itself – for instance, via wage bargaining
Generally the minutes echo the inflation report with regards to CPI
A word of warning also over the country’s finances
With the fiscal consolidation set to continue and export prospects subdued, even lower private
sector saving would probably be necessary to sustain UK output growth at the historical average rates
envisaged in the November Inflation Report central projection. The prospect of a continued reduction
in private sector saving and a persistent current account deficit should be carefully monitored.
The household saving rate was already at a relatively low level and was projected to fall further over
the forecast period. Continued falls would raise the economy’s dependence on external finance and could not be sustained indefinitely.
There is still also uncertainty over how much slack there is and it’s effect on both inflation and wage growth and whether the effect of the strong pound had a material effect on CPI.
One explanation for some of the recent weakness of inflation could be that the pass-through to
lower consumer prices of the appreciation of sterling since the start of 2013 had been faster or stronger
than anticipated. While sterling’s appreciation was no doubt playing a part in holding inflation
below the target – and would probably continue to do so – there was not yet evidence to suggest that
the effect would be any different than had been supposed at the time the Committee had assessed the
outlook in its August Inflation Report. (here’s what the inflation report said “In the light of
sterling’s recent appreciation, import prices, which have been pushing up inflation in recent years, are now falling.”)
So overall we know that we’ve seen a slowdown but the BOE are not keeping an overly dovish look on the economy. The main factor in keeping our economy subdued is exports but domestically we’re still ok. A shift in sentiment on lower inflation could manifest itself into actions taken by businesses but probably the lower costs that will be felt in people’s pockets should counter that somewhat, even if it’s only a temporary event.
As I said in the vote post the minutes aren’t as dovish as the market may have been expecting and that’s probably going to be enough to see the pound steady itself into the end of the year.
Lots more can happen but there’s still no hint from the BOE that rates are not going up, and that’s all the market wants to know.
It looks like the market is coming to the same conclusion after chewing over the details as cable is now pushing 1.5670