MacroScope

Broadbent’s BoE appointment keeps hawks in health

BRITAIN-BOE/Ben Broadbent’s appointment to the Monetary Policy Committee ought to dispel any notions that the Bank of England would be left short of hawks after the departure of Andrew Sentance.

A brief look at the history of Reuters polls shows that Goldman Sachs’ UK economists – led by Broadbent – were uber-hawkish in their outlook for British interest rates early last year.

In January 2010, Goldman predicted rates would rise to 1.5 percent by end of the second quarter of last year, and 2.5 percent going into 2011 — hugely out of step with both the consensus and as it turned out, reality. Rates went nowhere last year, and are still at a record low of 0.5 percent.

Towards the end of 2011, Broadbent’s team moderated their forecasts significantly, coming in line with the consensus for an interest rate hike coming deep into this year.

But his latest set of forecasts resumed a hawkish tone, with an expectation for three 25 basis point rate hikes this year, and a further four in 2012. The consensus view from a Reuters poll on March 3, by comparison, was more restrained: a quarter-point hike to 0.75 percent by the end of the third quarter, before finishing this year at 1.0 percent.

The perils of predicting BoE policy

BRITAIN/As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.

This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.

The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.

Japan the rule, not the exception

Japan may well have looked like the odd-one-out after Monday’s news its economy grew 0.1 percent over the second quarter – about the feeblest expansion possible.

RTR2H9LG.jpgEurope’s big players were already in full swagger after posting growth second quarter growth that often exceeded predictions, and the U.S. economy – although clearly slowing – still expanded at a decent pace over the same period.

But looks are deceptive, especially from preliminary three-month snapshots of the rich-world economies, and Japan’s lethargy is probably still the rule, not the exception.

How uncertain exactly is the uncertain BoE?

king-inflation.jpgFor a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.

Bank of England Governor Mervyn King referred to “uncertain” or “uncertainty” about the outlook five times at the May quarterly Inflation Report press conference according to the bank’s transcript, and the latest one didn’t seem much more confident in tone.

“There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area,” King said in his opening remarks before taking questions from reporters.

Slowing growth, MPC splits? That’s so 2008

Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.

INDONESIA/With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.

Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.

Rip-off Britain in effect

While most of the developed world frets about deflation, in Britain, inflation just won’t quit. 

The Bank of England has been forecasting a sharp fall in consumer price inflation for about as long as Britons have hoped for a summer of uninterrupted sunshine. But at least Britons are still betting on a fair amount of rain. 

UK inflation was 3.2 percent in June, a slight fall from the month before, but still 1.2 percentage points above the central bank’s target rate

from UK News:

BoE’s King “doesn’t do sex appeal”

Bank of England Governor Mervyn King was on good form when he addressed the Royal Society – Britain’s oldest scientific discussion club – on the vexing issue of communicating complex forecasts to the great unwashed.

Aside from his usual moan about the media’s desire to reduce the BoE’s beautiful but baffling ‘fan charts’ of inflation forecasts to one or two numbers, he made a rare and welcome admission that in past years the central bank had not done as well as it could have to flag up the risk that a financial crisis was about to happen.

The BoE’s financial stability reports – like those from many other central banks – sometimes sounded as if they were crying wolf in the years running up to the credit crunch by warning of pretty much every risk to markets short of Martian invasion.

from The Great Debate UK:

Bank hedges bets with QE expansion

BRITAIN-BANK/RATESWhen the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain's economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

On the other hand, the Bank clearly believes that the worst is over for the economy and that recovery will come soon -- even if it's going to be weak.

Europe’s central bankers go from death to dancing

It may be strictly coincidence but as TV stations are rolling out their latest batch of ballroom shows, Europe’s central bankers appear to have caught the dancing bug.

The Bank of England’s Mervyn King and the European Central Bank’s Lorenzo Bini Smaghi, two of central banking’s more colourful characters, both appear to have it on the brain.

Last week in a speechat Siena University nestled in Italy’s Tuscan hills, ECB board member Bini Smaghi said many bank CEOs in the pre-crisis days were dancing in a suicidal game of musical chairs, allowing their banks to follow the disastrous path of packaging up and buying toxic debt parcels, hoping that a chair would still be left when the music stopped and the stampede for seats begun. He called for a responsible adult to be in charge of the music in future.

from Global Investing:

The Big Five: themes for the week ahead

Five things to think about this week:

APPETITE TO CHASE? 
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally's momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week -- as much from China as from the major developed economies -- will show how much appetite there is to keep chasing the rally higher. 

TAKING CONSUMERS' PULSE 
- A better picture of the health of the consumer will emerge this week as U.S. retailers' earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers' profit margins, are the only thing that will tempt them to shop -- both key issues for the macroeconomic and corporate outlook. 

CENTRAL BANK WATCH 
- After last week's Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE's expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 -- and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead.