Yes that’s right, the unreliable boyfriend is back. Just when you thought you’d got rid of him, there he is, waiting for you outside your flat with an overzealous bouquet of flowers, cigarettes and a bottle of vino. The first few times your heart leaps even though you know it shouldn’t; but by this stage you just sigh and wonder why he bothered. Did he really think the leather jacket and naughty smile would cut the mustard??
And so, before the metaphor entirely tires itself out, we turn once again to Mark Carney’s pronouncements on interest rates. There he is on Sky News warning the British Public that the possibility of a rise in rates has ‘increased’. *wink*
I know, I know, we have heard this many times before. Most laughably in the summer, when one minute it was “now is not yet the time to begin that adjustment” of raising rates, then the next minute – or to be precise, 8 days later – it was “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional“.
Sterling enjoyed a delightfully painful flip-flop as a result of those comments, but Blondemoney dealt the unreliable boyfriend a fair hand back then. He merely saw the way the wind was blowing for the MPC and was giving himself the flexibility to ensure he wasn’t in the minority when the eventual rate hike decision is taken.
The wind has been blowing even further in that direction since the August inflation report, as the MPC noted themselves in the Minutes yesterday:
‘the relatively limited news on demand had pointed, if anything, to a slightly stronger picture than anticipated in the August [Inflation] Report’
‘If anything, recent developments had suggested that the remaining spare capacity in the economy was being absorbed a little more rapidly than had been expected’.
Pretty optimistic stuff. Even in paragraph 32 of the Minutes, which outlines the argument for leaving policy unchanged, they comment on ‘some signs of growing momentum’: ‘in particular stronger employment data, signs of a pickup in the housing market, and a partial rebound in new car sales’. And that’s in the paragraph arguing for unchanged rates! Oh the little tinkers. It’s in that paragraph that they give their biggest hint of when the rate rise could come, concluding:
‘More generally, the Committee could undertake a full assessment of recent developments, and the data released over the next couple of months, in the context of its November forecast round.’
So – November is when they’re itching to go, and a 70% chance of a 25bp hike is now priced in following comments from dove Gertjan Vlieghe this morning that:
‘Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise. If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months‘
A little bit more than 25bps is now fully priced by February next year. The reason for the disconnect in timing is partly because of that whole unreliable-boyfriend, lack-of-credibility thing, and also that yield curves have become so flat that hardly any central bank is expected to do anything ever. Never ever. Like, ever.
Oh but another curveball was thrown into that lack of curve pricing yesterday, with US inflation data beating expectations at almost 0.3% month-on-month. Maybe that December rate hike from the Fed might come after all? Either way, these are reminders that central banks are not flatlining.
Blondemoney knows from experience that when you’ve been let down and disappointed by Mr. Unreliable, it’s easy to believe he aint changed. But the whole corpus of the Bank of England is starting to sing from the same hymn sheet. When uber-dove Haldane flipped towards rate hikes in June, he noted:
‘“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year”’
This argument to withdraw the ‘insurance’ cut post-Brexit vote was cited again in yesterday’s Minutes:
‘A withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.’
Just like the Bank of Canada, they’ve decided the time is right to remove the insurance policy, and they’re just going to go for it. And why not? There’s certainly a window of opportunity for the BOE to get it done before Brexit talks get complicated.
This time, it’s not just Mr Unreliable at your door, it’s him and his best mates turning up with banners, loudspeakers, a song, and a script to deliver a clear message of why This Time, He Means It. Are you gonna take him back in, girlfriend? For once, you should.