The Bank of England dilemma

Interesting time in the UK as the Bank of England is facing an important arbitrage. There are potentially two types of shocks in the UK.
One is associated with the consequence of the Brexit on the growth momentum. And the other reflects higher inflation rate (above the 2% target).
The BoE meeting this morning has shown that MPC members may have very different views on monetary policy drivers. At this meeting the vote was 5 for rate stability and 3 for higher rates.
Just a reminder: the BoE has reduced its main rate to 0.25% last July just after the referendum on Brexit in order to accommodate the possible negative risk associated with the referendum result.

Two graphs on recent data can illustrate the MPC dilemma.  Continue reading

Fed: The announced normalization

The Fed main interest rate was increased by 25bp at the June meeting of the FOMC. It will now be in the corridor [1; 1.25%]. This is the fourth hike since December 2015 (start of the tightening cycle).
The impact of this monetary policy change has been very limited. The Fed’s communication strategy is to clearly say in advance what it will do. The Fed doesn’t want to create surprises to investors. Therefore investors can adapt their expectations and their portfolios to the new monetary policy stance. The impact of the measure when it is announced is null.
This is interesting notably on emerging markets. In the past, the Fed’s tightening cycle had a strong impact on them as capital flows were back to the US at the expense of emerging countries. Investors were surprised by the Fed’s move. That’s what economists call a sudden stop. Here, no one is surprised so there are no reversal in flows and emerging markets remain strong.

The Fed considers that the economy is now close to full employment (employment rate is 4.3%) and the inflation is close to its 2% target. Therefore it can be rational to increase rates. But as mentioned earlier, the Fed doesn’t want to create too much volatility and to create a persistent shock on the economy. That’s why its measures are announced loudly in advance.  Continue reading

What could make the ECB change its strategy?

This is the question we could well raise the day after Mario Draghi’s press conference that followed the monetary policy meeting.

The President of the ECB was emphatic in convincing his audience and the entire investment community that there is no question of the central bank changing the way it operates for now, even though it has adjusted the way it communicates on its policy. Any reference to a possible cut in interest rates was deleted from the press release, but according to Mario Draghi, this is not enough to indicate the announcement of a change in policy. The ECB is neither ready nor willing to change policy.

Insufficient inflation, which lags well behind the 2% target set out by the ECB, is the main factor behind this status quo. The President of the ECB again insisted that inflation volatility was solely due to oil price fluctuations. The other components of inflation are much more stable and increased by only slightly less than 1% per year on average over the past three years. This is low and still below the target. The ECB therefore has no reason to rush to change its stance. Continue reading

The ECB meeting – 4 points to keep in mind

4 points to keep in mind after the ECB meeting

1 – The forward guidance has changed. In the press release the possibility of lower interest rates has been erased (see here). It’s a real change in the ECB communication. Draghi said that this was linked to the fact that the risk of deflation is now null.
BUT the ECB president said that it was not a change or the announcement of a change in the ECB monetary strategy.  Continue reading

Fed and ECB: monetary strategy convergence is not imminent

This is my weekly column for Forbes.fr. You can find the published version here

The current dynamics of monetary policies is fascinating. 
The US central bank, the Federal Reserve or Fed, has just announced implementation at the end of the year of a policy that breaks markedly with its strategy since December 2008. The Fed finally seems to be coming out of the financial crisis that kicked off in 2007/2008. Meanwhile, the European Central Bank (ECB) is sticking to its very accommodative policy on a long-term basis. The Eurozone is unable to let go of the monetary crutches it adopted after the 2008 and 2012 crises.

The two economic giants’ policies diverge in a number of ways: Continue reading