Daily Archives: February 3, 2011

Chris Giles

The title of this post might seem an odd question. But this long analysis with oodles of quotes has demonstrated to me that I no longer have a good answer. I am confused and I know I am not alone.

Judging by Mervyn King’s 2006 Mansion house speech, the governor of the Bank will be concerned that there is confusion about the Bank’s objective and its analysis. Then, he said the answer to my question was fundamental for outsiders’ understanding of a central bank’s monetary policy:

“in order to form judgements about the likely path of interest rates over somewhat longer time horizons, markets do require some information from the central bank.  To be precise, two key pieces of information – our objective, and our analysis of the economy. Our objective is the 2% inflation target given to us by the Chancellor and plain for all to see.  And our analysis of the economy is published in the minutes of our monthly meetings, in more detail in our quarterly Inflation Report, and in speeches by members of the MPC.”
(emphasis in original)

The Bank’s objective and analysis might have been plain to see in the hubristic days of 2006, but it is far from clear today, particularly after last week’s speech by the governor. Read more

Robin Harding

High productivity growth is good news (+2.6% annualised in Q4). But combine it with low wage and employment growth and you get a big part of why inflation has been so low – and why it may stay that way. Employers’ labour cost per unit of output is falling.

Labour is the single biggest cost of almost any company. If it is falling they are most unlikely to be raising their prices. Read more

The euro has plummeted following the ECB press conference. Markets, it seems, were expecting a more bullish overtone from the press conference that followed today’s rate-hold decision.

FT Alphaville posted earlier on key phrases to watch for as signs of an imminent rate rise – but “strong vigilance” and “heightened awareness” were notable by their absence. Not that we – or RBS, who worked out the code words – had expected them today. Read more

The European Central Bank held fire in the fight against inflation on Thursday, leaving its main interest rate unchanged at 1 per cent for the 21st consecutive month. The decision by the ECB’s governing council was widely expected. No eurozone policymaker had hinted that a rise in official borrowing costs was imminent.

But Jean-Claude Trichet, president, has struck a noticeably tougher tone in recent weeks in the face of surging oil and food prices, encouraging financial market speculation that the ECB will raise interest rates later this year. Read more

After Poland and Hungary recently raised rates, Romania and the Czech Republic have both announced decisions to hold, at 6.25 and 0.75 per cent, respectively. It was a close shave in the Czech Republic, however, with 3 of the 7 members voting for a 25bp rate rise. Last meeting only one member voted this way.

Neither country has raised rates since the financial crisis, though in terms of inflation, at least, that is where the similarities end. Czech inflation is running at just 2.3 per cent while Romania’s prices rose 7.96 per cent in the year to December, significantly above the 3.5 per cent target. Raising rates to counter inflation would be tricky, however, as the currency, the leu, is already strong by historical standards: Read more

“Strong vigilance”. “Heightened alertness”.

If you hear either of these phrases at Thursday’s ECB press conference (which starts at 1.30pm London time) then brace yourself for an early interest rate rise. (You probably won’t till July.) Worth remembering that the ECB communicated with the market in code words during its December 2005 tightening cycle. When the governing council mentioned “strong vigilance” and later “heightened alertness”, a rate rise was never far away:

 Read more