Overview of the week commencing 18 September
Graham Cross, CEO
This week is all about the UK.
The Office for National Statistics (ONS) reported a 2.9 percent increase in the Consumer Price Index in the 12-months to August, up from 2.6 percent in the 12-months to July. Actually, 2.9 percent represents something of a surprise for the bond market where expectations were for a less sharp increase.
In the event, it was an import-induced increase in retailers’ prices – including a record increase in clothing and footwear costs – that caused the size of the increase. Indeed, the headline rate might have breached the 3.0 percent mark for the first time in more than five years had it not been for a similarly surprising pull back from 2.6 percent to 2.1 percent in food prices.
We think there is a very good chance indeed that we will see inflation in excess of 3.0 percent in next month’s release.
Meanwhile the pace of cost increases in owner occupiers’ housing costs (OOH) declined in the same 12-months from 2.0 percent to 1.9 percent. That had the effect of limiting the increase in the newer measure of inflation – the CPIH index – to 2.7 percent, up from 2.6 percent previously.
Prior to last week’s gathering of the Bank of England’s Monetary Policy Committee (MPC), there was little expectation of an imminent rate rise in the UK. However, that was before higher then expected inflation and a record low employment rate.
In the event, the minutes – published more or less immediately these days – betrayed a surprisingly hawkish tone. Moody’s – a company with a market value of $26 billion and 11,500 employees – are similarly contrite, admitting that ‘we had expected today’s Monetary Policy Committee meeting to be a quiet affair, but we couldn’t have been more wrong’.
Here’s the passage that has captured many an imagination… ‘A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target’.
Its effect has been to polarise opinion. Nomura’s Jordan Rochester is quoted in the Wall Street Journal as suggesting that a November hike is as good as done and dusted with the only real question pertaining to how far and how fast the Bank goes. In contrast, David Meierover at Julius Baer thinks that a renewed hawkish tone was necessary to prop up the pound and that we are likely to see some ‘sobering of over eager rate expectations’.
Our own position has much more in common with that at Julius Baer than at Nomura. We are sceptical that we will see a rate rise in November and even more sceptical that we are likely to see a series of rate rises any time soon.