The Bank of England minutes from the meeting a couple of weeks ago showed two policy makers, Martin Weale and Ian McCafferty, once again voting in favour of a 25 basis point rate hike.
This came despite the fact that inflation fell to 1% last month, as measured by the Consumer Price Index.
This is well below the BoE’s 2% target and while many have pointed to falling oil prices as being behind the move, core inflation which strips this out fell to 1.2%, which suggests there’s more to it.
With this in mind, I find it hard to understand how Weale and McCafftery can still justify wanting to raise rates which would typically weigh even heavier on the inflation outlook.
That said, they are widely viewed as the most hawkish members of the Monetary Policy Committee, so maybe it shouldn’t be too surprising.
On that same point, their opinions are unlikely to represent those of the rest of the committee and I don’t see the voting changing much towards a hike for most of the year at least.
Wage Growth Still Important to UK Rate Setters
It could even be 2016 before it happens given the outlook for inflation and wage growth.
Wage growth is improving in the UK and once again in the three months to October was better than expected, rising by 1.4% including bonuses and 1.6% excluding bonuses.
While this should be celebrated as it shows progress is being made and more importantly, it’s above inflation meaning real wages are finally rising on a consistent basis, it remains below the central bank’s 2% target, so we can’t get carried away.
The fact that real wages are rising is purely down to luck and if the BoE can achieve its target in the near future, real wage growth will once again be non-existent.
Big improvements still need to be made and for that reason, it’s important that the BoE remains accommodative.
ECB Trying to Fight Off Deflation
While the BoE may have become much less hawkish of late, its job over the next 12 months could not be much different than that of the ECB which is looking to aggressively expand its balance sheet in an effort to stop the Eurozone falling into a deflationary spiral.
Efforts made by the ECB so far have not been good enough, with its balance sheet actually shrinking as a result of LTRO repayments.
The first two take-ups of TLTRO’s have quite frankly been poor and nothing else appears to have done much at all, with inflation confirmed this morning as being at 0.3% in November.
There was speculation after the last meeting that the ECB was drawing up plans for a broad based quantitative easing program which may be the best chance it has of preventing a deflation crisis.
It may create political problems, but the central bank is clearly getting desperate and running out of ideas.
Russian Foreign Ministry Tries to Help the Ruble
Further efforts are being made by the Russian Foreign Ministry to stabilise its currency after two days of absolute mayhem for the ruble on the forex markets.
Prices rose to an all-time high of 80 rubles to the dollar yesterday before retreating, having fallen to 58 earlier in the same day in some of the most volatile trading conditions most people will ever see.
The ministry only reportedly has $7 billion of reserves, which makes you wonder how much its efforts will actually stabilise it, given that the Central Bank of Russia has apparently conducted $80 billion of interventions this year to little avail.
FOMC Statement Set to be More Hawkish?
As if everything that’s gone on this week wasn’t enough for the markets to get to grips with, this evening we’ll get the final monetary policy decision of the year from the Federal Reserve.
The decision itself is unlikely to come as a shock, with rates remaining unchanged, it’s the wording in the statement that people are most concerned with.
For a long time now, the Fed has committed itself to keeping rates at record lows for a ‘considerable’ amount of time beyond the end of QE.
The FOMC is believed to be considering removing it this month in a move that would clearly signal an imminent rate hike to the markets.
I expect plenty of volatility around this event whatever they do.
I’m sure if this is removed, Chair Janet Yellen will do her very best to assure the markets that it won’t come until the middle of next year, the only question is whether the markets will buy it.
The S&P is expected to open 7 points higher, the Dow 62 points higher and the NASDAQ 14 points higher.
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Article by Craig Erlam, Market Analyst, Alpari.
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