With the recent steep price declines for energy products and other commodities, headline inflation is generally set to remain below or close to zero in many countries during the autumn. Forecasts rightly assume, however, that by the first half of 2016 the collapse in energy prices will be falling out of the year on year numbers and headline CPI inflation will trend back towards 2%, at least in the US and UK.
Core inflation, of course, continues to provide the clearer underlying picture of inflation trends and as yet, there is little evidence of significant enough reflation to reignite inflation to a level discomforting to central banks.
Interest Rates & Monetary Policy
Short term money market rates generally trended sideways but with US rates out along the curve easing back following the Fed’s decision to maintain current rates. The US Federal Reserve widened its reaction function adding global growth and financial market turmoil to domestic growth and inflation developments. At the moment, observers are tending towards a Q1 hike but an equity bull market, stronger growth in China and a recovery in commodity prices and emerging market bond yields and currencies, could do wonders for December’s chances.
The Bank of England will follow the Fed and a mid-year rate rise is now considered the earliest by the futures market. The divergence on the timing of the next interest rate rise between economists and that priced into the financial markets continues to grow. In general, the former expects a rise in Q1 and the latter for later in the year.
Governor Carney recently reiterated his view that the decision should become clearer around the turn of the year but stressed that the outlook was clouded by uncertainty, and the Bank of England “will have to feel its way as it goes” once rates start to go up. It is unlikely the Monetary Policy Committee will move before the Federal Open Market Committee but Q1 is only likely as a starting date if the economy continues to enjoy an ongoing strong pace of domestic consumption and wage growth exceeds 4%.
The Bank of England also recently noted that the UK’s buy-to-let market poses an increasing threat to financial stability and is asking the Treasury for greater powers to police the market.
