24 August 2016

Carney's kitchen sink

Following the past seven years of slow but steady growth, low productivity gains and zero interest rates you'd be forgiven for forgetting what inflation feels like.

by James Godrich

Fund Manager

With the recent Bank of England (BoE) monetary announcement, some fiscal stimulus due before the turn of 2016, year-on-year comparative lows in the oil price still to be felt and to date, positive UK macroeconomic data post Brexit, it may not be long before that inflationary feeling re-emerges.

Post Brexit, Mark Carney was left with two options: follow the so far inconclusive evidence and admit that he and the BoE may have made some forecasting errors. Or to trust the BoE predictions and pre-empt economic disaster with monetary stimulus. He and the Monetary Policy Committee (MPC) chose the latter and have thrown the proverbial kitchen sink at the economy.

Taking the flow chart further we are now left with the outcome of either much required damage control and therefore the correct response, or with the outcome of a mistaken over-reaction leading to over-stimulation and unexpected inflation; the ramifications of which could be wide-spread.

Weak sterling has so far been successful in cushioning the Brexit blow and this has been shown in the latest retail sales data coming in well above consensus, boosted by a summer tourism boom. The next time we will see an update on this will be two and half hours before Mark Carney announces the next MPC decision on 15th September. No doubt he would have preferred two and a half days rather than hours’ notice.

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