Thursday, 13 February 2014

The thoughts of the Bank of England yesterday - the charts which said something to me

Lots of press here in the UK covering the Bank of England's evolved forward guidance thoughts which effectively dropped the unemployment rate as a key policy indicator.  As the Governor of the Bank of England, Mark Carney, put it:

“When the point comes [for rates to start rising] the adjustments will be gradual and limited. The MPC (Monetary Policy Committee) will not take risks with this recovery.”
So does this mean a change in the low interest rate policy of recent years soon?

Well, expectations have increased slightly but it is nothing material...
 ...and that's because they expect a slow economy?  A central projection of a 3%+ rise in household consumption, 11%+ rise in business investment and a 23%+ rise in housing investment.  That doesn't sound slow.  Look at the employment line though...growth of either side of 1% for the next 3 years.


So why the dichotomy between the consumption/investment projected variables and the employment ones?  The above chart seems to be saying that everything goes up quite aggressively (consumption, investment, average wages) except employment.  No wonder they are dropping the importance of unemployment...

Surely though such an economy is inflationary...and hence leads to higher interest rates?  The fabled 'escape velocity' and all that?

Forecasts and statistics always need to be treated with material caution.  One of the second or third charts is going to prove to be incorrect.  My instinct is that the latter chart is going to prove too optimistic.  And that implies that any benign optimism in the market is overstated.


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