Good morning,

Electioneering to counter the economics in today’s report

Today’s Quarterly Inflation Report from the Bank of England comes at a bit of a crossroads. We’re in the lead-up to a general election and the report itself, regardless of whether it’s positive or negative, will be used by each major party for electioneering and electioneering only. With future governmental policy uncertain, there’s only so much impact today’s report can have.

Nonetheless, as Jeremy wrote in his Sterling Update earlier this week, much has changed over the past quarter that will have to be reflected in the Bank’s forecasts today. Their inflation projections outlined in February already look meek, and we believe a 3% annual rise in prices is likely, and could happen before the end of 2017. Alongside this, growth remains favourable for the UK and expectations should stick at roughly 2.0% annually across the forecast horizon. Nonetheless, wages remain an issue here in the UK. It may be the case that prices are running higher and growth is positive, but until wages at least keep up with the rate of inflation, the UK consumer will be getting poorer in real terms, posing a threat to any longer term recovery.

The Bank have enough excuses not to raise rates

For this reason, it’s unlikely Mark Carney or the Bank will be particularly bullish today and with political uncertainty both in Westminster and in the UK’s relationship with Brussels, there’s a slim chance that markets will have to rush to price in expectations of imminent policy tightening. At present, a full rate hike is priced in for the beginning of 2019 and there is slightly more than a 1/3rd chance that rates tick higher by the end of this year.

Despite this, we’ve already seen a number of members of the Monetary Policy Committee opt for higher rates and Forbes, McCafferty and perhaps Saunders may have pressed the case for increased interest rates at this meeting, but caution over exchange rates, market confidence and the political backdrop will have overruled.

Plastic flowers for Draghi

A Dutch lawmaker (who also happens to be the son of Wim Duisenberg, the first European Central Bank president) presented the current head of the ECB a plastic tulip, explaining that Draghi should “Before your next conference, or any other conference, look at this tulip. Look at it and think of us”. Duisenberg junior was referring to the Tulipmania bubble of the 1600’s, where tulip bulbs became so valuable they were being used to pay for houses, acres of land and livestock before prices crashed and fortunes were lost – a stark message for the central bank that’s sent a number of European asset prices to all-time highs.

NZD drops on dovish RBNZ

While last night’s Reserve Bank of New Zealand rate decision came in unchanged, the central bank didn’t hesitate in insisting that rates are to stay low for an extended period to counter an inflation rate that they expect to slow over the next 18 months. NZD/USD now trades at year-to-date lows and has dropped close to 7% from the highs printed in January.

The headlines from the Bank of England drop at midday and US PPI data follows at 1330BST.

Have a great day.