Tuesday, July 15, 2014

Inflation is back in the UK | Yellen echoes Carney: “rate rises nearer than the market might expect”

According to the UK Office of National Statistics, inflation has returned to the UK. The annualised rate in June of this year is now 1.9%, just a whisker short of the target rate of 2.0%. This has clear implications for a rise in interest rates in the UK, and a consequent firming of the Pound Sterling. Already yesterday it had a strong surge against most of its international counterparts.

But the Bank of England now seems to be in something of a quandary. Comments by the governor of the Central Bank suggest that the fear still remains that raising rates could put a damper on the economic recovery that seems well grounded now, not least because, ironically, a strengthening pound could have a negative effect.

Then there is the effect that raising rates will have on households that have mortgages. This could impact consumer spending, a major factor in any UK recovery.

In the meantime Mr. Carney, his colleagues and Central Bankers everywhere know that once the inflation genie is out of the bottle, it is extremely difficult to put him back in again. The only real cure is prevention, and that will require a raising of core interest rates, sooner or later.

 Yellen echoes Carney

The Chair of the US Federal Reserve, Ms. Janet Yellen, is currently giving testimony to Congress on the state of the economy and the way in which the Fed is interacting with it.

One noticable comment was to the effect that if employment figures and inflation continue on the path they seem to have taken, then “… increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned”. These are almost exactly the words that were used by Mark Carney of the Bank of England in his recent Mansion House speech in London, which marked the start of the recent surge in Sterling.

Another interesting aspect of the testimony is the seeming return to the significance of employment data. It is not so long ago that the Fed appeared anxious to stress that it wanted to take a range of economic indicators into consideration in deciding its moves.

It looks like Non Farm Payrolls will be watched as closely as ever by the markets in the near future.

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