The most recent comments by Bank of England top policymakers suggest the central bank in London may have increased its efforts to prepare markets for an earlier lift-off than expected, while the Fed appears to have been pushing back those expectations. Will both central banks eventually lift-off simultaneously, if inflation picks up as expected, and macro data do not disappoint markedly?
It happened on June 12 last year, when BoE Governor Mark Carney stirred up foreign exchange markets by saying a UK rate hike was to come sooner than markets had been expecting at that time. Sterling then continued to surge markedly, partly on the back of that statement, and its significant pass-through since then has been incorporated in nearly all the BoE's inflation forecasts.
On Tuesday this week, Governor Carney again warned markets that the time at which monetary policy in the UK may begin to normalize was getting closer. Given the fact some market participants have been pricing in the BoE's first rate hike as late as the middle of 2016, Carney's most recent comments could be viewed as another tentative push for correction.
Speaking before the UK parliamentary Treasury Select Committee on Tuesday this week, Carney said: "The point at which the interest rates may begin to rise is moving closer, given the performance of the economy, consistent growth above trend, affirmative domestic costs, kind of balanced somewhat by disinflation that we are are importing from abroad in part due to the strength of the currency."
On the other side of the Atlantic, the common understanding within the markets has been that the Federal Reserve (Fed) may begin with the first round of rate lift-offs as early as in September, after July expectations had gone in vain. The notion of September's first rate hike has also been suppressed recently as the ongoing crisis in Europe and China, as well as the US dollar's increasing strength, weighed on those assumptions.
In her speech to Congress on Wednesday, Fed Chair Janet Yellen reiterated that the current ultra-low interest rates set by the US central bank "remain appropriate" given the ongoing slack in the labor market and weaker-than-targeted price growth.
"Regarding monetary policy, the FOMC conducts policy to promote maximum employment and price stability, as required by our statutory mandate from the Congress ... Given the economic situation...the Committee has judged that a high degree of monetary policy accommodation remains appropriate," the transcript of her speech published on the Fed's web site read on Wednesday.
This may also be be the case in UK, where jobless rate ticked up unexpectedly in May, but wages continued to increase. IHS Global Insight's chief economist Howard Archer explained this most recent glitch as saying: "the Bank of England is unlikely to place too much attention on one month’s labour data and will focus on the underlying trends. If unemployment resumes its downward trend and earnings growth pick up further, an interest rate hike before end-2015 will be a very real possibility."
The rhetoric by both the BoE and the Fed is also very similar in its reiteration that it is less about the timing of the first rate hike, but more about the path of policy adjustment that comes afterward, when rates will continue to increase only very slowly and gradually and will settle below the pre-crisis levels within the next three years.
Apart from Governor Carney, other BoE's MPC rate-setters have recently signaled the BoE should begin to increase rates sooner rather than later.
Speaking at the Resolution Foundation on Tuesday this week, the BoE's external rate-setter David Miles argued that the Bank of England should begin to normalize monetary policy as early as in August this year, and then maintain a slower and more gradual path toward post-crisis monetary normalization in the UK.
"I do have one more meeting on the Committee and it will coincide with the MPC’s August Inflation Report. It also comes at a time when I think the case for beginning a gradual normalization in the stance of monetary policy is stronger than at any time since I joined the committee over 6 years ago," Miles said.
Similarly, BoE policymaker Martin Weale suggested recently that the MPC should stand ready to start raising the base interest rate as early as in August this year as the UK labor market continues to tighten markedly.
One strong offsetting view among the nine-strong MPC is BoE chief economist Andrew Haldane who recently appeared much less enthusiastic about tightening the policy earlier than necessary.
Haldane argued that the recent pick-up in wage growth is weak proof that domestically-driven consumer price pressures are strong enough to push inflation up toward the 2% target in a two-year time period. "April's wage data was news, encouraging news … But one swallow does not a summer make ... Wage growth is causing some fluttering, but not in this dovecote," he said.
Will both central banks eventually lift-off simultaneously, if inflation picks up as expected, and macro data do not disappoint markedly?
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