Vlieghe Flop, Flips Sterling Fortunes

The MPC voted to keep rates on hold this week. Just two members voted to hike rates. Seven members voted to keep rates on hold. No change from prior month.

So when will interest rates rise? It's like waiting at the bus stop, for a bus that's two days late. You know it's going to come eventually. You just can't be sure when.

We have been waiting at the bus stop in Threadneedle Street for some years now. Churlish to talk of forward guidance and the 7% unemployment trigger rate. That bus passed by with the "out of service" sign some years ago.

So why the excitement this week? Sterling rallied against the euro/dollar as market expectations of an increase in base rates heightened. Despite the decision to hold rates on Thursday,  Sterling is trading at over $1.35 against the dollar and testing €1.20 against the Euro.

It all began with the closing statement from the Governor on Thursday. "Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations". Traders arose from slumbers, to go long Sterling. It doesn't take much to wake up the queue. The bus is coming, it could be here within the hour.

The came the speech on Friday from Gertjan Vlieghe at the SBE Conference in London. "The appropriate time for a rise in Bank Rate might be as early as in the coming months". Crikey. A dove squawked in SE1. The bus is around the corner. Check your tickets and grab a ride. The push to parity is off the trading floor. Sterling is the currency of choice at least for now. Well certainly for the week-end. The rally looks a little over extended to say the least. The bus may be a bit later after all.

In the U.S. sluggish retail sales in August could push any Fed move into 2018. The rally in Sterling may just be enough to take the edge off prices in the short term. The Bank expects inflation to rise to over 3% CPI basis before Christmas. The unreliable boyfriend may just be flirting with the markets again. The push to parity against the Euro, was too much even for the normally indifferent Old Lady of Threadneedle Street..

Gertjan Vlieghe may talk of a rate rise in the coming months ... let's not forget there are many months to come! Don't bank on a ride before Christmas ...

So what of inflation ...?
Inflation CPI basis hit 2.9% in August up from 2.6% prior month. RPI inflation was 3.9%. Do we really think such high levels of inflation are compatible with base rates on hold at 0.25%?

Goods inflation CPI was up to 3.1%. Service sector inflation was 2.7%. Producer prices rose slightly to 3.4%. Input costs edged up to 7.6%. The shock from the oil price rally, compounded by Sterling depreciation should be working out of the system by now. The August data suggests there is more inflation in the pipeline. Our models suggest the worst of the short rise is over. The Bank expects prices to peak at over 3% in the coming months. Does this mean the bus is coming after all? No time to leave the queue. Maybe time to push back in the queue, if you are over a few pounds over weight this weekend.

Strong jobs data, weak earnings ...
The latest data on employment was released this week. Almost 400,000 jobs have been created over the last twelve months. The unemployment rate fell to 4.3%. The ratio of unemploymemt to vacancies hit 1.9. Recruitment difficulties are increasing. Earnings continue to defy economics. The latest data suggest pay growth of just over 2% overall with real incomes under pressure as prices rise. The release of the public pay cap will lead to an increase in overall pay levels. The augmentation of pay will exacerbate underlying price pressure. A pay rise for every one is another "omnibus" around the corner ...

Don't Miss the Economics Conference on the 13th October. Our theme is the Economics of Greater Manchester. We will be talking about the Inclusive Growth Challenge, Balancing the Books and the Sectors Driving Growth in the City Region! Another Great Conference in the pro-manchester series . We have a great line up of speakers announced this week. Book Now Don't Miss Out ...
John

That's all for this week. Have a great week-end ...
John

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