MPC facing “Tricky” decision

Broadbent sides with colleagues

The makeup up the MPC, five Bank of England officials and four independents, is being brought into sharp relief. Chief Economist Andrew Haldane is perhaps tellingly, the only one of the "officials" prepared to put his head above the "rate hike parapet".

Currently, there are only eight members instead of nine since the appointment and resignation of Charlotte Hogg earlier in the year. Ms Hogg resigned over her failure to disclose her brother's senior position at Barclays Bank which presented a potential conflict of interest. Ms Hogg will, no doubt be replaced at some point.

Ben Broadbent, the Deputy Governor for Monetary Policy has had a week which could be termed his "fifteen minutes of fame". This is not an accustomed position for a conservative (small c) banker and his initial coyness disappeared yesterday as he pronounced that his is "not yet ready" to raise interest rates.

Broadbent called it "a bit tricky" to raise rates in the current environment given the imponderables of Brexit and its effect on trade. Given the Bank's "unseemly" rush to cut rates following the Brexit referendum result its new-found hesitancy is a little surprising. There is no question that a hike in rates now would be a risk but as a reversal of a clearly incorrect decision it may be appropriate.

 

Yellen turns a little dovish.

Janet Yellen the Fed Chair is half way through her twice-yearly testimony to Congress and The House of Representatives in which she "justifies" the actions of the FOMC over the previous six months.

The Fed has been in hawkish mood over the past six months or so, hiking rates three times despite an economy that is performing adequately.

Everyone is avoiding mention of the "elephant in the room" that is the performance of the stock market. The Dow has lost a little impetus following a monumental period where it has grown from 15,500 to 21,500. A little of the steam has been taken out of it, which without mentioning it, has been either a consequence of or the prime reason, for hiking rates.

The performance of the stock market in the U.S. is a very sensitive subject given the huge participation rate both corporate and individual which dwarfs any other country. Yesterday Mrs Yellen commented that the economy is healthy enough to sustain further rate increases but with inflation benign any hikes will be data driven. A winding down of the Fed's balance sheet bloated by bond purchases to add liquidity to the market during the crisis is also expected to start in the Autumn.

 

Canadian Dollar hits thirteen-month high after the rate hike.

I assume that we all know that the Canadian Dollar is nicknamed the Loonie and why that is, so I won't waste precious words. Suffice to say that the Loonie is trading at its highest rate in over a year following yesterday's wholly anticipated hike in interest rates by the Bank of Canada.

There has been some focus on the commodity currencies (CAD, AUD and NZD) as the Reserve Bank of Australia has signalled that rates have bottomed and their Labour market is tightening. The RBA will want to stay ahead of the curve to be on top of inflation when it starts to rise. The RBNZ is some way away from a change in monetary policy. There is a distinct improvement in the global economy driving optimism.

Nowhere is that optimism more widely felt than in the Eurozone. Benign inflation is giving the ECB all the time it needs to perfect monetary policy that fits all nineteen members of the Eurozone and there is now a real feeling of understanding of what is required seeping through the whole bloc.