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By HaleStewart June 18, 2017 10:33 am
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International Economic Week in Review: the BOE and BOJ Shift Their Inflation Thinking

  Good news continue on the global front: both the Financial Times “Nowcasts” and the World Bank are projecting slightly above trend global growth.  This shouldn’t be surprising.  EU news became slightly more bullish at the end of last year and has continued in that vein during the 1H17.  The Markit sentiment indicators are at highs, GDP growth continues to increase, unemployment is decreasing and retail sales are rising.  The latest Japanese GDP figure was stronger than projected while unemployment continues to plumb new depths.  Canada has emerged from its oil price shock, Australia continues to grow and China has avoided a potential slowdown (again).  Overall, the macroeconomic scenario is promising. 

      The BOJ and BOE announced their latest policy positions this week.  The combined impact of both indicates a shift in G7 central bank thinking.  Regarding prices, the BOJ stated:

The Bank will continue with "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.

Before the bank will raise rates, inflation must overshoot 2% and stay “above the target in a stable manner.”  They are clearly hoping a prolonged period of higher prices will pull overall CPI higher, eventually bringing it in line with the bank’s 2% target.

            The BOEs statement as longer:

Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.  Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.  For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

The projections that the Committee published in May showed that the economy was expected to operate with a small degree of spare capacity for most of the three-year forecast period, justifying the tolerance of some degree of above-target inflation.  The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above-target inflation.  Looking ahead, key considerations in judging the appropriate stance of monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand.

In light of these considerations, five members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit.  Three members considered it appropriate to increase Bank Rate by 25 basis points.  All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.  The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.

This is one of the most important central bank statements in some time.  The BOE notes that if they raise interest rates now, they will not only blunt inflation’s recent rise but also hurt growth, which is currently slowing.    Thanks to spare capacity, the UK should be able to absorb inflationary pressures over the medium term.  If this plays out as projected, the economy will do the bank’s job for it.  The bank will therefore maintain their current policy, adopting a wait and see approach regarding currently rising UK inflation rate.  Just like the BOJ, the BOE is hoping prices will overshoot but eventually return to 2%.

            On Monday, Carolyn Wilkens – a senior deputy governor from the Bank of Canada --  gave a very upbeat speech.  She first noted that energy provinces are once again growing, indicating the oil price drop slowdown is over.  Business capital investments are also increasing, confirming the change.  Labor market growth is following suit.  Prices are still weak, but this is the situation across the G7.  Markets interpreted the speech’s positive tone as indicative of an upcoming Canadian interest rate hike, although that might be a bit premature.

            EU news continued in its recently upbeat trend.  Industrial production rose .5% M/M and 1.4% Y/Y while the quarter employment numbers were 1.5% higher Y/Y.  Prices moderated .5%, increasing 1.5%.  But most of this was the caused by a 3.1% drop in energy prices. 

            It’s been about 6 months since the overall tenor of global economic news turned slightly brighter.  This week’s FT and World Bank projections confirm that these god data points have worked themselves into the data, slightly increasing overall economic growth.  With 6-7 months of good news behind us, we can now say that economically, things appear to be improving.


Hale Stewart is a tax lawyer in Houston, Texas with the Law Office of Hale Stewart, where he specializes in domestic and international tax structures and asset protection.  He is also a financial adviser with Thompson Creek Wealth Advisers.      




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