May 07, 2021

HEW: vote counts to price prints

  • Our week began with the usual monthly summary of our core views (HEM: re-opening) and an expansion on why we don’t expect consumers to splurge all their recent savings (see UK: saving the precautionary motive). The BoE also assumes most of those savings are sat on but it only seems to be considering the bright side of the income distribution. It is now so optimistic about the recovery rapidly normalising to how it was before Covid that unemployment peaks a mere 0.5pp above the current rate and is back at these lows within a year. The sunshine and rainbows at the Bank seem to have blinded the MPC from seeing the clouds we worry about, not that we expected any dark epiphanies this week. On the contrary, the BoE tapered its QE programme broadly as we expected while also trimming its medium-term inflation projections like we forecast (see BoE: activist leaves the hawkish roost). Any active removal of stimulus remains a distant prospect in most of the world, but not in Norway (see NB reaffirms H2 hike intention).
  • There’s more vote-counting over the weekend but among a less optimistic crowd – i.e. the UK electorate. Initial results from Thursday votes revealed the Conservative Party increased its majority by winning the only contested Westminster seat. The opposition Labour party appears to have struggled to find support more generally too, perhaps not helped by its failure to do any actual policy opposition over the past year. Council seats affect the grassroots support available in future elections but aren’t a game-changer. Separate results for Scotland’s parliament could have much more permanent effects as a majority of MSPs backing independence would raise the pressure for indyref2. After that result, we’ll be watching final inflation releases in some core EA countries, plus Sweden and Norway, along with UK GDP.

May 06, 2021
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Norway: NB reaffirms H2 hike intention

  • The Norges Bank kept the policy rate unchanged at zero percent and reiterated their view that its policy rate would probably rise in the latter half of 2021.
  • We think it is too early to call an end to the pandemic and are less sanguine on the global outlook. The risks skew to a later hike, albeit with the Norges Bank a first mover.

May 06, 2021
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BoE: activist leaves the hawkish roost

  • The BoE MPC voted to keep all its policy levels unchanged in May, although Chief Economist Andy Haldane dissented in favour of lowering the gilt purchase target by £50bn. That would effectively mean terminating purchases in Aug-21 instead of Nov-21.
  • Forecast revisions raise GDP and squash the unemployment rate. Potential GDP matches the demand upgrade to maintain an economic balance in 2yrs when inflation is also seen at target. Tweaked guidance removes the apparent dovish near-term bias.
  • Gilt purchases have been tapered, as we expected, to stretch them until November. A return of restrictions and failure to recover GDP may yet prompt another extension.