Archive

HEW: Crystalising Policy Divergence

• Spreads between ECB and Fed expectations widened again this week as the ECB held rates with a neutral bias while disappointing US labour market data drive dovish hopes.
• Underlying US services inflation was soft, and initial jobless claims spiked, albeit over Labor Day. We think US pricing has gone too far, and political pressure won’t dominate.
• Guidance with the Fed’s upcoming cut could start to correct that. The BoE will hold rates, after more hawkish macro news next week, and should trim its QT plan this year.

By Philip Rush

ECB: Balanced In The Good Place

• Staying in the ECB’s “good place” encouraged a neutral bias around its unanimous decision for no change, while being appropriately open to tackling future shocks.
• Staff inflation forecasts still undershoot the target, with recent upside news seemingly postponing passthrough rather than trimming the extent into something like our view.
• President Lagarde sounded relaxed about France’s spread widening, and the ECB did not discuss the TPI. We still expect no ECB easing against this, or further rate cuts.

By Philip Rush

Peru Nears Neutral as Rates Cut to 4.25%

• BCRP cut rates by 25bp to 4.25%, approaching neutral policy as August inflation fell to 1.1% YoY, the lowest since 2018, below consensus expectations.
• The real ex-ante rate is now 2.07%, very close to the 2% neutral estimate, suggesting limited scope for further easing without overstimulating the economy.
• Global trade tensions create a medium-term downward bias for growth outlook, with a data-dependent approach maintained for future policy adjustments.

BoE QT: Pruning A Bad Policy

• The BoE’s annual Quantitative Tightening announcement in September should see it prune the targeted size, we expect by £20bn to £80bn, concentrated in the long-end.
• Fewer maturities in the year ahead would otherwise put too much pressure on active sales into a market that lacks appetite, especially with LDI demand disappearing.
• Pruning the size and duration delays costs crystallising by several billion a year, which the Chancellor will welcome, yet QT’s poor design remains an expensive fiscal disaster.

By Philip Rush