This rate hike looks to be all about the tight labour market and the risk of rising wage pressures. While the MPC’s improved confidence that Q1 GDP weakness was temporary helps explain the timing of the hike, they can hardly be accused of being upbeat on the UK growth outlook. Rather it’s their pessimism about the supply-side that is pushing them to start to normalise, albeit very gradually. The lack of spare capacity and very low unemployment is threatening to boost domestic wage and cost pressures, exacerbated by the impact of low productivity on unit labour costs.
Maxime Darmet, Associate Director in Fitch’s Economics team says the BOJ meeting has not brought any major changes to monetary policy but will reinforce policy sustainability to its JGB purchases. Kaori Nishizawa, Director in Fitch’s Financial Institutions team adds that the overall impact on banks’ profits is likely to be rather small.
“Yesterday’s decisions will not change the monetary policy stance for at least the next two years, with the BOJ re-affirming its commitment to keep running its extremely accommodative policy until inflation picks up above 2% and stays there. …
US Q2 GDP growth at 4.1% annualised was faster than we expected in our last GEO (3%). While we always expected a bounce back in consumption it was more powerful than anticipated and speaks to the impact of an increasingly tight labour market and strong job growth on consumer income and household’s confidence.
Somewhat ironically in light of the administration’s concerns about external trade, exports also played a major part in the pick-up in growth, helping net trade contribute a full percentage point to annualised quarterly GDP growth. These numbers really bring the possibility of 3% growth for 2018 as…
We are inching towards the next rate rise. The MPC seem to have gained a bit of confidence in their judgement that Q1 GDP weakness was temporary, sound somewhat reassured on the consumer and are discounting the recent slight dip in wage growth. The shift in the vote to 6–3 from 7–2 in favour of no change partly reflects a response to continued tightness in the labour market and makes it more likely that we will see one rate hike this year — probably in the late summer.
Following the change of tone from the Fed and the ECB last…
“Today’s decision to end QE, albeit by providing a short extension to the end of year, ends months of communication ambiguity by the ECB and second guessing by markets. Moreover, the clear message that policy rates will remain at their present level “at least through the summer of next year” strengthens forward guidance on interest rates with an explicit display of pre-commitment by the ECB, designed to avoid the “taper tantrum” seen in the US in 2013 when QE was initially scaled back and market expectations of pending US interest rate hikes over-reacted.
The ECB seems to be…
In addition to moving to four rate hikes this year and raising the 2019 interest rate forecast in the projections, we have the removal of the forward guidance on keeping rates “below long run levels for some time” and the remaining language on “gradualism” in normalisation has been weakened.
The Fed sounds more bullish on the economy and has noted the decline in the unemployment rate. As we discussed in our June 2018 Global Economic Outlook, the growing imbalance in the labour market means that it is only a matter of time before sharper upward pressures on wages start to be seen. We see unemployment falling to 3.4 per cent in 2019 which would be the lowest since 1953.
“It looks like the 2018 rate hike has been delayed not cancelled. The MPC are quite dismissive of Q1 growth weakness and maintain their view that the economy has little slack. But the area that is probably giving them most
“After significant changes to its language in the March statement, today’s meeting was always likely to be a more lacklustre affair. But while Draghi confirmed that the underlying pace of expansion remains broad and solid, the recent moderation in growth indicators likely made the ECB even more determined not to rock the boat this month. Given that only two more meetings remain before September, the window is getting narrower for the ECB to communicate its expected change to forward guidance and policy. Along with the recent flat core inflation numbers and Draghi’s emphasis in the press conference on the impact of the stronger Euro on inflation, the ECB’s tone has become slightly more dovish. “
“While there is no change to the Fed’s end 2018 interest rate projection, this is clearly a firming up of the future trajectory of policy tightening. The projected end-2020 Fed Funds rate is now a full 50 bps higher than in last September’s projections, at 3.4%. The Fed seems to be gaining confidence in the normalisation process as they see the labour market tightening quite a bit further than they previously predicted. The fact that the Fed have acknowledged some slight softening in recent demand side indicators while upgrading their 2017 growth forecasts underlines the impact of the easing in fiscal policy on the near-term GDP outlook”.
Chief Economist at Fitch Ratings