Bias Determines Data Dependence
Central bankers have been eager to emphasise their data dependence in recent months, almost as though their actions shouldn’t always depend on the state of the economy. However, the practice doesn’t always live up to the principle. So far, the Fed has behaved best among the majors, rolling back its rate cuts with resilient outcomes and firming up again with renewed evidence the data are softening. But sometimes, data is the tail wagging the policy dog. The data deemed relevant can depend to an extent on what fits the desired policy, as aptly demonstrated by the BoE this week.
The ECB led the way for the BoE on policy and arguably also in this flexibly inverted interpretation of data dependence. Both dismiss high wage settlements in favour of surveys showing firms hope they’ll be lower later. Services inflation has also been worryingly persistent, with the final EA HICP inflation (2.57% in May) data confirming the surprisingly strong flash, while services inflation was revised up by 5bps above an already resurgent pace to 4.13%. Nevertheless, ECB cuts can continue if its peers follow its dovish path soon (see EA Inflation Stays Soft Despite Rise).
Meanwhile, UK services CPI inflation exceeded expectations again by only slowing to 5.68%, ruling out the BoE’s seemingly hoped-for June rate cut by being 0.4pp above its forecast. However, CPI inflation is only tracking 5bps higher, and underlying measures are slowing, albeit not to target, while volatile airfares drive most of the latest upside (see UK Services Air-Lifts Dovish Pressure).
The BoE unsurprisingly maintained the Bank rate at 5.25% with only two dovish dissents. However, the decision was “finely balanced” for probably at least four others, with high services inflation being downplayed in favour of some obscure new measures. August is explicitly identified as an occasion to review the Bank rate in light of the forecast round. This dovish bias lowered the hurdle to an August cut, reinforcing our call for that, although we still see it as a premature step that risks a reversal through rate hikes in 2025 (see BoE Rolls Hints to August).
One of the dovish data points promptly reversed as UK retail sales more than fully recovered from April’s crash in May, not that either move looks like a fundamental signal. The early Easter explains half the volatility. A return to a seasonably average number of rainy days and warmth explains the other half of May’s resurgence and possibly most of the substantial surprise. Consumer weakness seems asymmetrically relevant to the dovishly biased MPC, so the rebound would not prevent it from announcing a premature rate cut in August (see UK: Retail Seasonally Recovers in Dry May).
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Weak PMI data for June can always be pointed to instead, even if they are polluted by residual seasonality. The slight US rise is all the more impressive in that context, although that doesn’t negate the likelihood that it will average less through H2. A substantial fall seems likely in July.
Central banks elsewhere broadly continued on their previously signalled paths, with no surprises to the consensus over the past week. Beyond the BoE, that included 25bp rate cuts in Switzerland and Chile, a pause in Brazil and sustained tightness in Norway and Indonesia. Next week is quieter for policy decisions, at least among the majors. Interest rate announcements are scheduled from the Philippines, Sweden and Mexico on Thursday ahead of another likely rate cut in Colombia on Friday.