Policymakers Waiting and Seeing
The UK Budget dominated attention and debate in the UK over the past week, although the last fiscal statement before the general election was something of a snoozefest. As Alastair Newton highlighted in his political preview, this was primarily an event for the Conservatives to shore up ‘core’ support by fending off the Reform UK threat rather than appealing to the broader electorate. The embedded ‘bet’ is that an incoming Labour government will inherit the fiscal consequences (see UK Politics: Betting On Red).
In the event, it merely sold more of the same fiscal approach, measures, and political focus to weary voters. A fiscal windfall was spent on a national insurance tax cut in an ongoing effective reconfiguration from income tax. Non-dom reform stole a bad Labour policy. Challenges for the next Labour government are increasingly severe but not scaring markets. However, loose fiscal policy is sustaining the need for relatively high interest rates (see UK Flogging A Dead Horse).
There was more action this week on the monetary policy front, albeit with policy rates on hold across the board. That began with the Bank of Canada, continued with Bank Negara Malaysia and the ECB (plus Poland and Serbia), and surprisingly extended to Peru. Egypt’s 600bp rate hike to 27.25% was the idiosyncratic outlier.
The ECB unanimously maintained its policy rates and did not even discuss cuts despite this meeting being dovishly priced as starting a cutting cycle until recently. April is effectively ruled out, barring a crisis, with weakening wages needed to justify a June start. Resilient services inflation may mean wage costs are not benign enough. Although we still believe the ECB expects to cut in June, we expect resilience to delay that first move to September. A high neutral rate would also limit and slow cuts (see ECB Calmly Awaits News).
领英推荐
A hawkish demonstration of surprising gradualism came from the Central Reserve Bank of Peru, which defied expectations for continuing its steady cycle of rate cuts by holding its policy rate at 6.25% (see here). High inflation in last week’s release for February (see here) rattled them more than expected. However, the decision wasn’t as hawkish as that headline outcome sounds because it reduced the reserve requirement rate from 6% to 5.5%. The policy mix aims to keep stimulating the economy without raising inflation, including by avoiding FX weakness.
Overall, market pricing for the BoE outlook shifted slightly higher over the past week, even as it declined for the Fed. That seems reasonable as the UK front end lagged the Fed’s hawkish repricing in February. Indeed, we believe this gap combines with the fundamental necessity in the UK to make it a natural place to express hawkish views (see HEM: Reality Rolling Doves).
Insightful analysis – it's intriguing to see how global economic events are increasingly interconnected and the anticipation around US CPI data is a testament to that.