Shifts in Monetary Policy provide long term direction

First it was the European Central Bank providing a cautious approach which reflected President Mario Draghi’s view that monetary policy should create a “level playing field” for the entire Eurozone and that the withdrawal of additional stimulus would be discussed at October’s meeting.  Today there is a non-monetary policy meeting of the ECB Council where the effect of the stimulus is likely to be discussed. The Bank of Japan will meet tomorrow and will most likely leave rates in negative territory. Try as they might, the BoJ cannot inject inflation into their economy. The currency is a major part of the discussion when the BoJ meets as it is a vital economic component given the sensitivity and size of Japan’s export market.

The Federal Open Market Committee of the Federal Reserve to give it its full title will meet later today. There is no chance of a hike in rates given the benign current and future outlooks for inflation. The latest data show a 1.6% increase in headline inflation still well below the 2% target the Fed has set itself. The economy is performing adequately with Q2 GDP recently raised to 3%. There may be some advance guidance on the shrinking of the Fed’s balance sheet but that is all the market will get and that is likely to be the Fed’s position until the New Year.

Carney’s caution beats Vlieghe’s “volte face”

Following last week’s supposedly epic change in direction from the Bank of England where despite voting 7-2 to leave interest rates unchanged they managed to convince the market that they were considering a hike in interest rates, Governor Mark Carney managed to reel in expectations commenting that any rate rises will be gradual and limited.

Even further analysis of Gertjan Vlieghe’s comments lead to a dovish element hidden away in the hawkish rhetoric. His assertion that there will need to be several “conditions precedent” before he changes his vote has led to a deflating of the tightening balloon.

The Bank of England is faced with a challenging time before Carney leaves in June 2019. How they react to Brexit and the headwinds it is producing will be the most difficult matter to deal with.

Carney has tended to stay out of the Brexit debate commenting almost thankfully that he is not a party to the cause just the effect. HSBC in a note to investors comments that the conversion of “former doves” Carney and Vlieghe has “sealed the deal” for two rate hikes in the next year. Personally, I disagree. First; I consider Carney a realist rather than a dove. His outlook is, in my opinion, neutral, leaning neither towards a hawkish or dovish overall view. Secondly, while Vlieghe has set out his view on a change in monetary policy he is still some way from a vote for a hike and needs a rather substantial change in the U.K. economy to bring that about.

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Brexit Cracks getting wider

Boris Johnson, the U.K. Foreign Secretary has allowed himself to be cast as the “poster boy” for a Hard Brexit. He has been consistent in his belief that the monetary issue is the most important both literally and figuratively facing the Brexit negotiations. His House of Commons comment that the EU can “go whistle” if it expects the UK to pay Eur 100 bio. to settle outstanding budgetary demands and as an inducement to allow continued access to the single market. In his “Blueprint for Brexit, Johnson has reiterated this view but in a slightly different way. He now believes that the payments to the EU should cease on 1st April 2019 the day after Brexit is completed.

His boss Theresa May who is herself being allowed sufficient rope to hang herself is seemingly providing a similar courtesy to Johnson although in any other circumstance and at any other time, he would have been summarily dismissed for such a public opposition of Cabinet and Government policy.

The pound performed somersaults yesterday as the market clearly feels that the Brexit process would be smoother were Johnson to resign although the Foreign Secretary strenuously denied that was in his mind.

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