Unreliable boyfriend/Inflation nutters

Carney has in the past been cast as an “unreliable boyfriend” for blowing hot and cold and not really letting people know where he stands. I have to say this is a bit more true after today, as his emphasis on the weak aspects of the economy – noting the weakness of China as a factor – rather contrasts with his performance at the Treasury Select Committee a few months ago when he played down the weakness of China as something the Bank had already factored into their forecasts. Of course, he has to represent the views of the committee, but I don’t think there’s enough real change in the news in the last few months to justify a real change in the Bank’s thinking.

The conclusion is that listening to Carney is a mug’s game. In any case, I’m a fan of the market trying to make up its own mind about things, and it had essentially already priced a fairly distant rise in UK rates. Carney’s following rather than leading, and GBP was already under pressure, the marginal rise in inflation today notwithstanding. Regular readers will know I see plenty of good reasons for GBP weakness anyway. So EUR/GBP going to 0.77+ looks fair enough to me with 0.78 my short term target. But at these levels I’d be less keen to open new GBP shorts, especially against the USD, as a lot of the bad news is now in, unless we get more clarity on the risks around the UK EU referendum. Nevertheless, longer term, I still like EUR/GBP at 0.85+

The Riksbank are inflation nutters. That looks to be the conclusion of the report by former Bank of England governor Mervyn King and economist Marvin Goodfriend commissioned by the Riksdag Finance committee and published today. King was the one who coined the term as a description of central bankers who were too closely focused on near term inflation and missed the bigger picture. The report urges more flexibility and recommends that the Riksbank’s 2% inflation target should be measured by consumer price inflation at constant interest rates or CPIF, which is not affected by changes in mortgage rates, which seems obvious to anyone thinking seriously about the issue.

The report makers say it is “striking” that the members of the Executive board devoted so much time to thinking about the future path of the repo rate and to providing guidance as to their views on how it should evolve over the following three years.

“There is something surreal about the precision of the guidance provided by individual board members as to the future path of the repo rate when contrasted with the sheer uncertainty about the future and the fact that markets took rather little notice of the published path in determining their own expectations,” the report says.

In fact, I think the market has taken more notice of the Riksbank than the authors accept, especially recently. What should be the result of this report is that there is less focus on the immediate inflation outlook and consequently less Riksbank obsession with the level of the currency. And the market should feel more freedom to ignore the Riksbank’s repo rate projections. All of which should mean there is less reason to expect them to cut rates again or intervene given the strength of the real economy. Net result should be a substantially higher SEK.


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