Monex expects high inflation to continue

Bart Hordijk, valuta-analyst atj Monex Europe,

Although the main interest rate was kept unchanged at 0.5% with a 0-0-9 vote, the Gross Domestic Product Growth forecast for the UK economy were lifted up to 1.8% for 2018 (1.6% prior) and 1.8% for 2019 (1.7% prior). The real bombshell however was a line in the inflation report about how “monetary policy should be tightened somewhat earlier and by a somewhat greater degree than anticipated at the time of the November Report”.

Carney and companions see inflation remaining firm; around 3% in the short run and above the 2% level in the second and third year of their horizon. The reason for this is that they see the inflationary effects of the post-referendum weak sterling disappearing, while oil prices are up and surveys suggest tightness building up in many sectors, which for example may lead to higher wage growth. On a balance, the Monetary Policy Committee (MPC) expects a rather high inflation environment to remain for the foreseeable years.

Carney is confident in the revival of UK growth. He sees a trump card for the UK economy as the weakened sterling put exporters in a “sweet spot” (although the UK Trade Balance still doesn’t show this). Is Mark Carney however overconfident? Because apart from the Trade Balance which can hardly be called soaring, years of negative real wage growth have put UK consumers (70% of the UK economy) in a dire situation. That their potential to take the economy by the hand is weak is actually even admitted by the MPC themselves in the Monetary Policy Summary (MPS). Additionally, although investment has picked up, this is less than one would expect in this environment of strong global growth and low interest rates, which implies Brexit uncertainty is still dragging on investments.

Inflation may indeed stay strong for quite some time, but a stronger UK economy seems more founded in wishful thinking than in the fundamentals at this moment. There is a substantial risk that the UK is heading for a situation with persistent high inflation, while growth stays behind. The MPC has talked very little about this, possibly because they don’t want to hurt confidence in the economy even more. If this scenario would materialise however the harsh dilemma between price stability and a economy that’s making water will be thrown at the feet of Carney and his crew. Wishful thinking aside, the monetary policy situation in the UK is still not out of the waters in that case by any stretch of the imagination. News Wire & Equity Research: +31 084-0032-842

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