Thursday, July 14, 2016

Bonddad's Thursday Linkfest

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.  At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.  Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.


Official data on economic activity covering the period since the referendum are not yet available.  However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.  Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions.  Regarding the housing market, survey data point to a significant weakening in expected activity.  Taken together, these indicators suggest economic activity is likely to weaken in the near term. 

6-Month Chart of the Pound Dollar

6-Month Chart of the Pound Euro

Weekly Chart of the UK ETF

Australia's trend estimate of employment increased by 8,300 persons in June 2016, with:

  • the number of unemployed persons decreasing by 200;
  • the unemployment rate steady at 5.7 per cent;
  • the participation rate unchanged at 64.8 per cent; and
  • the employment to population ratio steady at 61.1 per cent.

Over the past 12 months, trend employment increased by 212,000 (or 1.8%), which was in line with the average percentage year-on-year growth over the last 20 years. Over the past 12 months, the trend employment to population ratio, which is a measure of how employed the population is, increased from 60.9 to 61.1 per cent.

Weekly Chart of the Australian ETF

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation in Canada is on track to return to 2 per cent in 2017 as the complex adjustment underway in Canada’s economy proceeds. The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty.


Now let me turn to the Canadian economy. Our discussions focused on how we should look through the choppiness in recent data to see the underlying trends, and what these trends mean for the inflation outlook. Among other factors, the fires in Northern Alberta, which have been costly for many, represent a sharp, but temporary, hit to the economy. We expect to see GDP fall by 1 per cent at annual rates in the second quarter, and then grow by 3.5 per cent in the third quarter as oil production resumes, rebuilding around Fort McMurray begins and the new Canada Child Benefit lifts consumption. In fact, fiscal measures, including infrastructure spending, provide an important support to growth over the forecast horizon.


We have always said that the adjustment to the oil price shock would be a complex process. And we see evidence that these adjustments are happening, thanks to the resiliency and flexibility of the Canadian economy. On the energy side, firms have been quick to cut back investment plans and reduce costs. By the end of the year, we expect these reductions to be largely over.

On the non-commodity side of the economy, we have also seen evidence of adjustment, but it has been more uneven. Export data have been particularly volatile, and it is very important for us as policy makers to assess underlying trends. What we see is that non-commodity exports over the past couple of years have been responding largely as expected to growth in foreign activity and the Canadian dollar. Businesses are telling us that they are benefiting from stronger demand and a lower dollar. We have a great chart in the MPR that shows that non-commodity exports have recovered almost to their pre-recession peak, which puts the recent volatility into proper perspective. Exports are projected to grow in line with the US economy over the projection period. We are being conservative by assuming that exports only make up part of the ground lost over the past four months. The past depreciation of the exchange rate will continue to support the level of exports, but its effect on export growth is projected to taper off over the course of this year.

5-Year Chart of the Canadian Dollar/US Dollar

Weekly Chart of the Canadian ETF