While the Bank of England is not likely to hint a rate hike this year in an explicit manner, but they could certainly update the projections on slack to enhance the view that this is coming, says Simon Smith of FxPro.
In the interview below, Smith also talks about the directions of the Fed and the ECB as well as volatility. Are we beginning to see a bounce from the bottom?
Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.
- The Bank of England publishes its Inflation Report this week. Can we expect a hint about the timing of the rate hike? Is late 2014 still seen as the probable timing of the first hike?
I don’t think we are going to get a hint along the lines seen in June. The IR is a chance for a more judgemental and considered view of policy risks. I think the projections and update on the amount of slack in the economy are going to further enhance the view that rates could well rise this year. I’ve long believed that a move this year is more likely than not, even before Carney’s speech in June. But the committee are probably not there yet, so I don’t see Carney explicitly pushing a 2014 rate rise view, as this won’t be reflecting the view of the committee as a whole at present.
- Mario Draghi said that preparations for the ABS are intensifying, including hiring a consultant. Is QE coming to the euro-zone or is it just another bazooka?
They have dropped enough hints that something is likely to come along, but its impact will be minimal compared to Draghi’s 2012 pledge to do “whatever it takes”. We are in a position where many asset markets are already perceived as being rich and we must not view QE in the Eurozone and also its potential impact as being anything along the lines of what we’ve seen elsewhere, such as in the UK and US. The structure of the ECB, its mandate and also the underlying capital market structure all combine to mean that any QE from the ECB will not have the same impact.
- Fed Chair Janet Yellen goes to the Jackson Hole Symposium later this month. Is the time ripe for laying out the Fed’s exit strategy or will she prefer not to rock the boat?
I think the Fed has been as explicit as it can be regarding laying out the conditions for their exit strategy of near zero rates. As she found out in March, being too explicit (hinting at 6 months between end of tapering and first rate hike) can do more damage to credibility than it offers help to markets. Indeed, I think there are problems with central banks trying to be too clear with markets, because ultimately there is high degree of uncertainty with monetary policy.
- The unemployment rate jumped in Australia. Can this push the RBA to a rate cut or holding for longer? Or could it be blamed on statistical changes?
I started the year with a bearish Aussie view (on view that rates were likely to be cut further), which proved to be my least successful call given the subsequent rally. So things could still work out, but I don’t see the RBA easing in the near future, with a move more likely in the fourth quarter should weakness in the economy prove to be more broad-based.
- Volatility seems to have picked up a bit lately. Do you think that we have bottomed out?
I think so, but I don’t see volatility rising rapidly from here. Ultimately what is going to bring volatility back will be actual changes in interest rates from the major currencies. Yes, we could see from the Aussie and also sterling, but they are some way off for the dollar and any further actions from the ECB are not likely to have a material impact on the currency. I also think that central banks have played a role in the low volatility environment in trying to be too explicit in guiding markets and I think they will play their part in pulling back from such explicit forward guidance, even before rate changes arrive.
Further reading: Fed cannot stop the stock market; ECB would feel relaxed with EUR/USD at 1.20