US Slow Sizzle, UK Slow Boil (03.12.15)
- The theme of monetary policy divergence amongst major central banks is likely to become more pertinent.
- The US Federal Reserve is inching towards a likely policy rate hike on 16th December. At the other end of the scale, a number of European central banks have negative policy rates and the ECB will likely announce an expansion and/or extension of its current QE program and possibly a further cut to its deposit rate at its policy meeting on 3 December.
- Somewhere in the middle is the broadly neutral Bank of England (BoE), which has oscillated between mild hawkishness and mild dovishness in the past year.
- But interestingly the US and UK economies have similar CPI-inflation, GDP growth and unemployment rates of around 0%, 2.5% and 5% respectively.
- While one could make the case that the BoE and markets are slightly too dovish about the need and prospect for UK rate hikes, I would argue that ultimately the Fed’s hawkishness relative to the BoE and the market pricing of Fed hikes seems broadly fair, for six reasons detailed in the attached presentation.