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The slide in oil, falling infl ation expectations, & temporary bursts of consumer price defl ation are a ‘double-edged sword’. Central banks hoping to start normalising rates this year now have to seek non-infl ation reasons. For most, these will be diffi cult to fi nd.
The exception should be the US Fed, whose recovery & dual mandate offer scope later this summer for their fi rst rate hike since June 2006. On the basis of the US’s relative insulation from global headwinds, unemployment dropping into the ‘Nairu’ range, & our upbeat outlook, more should follow.
More diffi cult will be the BoE’s position. UK real GDP is better, but the MPC’s +2%yoy CPI target may not be passed till spring 2016. This risks repeating the oil-induced complacency of the mid 1980s.
Elsewhere, the monetary reins are loosening. The ECB’s -0.2% ‘line in the sand’ gives bond vigilantes something to target, & can only intensify the search for yield. Relative to this, corporate debt, supra-nationals & even US Treasuries & UK gilts (notwithstanding election risk) may seem increasingly attractive.
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Neil WilliamsGroup Chief EconomistNeil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea. Read all articles by Neil Williams