- The slide in oil, falling inflation expectations, & temporary bursts of consumer price deflation are a ‘double-edged sword’. Central banks hoping to start normalising rates this year now have to seek non-inflation reasons. For most, these will be difficult to find.
- The exception should be the US Fed, whose
recovery & dual mandate offer scope later this summer for their first 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 difficult 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.