We received an interesting report this week out of the U.K. – a country we have not discussed for a while. Earlier this year, Mark Carney took over as the head of the Bank of England and one of his first moves was to adopt a Bernanke-style policy of forward guidance to markets about the central bank's plans on monetary policy. In August of this year, the bank announced that, as a guide, it would consider tightening monetary conditions when unemployment dipped below 7.0% from current levels of 7.6%.
On Wednesday of this week, the bank's Monetary Policy Committee issued its quarterly forecast, and gave a 50/50 chance that this target would be met in the fourth quarter of 2014 – which is a massive change from the bank's expectations earlier this year that this would possibly not happen until 2016. In addition, Governor Carney offered a much more optimistic view of the growth of the U.K. economy next year, saying that the British economy will grow 2.9% in 2014, which is way above the average market view of around 2.2% and notably higher than current IMF expectations of 1.9% for next year.
The linchpins to how this could come about is keeping inflation relatively low and improving productivity. Both measures are very low right now. Obviously inflation needs to stay that way while productivity needs to improve. U.K. inflation dropped in October to 2.2% and looks to be well-contained. Productivity in the U.K. is currently lower than in any other G7 member country except Italy.
If the stars do align for the Bank of England to raise rates then it will be the most important central bank to do so since the Great Recession. This would be a significant milestone.
My View: This leads us to a familiar discussion – what will the 2014 global economy look like? A central bank's policy agenda is always going to be more reliant on economic data – and when the economic data is consistent – that policy is easy to set. But when the data is more volatile, we may see some unpredictable actions by central banks. Next year will be a story that unfolds as the year progresses.
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