Category: Money Moves Markets

Recent Bank of England signals have been deemed to be less hawkish than those of the Fed and ECB, contributing to a view that UK policy tightening is less likely to prove excessive, in the sense of causing greater economic damage than necessary to return inflation to target. 

Monetary trends do not support this hope. 

It should be remembered that the Bank embarked on rate hikes and QT before the Fed and has raised rates by 340bp versus the ECB’s 250 bp. 

“Shadow” rate estimates attempt to incorporate the impact of unconventional monetary policy measures. The Wu-Xia shadow rate for the UK has risen by 1250 bp from its 2021 low versus increases of 650 bp and 980 bp respectively in the US and Eurozone – see chart 1. 

Chart 1

UK real narrow money (i.e. non-financial M1 deflated by consumer prices) contracted by more than comparable US / Eurozone measures in the six months to November – chart 2. The decline is historically extreme and suggests a severe recession – chart 3. 

Chart 2

Chart 3

UK nominal broad money (non-financial M4) grew by just 1.3% at an annualised rate in the six months to November – chart 4. The comparable Eurozone measure rose at a 5.0% pace. US broad money contracted but is correcting a much larger increase in 2020-21. 

Chart 4

Real broad money holdings of UK households have retraced almost all of the pandemic-related surge, falling to the lowest level since May 2020 – chart 5. Far from “excess” money balances supporting spending, a real money squeeze is now likely to magnify consumption weakness. 

Chart 5

Bank of England communications may be becoming less hawkish but the damage has been done. Officials ignored the monetary signal that a 2021-22 inflation spike would reverse with modest policy restraint. The economic consequences of overkill are likely to be at least as bad as in the US / Eurozone.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 01/04/2023 04:21:40 PM

Very interesting. It seems quite the recession is shaping up in 2023.

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COMMENT:
AUTHOR: Rob
EMAIL:
IP: 24.206.97.27
URL:
DATE: 01/11/2023 02:13:58 PM

Hi Simon,

Just wondering if you follow Sweden real money trends as the corporate news flow has been terrible for some time, especially in real estate!

Gas price relief and Chinese reopening have tempered pessimism about Eurozone economic prospects, contributing to a Q4 rally in equities. Monetary trends, by contrast, suggest a worsening outlook due to the ECB’s scorched earth policy tightening. 

The preferred narrow money measure here – non-financial M1 – contracted for a third straight month in November. The three-month annualised rate of decline of 5.3% compares with a maximum fall of 1.7% during the GFC – see chart 1. 

Chart 1

Narrow money weakness is being driven by households and firms switching out of overnight deposits into time deposits and notice accounts – a normal pre-recessionary development. Broad money, in addition, is slowing – non-financial M3 rose by only 0.2% in November, pulling three-month annualised growth down to 3.4%, the slowest since 2018. 

The headline M1 and M3 measures are displaying greater weakness, reflecting a fall in money holdings of non-bank financial corporations.

Broad money growth had been supported by solid expansion of bank loans to the private sector but, as expected and signalled by the ECB’s lending survey, momentum is now fading – chart 2. Slumping credit demand and forthcoming QT suggest that broad money will follow narrow into contraction. 

Chart 2

Corporate loan demand had been boosted by inventory financing but stockbuilding reached a record share of GDP in Q3 – chart 3 – and is probably now being cut back sharply, contributing to a move into recession. Consistent with this story, short-term loans to corporations contracted in both October and November. 

Chart 3

A sharp fall in inflation will support real money trends but has yet to arrive. The six-month rate of contraction of real non-financial M1 reached another new record in November – chart 4. 

Chart 4

Monetary tightening in 2007-08 and 2010-11 was associated with a divergence of money trends across countries, reflecting and contributing to financial fragmentation. This is occurring again, with weakness focused on Italy. 

Italian real narrow money deposits contracted by 9.7%, or an annualised 18.4%, in the six months to November, with the larger decline than elsewhere due to both greater nominal weakness and higher CPI inflation – chart 5.

Chart 5

In nominal terms, total bank deposits in Italy were unchanged in the year to November – chart 6. Italian banks’ assets grew modestly over this period. The banks funded this expansion by increasing their net borrowing from Banca d’Italia, which in turn accessed additional funding from the Eurosystem, resulting in a further widening of Italy’s TARGET2 deficit. This reached a record €715 billion in September following a surge in Italian BTP yields, falling back in October / November – chart 7. Another rise in yields since early December may have been associated with deposit outflows from the banking system and renewed upward pressure on the TARGET2 shortfall. 

Chart 6

Chart 7

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COMMENT:
AUTHOR: Rob
EMAIL:
IP: 188.213.139.53
URL:
DATE: 12/29/2022 04:56:16 PM

How much you wanna bet that the EU tries to blame Italy's "right-wing" government for the implosion. We know the truth.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 12/30/2022 12:50:26 PM

The big questions remains, when will central banks reverse course?

US non-farm payrolls have risen by an average of 337,000 per month in the eight months since the Fed started hiking rates in March. The household survey measure of employment was essentially flat over this period.

The gap between the eight-month changes in the two series is at a record high, excluding April-May 2020 when data were distorted by the pandemic*. (This comparison, however, uses revised data for the two series.) 

The payrolls numbers have informed the FOMC’s judgement that “job gains have been robust”, in turn influencing the magnitude of the rise in rates this year. 

The payrolls survey covers about 670,000 worksites, while the household survey has a sample size of about 60,000. Sampling error, therefore, is larger for the household survey – the standard error of the monthly change in the household survey employment measure is more than four times that of the monthly payrolls change, according to the BLS. 

The payrolls survey, therefore, is conventionally regarded as the more reliable gauge of short-term employment movements. 

A focus on monthly sampling error, however, ignores sometimes large revisions to the payrolls data due to annual benchmarking against unemployment insurance tax records. There is no comparable annual revision to historical household survey data. 

The annual payrolls revisions have averaged close to zero over the long run but there have been clusters of negative revisions around recessions – see chart 1. 

Chart 1

Benchmark revisions occur with a long lag. The BLS in August issued a preliminary estimate of a 462,000 upward revision to the March 2022 level of payrolls. This will be incorporated in monthly historical data up to March 2022 in February 2023. 

Benchmark revisions to recent monthly data, therefore, will occur in February 2024 under current BLS practice. 

Research by the Philadelphia Fed suggests that these revisions will be negative and potentially very large. The researchers have attempted to replicate the annual BLS benchmarking procedure using quarterly UI records. They estimate that the currently-reported level of payrolls in June 2022 of 151.9 million will be revised down by 843,000, or 0.55% – chart 2. 

Chart 2

This would imply that payrolls grew by only 3,500 per month on average between March and June compared with the currently-reported 349,000. 

Chart 3 compares three-month growth rates of the official payrolls series, the household survey employment measure and the Philadelphia Fed benchmarked payrolls series. The May / June readings of the latter two are equal.

Chart 3

The official payrolls measure has risen by an average of 329,000 per month in the five months since June. Monthly gains in the household survey employment measure averaged 72,000 over this period. 

A benchmarked payrolls estimate for September won’t be available until March but timely data on withheld income and employment taxes – including UI taxes – suggest that the official payrolls series has continued to overstate gains. The daily tax data are noisy but year-on-year growth of a moving average has fallen sharply since June, widening an undershoot of the normal relationship with aggregate private sector earnings growth from the payrolls survey – chart 4. 

Chart 4

*The payrolls series measures jobs while the household survey measures people. The wide gap partly reflects a rise in the number of people with multiple jobs. A BLS research series is available that attempts to convert household survey employment data to a payrolls concept, including by adding multiple jobs. This series rose by an average of 103,000 per month in the eight months to November. The difference with payrolls growth is also a record excluding 2020 data.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 81.150.175.79
URL:
DATE: 12/24/2022 09:55:56 AM

Thanks for your economic insights this year. It looks like 2023 can be quite a difficult one economically but certainly interesting for economists.

The BoJ’s decision to widen the fluctuation band of the 10-year JGB yield around the zero target follows an apparent withdrawal of monetary policy support by the PBoC in recent weeks. 

Three-month SHIBOR has risen by 75 bp since late September and is now only 15 bp below its start-of-year level – see chart 1. Upward pressure has been partly market-driven but the PBoC has chosen not to accommodate increased demand for liquidity. 

Chart 1

The PBoC’s Q3 monetary policy report, issued in November, expressed concern about medium-term inflation risks, stressing the importance of avoiding excessive monetary growth. An apparent hawkish shift may have been reinforced by the shock abandonment of the zero covid policy, which officials may view as likely to boost near-term price pressures via a faster demand recovery and / or an increase in supply bottlenecks. 

The Japanese / Chinese policy moves are worrying because monetary trends in the two economies have been providing a modest offset to significant US / European weakness – chart 2. That support could now fade. 

Chart 2

A rise in Japanese six-month narrow money growth in November was accompanied by a further pick-up in bank lending, consistent with stronger credit demand expectations in the BoJ’s Q3 loan officer survey – chart 3. The hope is that firmer bank loan growth / money creation will survive a modest policy adjustment. 

Chart 3

Global six-month real narrow money momentum is estimated to have risen for a fifth month in November but remains negative – chart 3. Allowing for the usual lag, the suggestion is that global manufacturing PMI new orders will bottom by next spring but remain in recessionary territory into Q3. 

Chart 4

The recovery in real money momentum continues to be driven by a slowdown in six-month CPI inflation, with nominal money growth languishing – chart 5. The inflation decline will extend but overly hawkish central banks risk pushing nominal money momentum to new lows. 

Chart 5

UK payrolled employment rose solidly again in November, while pay growth numbers for October surprised to the upside. It has been suggested that this news reinforces the case for a Bank rate hike of at least 50 bp this week. 

Employment is a lagging economic indicator. There is ample coincident evidence that a recession is under way. Annual broad money growth – as measured by non-financial M4 – is down to 3.4%, a level suggesting a medium-term inflation undershoot. The view here is that any rate rise this week will be a mistake. 

The monthly payrolled employment measure has a short history but it correlates closely with the quarterly (and less timely) Workforce employee jobs series. In the 2008-09 recession, the latter measure peaked two quarters after GDP.

Labour market indicators that lead employment / unemployment include the stock of vacancies and average hours worked. These indicators are usually roughly coincident with GDP.

The headline vacancies series is a three-month moving average but non-seasonally-adjusted single-month numbers are available and can be adjusted using a standard procedure. The resulting series peaked in April, one month before GDP, and fell again in November – see chart 1. The recent pace of decline is comparable with the 2008-09 recession.

Chart 1

The weak November vacancies number suggests that GDP contracted significantly last month after October’s catch-up from reduced September activity due to the Queen’s funeral.

Average weekly hours tell a similar story. The series, which is available only as a three-month moving average, peaked in March and fell again in October, reaching its lowest level – excluding the pandemic recession – since 2012.

Should the MPC react to strong pay numbers? The monetarist view is that pay pressures are an effect rather than a cause of high inflation and will moderate as the dramatic slowdown in money growth since 2021 feeds through to slower price rises.

The latest upside surprise, in any case, reflects a belated catch-up in public sector pay; six-month growth of private sector regular pay is high but moving sideways – chart 2. A public sector pay pick-up may be bad news for real government spending and / or the public finances but will have little effect on the pricing behaviour of private sector suppliers of goods and services – especially against a backdrop of deepening recession and a loosening labour market.

Chart 2

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 12/14/2022 10:51:44 AM

PMIs certainly suggest a recession has begun.

Monetary trends seem to suggest we're at least 10 months from any economic turn around. Raising rates further is likely to extend that?

The question remains, when will central banks ease policy and when will that easing gain traction in the real economy ?

The global manufacturing PMI new orders index was little changed in November, the six-month rate of change of the OECD’s G7 leading indicator has hooked up and cyclical sectors have been outperforming defensive sectors in the recent equity market rally. Do these developments signal a bottoming of global economic momentum and a prospective H1 2023 recovery? 

Monetary trends argue not. Global (i.e. G7 plus E7) six-month narrow money momentum rose slightly for a fourth month in October but remains in negative (i.e. recessionary) territory. All previous recoveries through the 50 level in global manufacturing PMI new orders were preceded by real money momentum rising above 2% – see chart 1. 

Chart 1

The June low in real narrow money momentum will probably hold but a corresponding PMI new orders low is unlikely before Q1 2023. There was a 10-month lag between the most recent real money growth peak (July 2020) and the matching PMI top (May 2021). 

There are additional negative considerations. The rise in real money momentum since June has been due to an inflation slowdown, with nominal money growth weakening further – chart 2. Previous PMI recoveries were preceded by nominal as well as real money accelerations. 

Chart 2

The rise in global real money momentum reflects the E7 component, with G7 momentum still weakening – chart 3. China, India, Mexico and Brazil have contributed to the E7 recovery but the increase has been exaggerated by a nominal money surge and inflation drop in Russia – chart 4. The latter may be of limited global relevance given Russia’s partial economic isolation. 

Chart 3

Chart 4

The six-month rate of change of the OECD’s G7 leading indicator rose slightly for a third month in November, according to calculations here. This appears to be a hopeful signal – bottomings historically have usually been followed by sustained recoveries, as chart 5 shows. The uptick is also consistent with recent better relative performance of cyclical equity market sectors. 

Chart 5

Initial indicator readings, however, are often revised significantly and previous sustained recoveries in the six-month rate of change from negative territory were accompanied or more usually preceded by a revival in G7 real narrow money momentum – chart 6. With the latter yet to bottom, the uptick in indicator momentum may be either revised away or reversed. 

Chart 6

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 12/02/2022 12:26:24 PM

Very concerning that money nominal and real narrow money are below levels before the GFC in most regions and seemingly more policy tightening coming.

Quite the economic debacle is seemingly brewing.

Secondarily, what is going on in Russia?

UK money trends remain consistent with inflation normalisation, implying that further MPC tightening will unnecessarily prolong and deepen the recession. 

The artificial boost to headline money numbers from cash-raising by LDI funds partially unwound in October – the Bank of England’s M4ex measure fell by 0.6% on the month after a 2.6% September jump. 

As usual, the focus here is on non-financial money measures, i.e. excluding volatile and uninformative financial sector holdings. The September surge in financial money was certainly no signal of future economic or inflation strength.

Annual growth of non-financial M4 was little changed at 3.4% in October, with the six-month annualised pace of increase lower at 2.7%. Annual non-financial M1 growth dropped to 2.6%, with the aggregate little changed in the latest six months – see chart 1. 

Chart 1

The latter weakness reflects households and non-financial firms switching out of sight into time deposits in response to higher term interest rates. The decision to lock away money is a negative economic signal, indicating weak near-term spending intentions. 

Broad money growth of 3-3.5% is unlikely to be sufficient to prevent inflation from falling below 2% over the medium term, unless potential economic expansion is even weaker than the generally assumed 1-1.5% pa. (This assumes no rise in velocity, which has exhibited a long-term downward trend, including during the 2010s.) 

Non-financial M4 is growing more slowly than the comparable Eurozone aggregate, non-financial M3, which rose by 4.8% in the year to October. 

The argument continues to be made that spending will be supported by the deployment of “excess” savings built up in 2020-21. The assessment of “excess” need to take into account inflation – fast price rises require more saving to maintain the real value of existing wealth. 

Real non-financial M4 has now crossed beneath its 2010-19 trend – chart 2. The suggestion is that money holdings are broadly in line with requirements given recent high inflation – there is no longer any buffer to cushion spending against an ongoing real money squeeze. 

Chart 2

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 11/30/2022 10:02:11 AM

Certainly shouldn't be tightening monetary policy now, nor fiscal policy.

It would be helpful to have charts going back to other cycles to get perspective, similar to the Euro area charts.

A simple model of the Fed’s past behaviour suggests a shift in policy direction from tightening to easing in March 2023, assuming that the economy evolves in line with its forecasts.

The Fed could delay cutting rates for several months but the model suggests a strong likelihood of action by Q3.

The model is based on the following observations / judgements about the Fed’s historical behaviour:

• Policy direction alternates between tightening and easing and is rarely “on hold” for long.
• Fed officials aren’t guided by a “target” level of rates; rather, they continue to tighten or ease until incoming data prompt them to stop / reverse.
• The Fed places little weight on forecasts, focusing instead on recent trends in variables related to its mandate objectives.

The aim of the model is to estimate the probability that the Fed will tighten or ease in a particular month based on data available at the time of the decision. It does not attempt to predict the size of any move (although extreme probability readings suggest larger moves).

The model assesses the relative probability of tightening versus easing – “on hold” is excluded by design. As noted, periods of stable policy have been infrequent and usually short-lived historically. (The long period of Fed funds stability in the 2010s is misleading because the Fed was easing / tightening via QE and other “unconventional” policies during this period, as reflected in movements in “shadow” rates.)

To estimate the model, history was divided into alternating unbroken episodes of tightening and easing. This division was made judgementally based on the timing of peaks and troughs in official or shadow rates. Shaded areas in the chart below denote tightening episodes.

A decision was made to limit the model inputs to a small number of “obvious” variables, rather than cherry pick from a large data set to achieve maximum fit. The model, nevertheless, performs adequately, with the probability estimates consistent with policy direction in 88% of months (i.e. above 50% in tightening months and below 50% in easing months).

The key inputs are the levels and rates of change of core PCE inflation and the unemployment rate. The rate of change of the ISM manufacturing supplier deliveries index – an indicator of production bottlenecks – was also found to be significant.

The model assessment was that there was a 96% probability of tightening in November. This estimate incorporated a September number for core PCE inflation and October readings for the unemployment rate and ISM supplier deliveries.

The median forecast of FOMC participants in September was for core PCE inflation to average 3.1% in Q4 2023, versus 5.1% in September 2022. The unemployment rate was forecast at 4.4% in Q4 2023 versus 3.7% in October 2022. The probability projections in the chart assume straight-line movements in the two variables from their latest levels to the Q4 2023 forecasts. Additionally, the ISM supplier deliveries index is assumed to be stable at its October 2022 level.

The forecast probability of tightening falls to 74% in December, suggestive of a smaller rate hike of 50 or even 25 bp next month.

The first FOMC meeting in 2023 is on 31 January-1 February. The forecast tightening probability is little changed from its December level in January but falls further in February and moves below 50% in March – the 40% reading implies a 60% likelihood that the Fed will by then have shifted to an easing bias.

The implied easing probability increases further after March, exceeding 90% in September, suggesting a strong likelihood that the Fed will be cutting rates by then.

Alternative assumptions can be examined. If the unemployment rate were to rise to 4.4% in Q2 rather than Q4, the easing probability would reach 90% three months earlier, in June.

An unlikely worst case scenario is that core inflation and the unemployment rate remain at current levels. Interestingly, even in this scenario the tightening probability falls below 50% in April, fluctuating around the 50% level over the remainder of the year. (This reflects a downward pull from the rate of change terms, which offsets continued upward pressure from levels of core inflation and unemployment.)

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 85.255.236.26
URL:
DATE: 11/17/2022 12:02:29 PM

Interesting model.

More interesting though is what path the economy will take after they start to cut.

We can look at the first cut in August 2007 for example. This cycle then didn't bottom out until early 2009.

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COMMENT:
AUTHOR: Stefano Feltre
EMAIL: sfeltre@fideuram.it
IP: 62.221.168.92
URL:
DATE: 11/24/2022 11:26:54 AM

Good morning,
in the current context will it be even more important to follow the fate of official interest rates or will the QT be more important for the future trend of Western economies and financial markets?
Thank you
Greetings

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COMMENT:
AUTHOR: Simon Ward
DATE: 11/29/2022 04:44:29 PM

Thank you for your interesting question. QE / QT variations seem to have been driving monetary trends since the covid shock. The easing suggested by the model for 2023 could initially be in the form of a QT taper / cessation (Q2?), with rate cuts following.

A post last month argued that a pick-in Eurozone broad money M3 growth into September reflected temporary factors that would reverse. October numbers delivered the expected turnaround, with M3 falling by 0.4% on the month. Narrow money measures, meanwhile, lost further momentum, with Italian data particularly weak.

The summer pick-up in M3 growth had been discounted here for two reasons: the numbers had been boosted by rapid and probably unsustainable expansion of financial sector deposits; and the pick-up was inconsistent with the behaviour of the credit counterparts (bank lending to government and the private sector, net external lending etc), instead reflecting a statistical “residual”.

October numbers showed a large drop in financial M3 holdings, correcting earlier strength, while the credit counterparts residual turned negative.

The preferred money measures here exclude financial sector holdings, which correlate poorly with near-term economic performance. Six-month growth of non-financial M3 was stable in October at 5.2% annualised; growth of non-financial M1 slumped further to 2.1% annualised, the weakest since the 2011-12 Eurozone crisis / recession – see chart 1.

Chart 1

Real narrow money is contracting much faster than during that crisis: the six-month rate of decline reached a new record in data extending back to 1970 – chart 2.

Chart 2

Country data show particular weakness in Italy, reflecting both nominal contraction and a larger recent inflation spike than elsewhere – chart 3.

Chart 3

The previous post suggested that a lending slowdown would act as a drag on broad money growth. Bank loans to the private sector were unchanged on the month in October.

Cyclical sectors of European equity markets have recovered some relative performance recently, possibly reflecting a belief that a grim economic outlook was becoming less dire at the margin. A minor recovery in the expectations component of the German Ifo business survey might be viewed as supporting reduced pessimism – chart 4.

Chart 4

The level of Ifo expectations, however, remains historically weak and a further fall in Eurozone / German six-month real narrow momentum argues that economic stabilisation, let alone a recovery, remains distant – chart 5.

Chart 5

Nominal money trends and prospects suggest that monetary conditions are already restrictive, contrary to the ECB’s assessment*. Likely policy overtightening is another reason for fading the cyclical rally.

*See speech by Executive Board member Isabel Schnabel.

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 81.150.175.79
URL:
DATE: 11/28/2022 06:08:53 PM

Certainly sobering monetary data. A policy response to counteract is needed as soon as possible.

Rather worryingly ECB members have been talking about further raising interest rates early next year. It seems they want to out do the Fed in the policy error stakes!

The major fiscal tightening announced by Chancellor Hunt in the Autumn Statement was motivated by a markedly more pessimistic OBR assessment of medium-term prospects for the economy and public finances. Even if its latest forecasts prove “correct”, revisions on this scale between six-monthly forecasting rounds are questionable and result in undesirable volatility in policy-making.

The economic outlook has deteriorated since the March Budget but the OBR’s fiscal assessment is based on the projected level of potential output four to five years ahead. This relies on assumptions about trends in productivity and labour supply and should be little affected by the prospect of a near-term recession.

The OBR has revised down its projection for potential output growth over the forecast horizon by a whopping 1.7 pp since March, mainly reflecting an assumed hit to productivity from energy prices staying high over the medium term. An associated loss of receipts accounts for almost a third of the £75 billion upward revision to borrowing in 2026-27 based on unchanged policies.

The OBR ignored the productivity implications of high energy prices in March on the grounds that it was unclear whether they would persist. The outlook is no less uncertain now yet the OBR has chosen to incorporate the full hit. A better approach would be to phase in adjustments over several forecasting rounds, varying the pace depending on energy price developments between rounds.

The most significant forecasting change since March was a substantial upward revision to the path of interest rates, with Bank rate and long-term (i.e. 20-year) gilt yields now averaging 4.4% and 4.0% respectively between 2023-24 and 2026-27, versus 1.5% for both previously. An increased debt interest bill accounts for £47 billion of the £75 billion boost to 2026-27 borrowing.

The interest rate assumptions are derived from market rates but they are clearly inconsistent with the OBR’s economic forecasts – particularly its projection that the annual change in consumer prices will turn negative in Q3 2024 and remain below zero for a further seven quarters.

The MPC’s latest forecasts show CPI inflation falling below target two to three years ahead if Bank rate remains at the current 3.0%*. An assumption of a 3.0% average for Bank rate is a more sensible basis for the medium-term fiscal forecast. If long-term gilt yields were also to average 3.0%, the interest bill in 2026-27 would be £21 billion lower than the OBR has projected, according to its debt interest ready reckoner. This is equivalent to three-quarters of the extra tax raised in 2026-27 from measures announced in the Autumn Statement.

A possible interpretation is that Chancellor Hunt has been bounced into unnecessary fiscal retrenchment by a combination of a questionable downgrade to the OBR’s productivity projection and its punctilious adherence to a forecasting convention – of using yield curve-derived interest rate assumptions – that made little sense in the context of recent stressed markets.

Chancellor Hunt, however, may have had an incentive to collude with the OBR’s doom-mongering, since it has allowed him to “kitchen sink” fiscal bad news in the reasonable hope that another OBR forecasting swing will open up space for him to reverse course and announce tax “cuts” before the next general election.

*CPI inflation falls below 2% in Q2 2024 in the MPC’s modal (i.e. central) forecast and in Q3 2025 in its mean forecast (which incorporates a risk bias to the upside).

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COMMENT:
AUTHOR: David Cotton
EMAIL: mrwbartholomew@gmail.com
IP: 78.129.191.50
URL:
DATE: 11/25/2022 12:13:09 PM

Well at least they're forecasting mild deflation. Possibly it will start earlier and be much deeper and longer than they anticipate.

The PMIs are screaming for looser monetary and fiscal policy. It seems likely to me, a much deeper recession than is needed is going to be the likely result of ignoring them in favour of dogma.