Recap 2-13-13: UK Inflation


The BoE Inflation Report showed the mean 2y forward inflation at ~2.3% vs 1.8% in November, the highest forecast in 2 years. Following the dovish MPC stance in the latest minutes, King commented that the BoE will both look through high inflation as well as add to stimulus if necessary. He also reiterated that pound depreciation is a necessary condition for rebalancing. These sent Gilt yields sharply higher, (driven by higher Inflation expectations) and sterling lower. EURGBP gapped higher by several figures and is now back near recent highs. (Much to my consternation!)

So in other words, this latest move appears mainly driven by fears that the BoE is throwing away its inflation mandate. Now, the BoE has had a looonnngg history of missing its inflation target. (the 5 year average is now sitting at 3.3%) But with 10y implied inflation expectations at very high levels, the MPC will likely have to at least mention this issue soon. Today’s Inflation Report explicitly noted that “The MPC will continue to monitor developments in inflation expectations closely.”

And worth noting is that the BoE’s own assessment that inflation in 2 years time will be above target is above 50%:

It’s probably fine for the BoE to say that they will look through near term REALIZED inflation. But looking through high and rising inflation expectations is a separate story altogether, as it suggests an attack on the BoE’s inflation fighting credibility. That is something that the bank probably won’t be too happy with. The release of last week’s minutes in 7 days could bring the first signs of acknowledging this. Although King’s comments today did not suggest that Merv the swerv is worried, he did spend a great deal of time talking about the importance of anchored inflation expectations. A reduction of the BoE’s dovish bias is likely to stabilize stagflation fears and arrest recent trends in GBP denominated assets.

Also, this is funny: Russia Deputy Finance Minister Says Russia Is Moving Away From Currency Manipulation – CNBC. Okie Dokie! h/t Dealbreaker.


  • US Core Retail Sales rose 0.1% MoM vs 0.3% exp and 0.6% prev.
  • There were some reports suggesting that other members of the G7 said France is totally isolated on currency policy and all G7 members accept that there is no currency war right now. Japan’s policy is meant to fix their domestic economy.
  • The Swiss government has announced that it is activating the Counter-cyclical Capital Buffer, imposing an additional 1% capital requirement on banks against their domestic mortgage lending.
  • Getco, a leading high-frequency trading firm, revealed that its revenue and earnings have slid almost uninterruptedly since the financial crisis – Dealbook

Upcoming Data:

  • Thu: BoJ, EU 4Q GDP, US Jobless Claims
  • Fri: G20, US Existing Home Sales
  • Mon: US Holiday, RBA,
  • Tue: German Zew, NAHB Survey,
  • Wed: BoE Minutes, UK Jobless Claims, US Housing Starts