Recap 2-12-14


So the BoE changed its metric for measuring the output gap from Unemployment to GDP as the 7% threshold becomes close to being breached. Having said that, its estimate of the GDP output gap is on the lower end of consensus estimates, which is hawkish. Nevertheless, the uncertainty around estimating potential GDP means that by switching metrics, the BoE has essentially given itself more flexibility. Especially interesting is the fact that nowhere in the Inflation Report did the BoE publish its estimate of potential GDP. This means that the 1-1.5% slack figure it reports is without an anchor. I.e. even if growth prints 4% this year, the BoE could claim that its estimate of potential GDP was 5% and thus decline to change policy.

Personally, I think the BoE will likely to be reluctant to hike much earlier than the rest of the G10. And with sterling strength over the past few years likely to contain both near term inflation as well as longer term growth, they will have plenty of ‘reasons’ to delay hikes.


  • BoE Inflation Report was quite hawkish:
  1. The Committee judges that spare capacity remains, equivalent to around 1%–1½% of GDP and concentrated in the labour market. Around half of that slack reflects the difference between unemployment and an estimate of its medium-term equilibrium rate… There is considerable uncertainty around those judgements and a range of opinions on the Committee. In particular, equilibrium unemployment and hours cannot be observed, only imperfectly inferred… The speed at which slack is absorbed depends crucially on the extent to which productivity growth picks up. Productivity appears to have grown more slowly than hoped as demand has recovered, even taking account of the upward revisions to growth in the MPC’s central backcast. As in November, the MPC judges that productivity growth will gradually pick up, but will only reach its pre-crisis average rate in the third year of the projection

  2. Inflation is likely to remain close to the target over the forecast period. Given this, and with spare capacity remaining, the MPC judges that there remains scope to absorb slack further before raising Bank Rate.

  3. The MPC will seek to close the spare capacity in the economy over the next two to three years while keeping inflation close to the target. To that end, it judges that there is scope for the economy to recover further before Bank Rate is raised and, even when Bank Rate does rise, it is expected to do so only gradually and to a level materially below its pre-crisis average of 5%.

  4. LFS unemployment is likely to reach the MPC’s 7% threshold by the spring of this year… The fall in unemployment probably overstates the fall in labour market slack — the scope for total hours worked to increase without pressure on pay… The fall in unemployment has been accompanied by a small downward revision to Bank staff’s estimate of the medium-term equilibrium unemployment rate, which is now judged to be between 6% and 6½%.

  5. Productivity growth has been unprecedentedly weak since the 2008/09 recession… It is not clear what has constrained productivity growth in recent years. But given the continued weakness in productivity, the MPC judges that the extent to which productivity growth will rise as a direct result of stronger demand growth is less than thought likely in August.

  6. in the Q&A Bean stated that the MPC would look to raise rates well before slack is fully eliminated.

Japan M2 rose to 4.4% in Jan vs 4.2% exp and prev

Japan’s machine orders fell 15.7% M/M vs. the -4% exp and +9.3% prev.

China Trade improved to +31.9bn vs 23.5bn exp and 25.6bn prev. Exports and Imports both jumped ~10%, with exports much stronger than exp

The House of Representatives passed a clean debt limit bill through March 15th, 2015. The Senate is expected to vote on it tonight.

Upcoming Data:

  • Wed: Australia Inflation Exp, Employment, UK RICS House Price Balance
  • Thu: US Retail Sales, Jobless Claims,
  • Fri: EU GDP, UMichigan Confidence