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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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From: zonder3/14/2005 10:58:24 AM
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UK Interest Rates - Lomax And The Bank's Inflation Forecasts

In a speech on Saturday 12th. March, Rachel Lomax - whose previous speech had been widely interpreted as on the hawkish side of the debate - gave a speech entitled "Inflation Targeting In Practice." This speech is very difficult to describe as hawkish and in some ways veers towards the dovish.

Lomax makes several points about the changes which the Bank has made to the inflation targeting process and how that has affected policy.

1. The Bank is moving towards using a "suite" of different forecasting models.

2. Rate changes since 2001 are much more likely in Inflation Report months. Lomax notes that since 2001, rate changes are twice as likely to occur in an Inflation Report month and that, "no fewer than six of the last eight changes have coincided with the publication of an Inflation Report."

3. Since 2001, there has been a need for fewer interest rate changes than the "earlier years." Lomax notes that, "..the members who voted for the most rate changes ARE associated with the earlier years of the Committee, consistent with the idea that the MPC may have NEEDED to respond more frequently during that period."

4. The Inflation Report's assumptions and balance of risks assessment are as important as the Fan Chart Inflation projection. Lomax argues that, "The assessment of risks is ALWAYS a material factor in determining policy. In our latest Inflation Report (February) we published a central projection which showed inflation rising gently but steadily above the 2% target. But the report noted that the BALANCE OF RISKS WAS TO THE DOWNSIDE and singled out some key near term risk areas, such as the household sector. This provided a nuanced background to the MPC's February decision to hold rates unchanged."

Conclusion: This is a different speech to the previous one (February 24th), which was interpreted as so hawkish. We see the main difference as being the endorsement in the most recent speech of importance of the assessment of risks which "are to the downside" as she notes. Has Mervyn King been at work here? We have had two recent speeches - by Tucker (who did vote for a rate rise in February) and now Lomax (who did not) which are less hawkish than expected (Tucker) or revising remarks which had been interpreted as unambiguously hawkish (Lomax). Lomax seems to endorse the idea that (while the two are not "mechanically" correlated) rate changes on Inflation Report months aid "transparency". If the data is supportive, Lomax might support a rate rise at the next Inflation Report month (May). If the data is unsupportive (and we believe it will be broadly unsupportive), then she will not. Hawkish arguments are being heard but then revised or "nuanced".
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