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Market Digest Hawkish BoK Minutes

By David Robinson
     LONDON (MNI) - The Bank of England is likely to regard any post-Brexit
shifts in headline inflation expectations with caution as it considers its
monetary policy response, as its recent research indicates that many of those
surveyed for the data were unable to provide an answer while others appear to be
replying according to widely differing criteria.
     Market-based UK inflation expectations have shifted sharply higher over the
past 12 months even as eurozone and U.S. measures have declined, but the BOE's
own inflation expectations survey found that a significant proportion of the
population say they simply do not know where inflation is heading.
     If sterling depreciates further due to a no deal Brexit or political
turmoil, the BOE's Monetary Policy Committee could find itself having to manage
the trade-off between tolerating above-target inflation and supporting already
weak economic activity.
     Inflation expectations are an important policy guide. But small shifts in
the aggregate measure might be just noise.
     MPC member Silvana Tenreyro noted in a speech in July that while long-term
inflation expectations had increased since the 2016 EU referendum, the BOE
surveys showed this masked a rise, from 34% to 44%, in those answering they had
"no idea" what prices would do.
     These were often respondents with lower incomes. As wage takers with little
freedom to shift between saving and consumption their significance from a
macro-economic viewpoint is diminished, but other types of respondents also
answered surveys in ways which were harder to assess than the headline
expectations data might suggest.
     Companies filling in CBI surveys mingle their views on the likely path of
input and output pressures facing their businesses with estimates of
economy-wide inflation. To add to the confusion, not only is the headline CPI
target measure in widespread use in the UK but so is the older RPI one, which
runs around 0.8 points above CPI, making it unclear which measure respondents
are following.
     Two previous episodes which resulted in a precipitous decline in sterling,
the June 2016 EU referendum and the Global Financial Crisis, showed that changes
in inflation expectations are hard to predict.
     Ahead of the June 2016 EU referendum, the BOE's Inflation Attitudes Survey
indicated that the public's median expectation for year-ahead price increases
was 2.0% and this only nudged up to 2.2% by August 2016 before jumping to 2.8%
by November. In August 2008, a month before the collapse of Lehman Brothers,
12-month expectations were running at 4.4%, before sagging to 2.8% by November,
and 2.1% in February 2009. In the most recent survey, in August this year,
12-month expectations were 3.3%.
     A June BOE working paper, by Roland Meeks and Francesca Monti, neatly
summed up the shortfall in the traditional policy makers' approach of focussing
on a single, average inflation expectation.
     "Central banks' preoccupation with inflation expectations has been half
right. Well-anchored expectations underpin the ability of monetary policy to do
more to respond to trade-off inducing shocks .. But expectations need to be
understood in the plural, not the singular," they said.
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]