James Alexander/ Nov. 27, 2015
In mid-2015 Mark Carney stated that the next move in UK rates would be up and that it would come into sharper focus at the turn of the year. This was interpreted as monetary tightening by Market Monetarists and some others.
Market prices moved: Sterling, bond prices, UK domestic stock markets as monetary policy impacted future expectations immediately and precisely (ie not in any long and variable fashion). The playing out of the flight path that Carney set in motion is now being seen in the backward-looking actual data.
NGDP does not get released in the first estimate of GDP, but the second. The trend seen in some low-level aggregates that we highlighted with the first estimate has been confirmed.
UK NGDP is way off trend at 3.40%, down a touch from the poor 3.42% recorded in 2Q15. And we already know that this nominal sluggishness is dragging down RGDP. The deflators obviously tell the same story. No inflation here.
Perhaps just over 2% RGDP is all that the UK can expect but the downside risks due to a 1%, and falling, deflator are heavy – due to downwardly sticky prices as highlighted by a German ECB Board Member recently. And as yet there are not many signs Carney is alert to these dangers, even if he has pulled back a bit from his monetary tightening language, money itself remains tight as NGDP bobbles along below trend.
It’s hard to understand Carney, but by standing pat in the face of this nominal slowing he is ensuring its continuance, that’s the nature of monetary policy – doing nothing is doing something.