How high does UK inflation need to go? asks Zak Mir

The governor of the Bank of England Mark Carney gives a press conference, his first since the leave result of the European Union referendum, at the Bank of England in the City of London

The governor of the Bank of England Mark Carney gives a press conference, his first since the leave result of the European Union referendum, at the Bank of England in the City of London

I have to say that the history of Bank of England Governor Mark Carney’s tenure has not been one which has filled me with joy.

Part of this have clearly been jealousy issues associated with his “matinee idol looks” and the £1 million package, as well as him clearly being friends with former Chancellor and now “journalist” George Osborne.

But personal matters aside, the way that the Bank of England is supposedly independent of the Treasury and political influence, has rather coloured UK monetary policy in recent years.

The global financial crisis

It took much longer for the economy to recover from the nightmares of the global financial crisis, especially the key banking sector. Royal Bank of Scotland (RBS) still has not recovered.

So it was right for Mr Carney to “err on the side of caution” and give the benefit of the doubt to matters such as inflation, or even the possibility of a bubble being created in the housing market.

Ironically, we are now much more at risk of going from “boom to bust” on real estate after this measure were enacted, especially as Philip “national insurance” Hammond did not retract any of the extreme tax moves.

Chancellor of the Exchequer Philip Hammond

View photos(Photo: Getty)
 Lower interest rates after the Brexit vote

Perhaps, what may turn out to be the pivotal moment – breaking the camel’s back – was the last rate cut, in the aftermath of the Brexit vote in June.

This along with the inflation resulting both from the fall in sterling, and attempts to profiteer by multi-national retailers and others, has led to inflation soaring last month up to 2.3%, well above the 2% required for the Governor of the Bank of England to write a letter to the Chancellor, explaining the situation.

The Inflation “hockey stick”

What will be interesting now in the weeks to come is when Mr Carney will blink?

The “inflation genie” is very much out of the bottle. True, there is an argument for saying that getting rid of deflation has been such a hard won battle that one might want to delay a little.

However, it would appear we are not simply seeing a return to normality, but risk a “hockey stick” turnaround, of the kind which even global warming proponents would be proud of.

The “conspiracy theory” on Carney and inflation suggests that he may wait for CPI numbers to rise to 3% or even more before raising interest rates, by which time growth and the economy in general could be seriously damaged.

Of course, many JAM’s (just about managing) could be hurt quite painfully by any rise in interest rates.

But the message is that as far as this particular part of the cycle it would have been best to move early and small, rather than have to take draconian measures later. Mr Carney’s legacy now depends on getting a very difficult predicament right.

The FTSE 100 “makes hay”

The FTSE 100 seems unaffected – reaching new levels above 7,400. The bonus here, is that Carney’s indecision could lead to the FTSE 100 rising hundreds of points. Therefore, at least for 2017,  selling in May, as the adage suggests, may not be appropriate.

Zak Mir is is the author of chart topping books, including 101 Charts For Trading Success and 49 Golden Rules of Technical Analysis, and is generally acknowledged as being one of the most experienced independent technical analysts in the UK.

Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only.  Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.


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