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ECONOMIC DATA ANALYSIS - CHANGE IN BOE'S INFLATION REMIT COULD BE BUDGET CENTREPIECE
ECONOMIC DATA ANALYSIS FRIDAY 15 MARCH 2013
CHANGE IN BOE'S INFLATION REMIT COULD BE BUDGET CENTREPIECE
• Chancellor has little room for manoeuvre; onus to shift to monetary policy to do more
• US FOMC expected to maintain case for further stimulus
• March indicators to show a modest improvement in global activity
UK Budget to take centre stage... Despite intense political pressure to change course, recent statements suggest that the Chancellor will stick firmly to Plan A in the coming week’s Budget. The weak growth environment, the recent sovereign downgrade and the possible overshoot in the UK’s public borrowing this year leave the Chancellor little room for manoeuvre. We expect a Budget that is fiscally neutral and allows the current focus on structural deficit reduction to continue. Within this, the Chancellor is likely to focus on measures aimed at boosting the supply side of the economy. The BoE Governor has intimidated strongly that supply side reforms are required to put the UK economy back on a sustainable growth trajectory. Notwithstanding the possible overshoot this year, the OBR’s forecasts for public borrowing and debt over the coming years are unlikely to deviate significantly from those published in the Autumn Statement in December. The medium-term economic projections, however, could be a little stronger - supported by the recent fall in sterling, the recovery in equity prices and the fact that GDP growth in 2012 was slightly better than previously expected.
Change in Inflation remit?...With little change expected in fiscal policy, the markets will be watching closely what the Chancellor may say about the role of monetary policy. Recent reports indicate that the government is examining proposals to give the Bank of England more flexibility to interpret its inflation mandate. The Chancellor may use the Budget as an opportunity to announce a change in the Bank’s Inflation Remit, or that the Remit will be subject to review. Ahead of this, the minutes of the March MPC meeting (released on Wednesday morning) will provide the latest insight into the MPC’s thinking While the MPC refrained from sanctioning further QE at this month’s meeting, we suspect it was a close call. The MPC has already acknowledged that it prepared to tolerate a protracted period of higher inflation and any change in its remit could pave the way for further monetary stimulus.
Global economic momentum ? ... More broadly, the coming week sees a slew of activity indicators for March from across the globe. The US Philadelphia Fed Survey and preliminary manufacturing PMI, will build on today’s Empire
State Survey and should maintain February’s firm readings. Our global team expects little change to euro area PMIs, nor the German IfO and ZEW surveys, with a bias to modest improvement. These suggest no marked change to market perceptions of the economic outlook. Perhaps most interesting will be the preliminary estimate of China’s manufacturing PMI. Recent weakness has been explained as reflecting Lunar New Year holiday distortions and the coming week’s survey may be watched for confirmation.
Fed - full steam ahead for now ... The Federal Reserve meets in the coming week with Wednesday’s announcement followed by a press conference. The Fed is almost certain to maintain its current commitment to open-ended QE and we fully expect Chairman Bernanke’s press conference to make the case for maintained stimulus as he and Vice-Chairman Yellen have in recent speeches. Yet with the US posting increasingly encouraging economic signs, despite the recent sequester, markets have started to consider when the Fed may taper its current operations. This meeting is unlikely to suggest any members are realistically looking at change ahead of the summer. However, the minutes to this meeting may give a better insight into the range of views amongst Committee member
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