Transitory is relative

On the galactic scale even plate tectonics are transitory. It is, therefore, difficult to argue with central bankers who insist that the current burst of inflation will not persist. Bank of England Chief Economist Andy Haldane is ready to do so though. He wrote yesterday that “Britain risks an economically impoverishing 1970s-style inflation spiral if the Bank does not act quickly”.

His monetary policy hawkishness might have been enough to send the pound higher, but darker forces were at work: Brexit re-emerged as a stumbling block for the pound. The EU told Britain that continued failure to comply with the withdrawal treaty would result in economic sanctions, and US President Joe Biden warned the prime minister not to imperil the Good Friday peace agreement.

In the absence of any positive influence sterling moved lower, eventually sharing last place with the NZ dollar. It lost an average of 0.2%, giving up half a US cent and a fifth of a euro cent. A strong reading for the RICS house price balance, released overnight, was only mildly helpful to sterling.

No BoC taper

Ahead of the Bank of Canada’s monetary policy announcement, investors pushed up the CAD in anticipation that the central bank might announce a wind-down of quantitative easing. When the statement contained no such commitment, the Loonie was sent back whence it had come, leaving it unchanged against the USD.

The two key points of the BoC statement were that inflation “is expected to ease later in the year, as base-year effects diminish” and that “there remains considerable excess capacity in the Canadian economy”. The BoC expects to see a sustainable 2% inflation rate “sometime in the second half of 2022”.

There was not much else for investors to play with, other than this morning’s Australian new home sales. A 15.2% rise in May followed April’s 54.4% decline, perpetuating the recent volatility, which has seen monthly changes range from +91.8% to -69.4%. The Aussie is on average unchanged.

Lots to watch

There is scope for volatility on a much wider scale in the coming couple of days. Inflation data are due from Sweden, Norway and the United States. The European Central Bank will pronounce on monetary policy. Britain will report on output, trade and gross domestic product. And through it all, G7 heads of government will try to put the world to rights in Cornwall.

As far as the ecostats are concerned, analysts expect to see headline inflation readings of 2.9% from Norway, 2% from Sweden and 4.7% from the United States. Friday’s UK numbers are forecast to deliver strong double-digit annual increases for industrial and manufacturing production, resulting from deep lockdown-induced troughs in spring last year.

The assumption is that the ECB will not break ranks with the US Federal Reserve and the other major central banks who have been banging the transitory-inflation drum. Its updated economic outlook will be the most likely source of clues about when monetary policy might begin to tighten.