Attitudes to inflation
A widening perception gap separates the European Central Bank from the US Federal Reserve. It is several weeks since the Fed officially dumped the “transitory” characterisation of inflation. The ECB, meanwhile, still sees the 5% headline rate reported last week as part of a “pandemic cycle”.
In an interview with RTE at the end of last week, Philip Lane, an erstwhile governor of the Bank of Ireland who is currently the ECB’s chief economist, said “we do think in this year inflation is going to come down”. The current spike “is basically part of a pandemic cycle, if you like, in inflation" and "in that sense it should not be interpreted in terms of historical norms: the pandemic is a unique episode". For the avoidance of doubt Dr Lane also “reiterated the official ECB stance that it would be highly unlikely for interest rates to be changed this year”. Away from Frankfurt, many analysts are rather less nonchalant. They believe the ECB will be forced to reconsider its ultra-accommodative monetary policy, not least because of growing pressure from within the Governing Council.
Federal Reserve Chairman Jerome Powell has a different view, more in line with the minutes of the Federal Open Market Committee published last week. When he appears before the Senate Banking Committee today, at his confirmation hearing for a new term, he will stress the importance of keeping inflation in check. The text of his speech was released yesterday and it says that “high inflation exacts a toll” and “we will use our tools… to prevent higher inflation from becoming entrenched”. As for US interest rates, Dr Powell has made no commitment but FOMC minutes have led more than one research department to predict four increases this year.
In the last month, week, and day, there has not been much movement of the EUR/USD exchange rate. That stability might not persist if the Fed fights inflation while the ECB ignores it.
With little to wind them up, currencies were mostly calm on Monday. The USD, EUR, CAD, AUD and NZD were all but unchanged against one another. The biggest divergence was between the safe-haven CHF and JPY, with the franc losing more than 1% to the yen. It could have been the result of less negative German bond yields attracting more buyers.
The morning’s ecostats from Europe showed Swedish industrial production rising 4.2% in the year to November and manufacturing orders increasing by 3%. The Sentix measure of Eurozone investor confidence improved by a point and a half to 14.9 and unemployment in the zone ticked down to 7.2%.
There were no worthwhile US statistics. Overnight the BRC’s retail sales monitor showed UK sales holding up in December with “festive cheer to round off a strong year”. In Australia, retail sales rose 7.3% in November and were up by 5.8% compared with the same month last year.
Today’s agenda is heavy on central bankers, light on economic statistics. The ECB and the Fed will once again be in the limelight.
Although Jerome Powell has already released his text for the confirmation hearing there will still be chance for him to reveal more at the subsequent Q&A session. Kansas City Fed president Esther George is also up, speaking about the economic and monetary policy outlook. In Frankfurt, Jens Weidmann will hand over the presidency of the Bundesbank to Joachim Nagel at an online event: ECB President Christine Lagarde will also take part. Bank of Japan Governor Haruhiko Kuroda will be speaking tonight.
The ecostats cover Italian retail sales, US small business confidence and UK gross domestic product. Tonight Japan reports on bank lending and trade, Australia prints new home sales for December and China releases the inflation figures for December.