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Is the tide finally turning for global central bank policy?
A few hawk talons are showing, and events this week are a reminder that over-easy monetary policy won’t be around for ever, even as the euro-zone crisis continues to rage and the global economy struggles with a patchy recovery.
The Bank of Canada set the tone Tuesday as it left its interest rates unchanged and indicated it may pursue a “modest withdrawal” of monetary stimulus measures.
Then the Riksbank snapped a run of interest rate cuts Wednesday and said there were signs the Swedish economic outlook was improving.
That was followed by the publication of the April minutes from the Bank of England’s nine-member Monetary Policy Committee, which revealed an unexpected hardening in the position of its most prominent dove — Adam Posen.
All of which could be good news for the Canadian dollar, Swedish krona and British pound — particularly if the Federal Reserve and Bank of Japan continue to ease while the European Central Bank is bogged down dealing with the fallout from searing fiscal retrenchment and bank deleveraging.
On the flip side, it’s not such good news for Canadian, Swedish and U.K. exporters.
Still, in the U.K. in particular, hawkish talons may have something meaty to grip on.
Data Tuesday showed a surprise pickup in the annual rate of inflation to 3.5% in March from 3.4% in April, forcing the market reassess whether the Bank of England’s assumption that inflation would fall back in line over time without a policy response.
Rather than the 2% targeted by the BOE, U.K. inflation now appears set to remain above 3% in the second quarter and perhaps into the second half of 2012, the central bank’s deputy governor Paul Tucker now believes.
“It looks like the mega dove is no longer looking for [quantitative easing],” said Richard Cochinos, G10 FX strategist at Bank of America Merrill Lynch Global Research, referring to Mr. Posen.
Will the effects on sterling be lasting? “Yes, because… what you’re going to see is a shift in focus from growth-orientated information being important for sterling and gilts to inflation being the most important,” Mr. Cochinos said.
For a market that has largely ignored inflation data for several months, that’s quite a shift.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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