The severe winter has knocked Britain’s purple sprouting broccoli harvest for six. Broccoli futures closed limit-up in Spalding yesterday for the third day in succession and supermarkets reported panic buying as long queues formed of middle-class consumers desperate to pick up any remaining stocks. Sarah Pettit, the country’s preeminent broccoli magnate, told the media “Nobody could have predicted this. It’s been terrible.”
She was in good company. The governor of the Bank of England said pretty well the same thing yesterday in the Q&A session following his speech to introduce the Bank’s Quarterly Inflation Report. Mervyn King told journalists “…there is plenty of room for differing views about the outlook for inflation two to three years ahead”. Concerning the economic projections included in the QIR, he made the point that they are not a prediction of where inflation or growth will be in the future, rather a best estimate of the likely direction. He said “the chance of the central projection being met at any given point is almost zero.”
By the same token, he said investors should not take literally “the assumption that Bank Rate increases in line with market expectations”, discussed here yesterday morning. The economists framing the projections have to make some assumption about interest rates; they may as well use the assumptions of the market, as crystallised in futures and other market prices. The governor was keen to drive home the idea that he and the MPC have no grand strategy. They make their policy decisions month by month. Interest rates will, inevitably, go up: exactly when that process will start and how rapid it will be neither the governor nor anyone else can predict at this stage. The tone of his presentation suggested he is not at all convinced by the argument for rates to move higher in the near future, whether from genuine economic need or to protect the good name of the Bank. He quoted the lines of Peter Cook in Beyond the Fringe, a satirical show from the 1960s; “We need a futile gesture at this stage. It will raise the whole tone of the war.” This morning’s papers are as divided on the issue as the MPC clearly is: The Guardian says “Mervyn King is no man for a futile gesture” while The Daily Telegraph insists “Mervyn King should embrace the ‘futile gesture'”.
The debate will run and run. What mattered yesterday, though, was the governor’s clear dismissal of the notion that the Bank Rate will necessarily go up three or four times before Christmas. And that debunking cost sterling dear. It was already on shaky ground before the governor opened his mouth, rattled by a disappointing UK employment report that showed 2,4000 more jobseekers in January. During the course of Mr King’s speech it fell by a further cent against the US dollar and half a cent against the euro. It rebounded quite strongly against the dollar later in the day, the dollar hampered by a small but disappointing -0.1% fall in US industrial production. Compared with Wednesday morning sterling starts today down by one yen, half a US cent and the best part of a euro.
Figures released overnight by New Zealand put the purchasing managers’ index half a point higher at 53.7 while the producer price index showed manufacturers’ costs rising by 0.9% in the December quarter as factory gate prices went up by 0.2%. From Europe this morning come Euroland current account, construction output and consumer confidence, ZEW’s survey of Swiss economic expectations and the CBI’s industrial trends survey of UK manufacturing orders. The United States’ consumer price index (CPI) inflation figure is the day’s most important statistic, if only for theoretical reasons under the currently ultra-relaxed Fed policy. Other data from the States include weekly jobless claims, consumer comfort (everybody else refers to is as consumer confidence) and the Philadelphia Fed’s manufacturing survey. Canada’s only two offerings are wholesale sales and the Bank of Canada’s monetary policy report.
Sterling seems to have settled down again after yesterday’s reaction to the governor’s statement of the blindingly obvious. As long as the CBI orders figure does not get in the way it will probably be left alone to lick its minor wounds.