Pump up the volume
Back in early 2004 the Bank of England was in the middle of a robust interest-rate hiking campaign. It opened the year at 3.75% and by August 2004 was up to 4.75%. Consumer inflation was never a real problem, with British CPI running in a 1.0-1.5% range at the time. It was really about housing prices, and the central bank's dramatic action took the air out of the UK housing bubble for sure. Annual housing inflation across the UK (per Nationwide) hit its most recent peak of 20.3% in July 2004 and has been tumbling ever since, hitting a low of just 1.8% in Septemer with a slight bounce since then, settling at latest measure at 2.4% in November. In the sixteen months since July 2004, five have seen SA monthly price declines. As a consequence, RPI inflation (which includes housing) has plunged from 3.5% in late 2004 to 2.4% in November 2005.
The UK bond market has decided that the BoE has had enough. The Bank cut interest rates by 25 basis points in August 2005 and the widespread belief seems to be that another cut in the works.
U.K. government bonds had their biggest weekly advance in six months after comments from Bank of England policy makers spurred speculation interest rates in Britain will be lowered further.Time to pump up the volume?
The rally in bonds sent two-year yields to their lowest since mid-October as the minutes of the bank's last rate-setting committee meeting showed Stephen Nickell voted for an interest rate cut, while the rest voted to keep rates on hold. BOE Chief Economist Charles Bean said in an interview on Dec. 18 the bank won't necessarily ``sit here until the spring doing nothing.''
``Bean was the first source of joy for the bond bulls, followed by the Bank of England minutes, which followed on to the GDP figures,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, Scotland. ``We had a triple whammy of good news.''
I suspect this is a lesson for future Fed behavior as well. With US core inflation remaining quite low and stable, with housing prices still out of control and consumer spending spilling red ink everywhere, and with global production showing signs of beginning to outstrip consumption again, the Fed is storing up ammunition in these latest rate hikes as much as it is fruitlessly trying to reign in American consumption. If the ECB is going to cut back on supplying liquidity to the global economy, the BoE and later on the Fed are most likely to stop in to stem the stem of the tide.