The tariff situation is not just an issue for traders, as it is proving to be a headache for central banks as well. This has added an unusual amount of ambiguity into what could be expected from interest rate policy going forward. And it’s particularly acute for the Bank of England(BOE).
There is still a month before the next Bank of England(BOE) meeting, which means the pound has plenty of room to react to the data coming out. Now that there is a little more clarity on what to expect from tariffs, markets can adjust and start taking into account the macroeconomic indicators. But it seems there is still a period of volatility ahead as traders try to understand what’s going on.
The Models Aren’t Working
One of the issues for trying to figure out what central banks will do was highlighted by the BOE’s independent MPC member Megan Greene on Friday. She said that the most important thing to understand the impact of tariffs was to watch the currency markets. That could go so far as to even help shape the response from national governments.
Greene went on to say that forex has not operated as models would suggest, and the dollar has weakened instead of appreciating as would be expected. A stronger dollar would normally increase inflation in other countries. But a weaker dollar would presumably have the opposite effect. This means the inflation implications of tariffs is ambiguous, a view that was shared by Green’s colleagues on the BOE’s decision board, Clare Lombardelli and Sara Breeden earlier in the year.
So, What About Rates?
With three of the nine MPC members saying that more data is needed to figure out what’s going on with inflation, it might be premature to bet on what the Bank of England(BOE) will do at its next meeting. In the meantime, close scrutiny of the data becomes more important amidst market volatility. At the end of the day, the BOE will have to respond to what CPI indicators are showing, regardless of what traders are worried about.
The UK is among the least affected by the tariffs, and had maintained a trade deficit with the US prior. It’s expected that Britain could reach a deal with Washington relatively easy if a “zero-zero” tariff regime is the objective, as both countries were already well advanced in a free trade negotiation. In the meantime, however, investors and central banks might take a more cautious approach.
What the Data Will Say
Tuesday sees the release of British jobs data. The February UK unemployment rate is expected to stay unchanged once again at 4.4%. Average earnings (including bonus) are expected to increase at an annual rate of 5.7%, slightly slower than the 5.8% prior. Meanwhile the British economy is forecast to have added 95K jobs over the rolling three month period, a slowdown from the 144K prior. In combination, this suggests that the labor market remains tight, an indication for the Bank of England(BOE) to be hesitant to ease.
On Wednesday, it’s expected that the ONS will show March UK headline CPI rose to 3.2% from 2.8% prior, with the main culprit seen rising food costs. However, the core rate is expected to decline to 3.3% from 3.5% prior. Both figures are well above the 2.0% target for the BOE. But the core rate could get more weighting by policymakers.
