It never ceases to amaze that markets behave the way they do. Let’s take UK interest rates as an example. It appears that the forecast for CPI inflation is to fall into negative territory over the next couple of months and as such will result in a delay in increasing interest rates, due to the fall in oil and food prices. However this does not seem to make much sense because if we take oil as an example, if oil prices were to remain low, inflation will leap up because those goods included within the CPI index fall out of the basket.
The good news is that the Bank of England seems to be very alert to this and a new member of the MPC has been quoted as saying that if inflation did pick up it “would most likely merit an increase in interest rates sooner than people are currently expecting”. This will make the release of the next BoE Quarterly Report, due out in a couple of weeks, interesting.
Within the Eurozone the impact of the Quantitative Easing programme announcement had little effect on the market, which reacted way in advance of the announcement. The important thing was that the ECB announced its plan and that it was sufficiently large enough to be potentially effective. In this regard it is clear that the anticipated effectiveness is limited and will be much less effective than either the UK or US’s QE programme.
What is becoming clearer is the political risk within the Eurozone may be more important than any austerity measure, something that seems to have been largely ignored by many. If you were to look at the effectiveness of austerity within the UK then it is generally agreed that it has caused asset price bubbles. This will play into the hands of left wing parties, which have rapidly established themselves throughout Europe and could threaten the Eurozone.