December's Decision

After last Friday’s employment and output data releases, I wonder if the Bank is relieved that the upcoming policy decision is not an MPR.  A few words of acknowledgement here and there in the press release and they can leave rates unchanged.  Nothing to see here, folks.  But I would hope that in the hallowed halls there is a recognition that it just got harder to justify their cautious approach to raising rates by overemphasizing the risks of what might happen versus weighing what is happening.  To remain dovish suggests that the downside risks to future economic performance from potential trade and announced macro prudential measures must have increased to offset any increase in upward price pressures coming from the actual persistent expansion of the economy.  I don’t believe that you can make a solid case that the potential negative impact from these two measures has become more likely or that their outcomes will be worse than previously envisioned a few weeks ago.  What we do know is that if the worse unfolds, the economy will be dealing with these issues from a higher starting point which should give policy makers some comfort.

I think back to the many analogies that the Bank has used; from walking the dog, to cooking spaghetti sauce, to sailing without navigation equipment, to driving a car.  Remember how when you are driving and see a stop sign ahead, you don’t jam on the brakes, you carefully pump the brakes and come to a gentle stop at the intersection.  The Bank was going to appropriately raise rates to slow the economy so that inflation would nestle into the 2% level.  But what do you do if you are so preoccupied by possible collisions that may happen beyond the intersection that you forgot to break appropriately and you now find yourself either in the intersection or through it.  I suppose mere mortals have two choices.  You can now brake and end up somewhere beyond where you were suppose to be or you can keep your foot on the accelerator and continue on in hope that one of the events that you were worried about occurs and is able to slow you down without causing too much damage to the car.  But a central bank is not a mere mortal so the choice most likely to be taken is to convince the market that the intersection was never where the Bank said it was.  You keep telling people that the stop sign is further up the road, so its okay to keep the pedal to the medal and not to worry, that the brakes will be applied at the appropriate time. 

This sounds to me like an accident in waiting.