Navigating Price Suprises
In hindsight, the BoE’s fruitless entreaties to markets over the past few weeks have exposed the limitations of zero-bound policy. On many occasions since the financial crisis, there have been calls (especially by the IMF at one point) for central banks to adopt a more liberal approach to inflation mandates. This has been executed in practice, but the onset of forward guidance has complicated proceedings. From investors’ point of view, the biggest point of contention now for guidance in general is the breach of price targets. Should key inflation readings show signs of structural gains, central will struggle to anchor interest rates, with currency strength an unwelcome second-order effect.
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