1. Bank of England looks set to hike next week.
And yes, inflation is high but growth is weak & real incomes are being squeezed.
2. Message from the Bank since August has been clear: we expect weak growth, squeezed incomes and, oh, if we are right - we’ll have to hike.
3. Why the shift from the Bank? Possibly worries about “financial stability” (polite way of saying “bubbles”) but more likely...
4. They’ve become pessimistic on the supplyside of the UK economy. They think the 10yr weakness of productivity growth isn’t temporary -
5. It’s here to stay (in their view). Growth since 2010 has relied on using up spare capacity but with unemployment ultra-low -
6. That spare capacity has been eroded. Without productivity growth, then we will soon (again in the view of the MPC as I see it) face -
7. Rising price pressures. This is grim. It’s the equivalent of saying today’s weak growth is “as good as it gets”.
8. I don’t understand what made the Bank swerve to this view. But it’s where they think we are - and it’s a defendable position.
9. Macro policy is usually about trade offs. And the terms of those trade offs in the U.K. look grim. (Ends).
10. When I said the thread was done, that was fake news.
There’s a huge outstanding question.
11. Is next week’s hike “one and done”? I.e. is it just reversing last August’s cut or the start of a (v gradual) hiking cycle?