Daily Commentary BY THE CURVE TEAM –

Inflation Could Be Growing Concern

15th of May, 2018

In an otherwise quiet start to the week, monetary policy normalisation, inflation and geopolitical pressures were the trending topics. What is interesting is that all of these are in some way interrelated.

The Cleveland Fed president and voting member Loretta Mester, speaking at a Banque de France Conference, reaffirmed her more hawkish outlook for monetary policy. Mester pointed out that the due to “fiscal policy turning from restrictive to stimulative, the economy growing above trend, and investment rising” the equilibrium interest rate is rising.

Also speaking at the conference was the Banque de France Governor and ECB Governing Council member Francois Villeroy. He spoke candidly about the end of QE and the timing of the first rate hike from the ECB, coming across a little more hawkish than the ECB party line of late.

There is some cause for concern on the inflation front as the price of oil continues to rise. Concerns over the potential supply disruption on the back of deteriorating geopolitical jostling in the middle east has push the price of oil to new highs.

While these effects on headline inflation indices are often overlooked, if higher prices are sustained, it does eventually feed through to core inflation. It is something to keep an eye on.

The data and events calendar picks up today, starting with the minutes from the RBA’s May meeting. Later today we then get the monthly Chinese economic activity data dump before US retail sales are released tonight.

David Flanagan

Director - Interest Rate Markets