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Divergent monetary policy visions

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  • The Bank of England is not expected to do anything today, although at some point the embarrassment of forward guidance probably needs to be taken outside and put out of its misery. Nevertheless markets are edging towards the idea that the UK could be the first major economy to have rate increases.
  • Market expectations around the ECB are focused on deflation fears and the possibility of further easing - the (perhaps less reliable) strength of sentiment data has only partly mitigated that. We do not see action today, and the ECB does have an incentive to keep some policy stimulus in reserve against future problems.
  • No monetary policy decisions from the US today, but we do have the prospect of unit labour cost data (expected to be still declining). This is not only an indicator of inflation but potentially an indicator of slack in the labour market, which is a big focus for Yellen.
  • Emerging market tensions seem to have calmed for the time being as investors pause for breath. However the underlying problems of the afflicted countries do need to be resolved to ensure stability - and the underlying problems are domestic in origin, and nothing to do with US quantitative policy.