In this month's Viewpoint: Dovish Fed risks liquidity bubble, Scottish independence: economic and political challenges, Indonesian elections: no swift turnaround on offer and Views at a glance.
30 June 2014
- The latest statement from the Fed and comments from chair Janet Yellen indicate the US central bank is in no hurry to increase interest rates, despite a pick up in inflation and signs of excess in financial markets. Our baseline view sees a tighter labour market and greater inflationary pressure and our Taylor rule model indicates that interest rates should already be rising.
- However we recognise that some of the old rules do not apply given the headwinds on activity: debt remains relatively high, bank lending spreads are greater and markets are more sensitive to higher rates. The danger for the Fed is that by delaying tightening we will either see higher inflation, or excess liquidity will continue to flow into asset markets, creating the risk of a bubble and so making the exit from loose policy more difficult.
Scottish independence: economic and political challenges (page 6)
- Scotland will hold a historic referendum that could see it end a 300-year long political and economic union with the rest of the UK. We analyse the political and economic implications for both an independent Scotland and the remaining UK.
- The results of our analysis are a concern: Scotland is likely to struggle to rein in a huge fiscal deficit, which is likely to be made worse by dwindling revenues from North Sea oil and gas production. A new central bank and currency are likely, but Scotland may struggle to gain the confidence of markets. Bottom line: an independent Scotland is highly likely to face severe economic challenges and pressures from financial markets.
Indonesian elections: no swift turnaround on offer (page 14)
- Another month, another Asian election, this time in Indonesia. While there is a market favoured candidate, we see less cause for optimism given the tightness in current polls and limited policy differences.
Views at a glance (page 18)
- A short summary of our main macro views and where we see the risks to the world economy.
- Azad Zangana
- Craig Botham
- Keith Wade
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