The Bank of England Monetary Policy Committee (MPC) meets every month for two days in order to establish the short-term direction of monetary policy. The meeting is usually held on the first Wednesday and Thursday of each month, with changes in monetary policy announced directly after. Details are only made available in the minutes, however, which are subsequently published a couple of weeks later.
The Bank of England differs from other major central banks in that it has a stated inflation objective which is set at 2 percent. The MPC uses the Consumer Price Index in order to assess UK inflation and therefore establish its decision on any amendments to the base rate.
The rate agreed by the MPC acts as a basis for every other UK rate and any change will have a knock-on effect on Short Sterling, Gilts, mortgage rates and so on. If the MPC decides on a change that is out of line with market expectations, it can have a substantial and extensive impact on UK markets (and, to a lesser extent, European markets).
Consumer price indices quantify the variation in the general level of prices charged for goods and services bought for the purpose of consumption in the UK.
There are two key measures of inflation in the UK: namely, the Consumer Price Index (CPI) and the Retail Price Index (RPI).
The RPI is the more commonly known of the two, and is the basis for revisions to tax allowances, state benefits and pensions.
The CPI is used by the Government, however, as the basis for their inflation target, which was set at an annual rate of 2% in December 2003 and is also an internationally comparable gauge of inflation. Before December 2003 CPI was known as the Harmonised Index of Consumer Prices (HCIP).
CPI figures are released by the Office for National Statistics at 08.30 GMT around the middle of each month, with data pertaining to the previous month.
Broadly speaking, the information compiled in order to determine the two figures is the same: around the middle of each month the Office of National Statistics records over 100,000 prices for over 500 items consisting of specified types of good and services in a variety of shops in around 150 locations spread throughout the UK. Index calculations are based each month on 'like for like' comparisons. The components of the index are weighted to reflect the relative importance of the items in question. For example, a rise in the price of petrol would have a bigger impact on the RPI than the price of bread.
So, in essence, the CPI uses the same data as the RPI; there are, however, some important differences between the two. RPI is expressed in terms of the comparison of prices relative to January 1987, when the index is assigned a value of 100.
CPI has a shorter history and is expressed comparative to 1996, when the index has a value of 100.
A different form of the CPI is the Core CPI, which excludes such volatile items as food and energy, and is thereby considered a more useful measure of inflation owing to its exclusion of these components which may distort the change in the cost of living.
To combat inflation the Bank of England may raise interest rates which will have an adverse effect on the economy. Higher rates will, in the short term, make holding sterling more attractive to foreign investors, which will in turn cause upward pressure on the value of sterling.
Current Account summarises the flow of all goods, services, income and transfer payments to and from the UK and is reported quarterly by the office of National Statistics at 08:30 at the end of the final month following the relevant quarter.
Current Account, along with Financial Account and Capital Account, makes up the UK's Balance of Payments and a positive value indicates a current account surplus, whereas a negative value indicates a current account deficit.
Persistent Current Account deficits may lead to a natural depreciation of a currency, as trade, income and transfer payments usually reflect sterling leaving the country to make payments in a foreign currency (just as underlying surpluses act as an appreciating weight).
Current Account figures are released several weeks after the period for which they are reporting, which has the effect of diminishing the impact of the report on the financial markets.
Nevertheless, Current Account is important for forecasting long-term developments in FX rates and is useful as a depiction of how the British economy is interacting with the rest of the world.
Gross Domestic Product (GDP) is the broadest overall benchmark of economic activity and quantifies the production of goods and services within the UK.
It is calculated by adding up all expenditures on all final goods and services produced during the year as shown:
GDP = C + I + G + (X - M)
Where: C = ConsumptionAn increasing GDP indicates an improving economy, which is generally good for sterling and for the financial markets. Extremely robust economic expansion can create inflationary concerns which may contribute to tightening of monetary policy.
Most of the components that comprise the report are known well in advance, meaning that GDP tends to be well anticipated. If, however, the figure does differ from expectations, it does have the potential to cause significant market movement.
The Consumer Confidence Index is a monthly survey conducted for The Nationwide by TNS. The survey was started in May 2004.
The Nationwide Consumer Confidence Index measures the population's view of the current position and future prospects of the UK economy. The index takes into account the general economic situation, employment conditions and personal expectations of the months ahead.
Results are published each month, at 23.01 GMT on the Wednesday before the Bank of England's Monetary Policy Committee announces its interest rate decision.
1,000 adults are interviewed each month, with the sample structure to be nationally representative of all adults in term of age, sex and socio-economic group. The questions posed in order to calculate the indices are based on those asked by the Conference Board (in the US), but adapted for UK conditions.
The Index is based on answers to five questions included in the survey.
Each respondent is asked to appraise current economic conditions and employment conditions.
Each respondent is also asked how they expect conditions to be in six months time. These six-month expectations are on: economic conditions; employment conditions; and the respondent's total family income.
For each of the five categories, there are three response options: POSITIVE, NEGATIVE and NEUTRAL.
For each of the five questions the POSITIVE figure is divided by the sum of the POSITIVE and NEGATIVE to yield a proportion, which is called the 'RELATIVE' value.
For each question, the RELATIVE for May 2004 is then used as a benchmark to yield the INDEX value for that question.
The Consumer Confidence Index is then averaged together as the arithmetic mean of all five indices.
TNS is part of the same group that conducts research for the respected U.S. Consumer Confidence Index issued by the U.S. Conference Board, which has been run since 1967 and is generally recognized in the States as being a key economic indicator.
An increasing level in the Consumer Confidence Index normally prefigures a rise in consumer spending, which powers economic growth. Within reason this is beneficial for the financial markets; however, high economic growth can come at the cost of inflation.
The figure is released at the start of each month, making Nationwide Consumer Confidence a timely measure of consumer sentiment now and in the immediate future.
This is an unofficial estimate of the UK's Gross Domestic Product, made by the National Institute of Economic and Social Research (NIESR). The estimate is released monthly at 23.01 GMT no more than two weeks after the end of the month on which the data is based.
The implications of the report are very similar to those for GDP: an expanding GDP indicates a growing economy, which is generally beneficial for the financial markets. Growth that is too rapid will promote inflationary worries, however, that may influence the MPC to raise interest rates.
Trade Balance is a monthly report that measures the difference between exports and imports of goods and services. The report is released by the Office of National Statistics at 08.30 GMT, within 40 days of the period to which the data pertains.
The figure is typically expressed in billions of pounds, and is presented alongside a year-on-year percentage change.
The Trade Balance is one of the largest constituents of the UK's Balance of Payments and accordingly offers a useful glimpse into pressures on the value of sterling.
A positive figure shows that the value of exports exceeds the value of imports: a trade surplus, in other words.
It follows that a negative number is indicative of exports being exceeded by imports: a trade deficit.
A trade deficit essentially signals that sterling is seeping out of the country, in order to purchase foreign imports with foreign currency. This outflow of currency can have a negative impact on the value of sterling, if not offset by comparable capital inflows.
This report's influence is moderated by its somewhat belated nature: the information is released up to 40 days after the period to which it relates. Moreover, the data is often well anticipated.
Despite these limitations, Trade Balance is still considered one of the more significant reports issued from the UK, owing to the general importance of Trade Balance data.
The Unemployment Rate is released quarterly, around the middle of the month, by the UK Office of National Statistics, and is based on a survey of around 53,000 households throughout the United Kingdom.
The report measures the proportion of the economically active population defined as unemployed.
The definition of an unemployed person is either someone who is without a job, but wants to work and has actively sought work in the last four weeks, or someone who is out of work, has found a job and is waiting to start in the next two weeks.
The Unemployment Rate allows unemployment to be interpreted in the context of other changes, such as variations in the size of the population and in economic activity.
A lower Unemployment Rate means greater numbers of workers who are earning an income and this suggests greater consumer expenditure and therefore economic growth. This is generally beneficial for the stock market, but, as always, if growth is too fierce, it can create inflationary pressures.
The Unemployment Rate is a moderately important indicator and can have a reasonable impact on the markets.
This quarterly report details the flow of all goods and services, income, and transfer payments to and from Australia and can be used as a general yardstick of how Australia's economy is interacting (on a non-investment basis) with other economies from around the globe.
The Current Account figure is calculated by the Australian Bureau of Statistics and is released three months after the quarter for which it reports (for example, the report for the first quarter, which is up to March, is released at the end of May).
The Current Account is compiled by aggregating the value of the trade balance (exports and imports for goods and services), income payments (such as interest, dividends and salaries) and unilateral transfers (aid, taxes, and one-way gifts).
A positive value (a current account surplus) shows that the flow of money from these elements into Australia exceeds the money leaving Australia. A negative value (current account deficit) indicates a net capital outflow from these components.
Recurrent deficits may eventually cause a natural depreciation of the Australian dollar, as trade, income and transfer payments usually reflect Australian dollars leaving the country to make payments in foreign currencies (just as underlying surpluses may have an appreciating effect).
Along with GDP and Trade Balance, Current Account is a key force when considering long term developments in foreign exchange rates and accordingly is usually considered to be one of the more significant Australian economic reports.
It should be pointed out that the impact of the figure on the financial markets is diminished somewhat by only being released once a quarter, by which time many of the components of the report are already known.
The Consumer Price Index (CPI) is the foremost indicator of inflation for Australia.
The index is complied by the Australian Bureau of Statistics and is released on a quarterly basis, one month after the period for which it is reporting.
Inflation reflects a decline in the purchasing power of the Australian dollar, where each dollar buys fewer goods and services. In terms of measuring inflation, CPI is the most obvious way to quantify changes in purchasing power. It does this by measuring quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the CPI population group (i.e. metropolitan households). This 'basket' covers a wide range of goods and services, arranged in the following eleven groups:
An increase in the index indicates that it takes more Australian Dollars to purchase this same set of basic consumer items.
Unlike most other countries, Australia publishes CPI quarterly instead of monthly, increasing the market impact of the report upon release. The headline number is released as the percentage change from the previous quarter or year.
Gross Domestic Product (GDP) is the broadest overall benchmark of economic activity and quantifies the production of goods and services within Australia.
It is calculated by adding up all expenditures on all final goods and services produced during the year as shown:
GDP = C + I + G + (X - M)An increasing GDP indicates an improving economy, which is generally good for the Australian dollar and for the financial markets. Extremely robust economic expansion can create inflationary concerns which may contribute to tightening of monetary policy.
Most of the components that comprise the report are known well in advance, meaning that GDP tends to be well anticipated. If, however, the figure does differ from expectations, it has the potential to cause significant market movement.
The Labour Force Survey is a monthly report from the Australian Bureau of Statistics. It contains estimates of unemployed and employed civialians, classified by sex, status, territory and age. The estimates are based on a survey of about 30,000 dwellings and covers about 0.45% of the population of Australia.
The report is released at 11.30am EST on a Thursday, often the second Thursday of the month, and contains data pertaining to the previous month.
The survey contains two important sections: the Unemployment Rate and the Employment Change.
The unemployment rate details the percentage of unemployed persons in the labour force (unemployed persons are defined for the purposes of this report as being those who have no job but are actively seeking work, whilst the labour force is defined as the total of employed and unemployed persons).
The Unemployment Rate serves as a leading indicator of the state of the labour market and is considered to be a timely report, released as it is just a few weeks after the relevant period.
A large chunk of Australia's GDP is made up consumer spending, and it therefore follows that high levels of unemployment, which equals lower overall incomes and will naturally serve to hamper consumer spending, will have an adverse effect on any prospective growth in the economy. The overall importance of employment for the economy means that the data contained within this report often has a major effect on the market.
This figure traces the number of people who are employed in Australia (the headline figure is the annualized percentage change in employed workers).
While a robust employment situation is generally beneficial for the economy, a strong rise in the numbers of the newly employed points toward the potential for rapidly increasing consumer spending, which presages inflationary pressures.
As the RBA often counters the threat of inflation with rate increases, this figure can be used as an indicator of future action by the central bank.
The Reserve Bank of Australia stands as the central monetary authority for the Australian economy and meets eleven times each year: meetings are held on the first Tuesday of each month (with the exception of January).
The bank's chief duty is to maintain inflation within a 2-3 percent band which is targeted by its own policy makers.
Inflation is controlled by making changes to the overnight cash rate, which has a large influence on Australia's financial markets.
Any change in the cash rate will directly influence interest rates in consumer loans, mortgages and bond rates. As short-term interest rates fundamentally shape the returns from any holding in a currency, the RBA rate decision has a bearing on the Australian dollar exchange rates (a rate hike or expectations of such a decision will tend to cause the Australian dollar to strengthen, while rate cuts will case depreciation).
By adjusting the cash rate, the RBA seeks to keep consumer and producer prices increases at manageable levels without neglecting economic growth.
CPI, or National Consumer Price Index, is the key inflation measure in Japan. It reflects changes to the price of a designated 'average basket' of goods and services, just like in other countries.
CPI is used as the basis for monetary policymaking by the Bank of Japan. Within the main release, 'CPI excluding fresh food' is often focused on by markets, since it excludes volatile and potentially distortional food prices.
The figures are released monthly, in the last week of the month following the period covered.
See the Japanese government statistics website for more information.
The Japanese GDP release measures the value of the total production of goods and services in the Japanese economy. The headline figures are annualised percentage changes in real and nominal (non-inflation adjusted) GDP.
While surprises are rare, even small deviations from expectations can have an impact on markets.
There are two 'estimates' published each quarter, with a month between them. The first of these is released in the second month following the end of the quarter.
See the Japanese government statistics website for more information.
The Industrial Production Index reveals the volume of goods produced by Japan's mining and manufacturing industries. It is a widely studied leading indicator that can help predict future movements in the general health of the economy.
The monthly releases are issued in preliminary form, and then in revised form two weeks later. The release is published monthly, one month after the reporting month. It is revised two weeks later.
See the Japanese government statistics website for more information.
This release tracks the total value of machinery orders placed at leading manufacturers in Japan. The survey is held to provide an early view of trends in corporate capital spending. Favourable figures are often seen as a sign of a healthy business outlook.
The figures are released monthly, in the middle of the second month following the reporting period.
See the Japanese Cabinet Office website for more information.
This release contains various different measures of the money supply (i.e. the amount of money in circulation in the economy).
These are similar to US and European measures and are defined as M1, M1+CDs (Certificates of Deposit), M3+CDs and Broadly-defined Liquidity.
The data is released monthly, in the second week of the month following the period covered.
See the Bank of Japan website for more information.
This release measures the total value of goods and services sold over the month in Japanese retail outlets. The figures are seen as a good indicator of the overall state of the economy and as such have a tendency to affect markets upon publication.
The headline figure is the year-on-year percentage change in the value of products sold. The figures are released monthly, in the month following the month covered by the data.
The widely-followed Tankan Index is a measure of business confidence in Japan. The Index is derived from a survey of firms who are asked whether they regard business conditions as favourable, not so favourable or unfavourable.
It can be positive or negative, denoting prevailing optimism or pessimism respectively, and is broken down into two categories: Manufacturing firms and non-Manufacturing firms.
The Index is released quarterly, on the first Monday after the period covered.
See the Bank of Japan website for more information.
This index tracks prices of goods purchased by Japanese corporations. Since the costs faced by companies are related to the prices they ultimately charge consumers, there is a relationship between rises in the CGPI and the CPI, and so this release has the potential to move markets.
The CGPI is released monthly, on the eighth business day of the following month.
See the Japanese government statistics website for more information.
Reproduced courtesy IG Index
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