There can be no doubt about it. Bubblenomics is back.
The stock market is at dotcom highs. House prices are rising. Markets reckon interest rates will remain at 0.5pc for at least another three years, despite official forecasts for GDP growth to have been a solid 2pc for two years by then. And a single month’s inflation reading sends sterling tumbling by a cent against the dollar on expectations that it will convince the central bank to load up the printing presses once again.
None of it makes any sense, but it is the current juncture. Short-term financial hedonism has replaced rational long-term decision making.
Persistently low rates are now the markets’ status quo, and traders can only see evidence of more quantitative easing in the runes. When the Governor said last week that “once the economy improves then it may be possible to raise rates sooner than the current market expectation”, it fell on deaf ears. But when inflation came in at 2.4pc for April, below the 2.7pc forecast, it lit up their QE hopes like a flare.
“Sterling weakened as speculation increased about the likelihood of more monetary easing by the Bank of England, which would have a negative impact on the currency’s value,” Andy Scott, account manager at foreign exchange specialists HIFX, said this morning.
No matter that inflation is still above the 2pc target, and will start climbing back towards 3pc next month. No matter that April’s inflation figures were an anomaly because there were big increases in air fares last year as Easter fell in April, but the holiday came in March this year. No matter that the Bank does not expect inflation to get back to 2pc until 2015. No matter that inflation remains the biggest squeeze on household finances.
And no matter that, when the interest rate rise does come, it will inevitably deliver an economic “shock” – as the International Monetary Fund and the Bank for International Settlements have warned. But in bubblenomics none of that matters. As long as there is something to ride, the markets will.
What’s remarkable about this bubble, though, is it’s inflated without a recovery. Markets have become completely detached from economic reality. It’s going to be ugly when the QE helium tap is permanently turned off.