The vanishing cycle

Just as the popularity of two-wheeled pedal power has been surging across London, a different type of cycle, the economic kind, has vanished from sight.

Unspectacular economic growth and weak inflation has allowed central bankers to motor on, boosting markets. However, our concern is that the economy is suffering mechanical problems, which should be reflected in market pricing as monetary policy is gradually tightened.

Economic theory suggests that loose monetary policy encourages growth, leading to a reduction in the unemployment rate which eventually forces wages up. As central banks see this feed into inflation, they hike interest rates in order to reduce growth to a sustainable level.