“The Bank will encourage the uncollateralized overnight call rate to remain at around 0.75 percent.” Bank of Japan, 28 April 2026.
“Today the FOMC decided to leave our policy rate unchanged.” Jerome Powell, 29 April 2026.
Transcript of Chair Powell’s Press Conference – April 29, 2026
“The Monetary Policy Committee (MPC) voted by a majority of 8-1 to maintain Bank Rate at 3.75%.” Bank of England, 30 April 2026.
Bank Rate maintained at 3.75% – April 2026 Monetary Policy Summary and Minutes | Bank of England
“The Governing Council today decided to keep the three key ECB interest rates unchanged.” Christine Lagarde, 30 April 2026.
It was a clean sweep, no need to adjust monetary policy, by any of them. Regardless of any changes that may have occurred in the world, or in any of their individual economic circumstances, it was universally determined that everything was just right as it is. Just as was the case for each of them in their March policy meetings.
All of the central bankers threw out the standard plethora of negative supply shock excuses and caveats. They are going to look through the supply shock. Monetary policy is not the right tool to manage oil prices. They have to watch for indirect and second order price effects. Despite doing nothing, from a policy perspective, after two months of the hostilities and sustained supply shocks/price increases, they all assure us that they are committed to returning the various measures of inflation back to their 2% target levels. This Bank of England paragraph is a very succinct example of the common tone amongst the peer group.
“Monetary policy could not affect global energy prices, and should generally look through the initial direct, and typically also some indirect, effects on domestic inflation from a negative energy supply shock. Monetary policy would transmit with too long a lag to impact these direct and indirect effects, but would need to lean against second-round effects in wage and price-setting that proved more persistent.” Bank of England, 30 April 2026
Bank Rate maintained at 3.75% – April 2026 Monetary Policy Summary and Minutes | Bank of England
Unfortunately, for Governor Bailey, the pesky global energy price increases, as of the March CPI print, fed through sufficiently enough to force him to draft a letter to the Chancellor of the Exchequer explaining, yet again, why he is not achieving his price stability mandate.
governor-cpi-inflation-letter-april-2026.pdf
“Having already increased to 3.3%, CPI inflation is expected to be higher later this year. Bank staff expect inflation to decline to 3.1% on average in 2026 Q2 before rising back to 3.3% in Q3.” Andrew Bailey, 30 April 2026.
Figure 1: UK CPI YoY% (white) and BOE Bank Rate (blue). CPI 2% Policy Target (green) and +/- 1% Tolerance (red-dashed). March 2020 – March 2026
Source: Bloomberg
The above picture covers the tenor, thus far, of Governor Bailey who commenced his term as governor in March 2020. After a career best run of being inside the +/- 1% tolerance band (outside of which he must send a letter to the Chancellor) from April 2024 through March 2025, he has found himself, yet again, consistently above the +1% topside band. Of his recent letters (June 2025, September 2025, December 2025, April 2026), it is only this most recent one that he has been able to blame the Bank’s failure on oil prices, et al. Since the CPI index has moved back above the 3% ceiling, they have cut rates by 0.25% three times.
As a quick aside, and not something that you see very often in these pages, we must commend BOE Chief Economist, Huw Pill, for his dissenting vote in favour of hiking the Bank Rate by 0.25%.
The 3.3% latest CPI number is for March. Based on Bailey’s letter to the Chancellor, despite sending it on April 30th and having the whole month of April actual price data to hand, though not yet having the official April CPI numbers, he has confidently informed the Chancellor that they expect 2026 Q2 inflation to decline back down to an average of 3.1%. Based on what we have seen in April, we might call that optimistic.
As we discussed last month (Convex Strategies | Risk Update: March 2026 – “Exposing Fragility”, his 3.1% projection for Q2 is flattered by the imposition of the government’s household energy-price cap, without which reported CPI increases would be even higher. He, not surprisingly, does not mention this in his evaluation of inflation. So, again, you have a government adding to their deficit and debt financing (what we would term true inflation), through a subsidy that mutes the reported price increases and then a central bank that presents the muted numbers as though they are telling the real story. As we said last month – “wash, rinse, repeat”.
Meanwhile, the long memory of price level increases builds. Paging H.E. Hurst!
Figure 2: UK CPI Index (white). Historical Trend 2% (red). Bailey-era Commences March 2021 (purple). 1997 – March 2026
Source: Bloomberg, Convex Strategies
“Not just the size of the floods, but also their precise sequence, matters.” Benoit Mandelbrot, 2004.
For the UK, we only have reported CPI numbers through March. For the Eurozone, we already have their April CPI estimates and, not the least surprisingly, things didn’t get better.
Figure 3: Eurozone HICP YoY% 1997 – April 2026 (white). Symmetric Target Adoption July 2021 (purple). 1997 – July 2021 Average (red). July 2021 – March 2026 Average (green)
Source: Bloomberg, Convex Strategies
Figure 4: Eurozone HICP Index (white). Historical Trend 1.8%pa (red). Symmetrical Target as of July 2021 (purple). 1997 – April 2026
Source: Bloomberg, Convex Strategies
President Lagarde even stressed the problems in her official statement at the above linked press conference.
“Inflation rose to 3.0 per cent in April, from 2.6 per cent in March and 1.9 per cent in February…Inflation expectations have moved up significantly over shorter horizons…The increase in energy prices will keep inflation well above 2 per cent in the near term. As the period of high energy prices extends, the likely impact on broader inflation through indirect and second-round effects intensifies.” Christine Lagarde, April 30 2026.
Nevertheless, unchanged. This is where the memory comes in. People remember what happened post the ECB’s switch to a symmetrical bias around the 2% target, implemented in July of 2021 (purple line above). People remember all the talk throughout 2021 and H1 2022 of transitory, anchored expectations, forecasts of immediate returns to target. People remember the side-stepping of accountability after they were forced to respond with aggressive rate hikes, blaming it all on exogenous supply shocks, claiming it had nothing to do with their years and years of extraordinary policy to ignite inflation and massively delayed response when inflation exploded higher.
Will people, this time, be willing to complacently standby and believe that it won’t spiral out of control like it did last time? Will they believe that the ECB’s efforts to assure everybody that they have it all under control, despite taking no action, aren’t just more of the same misspent attempt at manipulating behaviour only to allow prices to spike unprecedentedly?
Figure 5: Here We Go Again: Eurozone HICP YoY% vs ECB Quarterly Forecasts through March 2026
Source: ECB, Convex Strategies
We suspect not. We suspect that folks will be much quicker to respond to the price shock that is right in front of them. Not least because, after the last occurrence, all the service providers that we know of, having had no such thing for years, added inflation adjustment terms to all their fee agreements. It is a legally contractual hardcoding of memory!
Fool us once, shame on you. Fools us twice, shame on us. For our thoughts on the topic, back when they finally started to respond the last time around, folks may want to check out our November 2022 Update – “Fools or Liars” Convex Strategies | Risk Update: November 2022 – Fools or Liars?.
As for our friends at the Bank of Japan, they too went with unchanged, in the face of three dissenting votes that wanted a hike. Of course, the difference being, they are by their own admission still running highly accommodative monetary policy, intentionally trying to drive what they call “underlying inflation” up to their 2% target. As it was an April meeting we got their quarterly update on projections.
Outlook for Economic Activity and Prices (April 2026)
Figure 6: BOJ Forecasts for CPI ex Fresh Food and CPI ex Fresh Food and Energy
Source: Bank of Japan Outlook for Economic Activity and Prices (April 2026)
Their official price stability measure, CPI ex fresh food, came in at 2.7% for Fiscal 2025, now above target for a full 4 years and, with significant increases in the projections for the next 3 years, expected to be so all the way through 2028. Of course, like we discussed with the UK above (and could do the same with the Eurozone), the current YoY% data series is being masked due to fresh government subsidies on both fuel costs and childcare costs.
The gist is, the BOJ is sticking with their magical policy whereby the accommodative setting, significant negative real policy rate, will push their mythical “underlying inflation” measure upwards to 2%, while simultaneously pushing their reported measures of inflation back downwards towards 2%, as they have consistently (and wrongly) forecast for the last four years. I’m sure all central banks around the globe would love to learn of this magical policy that increases inflation where you want it and reduces inflation where you don’t want it.
This all leads to the not totally unpredictable second-order effect of a grindingly weak JPY. That then gets met with explicit FX intervention from the same MoF that is presumably the one pressuring the BOJ to not normalize interest rates. The mind boggles.
We don’t know the future any better than the faux-shamans running central banks. Our point, as always, is that they should be less like central planners – forever trying to manipulate the system toward some mythical best outcome – and more like risk managers, acknowledging the ever-evolving initial conditions and responding to what is actually happening.
Still, we would always defer to the legendary Jim Grant on matters of historical precedent. This latest interview is another masterpiece, full of his characteristic wisdom and turn of phrase.
(3) Full Transcript: Jim Grant on War, Inflation, and the Dollar
“One thing that is forever, invariably true is that war is inflationary. War overstrains the productive apparatus. Its purpose is to destruct and kill, and to print money to finance those activities. That’s the essence of inflation.” Jim Grant, April 2026.
That seems a very good description of the simple nature of what is precisely going on at this very moment. Supply is being impaired while money is being printed.
This tracks very closely to a phrase we have coined, borrowing on the language of the wonderful Craig Tindale (you can find Craig on Substack or X and across a range of podcasts, for example this one with our friend Jeremy Mckeown In the Company of Mavericks – … – PIWORLD Investor Podcasts – Apple Podcasts):
“The material ledger continues to deplete, while the financial ledger continues to inflate.”
This is the very essence of our Hunger Games and Resource Wars. And right now, it appears everyone is in the arena.
This gets to the very nub of the mistake central bankers (and all adherents to Sharpe World’s simplifying assumptions) continue to make. As our good friend Bill White has repeatedly declared:
“They have the wrong model.” William White, more times than we could note.
The central bankers continue to operate as though we inhabit a “small world”, aka Sharpe World – a world where probabilities are knowable, aggregates explain outcomes, sophisticated optimization is feasible. This is the comfortable domain of expected utility theory and equilibrium models. There is no concept of time, of endogeneity, of memory.
In reality, we live in a “large world” of deep uncertainty.
The incomparable Grant Williams graced us as a keynote speaker at the recent Volatility Investing Conference in London and, without any prompting from ourselves, laid it out ever so eloquently.
“Let’s start by understanding that uncertainty is not the same as risk…We live immersed in uncertainty, and the challenge of acting with incomplete knowledge is our perennial struggle. We create models and forecasts to try to make sense of and bring comfort to a constantly unknowable future, and we tell ourselves stories to try and make sense of the world and bring order to chaos…However, no matter our desire to write stories, create models and forecasts or bring order to our chaotic world, we always – and I mean ALWAYS – know less than we think we do.” Grant Williams, April 2026.
Just beautiful. As we often put it – the future can be divided into two space-states: 1) things we (think we) know, and 2) things we don’t know. Space-state #2 is a heck of a lot bigger, and more important to cope with, than space-state #1.
This echoes brilliantly with the works of GLS Shackle, one of the true heroes of complexity and uncertainty. As Ludwig Lachmann wrote in his 1976 essay “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society”.
“For Shackle the future is not only unknown, it is unknowable. Expectations are not merely uncertain; they are radically uncertain. The future is not a set of possibilities to which probabilities can be attached; it is open and creative.” Ludwig M. Lachmann on GLS Shackle, 1976.
From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society on JSTOR
Shackle is not alone. Frank Knight distinguished risk (measurable probabilities) from true uncertainty. Herbert Simon gave us the concepts of bounded rationality. Friedrich Hayek stressed dispersed knowledge. We explored our own version in what we dubbed “Probability vs Possibility” back in March 2023 Convex Strategies | Risk Update: March 2023 – Probability vs Possibility.
Today, one of the clearest flag-bearers of these principles is Gerd Gigerenzer. This is a link to a presentation that he gave to the Bank of England all the way back in 2016. Were they paying attention?
One Bank Flagship Seminar by Gerd Gigerenzer
In discussing the use of small world models in economic analysis, Gerd put it this way:
“The problem is not computation; it is estimation… It borders on astrology.” Gerd Gigerenzer, 2016.
Central bankers continue to apply their small-world mindset in hopes that they can influence behaviour and, through such, achieve desired outcomes. Instead, they end up leaving people unprepared for future painful shocks. Why not proactively respond to what is already visible? Direct and indirect prices have already made significant jumps. Literal supply has been removed from the market. Get ahead of the potential second-order effects by moving early. If it works, and you prevent them, then move rates, quickly, back down.
It is hard to believe that the great minds inside central banks are unaware of what is already happening in terms of indirect prices or second-order effects. Borrowing, again, some pictures from the extraordinary work getting done by Wigram Capital Advisors https://wigramcap.com/, we can see some of those elements. Keep in mind, the below figures represent numbers for March! April numbers are not yet available but one can sort of imagine.
Figure 7: Korea: Export Price Index – Soaps, Detergents & Toothpaste YoY% (black) and 3-month Annualized (green)
Source: https://wigramcap.com/
Figure 8: Korea: Manufacturing Inventory, Chemicals and Chemical Products
Source: https://wigramcap.com/
We think Korea is a great example of a major importer of energy and then, a major manufacturer and exporter of downstream petroleum products. Are these the indirect prices that all the central bankers are keeping an eye out for? Should we start to expect subsidies for toothpaste and soap? The running down of inventories is a story that we are hearing all across the Asia manufacturing centres. Is Governor Bailey seeing this in his explanations of where he thinks near-term prices are going?
Jumping back to the Jim Grant interview where he reaches into his voluminous memory and pulls out this quote from former Federal Reserve Chairman, William McChesney Martin.
“We can never recapture the purchasing power we have lost.” William McChesney Martin, August 1955.
Imagine if he was staring at this today!
Figure 9: US CPI Index (white). Historical Trend 2% (red). Flexible Average Inflation Targeting (FAIT) Framework Aug 2020 (purple). 1997 – March 2026
Source: Bloomberg, Convex Strategies
We summed it up as best we could in last month’s Update.
“The debasement of fiat will have a very long memory. The ability to continue to do so has very direct implications on the ongoing competition we have dubbed the Hunger Games and Resource Wars. The fragility that drives the Hunger Games is increasingly ubiquitous. Current circumstances seem destined to lead to ever more government spending around solidifying positions within individual resourcing dependencies. Military spending will continue to rise. Support for aging populations continues to accumulate. Taxpaying and saving populations, aka working-age populations, will inevitably decline. The competition to issue bonds and secure critical resources isn’t going to simply fade away.”
The challenges of the supply shocks, resource bottlenecks, ever more military spending, along with already extreme Debt/GDP ratios and skyrocketing interest costs, just keep stacking up on top of the foundational inevitability of the population demographic dilemma: ever more cost to support an aging population, and ever fewer taxpayers/savers to fund it all.
Figure 10: Total Fertility Rates: Japan, German, Italy, France, USA, South Korea, Sweden. 1960 – 2024 (solid lines) and Projections to 2100 (dashed lines). Replacement Level 2.1 (red dashed)
Source: UN World Population Prospects 2024
The official forecasts on Total Fertility Rates (TFR) have consistently assumed stabilisation and a slow return towards Replacement Level and, much like central bank inflation forecasts, they have consistently been wrong. Declines in TFR have been accelerating in recent years.
This leads to the immediate problem as defined by the Dependency Ratio, i.e. how many elderly folks are there relative to working-age population. Combine this “volume dynamic” of ever fewer taxpayers/savers, with the “price dynamic” of the simultaneous squeezing of retirees’ ability to cover inflated costs, necessitating more government support, alongside compressing the real wages of the following behind working-age-population cohort, impairing their capacity for taxpaying and saving.
Figure 11: Dependency Ratio: Japan, Germany, Italy, France, USA, South Korea, OECD Average. 1960 -2024 (solid lines). Projections to 2060 (dashed lines)
Source: UN World Population Prospects 2024, OECD Employment Outlook 2025
It is worth noting that, in the case of Dependency Ratio, the projections aren’t made up forecasts, like the above TFR projections. These are, more or less, carved in stone known numbers based upon the current population and mortality rates. This is going to happen.
For those interested in this topic (everybody should be interested in this topic) we would suggest tracking down the just issued “The Unanchored Central Banker: Demography, Fiscal Instability, and an Erosion of the Central Bank’s Inflation-Fighting Ability” https://unanchoredcentralbanker.com/. This is a follow-up book by Charles Goodhart and Manoj Pradhan to their foresightful 2019 book “The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival”.
“In past decades, the demographic sweet spot helped to push inflation and interest rates lower and growth higher. Fighting inflation with such tailwinds was never a problem, nor was financing debt. That regime is changing rapidly.” Charles Goodhart and Manoj Pradhan, 2026.
From an investment perspective, bonds have been an enormous opportunity cost as a form of ballast in a portfolio, certainly since the advent of QE, and, far worse, have contributed negative nominal and significantly negative real returns since the bond bubble peak, coincidently in August 2020, the same time the Fed implemented FAIT.
Figure 12: Since QE: US Treasury Total Return Index (white). US CPI Index (blue). FAIT August 2020 (purple). Feb 2009 – March 2026
Source: Bloomberg, Convex Strategies
Figure 13: Since FAIT: US Treasury Total Return Index (white). US CPI Index (blue). FAIT August 2020 (purple). Aug 2020 – March 2026
Source: Bloomberg, Convex Strategies
We have discussed at length who bought all these bonds, all the way to the ridiculous levels of 0% and even negative yields – Rational Accounting Man. The policymakers’ tools of financial repression. In government bond markets, Rational Accounting Man is by far the dominant market participant. They are not making decisions about the long-term compounded wealth created by holding bonds for retirement, in order to cover consumption needs of the future. They are not price or value sensitive buyers, fine tuning expectations about multi-year/decade inflation expectations or monetary policy. They are making decisions based upon BIS Regulatory Guidelines, and Solvency II, and IAS19, and FX Reserve mandates, and mechanical 60/40 or Risk Parity practices, and Value at Risk calculations, and ergodic assumptions, and Monetary Policy objectives, and financial stability precautions, and calendar period compensation structures based on nominal outcomes. They are, as a whole, price/value insensitive buyers, sans skin-in-the-game.
Following their lead has not been a good idea. What has been a good idea, has been the concept of building convexity through explicit risk mitigating strategies. Stop using bonds as ballast to slow you down. Jettison the bonds, replace them with explicit loss mitigating strategies, freeing up capital to go and take more participating risk (see Convex Strategies | Risk Update: February 2026 – “Step #1: Free Up Capital”).
Just a quick update on one of our standard hypothetical sample portfolios, the Always Good Weather Portfolio (AGW), versus the traditional 60/40 Balanced Portfolio. The Balanced Portfolio in this example consists of 60% allocation in the S&P 500 Total Return Index (SPXT Index) and a 40% allocation in the US Treasury Bond Total Return Index (LUATTRUU Index). For the AGW portfolio we put 40% in the S&P 500 Total Return Index and 40% in Nasdaq 100 Total Return Index (XNDX Index) and 40% (20% 2x levered) in our extrapolated Long Volatility Manager Index of the old EurekaHedge LongVol Index and the new WITH Long Vol Index. We will run these during what we call the QE Era, commencing in March 2009 with the Fed’s first implementation of QE. This gives us a hypothetical portfolio that accelerates in good markets, decelerates in bad markets. Just what, hypothetically, one would want over the last couple of months!
Figure 14: Hypothetical AGW 40/40/40 (blue) vs Balanced Portfolio 60/40 (red). March 2009 – April 2026. Scattergram and Return Distribution
Source: Bloomberg, Convex Strategies
Figure 15: Hypothetical AGW 40/40/40 vs Balanced Portfolio 60/40 (red). March 2009 – April 2026. Compounded View
Source: Bloomberg, Convex Strategies
Looks good. In fact, for this particular hypothetical barbell portfolio, April 2026 turns out to be the best monthly return, to date, in the entire series. The AGW Portfolio has less risk than the Balanced Portfolio, in terms of Max Drawdown (17.6% vs 19.6%), Downside Volatility (5.1% vs 5.7%), and Downside Beta (0.47 vs 0.58), and a much higher CAGR (16.5% vs 10.8%) resulting in much higher terminal capital (1,395.98 vs 584.71). Put brakes on your race car so you can, safely, go out and drive faster.
This is the solution in large worlds of uncertainty. Don’t try to predict an unknowable future. Focus on being prepared for the uncertainty that is inevitably out there and will always have the largest impact on the outcomes of the race.
Read our Disclaimer by clicking here