Bank of England Preview

March 3, 2009

The consensus expectation makes sense in this case.  Most pundits, including me, look for another 50-basis point drop in the Bank of England benchmark rate to 0.5%.  Put differently, Britain’s central bank will likely do Thursday at 12:00 GMT what the Bank of Canada did today at 14:00 GMT.  That would leave the G-7 with a central bank rate no higher than 0.5% in four of its five instances (the ECB represents the other three members, Germany, Italy and France, and will remain the one exception).  The British government’s top Treasury official, Darling, suggested that the Bank of England may even go one step further on Thursday, fleshing out details of quantitative easing now that nominal interest rates are near to zero.

British growth fell at the fastest quarterly pace, -5.9% at an annualized rate, in the final quarter of 2008 since 1980.  Manufacturing hasn’t been weaker since 1Q74, and service sector output fell at the quickest pace since 4Q90. In 4Q08, exports, investment, and consumption dropped at annualized rates of 20.2%, 8.9%, and 2.8%. The CBI industrial trends index weakened from -35 in December to -48 in January and -56 last month.  The factory PMI is also pointing to accelerating negative growth.  Britain’s housing market continues to collapse despite 400 basis points of rate cuts since October.  Retail sales has been more resilient than suggested by anecdotal evidence or adverse labor market developments.  Rhetorically, Bank of England officials have not made remarks to dissuade analysts from forecasting a half-percentage point rate cut on Thursday.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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