Bank of England Preview

May 5, 2009

This month’s Monetary Policy Committee (MPC) meeting, whose announcement is set for Thursday at 11:00 GMT, will be uneventful and mirror last month’s.  In March, the Bank Rate was halved to 0.5%. Officials indicated that level would be the end of the line for cutting rates and immediately announced a 75 billion pound program of asset purchases over three months and consisting mostly of gilts.  The Committee promised to review its quantitative easing at its April and May meetings.  After meeting April 8-9, “the Committee agreed that there had been no material change in the conditions that had led them to the decision [in March] on the necessary scale and timing of asset purchases that was required.”  Its conclusion after this week’s meeting should be no different.

The global economy is perceived with less fear now than a month ago, and some of that has spilled over into Britain.  Exports jumped 20.6% in March. The British construction PMI improved 7.2 points to 38.1, and the manufacturing PMI in April was 2.9 points higher at 42.9.  Real retail sales in 1Q, up 0.9% from 4Q08 and 2.0% from 1Q08, was firmer than assumed.  Consumer confidence hit a 12-month high by one measure, and the CBI Distributive Trades Survey, a gauge of retail sector conditions, leaped 47 points to a 15-month high of +3 in April.  Sterling has appreciated 2.7% against the dollar and 1.8% against the euro since the last meeting, and the FTSE has risen 10.5%.  Ten-year gilt yields are 32 basis points higher, steepening the yield curve.  But make no mistake, Britain remains very depressed after seeing real GDP plunge 7.4% saar and 4.1% on year in the first quarter.  Bank of England monetary data in March failed to reveal a discernible lift from quantitative easing to corporate or household credit growth.  Auto production is down 51% from a year ago, and the jobless rate of 4.5% is at an 11-year high.  The annual budget was very poorly received, as such projected a near-doubling of the debt-to-GDP ratio to 81% by FY2013/14 despite overly optimistic projected growth in the out-years of a five-year forecast.

At its June meeting, the MPC will have to flesh out the next stage of its policy.  The process of communicating such information is likely to begin in the quarterly inflation report, due later this month, but it will probably not be addressed in this Thursday’s statement for immediate release.

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

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