Bank of England Preview

December 9, 2009

Chancellor of the Exchequer Darling delivered a pre-budget report today that did the expected, broke no new ground, and bequeathed a deficit of over 12% of GDP to the next government, which the Tories are heavily favored to capture in elections next May or June.  This month’s meeting of the Bank of England Monetary Policy Committee will similarly mark time.  The November meeting had split three ways on quantitative easing, with a 7-person majority deciding to up the Asset Purchase Plan by Gbp 25 billion to Gbp 200 billion in all over the three months to January.  Spencer Dale voted not to extend the plan, and David Miles wanted an increase of Gbp 40 billion to Gbp 215 billion.  Note that the majority did reduce the incremental pace of asset purchases by half at last month’s meeting in a sign that quantitative easing is at least winding down in intensity.  This month’s announcement of no further policy changes will be made at 12:00 GMT on Thursday.  The matter of a change in QE will not come up until February, and raising the 0.5% Bank Rate is at least a year away.  It’s been at 0.5% since cuts of 50 bps each last February and March.  Previously, the Bank Rate was slashed by 50 bps in October 2008, 150 bps in November and 100 bps in  2008, and cuts of 25 bps in December 2007, February 2008, and April 2008 had been made from a 5.75% cyclical peak early in the global financial crisis.

In November’s quarterly review of inflation prospects, officials concluded that at interest rate path then priced into market rates and assuming unchanged quantitative easing, inflation would be more likely to lie beneath the 2% target than above it during the medium-term target period.  Unlike Euroland, Japan, Canada and the United States, Britain’s economy continued to contract in the third quarter.  The housing market has improved, and both the manufacturing and service-sector PMIs lie above 50 again.  However, consumer confidence seems stalled, and industrial production posted a surprisingly large 1.4% drop in August-October from the prior three months.  The trade deficit continues to be huge in spite of a softer pound, which has lost another 1% since the November meeting.

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



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