Bank of England Retains Status Quo

September 9, 2010

The Bank of England announced no policy changes and will let published minutes of its monthly meeting on September 22 do all the explaining of its latest thinking.  The Bank Rate has been at 0.5% since March 2009, and the asset purchase program was last raised in November 2009 by GBP 25 billion to the present limit of GBP 200 billion, which was reached by end-January of 2010.  British growth is already slowing, but inflation has stayed stubbornly above target.  The trade position did not improve despite sterling depreciation in late 2009 and early 2010.

  • The National Institute of Economic and Social Research estimates that real growth slowed to 0.7% in the three months to August from 1.3% in the three months to July.  Economic growth will be depressed further over the coming year by a massive dose of fiscal restraint.
  • CPI inflation is targeted at 2.0% but was 3.0% or greater in every month so far of 2010.  Bank of England officials blame the spike in prices on temporary factors but are unnerved that the extensive duration of the overshoot may dislodge expected inflation.  Policymaker Andrew Sentance has dissented in favor of a 25-bp rate hike at the last three policy meetings.  One encouraging sign was a drop in core CPI inflation to 2.6% in July from 3.1% in June.
  • Trade figures released today revealed a shocking GBP 8.667 billion goods deficit in July, much more than forecast.  The deficit averaged GBP 8.1 billion per month in May-July versus GBP 7.5 billion in the first calendar quarter of this year.  The trade-weighted pound previously had dropped 9.5% in a seven-month space to March 2010.

Coming into this month’s meeting of the Monetary Policy Committee, some market chatter had surfaced that the central bank might be tempted to raise its asset purchase program limit, but a vast majority of analysts correctly projected that such action would not be sanctioned at the September meeting.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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