Bank of England Preview

October 4, 2011

The Bank of England’s Monetary Policy Committee will reveal this month’s policy settings at 11:00 GMT on Thursday.  In September, the vote to retain a 0.5% Bank Rate was unanimous (9-0) for the first time in a year, and Adam Posen continued to dissent unilaterally in favor of resuming quantitative easing. 

Analysts have increasingly framed the forecast for a new tranche of asset buying as a matter of “when, not if.”  The shift was fostered by dovish minutes from the September 8th meeting.  A number of developments were cited that suggested sub-target inflation in the medium term if more stimulus isn’t undertaken: global difficulties, subdued domestic demand, fiscal restraint, plenty of spare capacity, and subdued wage pressures.  Many  “members thought it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point.” 

The view that officials will unveil more quantitative easing this week is a minority one, however.  Officials historically like to coordinate policy changes with the quarterly inflation reports that are prepared in February, May, August and November.  CPI inflation ticked higher to 4.5% in August, 1.5 percentage points above the target ceiling, while PPI-O and PPI-I inflation printed at 6.1% and 16.3%.  The manufacturing purchasing managers index in Britain unexpectedly rose to 51.1 in September after sub-50 readings, which convey contracting activity, in July and August.  A more likely outcome according to the pundits is that no changes will be announced Thursday but the minutes of this week’s meeting, which arrive on October 19, will show at least one other dissenter joining Posen in calling for quantitative stimulus without further delay.

In forecasting, one often encounters a consensus that central policy is going to change but not at the meeting immediately ahead.  The logic in making that kind of projection is to capture elements of the two likeliest outcomes when presented with a toss-up.  Both possible outcomes are covered.  From the central bank’s point of view, if officials are 100% sure that policy is going to be eased within two or three months, there ought to be no good reason not to take action immediately and thereby eliminate an uncertainty.  The rationale for delaying a decision that’s virtually certain to happen soon is that officials in fact are not absolutely sure what that the action in question will in fact be warranted later.  Delay represents reasonable doubt whether easing is in fact the correct call. 

Since the September 8 meeting, the pound has declined 3.5% against the dollar but risen 1.3% on a trade-weighted basis.  All things the same, that implies somewhat tighter monetary conditions even as U.K. share prices were depreciating 7%.  Ten-year gilt yields have dropped nine basis points, which is less than the move in some other sovereign yields.  An announced increase in the GBP 200 billion ceiling on quantitative easing, which was completed in January 2010, remains possible even this month.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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