Bank of England Preview

December 7, 2011

The Bank of England is currently engaged in a new round of quantitative easing, GBP 75 billion in size launched at the October monthly meeting of the Monetary Policy Committee and not set to be completed until late January.  There is not a pressing need to change policy parameters this month.  They are a 0.5% Bank Rate since March 2009 and the new limit of GBP on the asset purchase program.  However, when minutes from this week’s minutes are released on December 21, they will be more dovish in tone and likely hint of further quantitative easing after January.

This month’s quarterly inflation report downgraded prospects for growth and inflation.  On unchanged policy, GDP would stagnate in the first half of 2012, while CPI inflation would sink to 0.9% late next year and be still well below the 2% target at 1.3% two years from now.  \

The OECD’s revised forecast of British growth projects 0.9% this year, 0.5% next year and 1.8% in 2013.  Consumer confidence is very depressed.  Industrial production in the U.K. fell 0.2% in August-October and by 1.5% from those months a year earlier.  The merchandise trade deficit soared to GBP 9.8 billion in September, and the manufacturing purchasing managers index of 47.6 in November constituted the deepest rate of contraction in 29 months.  Minutes from the November meeting revealed that while there was a unanimous 9-0 vote to do nothing further then, some members predicted that further quantitative easing might become warranted.  Dovish minutes at this month’s meeting would set the stage for another announced rise in quantitative easing after next month’s meeting.  For announcement effect, policymakers might feel that waiting that long could magnify damage to confidence.  Therefore, whereas a statement increasing the limit on asset buying is not the street consensus going into Thursday, such an outcome has far from zero probability.

The Bank of England’s decision will be posted on its web site at 12:00 GMT on Thursday.

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

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