Bank of England Preview

February 8, 2012

In March 2009, the Bank of England’s benchmark interest rate hit virtual bottom at 0.5%, which continues to be its level, and the cutting edge of monetary stimulus switched to quantitative asset buying.  The initial GBP QE ceiling of GBP 75 billion was raised to GBP 125 billion in May 2009, GBP 175 billion in August 2009 and GBP 200 billion in November 2009.  This goal was reached two years ago in January 2010, and no further quantitative easing was undertaken until October 2011, when the ceiling was raised to GBP 275 billion.  It has taken until now for the new limit to be exhausting, setting the stage for tomorrow’s announcement at 12:00 GMT to be a key event.  Most analysts expect the ceiling to be lifted by another GBP 50 billion to GBP 325 billion (about $515 billion).

Confidence in the likelihood of new stimulus has eroded a bit, however, in the wake of better-than-expected survey evidence. 

  • The manufacturing purchasing managers index rose 2.4 points to an 8-month high of 52.1 in January.
  • The services PMI advanced 2.0 points to a 10-month peak of 56.0.
  • Consumer confidence improved four points to a 7-month high in January according to the GFK index.
  • The Lloyds business barometer improved a dozen points to minus 11 in January.
  • Also, the minutes from the January 11-12 meeting reveal a mix of opinion over the urgency of expanding quantitative easing and observed that the ECB’s big injection of 3-year liquidity had reduced the chances of a severe banking system accident.

Despite the above developments, I continue to anticipate further monetary easing to be adopted this month.  The standardized ILO estimate of British unemployment, 8.4% in September-November, was the highest since the mid-1990s.  Real GDP fell last quarter by 0.8% at an annualized rate.  Productive industries sank nearly 5%, and services were unchanged from 3Q.  Even if GDP manages to stay positive in the current quarter, Britain’s economy will have stagnated over the latest reported six months.  And it’s by no means assured that GDP will return to the black in 1Q12.  Retail activity got off to a very weak start, as attested by a 0.3% on-year drop in same-store sales and a 31-point deterioration to a reading of minus 22 in the British Retail Consortium’s monthly distributive trades survey.  British growth in 2012 will be at best marginally positive, squeezed by fiscal cutbacks and Euroland’s recession. 

At long last, U.K. inflation appears to be receding.  Consumer prices rose 4.2% in the year to December, a full-percentage point less than in the year to September.  Core CPI and PPI-O inflation are each down to 3.0%.  Wage pressures are benign.  If monetary policy tracks as the market expects, officials believe that inflation will fall to below the 2.0% medium-term target in the policy horizon.  A new quarterly Inflation Report will be published on February 15.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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