Bank of England Preview

November 7, 2012

A majority of analysts appear not to expect quantitative stimulus to be expanded this month even though the program’s current limit of GBP 375 billion or roughly $600 billion has now been reached.

Exhibit AMinutes from the October Monetary Policy Committee meeting revealed that some policymakers think the stimulative effect of ever-lower long-term interest rates is hitting diminishing returns, and some worry that repeated knee-jerk increases of quantitative easing could lift expected inflation.  More recent remarks by BOE Governor King suggest that downside surprises are necessary to persuade the committee majority to approve new easing.

Exhibit B:  There have been some upbeat data.  British GDP advanced by a greater-than-anticipated 1.0% in the third quarter.  A 0.6% September rise of retail sales also surpassed forecasts.  The distributive trades survey index jumped 24 points to +30 in October. 

Exhibit C:  Ezone financial strains are less acute than four months ago.

Investors should be aware that some risk nonetheless exists of a QE surprise tomorrow at 12:00 GMT.  Bank of England policy members are encouraged to vote their own belief.  Because decision-making is less predisposed to consensus building than at other central banks, the Bank of England historically has tended to produce more than its share of surprises, and an expansion of QE could be justified without appearing imprudent.

  • Third-quarter growth was inflated by the Olympics and because the second quarter was dampened by Jubilee celebrations.  NIESR estimates that GDP in August-October was only 0.5% better than in the previous three-month period. 
  • The service-sector PMI declined 1.6 points to a 22-month low of just 50.6, consistent with near stagnation.  The factory PMI dropped 0.6 points to 47.5, indicating the fastest pace of decline in fifteen months.
  • Exports fell in August, boosting the merchandise trade deficit to nearly GBP 10 billion.
  • Industrial production fell 1.7% in September.
  • The end of the U.S. election has brought the fiscal cliff into focus, creating a reality check around the world.  The Ftse 100 index slumped 1.6% today.
  • 10-year gilt yields are 7 basis points higher than when policymakers met last month.

One thing everyone can agree upon.  A cut in the Bank Rate, which has been 0.5% since March 2009, is remote.

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

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