Bank of England Meeting Preview: No Rate Change Expected

June 3, 2008

In few economies is the stagflation dilemma as pronounced than in Britain. The price component of the factory-sector PMI hit a series high of 62.0 in May, while the activity component was exactly at the 50.0 line of demarcation between expansion and contraction. That 50.0 score represented a 6.1-point drop since July 2007, one month before the credit crunch began. Over the same span, the Ezone and U.S. PMI-mf’g scores fell by a lesser 4.3 and 4.2 points. Expected inflation hasn’t been higher in at least ten years according to the CBI monthly retail sector survey. CPI inflation was 3.0% in April, a full percentage point (ppt) above target, and it will soon probably surpass 3.5% and maybe 4.0%. Consumer confidence plunged from -2 last August to -29 in May, lowest since September 1990. The construction PMI reading of 43.9 in May was a low for this data series, and the Nationwide house price inflation index imploded from +11.1% y/y in June 2007 to -4.4% by May 2008. Mortgage approvals hit a record low in April according to data from the British Bankers’ Association and were 11% lower than forecast.

A majority of Bank of England policymakers are particularly worried about evidence of rising expected inflation. It believes that a rate cut could depress sterling and leave expected inflation even more untethered. Only perennial dove Blanchflower of the nine people on the Monetary Policy Committee voted in favor of a rate cut in May. This Thursday’s meeting of the committee will be the last one for Deputy Governor Rachel Lomax. Her departure may leave the MPC even more reluctant to cut the 5.0% Bank Rate. She cast dissenting votes for no rate change at meetings in November 2006, January 2007 and July 2007, each of which resulted in a 25-bp increase in rates. The coming Bank of England rate announcement will be made at 11:00 GMT on Thursday, and it will not be accompanied by an immediate statement. Minutes of the meeting will be published on June 18th, however. The Bank Rate peaked at 5.75% during the five months to early December 2007. Subsequent cuts were made that month and in February and April.



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