Bank of England Preview

August 5, 2009

The Bank of England will announce its latest monetary policy thoughts and plans at 11:00 GMT on Thursday.  The Bank Rate has been at 0.5%, an effective bottom, since March.  The rate had been at 5.0% at the start of last October.  Additional stimulus since the rate reached 0.5% was provided through quantitative easing, specifically Gbp 125 billion of government bond buying compressed into five months but less in July than earlier months.  The British Treasury earlier agreed to a Gbp 150 billion ceiling on the program, and the main suspense of this week’s meeting is whether the Bank of England takes that offer immediately, defers the decision while keeping the option of future quantitative easing, or sends a signal that no more quantitative easing is likely.  A story in the London Sunday Times in the first weekend of July said the Monetary Policy Committee (MPC) was leanng toward the first option, but surprisingly upbeat data make the middle choice the current favorite of analysts.

The MPC generally likes to synchronize its actions with quarterly inflation reports, which are released in February, May, August and November.  Minutes from the July meeting revealed that a decision on whether to expand quantitative easing was explicitly put off until August when the new staffing forecasts and analysis would become available.  One of the MPC’s most hawkish members, Tim Besley, has stepped down and will be replaced by the renowned U.S. economist, Adam Posen, who would appear to be less ideologically hawkish than his predecessor.  But the key this meeting will lie not on personnel but  in economic data, which point to an earlier exit from recession than had been assumed and a more robust recovery.

  • The Halifax house price index rose 1.1% in July, cutting its 12-month drop to 12.1% from 15% in June and 17.7% in April.  The Nationwide house price measure fell just 6.2% in the year to July compared to 17.6% in the year to February.
  • Bank of England data for mortgage approvals show a five-month improvement to a 14-month high.
  • Loans to small firms are flowing much more freely according to the British Bankers Association but remain very light to consumers.
  • Britain’s PMI’s all rose impressively in July — by 1.6 points in services, 3.4 points in manufacturing, and 2.5 points in construction.  The sum of the services and manufacturing indices was 104.0, up from 99.3 in June and 83.9 last November.  Both services and manufacturing exceeded 50 in July, the first indication of expanding activity in both areas since April 2008.
  • Industrial production fell just 0.6% last quarter (roughly 2.4% annualized0 after tumbling 5.1% (some 19% saar) in the first quarter.
  • Consumer confidence since January has risen to 60 from 41 on one gauge and to minus 25 from minus 37 on another.
  • The CBI survey of retailers had a July reading of minus 15 compared to a December score of minus 55.

Reflecting mounting speculation that MPC officials will pause quantitative easing, sterling hit $1.7043 today, highest since last October 20, 26.3% above the low of $1.3505 on January 23rd and 3.6% stronger than at mid-2009.  Britain’s budget deficit has soared with the highest public sector borrowing requirement last quarter since at least 1946, and as in the United States there is concern about monetary policy maneuvering in an environment of super-high deficit spending.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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