Bank of England Preview

September 9, 2009

The Monetary Policy Committee announcement at 11:00 GMT on Thursday will undoubtedly retain a 0.5% Bank Rate.  That is its lowest practical level, reached six months ago in March when officials turned to quantitative easing and a supplementary way to loosen policy further.  The Bank Rate had been cut by 450 basis points over the prior five months, including a slice of 50 bps at the March meeting.  The asset purchase program was initially set at Gbp 75 billion, raised to Gbp 125 bps in May and by another 50 billion pounds to Gbp 175 bps in August.  In light of three dissents at the August meeting, including one by Governor King who was joined by the usually hawkish Tim Besley and newcomer David Miles — each of whom favored a Gbp 75 bln increase to Gbp 200 bln — a modification of the asset purchase total is conceivable now.  The Bank’s chief economist, Charles Bean, recently stressed that it is too early to gauge if quantitative easing has been sufficiently forceful to be successful, and money growth and credit expansion still look fragile.  If the target holds instead at Gbp 175 bln, such would imply doing a little more than Gbp 15 bln in both September and October.

Chances look good that there will eventually be more central bank asset purchases than Gbp 175 billion, and such an announcement probably will be made no later than next month.  Last month’s quarter inflation report from the Bank of England indicated that at market-priced future rate levels, CPI inflation would likely be less than 2.0% in the middle of 2011 and more likely to be less than 1% than more than 3%.  That conclusion was the central bank’s way of telling markets that they are probably pricing in too big a rise in rates.  On-year CPI inflation was 1.8% in July, down from 5.2% last September, and core CPI is now slightly less than 2.0%.

British growth in the third quarter is expected to return to the black but to fall short of growth in Euroland, the United States, or Japan.  Real GDP was reported initially as having fallen 2.6% last quarter at a seasonally adjusted annual rate and by 5.5% from 2Q08.  However, that figures is likely to be revised to a larger drop because investment tumbled 10.4% in the quarter, worse than assumed initially.  Retail sales in 3Q were disappointing, in part due to wet weather.  The CBI’s latest retail survey produced weaker results than anticipated.  However, consumer confidence continues to edge up.  And the 3.3% climb of real retail sales in the year to July represented a 14-month high, aided by auto buying incentives.  Like GDP, the housing market appears to be stabilizing after a very sharp downturn.  The labor market remains very soft, with unemployment in 2Q of 7.8%, 2.4 percentage points higher than in 2Q08.  Wage growth of 2.5% is very subdued.  August PMI readings dipped 0.5 points to 49.7 in the case of manufacturing but rose 0.9 points to 54.1 for services.  Industrial production firmed 0.5% in July, thanks to a 0.9% increase in factory output.  Real exports and imports scored impressive monthly gains in July, but the current account deficit remains close to 2% of GDP. Britain’s fiscal deficit is considerably deeper in the red and expected to surpass 14.0% of GDP this year, limiting room to stimulate further from that source.  The mounting expectation that the Bank of England will keep an ultra-loose monetary policy for longer than thought previously has weighed on sterling, which since the August policy meeting has declined 2.8% against the euro and 2.6% against the dollar.

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



Comments are closed.