Bank of England Preview: Status Quo

October 7, 2009

The conventional wisdom is that the Bank of England will also not modify current policy.  Investors should bear in mind that the corporate culture of the 9-person Monetary Policy Committee emphasizes independent thinking in contrast to consensus-building at many other central banks like the ECB or Fed.  With decisions based on a strict voting of members, the Bank of England therefore produces more surprises than the average central bank.  Although the last seven meetings had unanimous votes on the British Bank Rate, August’s meeting had three dissenting votes in favor of a larger asset purchase program.  The Gbp 175 billion ceiling runs only through next month.  I expect this policy stimulus to be continued beyond November, but a decision to do that could come next month rather than tomorrow.

The pound has fallen 3.7% against the dollar and 5.6% in trade-weighted terms since the last meeting four weeks ago.  Gilt yields are down 35 basis points.  Those moves represent substantially further incremental stimulus and are a big reason why officials have the leeway to delay any new announcement on quantitative easing.  U.K. inflation of 1.6% has not dropped as low as inflation in either the U.S. or Euroland, but labor market conditions keep getting softer, a sign that inflation will settle back further in coming months.

U.K. recent real economic data are mixed.  Consumer confidence is recovering, and a 1.2% rise of retail sales volumes in June-August from March-May constituted a 14-month high.  The service-sector PMI reading of 55.3 in September was at a two-month high, but the sister index for manufacturing slid to 49.5 from 49.7 in August and 50.2 in July.  Industrial production for August printed at a shocking decline of 2.5%, resulting in a negative three-month over three-month average comparison.  Britain’s housing market has improved more quickly than expected, but money and credit expansion data suggest that the impact from quantitative easing undertaken thus far has not been as big as hoped.  The Ftse has risen only 0.4% net over the past four weeks.

The Bank of England will announce its decision at 11:00 GMT on Thursday.  The Bank Rate was reduced in six increments from 5.0% prior to last October 8 to 0.5% after March 5.

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



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