Bank of England Preview

February 3, 2010

The retention of a 0.5% British Bank Rate was never in doubt.  Bank of England officials no doubt hoped for a stronger case than now exists against extending their Gbp 200 billion asset purchase plan.  Most central banks have begun the shift away from ultra-easy monetary policy, some even raising key rates and many others like the Fed and ECB beginning the reversal of unconventional stimulus, otherwise known as quantitative easing.  All the Bank of England did so far was expand quantitative easing in November less aggressively than last August or May.  The Gbp 200 billion limit has just been exhausted, and policy has arrived at a cross-roads. One month ago, I was confident that the asset purchase program would at least get paused at this juncture, but I now attach even odds to an increase of another Gbp 25 billion in the programMinutes from the January meeting showed a 9-0 unanimous vote in favor of deferring the decision until this month and warned about the risk of upwardly creeping expected inflation amid a sustained interval of above-target consumer price increases.  Their on-year change in fact jumped more than anticipated to 2.9% in December, highest in nine months, from 1.9% in December.  A larger-than-anticipated 15.2K drop of unemployment in December, most in 32 months, also seemed to seal the deal for ending quantitative easing at least on a conditional basis.

But Britain has had its share of bad data surprises.  Real GDP edged only 0.1% higher last quarter, a fourth of what analysts expected.  Over the final three quarters of 2009, GDP dropped 1.1% at an annualized rate.  GDP declined 3.2% in the year to 4Q09 after a drop of 1.8% in the year to 4Q08.  Factory output was unchanged in November and still 5.4% lower than a year earlier.  Retail sales volumes only rose 0.3% in December, a fourth of what was expected, and the CBI survey of the retail sector produced a 21-point adverse swing in wintry January to minus 8.  Today’s service-sector purchasing managers index printed at 54.5, an unexpectedly large 2.3 points less than in January.  M4 growth contracted sharply in January to only 6.4%, suggesting that quantitative easing isn’t working.  On the political front, the seemingly unassailable Conservative Party lead in opinion polls has been halved since December and now is thin enough to suggest that even if the Tories win, they will not command a majority of parliamentary seats.

Sterling has been straddling $1.60.  The pound’s vulnerability to a widening gap between British monetary policy and the less ultra-loose stances at other central banks is another factor that the Monetary Policy Committee will have to consider.  Unlike other monetary authorities, the British pride themselves in choosing policy by majority vote, not consensus, and policymakers are encouraged to vote as they personally see the facts.  A result of this individuality is that the Bank of England produces more dissents than others and surprises central bank-watchers more often especially at times like this when information is not arrayed on one side of the ledger.  The policy announcement is scheduled for 12:00 GMT on Thursday.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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