Bank of England Preview

April 7, 2010

The Bank of England will not be changing policy this month.  An announcement will be made at 11:00 GMT on Thursday.  The asset purchase facility was suspended but not subsequently wound down after hitting a ceiling authorization of Gbp 200 billion at end-January.  The bank rate target of 0.5% since March 2009 represents a practical floor but is unlikely to rise this year.  British GDP grew 0.4% in 4Q (1.8% annualized) after declining 6.2% annualized over the prior six quarters.  Although CPI inflation of 3.0% as of February is expected to remain above the 2% target in the near term, the economy’s considerable slack should depress inflation below its target in much of 1H11.  On-year M4 growth has decelerated from from 12.1% last August to 10.8% in October, 6.4% by December, and 3.9% in February.  Britain’s huge budget deficit will be addressed after the May 6 election particularly if the Conservative Party secures a majority, and that effort would create a big economic headwind that the Bank of England may feel compelled to counter. Bank officials haven’t ruled out additional asset purchases in the future, and tighter fiscal policy would be the likeliest catalyst for doing such.  But all this is jumping ahead in the story.  No policy change will be made now because economic circumstances do not warrant such and since the election campaign has just begun.  Among Britain’s three purchasing manager indices in March, that for manufacturing increased 0.7 points to 57.2, that for construction climbed 4.6 points to 53.1, and that for services fell 2.0 points to a still-solid 56.5.  Minutes from the March Monetary Policy Committee’s meeting revealed a unanimous 9-0 vote in favor of no changes then in the policy settings, but officials expressed some concern that above-target actual CPI inflation could lift expected inflation.  Since that meeting, sterling has risen by 1.3% against the dollar and 3.6% against the euro, which is likely to have eased some of that anxiety.

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



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