Bank of England Preview

July 7, 2010

The June 9th meeting of the Bank of England’s Monetary Policy Committee ended in a split 7-1 to maintain present policy settings, a Bank Rate of 0.5% — the level since March 2009 — and  Gbp 200 billion stock of asset purchases, a level reached in January but not extended beyond that limit subsequently.  Member Andrew Sentance wanted to raise the Bank Rate to 0.75%, citing “resilient British inflation in the aftermath of the recession” and faster nominal GDP expansion in recent quarter than typical pre-recession rates.  Sentance has a hawkish paper trail, having cast several dissents that called for a tighter stance than the majority, but his view was well-taken.

The minutes indicate that Mr. Sentance, although isolated in his vote, had company among some other committee members who agreed that price risks had moved marginally to the upside.  Some of these wanted to see the forthcoming Budget before deciding anything.  In that event, the largest spending cuts since Thatcher was prime minister were unveiled.  All other considerations being the same, the budget argues for continuing the status quo this month, and that is the almost universal expected outcome of Thursday’s meeting.

British GDP between 3Q09 and 1Q10 expanded 1.1% at an annualized pace, twice as much as Euroland GDP.  Unemployment continues to recede, and wage increases have picked up.  CPI inflation of 3.4% on year sticks out like a sore thumb when compared to the lower rates of other Group of Seven economies.  Producer output prices are 5.7% higher than a year ago.  The latest readings of industrial production and real retail sales were both somewhat greater than 2.0% above year-earlier levels.  The core measure of M4 preferred by MPC officials shows the strongest on-year growth since the onset of the world financial crisis, but mortgage credit demand has been soft.  Britain’s PMI readings in June were 57.5 in manufacturing, down 0.5, and 54.4 in services, a full point less than in May.  Their direction was down, but their levels imply decently positive activity growth. The industrial trends index based on a monthly CBI survey was weaker in June than May, but the retail survey produced an improving result. 

Since June’s meeting, the pound has risen 4.3% against the dollar and is again trading above the key $1.50 level.  A 12-basis point net rise in ten-year gilt yields sits apart from the flat to lower trend of other sovereign debt yields.   The Bank of England announces the policy decision at 11:00 GMT, but the Committee’s logic will not be known until minutes of the meeting are published two weeks later.  The key suspense is who, if anybody, dissents in favor of a rate hike.

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



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