Bank of England Won’t Pull QE2 Trigger Thursday

October 5, 2010

Suspense ahead of Thursday meeting of the Monetary Policy Committee concerns whether the asset purchase program might be increased as a stimulative step.  Minutes from last month’s meeting indicate a greater predisposition to doing such by some members, even though Andrew Sentance retained is dissent in favor of a rate increase.  Sentance has won no converts from others on the Board and is a red herring in the debate.  Tightening is a non-starter as Britain braces for the impact of a heavy dose of fiscal austerity plus weakening demand in other European markets.  The decision is whether to ease or not, and the channel for doing that would be an increase in quantitative easing, that is asset buying.  Such a move is not going to happen in October even though that would be the consistent action if the U.K. were to escalate the multilateral currency war.

The U.K. Bank Rate has been at 0.5% since March 2009, and officials consider that level the lowest possible without risking money market damage.  Any further easing can be done through the asset purchase program, which after being initiated in March 2009 was raised two months later and again in August 2009 and November 2009.  The limit of GBP is presently GBP 200 billion and was exhausted  at the end of January 2010.  Economic data during the past few weeks in Britain have not been as bad as feared.

  • Retail sales volume fell 0.5% in August but was still 1.4% greater in June-August than the previous three months.
  • Britain’s service-sector purchasing managers index rebounded to 52.3 in September after falling to 51.3 in August from 53.1 in July.
  • The manufacturing PMI reading of 53.4, though down from 54.3 in August, was still comfortably above the 50 line of stagnation.
  • Industrial production was 0.6% higher in May-July than the prior three months.
  • Unemployment only increased by 2.3K in August.
  • Real GDP growth spiked to 4.7% at an annualized rate in the second quarter.
  • Consumer price inflation (3.1%) was still above the 3% target ceiling in August.

Another argument against raising the asset purchase program at this moment is the weakness of sterling, a passive means of loosening monetary conditions.  Between the last meeting on September 9 and October 1, the trade-weighted pound weakened 2.8%.  A shift of that size can be expected to provide as much stimulus as a rate cut of at least 50 basis points given the rule of thumb that a 4% trade-weighted currency change equates to about a 1 percentage point in interest rates in Britain.

Growth is unquestionably headed for shallower waters and could stall.  M4 growth of 1.8% in August was the weakest since at least mid-1983.  Housing data are looking shaky.  The trade deficit has widened, and consumer confidence of minus 20 in September is very weak.  Policymakers prefer to synchronize policy changes with its quarterly updates of macroeconomic forecasts, which occur in February, May, August and November.  Exceptions are made only when a strong urgency arises.  The data do not warrant an exception this month.  The central bank’s decision will be unveiled at 11:00 GMT on October 7, but investors will not learn the latest thinking of policymakers or how they voted until minutes are released on October 20.

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



Comments are closed.